-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VndClCexwVI8kxbC3gKRTKw3UWnWc0DYifWPfdECBlm9YnN4YBPaqLLO4tNB6Rcw 0l29QF6JWjXi6XTW+l/Qtw== 0000830736-98-000004.txt : 19980218 0000830736-98-000004.hdr.sgml : 19980218 ACCESSION NUMBER: 0000830736-98-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALITY PRODUCTS INC CENTRAL INDEX KEY: 0000843462 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 752273221 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-18145 FILM NUMBER: 98537800 BUSINESS ADDRESS: STREET 1: 560 DUBLIN AVE STREET 2: STE 201 CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142288120 MAIL ADDRESS: STREET 1: C/O MULTIPRESS INC STREET 2: 560 DUBLIN AVE CITY: COLUMBUS STATE: OH ZIP: 43215 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED AMERICAN INDUSTRIES INC /DE DATE OF NAME CHANGE: 19920322 FORMER COMPANY: FORMER CONFORMED NAME: VIRTUALISTICS INC /DE/ DATE OF NAME CHANGE: 19890523 FORMER COMPANY: FORMER CONFORMED NAME: ANALYTICS INC /DE/ DATE OF NAME CHANGE: 19890212 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended December 31, 1997 0-18145 Commission file number QUALITY PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 75-2273221 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 560 Dublin Avenue, Columbus, OH 43215 (Address of principal executive offices) (614) 228-8120 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (I) Yes /X/ No / / As of December 31, 1997, there were 2,554,054 shares of the Company's common stock outstanding. QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET
December 31, 1997 (Unaudited) ASSETS Current Assets Cash $ 403,987 Restricted Cash 15,404 Accounts Receivable, Net 775,650 Inventories 882,000 Other Current Assets 160,867 ---------- Total Current Assets $2,237,908 Property, Plant and Equipment 846,127 Less Accumulated Depreciation (812,189) ---------- Net Property, Plant and Equipment $ 33,938 Other Assets 4,320 TOTAL ASSETS $2,276,166
See notes to Consolidated Financial Statements QUALITY PRODUCTS, INC. CONSOLIDATED BALANCE SHEET - Continued
December 31, 1997 (Unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Note payable, short term portion $ 200,000 Accounts payable 593,273 Accrued expenses 197,152 Customer deposits 218,213 Income Taxes payable 34,049 ------------ Total Current Liabilities $ 1,242,687 NON-CURRENT LIABILITIES: Notes payable, non-current $ 1,250,000 Notes payable, related parties, non-current 400,000 ------------ Total non-current liabilities $ 1,650,000 COMMITMENTS AND CONTINGENCIES: STOCKHOLDER'S DEFICIT: Preferred stock, convertible, voting, par Value $.00001; 10,000,000 shares authorized; 1 share issued and outstanding Common stock, $.00001 par value; 20,000,000 $ 25 shares authorized; 2,554,054 shares issued and outstanding; 1,033,333 shares reserved Additional paid in capital $ 30,053,325 Accumulated deficit (25,643,899) Less: Treasury stock, 176,775 shares at cost (5,025,972) ------------ Total stockholders' deficit $ (616,521) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,276,166
See notes to Consolidated Financial Statements QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF INCOME
For the three months ended December 31, 1997 1996 (Unaudited) (Unaudited) Net Sales $1,731,415 $1,380,637 Cost of Goods Sold 1,135,536 870,159 ---------- ---------- Gross Manufacturing Profit 595,879 510,478 Selling, General, & Administrative Expenses 392,322 327,853 ---------- ---------- Operating Income 203,557 182,625 Other Expense Interest Expense (28,646) (41,290) Other (817) (4,246) ---------- ---------- Total Other Expense (29,463) (45,536) Income Before Income Taxes 174,094 137,089 Income Taxes 6,049 - ---------- ---------- Net Income 168,045 137,089 Earnings per share: Basic earnings per common share (Note 5) $ 0.07 $ 0.06 Diluted earnings per common share (Note 5) $ 0.06 $ 0.05
See notes to Consolidated Financial Statements QUALITY PRODUCTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended December 31, 1997 1996 (Unaudited) (Unaudited) Cash Flows From Operating Activities: Net Income $ 168,045 $ 137,089 Adjustments to reconcile net income to net cash provided by (used by) operating activities; Depreciation and amortization 3,311 4,799 Cash provided by (used for) current assets and liabilities: Restricted Cash 26,832 86,501 Accounts receivable (73,055) (27,923) Inventories (73,683) 45,479 Other assets (137,641) (42,928) Accounts payable 223,257 127,181 Accrued expenses (265,650) (23,855) Customer Deposits (43,828) - Income Taxes Payable 6,049 - Due to officer - (25,000) ---------- ---------- Cash provided by (used by) operating activities (166,363) 281,343 Cash flows From Investing Activities: Purchase of machinery & equipment (1,274) (6,300) Amounts receivable from liquidation - 2,397 ---------- ---------- Cash used by investing activities (1,274) (3,903) Cash Flows From Financing Activities: Repayments - notes payable (135,000) (89,182) Issuance of Debentures 1,530,000 - Repayment - Debentures (50,000) - Repayment - Bank Line of Credit (1,180,000) - ---------- ---------- Cash provided by (used for) financing activities 165,000 (89,182) Net Increase (Decrease) in Cash (2,637) 188,258 Cash at Beginning of Period 406,624 8,094 ---------- ---------- Cash at End of Period $ 403,987 $ 196,352
See notes to Consolidated Financial Statements Cash Flow Information - continued The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows:
Three Months Ended December 31, 1997 1996 Cash paid for interest $30,373 $41,290 Cash paid for taxes - -
QUALITY PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all the disclosures normally required by generally accepted accounting principles. Reference should be made to the Quality Products, Inc. (the "Company") Form 10-KSB for the year ended September 30, 1997, for additional disclosures including a summary of the Company's accounting policies, which have not significantly changed. The information furnished reflects all adjustments (all of which were of a normal recurring nature) which, in the opinion of management, are necessary to fairly present the financial position, results of operations, and cash flows on a consistent basis. Operating results for the three months ended December 31, 1997, are not necessarily indicative of the results that may be expected for the year ended September 30, 1998. 2. Restricted Cash The Restricted Cash is held at the Company's bank as collateral for a Letter of Credit securing the Company's potential obligations for its Worker's Compensation insurance policy. The policy expires November 30, 1998. During the quarter, $27,236 was used to reduce bank indebtedness and $15,000 was renewed until November 30, 1998 to secure any remaining potential workers compensation obligations. 3. Inventories
Inventories at December 31, 1997 consist of: Raw materials and supplies $ 472,440 Work-in-process 333,829 Finished goods 79,549 Reserve for obsolescence (3,818) --------- Total $ 882,000
4. Commitments and Contingencies In November 1993, the Company and its Multipress subsidiary were sued in Indiana Superior Court by an employee of a company that had purchased one of the Company's presses from a 3rd party. The plaintiff seeks unspecified monetary damages for a personal injury that occurred in her employer's facility. Although the Company's subsidiary carries full product liability insurance, the Company's former management did not notify the insurance carrier within the prescribed time period. Accordingly, this claim is not covered by insurance. Based upon consultation with the Company's counsel, the Company does not believe that the litigation will have a material adverse affect on the consolidated financial position, results of operations or cash flows of the Company. The company has made a provision for the estimated potential loss on this matter. 5. Earnings Per Share On December 31, 1997, the Company adopted Financial Accounting Statement No. 128 issued by the Financial Accounting Standards Board. Under Statement 128, the Company was required to change the method previously used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options are excluded. The impact of Statement 128 on the calculation of earnings per share is as follows:
3 Months Ended December 31: 1997 1996 BASIC: Average Shares Outstanding 2,554,033 2,395,680 Income From Operations $ 203,557 $ 182,625 Basic Earnings Per Share (FAS 128) $ 0.08 $ 0.08 Net Income $ 168,045 $ 137,089 Basic Earnings Per Share (FAS 128) $ 0.07 $ 0.06 Primary Earnings Per Share, As Previously Reported (APB 15) N.A. $ 0.06
Note 5 - continued
3 Months Ended December 31: 1997 1996 DILUTED: Average Shares Outstanding 2,554,033 2,395,680 Net Effect of Dilutive Stock options and warrants based on the treasury stock method using average market price 248,888 197,826 Total Shares 2,802,921 2,593,506 Income From Operations $ 203,557 $ 182,625 Diluted Earnings Per Share (FAS 128) $ 0.07 $ 0.07 Net Income $ 168,045 $ 137,089 Diluted Earnings Per Share (FAS 128) $ 0.06 $ 0.05 Fully Diluted Earnings Per Share, As Previously Reported (APB 15) N.A. $ 0.04 Average Market Price of Common Stock $ 1.32 $ 0.23 Ending Market Price of Common Stock $ 1.06 $ 0.18
The following securities were excluded from the calculation of diluted earnings per share at December 31, 1997 because they are considered anti-dilutive under FAS 128: 1) Options granted to company officers and directors to purchase 100,000 shares of the Company's common stock at $2.00 per share. 2) Warrants issued pursuant to the Company's debentures to purchase 465,000 shares of common stock @ $2.00 per share. 6. Private Placement Debt On November 25, 1997, the Company consummated a private placement offering of 30 units of Company debentures in the amount of $1,530,000. Each unit represents: a) a $50,000 interest in a 6% $1,500,000 note payable, b) a warrant to purchase 10,000 shares of the Company's common stock at $1 per share during the period November 1, 1997 through September 30, 1999, and c) a warrant to purchase 15,000 shares of the Company's common stock at $2 per share during the period October 1, 1999 through September 30, 2001. The Company incurred expenses of approximately $150,000 in connection with this offering. The Company utilized the proceeds of the offering to repay the bank line of credit, a $135,000 note payable and expenses associated with the offering. Schedule of required future annual principal payments:
Fiscal Year Ended September 30 1998 $ 150,000 1999 $ 200,000 2000 $ 200,000 2001 $ 900,000 ---------- TOTAL $1,450,000
Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended December 31, 1997 as Compared to December 31, 1996 Net Sales for the three months ended December 31, 1997 were $1,731,415 as compared to $1,380,637 for the three months ended December 31, 1996, an increase of $350,778 or 25.4%. Gross profit was $595,879 or 34% of sales as compared to $510,478 or 37% of sales for the same period a year earlier. Sales increased due to increased sales and marketing efforts during the past year and the improved performance from manufacturers representatives in certain territories. Gross profit decreased as a percentage of sales due to slight increases in material costs and labor costs. Selling, general and administrative expenses increased from $327,853 during the three months ended December 31, 1996 to $392,322 for the three months ended December 31, 1997. Selling general and administrative expenses as a percentage of sales were 22.7% during the three months ended December 31, 1997 as compared to 23.7% for the three months ended December 31, 1996. Selling, general and administrative costs increased due to one time payments and accruals during the quarter and the increase in sales by outside representatives which meant higher commission costs during the period as compared to the previous year. The one time payments and accruals included $10,000 paid as a hiring bonus to Multipress's new President and $20,000 towards the repricing of the Company's President and Chief Financial Officer's stock options from $0.10 to 1.00. Previously, the President and Chief Financial Officer had agreed to convert their respective 175,000 stock options exercisable at $.10 to $1.00 in exchange for certain cash payments and an additional 50,000 stock options exercisable at $2.00. The balance of the cash payments or $27,500 payable to the Company's President and $37,424 payable to the Company's Chief Financial Officer will be accrued during the second quarter, and if cash resources permit, paid out by February 28, 1998. This will result in further one time charges against earnings in the second quarter of $64,924 thereby reducing earnings lower than what would otherwise be expected in the second quarter. By agreeing to this concession, the Directors have shown their confidence in the future of the Company and despite the fact the options were granted when there was no market for the Company's shares two years ago, ensures all outstanding stock options are more fairly priced. Interest expense for the three months of $34,048 was offset by $5,042 of interest revenue for a net interest expense of $28,646 for the three months ended December 31, 1997 as compared to $41,290 for the comparable period a year earlier. The decrease is due primarily to the reduction of the interest rate on the Company's outstanding indebtedness. The Company currently has $1,850,000 of 6% debt which will reduce by a minimum of $50,000 per quarter and currently earns market rates on its cash reserves. This should lead to a lower interest expense in the foreseeable future. Net income for the period was $168,045 as compared to $137,089 for the same three month period a year earlier, an increase of $30,956 or 22.6%. Although sales increased during the first quarter this year as compared to last year, increases in cost of sales and selling, general and administrative costs increased over last year thereby reducing the relatively higher income that would have been expected with higher sales. Income tax provision in the 3 months ended December 31, 1997 and 1996 includes a benefit related to utilization of NOL carry forwards of approximately $28,000,000. The 1997 provision relates to the company's city income taxes. Liquidity and Capital Resources As of December 31, 1997, the Company had a working capital surplus of $995,221 as compared to a working capital deficiency of $1,317,756 at December 31, 1996 and a working capital deficiency of $459,977 at September 30, 1997. The change from a working deficit to a working capital surplus is due to the profitable operations of the Company and more importantly, the refinancing of the Company's outstanding bank indebtedness. At September 30, 1997 and in previous quarters, the Company's bank indebtedness had been due on demand and accordingly shown in current liabilities, thereby increasing the Company's working capital deficiency. On November 25, 1997, the Company completed a $1,530,000 financing consisting primarily of a $1,500,000 three year loan. This loan, except for the current portion of $200,000, is disclosed in long term liabilities and accordingly results in a better working capital balance. This surplus should continue to increase as the Company anticipates profitable operations at least through the foreseeable future. The Company's major source of liquidity continues to be from available cash on hand which is generated from profitable cash flow from operations. The Company has no material commitments at this time other than its quarterly payments of $50,000 on the long-term note payable. The Company is currently investigating various accounting and inventory computer systems which could lead to a one time material expenditure not to exceed $175,000. No decisions have been made, but it is expected that the new system will be purchased and installed prior to September 30, 1998. The Company's overall financial condition continues to improve and now that the Company has secured long term financing, it has more assurances than any time in recent years that it will continue operations. PART II Item 1. Legal Proceedings The SEC notified the Company of an investigation in 1994. In November 1996, the SEC filed an administrative action against the Company (SEC Case No. 3-9186), charging primarily that the Company (1) issued misleading press releases in March 1994 concerning a proposed agreement between Disney and Consumer Products; (2) overstated the value of engineering drawings in financial statements contained in periodic SEC reports; and (3) failed to file periodic reports since the quarter ended June 30, 1995. The SEC and the Company settled all charges against the Company, without payment of any money by the Company, by a consent decree, entered April 1, 1997, whereby the Company neither admitted nor denied the charges and agreed to the entry of a "cease and desist" order that it not violate federal securities laws in the future. The Company is a defendant in a case in Porter Superior Court, in Indiana captioned Jackson v. Multipress et. al. No. 64D02-9311-CT- 2675. The plaintiff alleges she injured her hand while using a Multipress machine. Due to a decision made by the Company's management at the time the case began (prior to March 1995) not to seek insurance coverage, the Company could be responsible for the entire amount of any judgment or settlement. Various other legal actions and proceedings are pending or are threatened against the Company and its subsidiaries. These actions and proceedings arise in the ordinary course of business and are routine litigation incidental to such business. None of the litigation matters currently pending is deemed to be material by management of the Company. Item 2. Changes in Securities and Use of Proceeds On November 25, 1997, the Company consummated a private placement offering of 30 Units at a purchase price of $51,000 per Unit for total proceeds of $1,530,000. These Units were sold through Eastlake Securities, Inc. an NASD member firm as "Placement Agent." The Placement Agent's fee was $75,000. The Units were sold to accredited investors and the Company believes the sales were exempt from registration under the Securities Act of 1993 under Section 4(2) of that Act and Rules 505 and 506 of Regulation D under that Act. The Units were sold to less than 30 accredited investors without any public solicitation. Each of the 30 Units consisted of (1) $50,000 beneficial interest in a 6% Secured Note in the principal amount of $1,500,000 issued jointly and severally by the Company and its wholly-owned subsidiary. QPI Multipress, Inc. to the order of Eastlake Securities, Inc. as agent for the lenders pursuant to a credit agreement, (2) a Series A Common Stock Purchase Warrant to purchase ten thousand (10,000) shares of the Company's common stock at $1.00 per share during the period November 1, 1997 to September 30, 1997 to September 30, 1999, and (3) a Series B Common Stock Purchase Warrant to purchase fifteen thousand (15,000) shares of Common Stock at $2.00 per share during the period October 1, 1999 to September 30, 2001. The 6% Secured Note is secured by all of the assets of the Company and its subsidiary. The proceeds of the offering totaled $1,533,762.15 including interest of $3,762.15. The expenses of the offering totaled $135,363.31 including the $75,000 placement fee to Eastlake Securities, Inc., leaving net proceeds of $1,398,398.84. Of that amount, $1,160,785.96 was used to pay off a short term debt of that amount to Provident Bank and $237,612.88 was used to pay a short term debt to Eastlake Securities. Item 6. Exhibits and Reports of Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K Not applicable Signatures In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized: Quality Products, Inc. ---------------------- Registrant Date: February 13, 1998 By /s/ Bruce C. Weaver ------------------------ Bruce C. Weaver President (Principal Executive Officer) By /s/ Jonathon Reuben ------------------------ Jonathon Reuben Principal Financial and Accounting Officer EX-27 2
5 3-MOS SEP-30-1998 DEC-31-1997 419,391 0 775,650 11,867 882,000 2,237,908 846,127 812,189 2,276,166 1,242,687 1,650,000 0 0 25 (616,546) 2,276,166 1,731,415 1,731,415 1,135,536 988,201 29,463 0 28,646 174,094 6,049 168,045 0 0 0 168,045 0.07 0.06
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