<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED))
For the fiscal year ended September 30, 1995
----------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-18145
QUALITY PRODUCTS, INC.
(Name of small business issuer in its charter)
DELAWARE 75-2273221
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
560 Dublin Avenue
Columbus, OH 43215
(Address of principal executive offices) (Zip Code)
(614) 228-8120
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under to Section 12(g) of the Act:
COMMON STOCK, $.00001 PAR VALUE
(Title of Class)
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. Yes [ ]
No[ X ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was $5,407,956.
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of September 30, 1995, was $494,223 based on the average of
the bid and asked price of $0.25 as reported by the NASDAQ electronic bulletin
board on such date.
As of September 30, 1995, there were 1,976,931 shares of Common Stock, $.00001
Par Value issued and outstanding.
<PAGE>
QUALITY PRODUCTS, INC.
FORM 10-KSB
PART I
ITEM 1. BUSINESS
GENERAL
Quality Products, Inc. (the "Company") is a holding
company. The Company's sole operating subsidiary is QPI Multipress, Inc.
("Multipress"), a manufacturer of hydraulic presses and accessories. The
Company's other operating subsidiaries all discontinued operations shortly after
the end of the fiscal year ended September 30, 1995. These subsidiaries are
Technical Metals Company ("TMC"), a steel processor, Q.P.I. Consumer Products
Corporation ("Consumer Products"), a manufacturer of foam recreational products
and Quality Toys, Inc. ("Toys") a manufacturer of toys. The Company also owns a
non-operating subsidiary, American Liberty Mining Corporation ("ALMC") which
holds certain zinc mining claims.
A more detailed discussion of the Company and its subsidiaries follows. The
information set forth herein gives effect to the one for four (1 for 4) reverse
split effected on November 30, 1994.
RECENT DEVELOPMENTS
In 1992 and 1993, the Company embarked upon an ambitious expansion program. In
1992, the Company acquired Playtime Toys, Inc., a manufacturer of foam-related
products, primarily toys and educational products, in a stock for stock merger.
In 1993, Consumer Products acquired PI Consumer Products Corporation in a stock
for stock merger, thereby growing its consumer products manufacturing
operations. In December 1993, the Company acquired TMC Corporation for 78,750
shares of the Company's common stock plus approximately $6.8 million cash to pay
TMC debt. These acquisitions resulted in revenue growth from $12,175,683 in
fiscal 1993 to $36,531,875 in fiscal 1994. However, the cost of the
acquisitions, together with the Company's decision to borrow approximately $5.3
million in April 1994 to repurchase its common stock, combined to severely limit
the Company's and its subsidiaries' working capital. Furthermore, Consumer
Products and Quality Toys changed, from marketing through distribution sales
arrangements to the costly creation of a direct sales force and implementation
of a manufacturers representative network, both of which proved to be costly
failures. The subsidiaries' unanticipated operating losses and borrowings to
repurchase stock led to the Company's inability to raise additional capital by
the end of fiscal 1994, which impaired the abilities of TMC and Consumer
Products to realize potential profitability. In March 1995, as a result of
shareholder dissatisfaction with management, Messrs. Renaldo, James Keefe, Greg
Tamborello and Lorne Durkett, constituting all the directors of the Company,
resigned all their positions with the Company. Messrs. Tom Raabe, Micah Eldred,
Bruce Daigle and Jon Reuben were thereafter elected to serve as directors. Tom
Raabe became President and CEO and Dan Sullivan continued to serve as chief
financial officer. This new management group was faced with the task of
resolving the Company's debt crisis while defending numerous creditor and
stockholder lawsuits brought against the Company and former management. The
Company's financial condition and results of operations continued to worsen. The
Company was also saddled with economically unviable long term leases and
contracts and a new lawsuit brought by the former CEO, James Renaldo. The new
management tried to continue to operate TMC and Consumer Products, but was
unable to stem operating losses or reduce the Company's debt to Provident Bank,
which had grown to $6-7 million throughout fiscal 1995. By the end
of fiscal 1995, QPI Consumer Products Corporation was in bankruptcy and TMC
Company was winding down and liquidating its assets.
In October 1995, Messrs. Daigle and Eldred resigned from the board of directors
and Mr. Sullivan resigned as an officer and employee. In November 1995, the
Company hired a turnaround consultant, Bruce Weaver to attempt to reorganize the
Company's operations around its remaining profitable operating asset,
Multipress. In February 1996, Mr. Weaver became a director and replaced Mr.
Raabe as President and CEO. Since the end of fiscal year 1995, the Company has
closed down all subsidiaries' operations except Multipress, liquidated
<PAGE>
its subsidiaries' other assets, repaid substantial debt and settled numerous
other material obligations. While the Company is still saddled with serious
financial problems, virtually all of which were inherited from the Company's
previous management, the Company is in a stronger position to survive than at
any time since the end of fiscal 1994.
QPI MULTIPRESS, INC.
On October 1, 1995 all of the operating assets and liabilities associated with
the Multipress business were transferred to QPI Multipress, Inc., an Ohio
corporation wholly owned by the Company.
Multipress manufactures industrial hydraulic bench presses, floor presses
(together, referred to as "Multipresses" herein) and accessories used with
Multipresses. The Company is one of the leading producers of industrial
hydraulic "C" frame presses in the United States. Multipresses are used in a
variety of industries, including automotive, appliance, abrasive materials,
electrical and food compaction industries.
The current Multipress(R) line, which consists of 27 different standard models,
is adaptable to CIM (Computer Integrated Manufacturing), a combination of
hydraulic presses with robotics. Multipress(R) has provided turnkey operations
to a number of Fortune 500 companies. Turnkey systems include a combination of
any number of peripheral automation devices used in conjunction with a
Multipress(R).
At least half the machines Multipress(R) ships are special or modified in some
way to suit customer requirements. In addition to standard C-Frame or Gap Frame
presses, 4 Post or 4 Column designs either with or without a moving plate can be
furnished up to 600 ton capacity. Many special designs and configurations have
been furnished in the 55 years Multipresses have been produced. These include
ultra high speed, special frames, variations in daylight, throat, bed size, dual
or triple units, located around a large dial table.
Multipress(R) requires several different raw material components for its
presses. Multipress(R) is not dependent on any one supplier for any of its key
parts and believes that its relationship with its suppliers is satisfactory.
Historically, the automotive, appliance, and electrical industries have provided
approximately 75% of sales revenues. Additionally, Multipresses have been
integrated with automated robot systems developed by unrelated companies and
used in assembly line systems. Multipress(R) competes in its market with about a
half dozen other companies, none of which is overly dominant. Multipress(R)
competes primarily based on its ability to customize its presses, the excellent
quality and longevity of its product and its excellent service.
Multipress(R) markets its presses through an in house force consisting of three
sales agents and through more than 25 non-exclusive sales representatives.
Multipress' primary market has been Ohio, Michigan, Indiana and Illinois.
However, sales are starting to diversify more as manufacturing is spread to the
southeast and southwest part of the United States.
Multipress(R) does not market directly abroad, however it has sold some presses
through sales representatives to customers overseas.
No one customer accounted for more than 10% of sales in 1995.
Multipress'(R) backlog generally varies from quarter to quarter as customer
purchasing is somewhat random. Multipress'(R) backlog at September 30, 1995 was
approximately $482,000, which was lower than the average backlog of $800,000.
The backlog is usually shipped within a few months from order.
<PAGE>
QUALITY TOYS
Quality Toys (formerly known as QYP, Inc. and Playtime Toys, Inc.), a Nevada
corporation, acquired a manufacturer of children's educational puzzles, toys and
foam late in 1992. The purchase price for this acquisition was the issuance of
896,292 shares of the Company's common stock to the shareholders of the
manufacturer.
At the time this entity was acquired in late 1992, it was still a development
stage corporation, with assets consisting mainly of cash, inventory, property
and equipment used in its operations.
During 1994 and early 1995 until operations ceased, Quality Toys had tried to
market its products throughout the United States, through the use of
manufacturers' representatives, via catalogues and directly to national
retailers and selective overseas markets. Competition in this industry, which is
based upon Consumers' ever-changing tastes, marketing and pricing, is intense
and sales never materialized. Quality Toys attempted to expand sales through the
use of licensing agreements, however overall Company liquidity problems had
surfaced by that time, and Quality Toys was unable to capitalize on those
agreements.
Quality Toys' projected sales levels were never achieved. In fiscal 1994,
Quality Toys lost $2,158,000 on sales of $336,000.
Additionally, Quality Toys was dependent on a few key foam suppliers, access to
which was critical to its success. As losses continued, these accounts fell past
due and supplies of important foam were shut off. Accordingly, Quality Toys
discontinued operations in early fiscal 1995. In February of 1995, Quality Toys'
building in Fort Smith, Arkansas was sold for the assumption of the mortgage by
the purchaser and 50,000 shares of Exsorbet, Inc., a publicly-traded company.
Q.P.I. CONSUMER PRODUCTS
The Company acquired QPI Consumer in 1993 in a stock for stock merger with PI
Consumer Products. QPI Consumer manufactured and marketed a variety of consumer
items and foam recreation products, including, water sports equipment, hunting
and camping equipment, pool and spa products, decoys, flooring systems, exercise
equipment, and children's toys. Marketing was done primarily through
distributors until 1994, when QPI Consumer embarked on a costly and unsuccessful
effort to establish a direct marketing capability through regional sales
representatives supported by inside sales and marketing personnel. QPI
Consumer's expenses soared while its sales did not, and QPI Consumer lost
approximately $6 million in fiscal 1994.
During 1995, the operations of QPI Consumer became increasingly unprofitable,
and the financial condition of the subsidiary deteriorated drastically. Sales
continued to decrease due to increased competition, margins which were
continually getting worse and new product line sales which did not materialize.
Also substantial costs were incurred redesigning and packaging certain products,
moving the operation from one facility to another. Significant inventory write
downs were necessary due to excessive quantities of slow moving and end of line
products on hand.
QPI Consumer experienced a severe cash crunch in fiscal 1995. The line of credit
with the Company's secured lender was at its limit, no new cash sources were
available, and key trade suppliers fell increasingly past due. QPI Consumer
therefore decided to sell to a former officer and a former employee a product
line known as Feather Flex, which manufactured and marketed a line of hunting
decoys in an effort to alleviate some of the financial burden.
Problems became more serious and, on August 25, 1995, after attempting
unsuccessfully to settle with its unsecured creditors as a class outside of
bankruptcy court, certain unsecured creditors of QPI Consumer filed an
involuntary petition under Chapter 11 of the Bankruptcy Code against QPI
Consumer. On October 17, 1995, QPI Consumer filed a voluntary petition, thus
converting the proceeding to a voluntary chapter 11 case. Then
<PAGE>
QPI Consumer immediately began preparing a plan under Chapter 11 to conduct an
orderly liquidation of the business. The liquidation was completed during fiscal
1996.
TMC (TMC)
During 1995 the operations of TMC experienced many of the same liquidity
problems as did QPI Consumer. The problems were exacerbated by the many
management changes that took place within TMC. Shortly after the acquisition the
then President resigned taking with him several important customers. To remain
competitive and quickly fill the void, TMC accepted work from customers at
prices which reduced slim gross margins even further putting a strain on
profitability.
TMC, which was a steel service center, was in an extremely competitive capital
intensive business whose gross margins were slim. Also, customers were reducing
the number of suppliers they were using, consolidating business into fewer and
fewer suppliers. Automobile companies were putting more and more pressure on all
suppliers to cut costs ever further. Accordingly, TMC started incurring losses.
Throughout fiscal 1995, TMC became increasingly unable to pay its bills as they
fell due. TMC purchased the vast majority of its steel from one supplier and
this account was falling further and further past due with every month. To
compound the problem, the steel suppliers raised prices and contracts with
customers and pressures to keep costs down meant TMC could not pass these
increases on. Poor credit at this point prevented TMC from going elsewhere for
steel supplies.
With costs of raw materials too high and no credit available, positive gross
margins evaporated and trade accounts payable fell significantly past due. Most
importantly the Company's primary source of steel was becoming more and more
restricted, severely hindering operations. As TMC's problems became apparent to
the steel industry, TMC began losing orders.
As TMC had become a drain upon the Company's resources by the end of fiscal
1995, management was left with no choice but to wind down the operations of TMC
and liquidate its assets. This liquidation was completed in early fiscal 1996.
EMPLOYEES
The Company and its subsidiaries employed a total of 127 employees, of which 121
were full time employees as of September 30, 1995. Approximately 30 employees at
TMC belonged to the Teamsters Union.
ITEM 2. PROPERTY OF THE COMPANY
The following table provides certain information with respect to the principal
plants and offices of the Company utilized during the year ended September 30,
1995. The properties were held under leases that have various terms and
maturities, except the Melvindale, Michigan facility and the Fort Smith,
Arkansas facility, which were owned. All properties are considered to be in good
to satisfactory condition.
Locations Descriptions
1718 East Seventh Avenue A month to month lease of approximately
Suite 204 2,000 square feet of office used as the
Tampa, Florida principal executive office of the
Company. The lease was terminated in
July 1996, paid in full.
<PAGE>
3535 Medulla Road A month to month lease for approximately
Lakeland, Florida 100,000 square feet of manufacturing,
distribution, and office space used by
QPI Consumer Products Corporation. The
lease was terminated in July 1996.
560 Dublin Avenue A year to year lease for approximately
Columbus, Ohio 50,000 square feet of manufacturing
office space currently expiring July,
1998 used by QPI Multipress Inc., and
since August 1996 also used as the
principal executive office of the
Company.
18800 Meginnity Approximately 60,000 square feet of
Melvindale, MI 48122 office and manufacturing space used by
TMC. The building was sold in April
1996.
3820 Northdale Executive A six year lease expiring June, 2001 for
Centre, 3820 Northdale approximately 5,000 square feet of
Blvd., Suite 304B office space formerly used as the head
Tampa, Florida office of the Company. The Company moved
out in June 1995, prior to the
expiration of the lease, but has not
re-let the premises.
7105 New Tampa Highway A long term lease of 250,000 square feet
Lakeland, Florida of warehouse and distribution and office
space used by QPI Consumer Products
Corp. QPI Consumer moved out in June
1995 prior to the expiration of the
lease, and settled the remaining term of
the lease with the landlord.
Ft. Smith, Arkansas A facility owned by the Company's
subsidiary Quality Toys, Inc. that was
sold in February, 1995 for proceeds
consisting of the assumption of the
mortgage by the buyer of $373,324 and
50,000 shares of common stock in a
public company. Such shares were sold in
1997 for approximately $80,000.
ITEM 3. LEGAL PROCEEDINGS
In early 1995, two putative class action and derivative action lawsuits (one by
Bruce Daigle (who subsequently became a director of the Company) and the other
by Bruce Balch) were filed against the Company and James Renaldo in the United
States District Court for the Middle District of Florida, Tampa Division. Both
complaints alleged the Company violated federal securities laws and Delaware law
in connection with a proposed merger between the Company and Exsorbet, Inc.
which merger was subsequently abandoned and that various publicly filed
documents and press releases were misleading. In 1996, both cases were
dismissed.
In March 1995, PI, Inc., sued the Company and its former president, James
Renaldo, in the United States District Court for the Southern District of New
York for the Company's failure to register shares of restricted stock issued to
PI, Inc. in connection with a 1993 merger between the QPI Consumer and PI,
Inc.'s subsidiary PI Consumer Products Corporation. The complaint was dismissed
in December 1995 against the Company and Renaldo. In 1996, PI sued the Company
on similar grounds in the United States District court for the Middle District
of Florida, Tampa Division. The action was settled in August 1996, with the
Company issuing PI a $500,000 long term 6% note, which is convertible by
PI into the Company's common stock at $.75 to $1.00 per share.
In March 1995, Howard S. Klein sued the Company in the United States District
Court, Eastern District of Pennsylvania for alleged lost profits on Company
stock he purchased from 1989-1993, plus actual losses
<PAGE>
incurred. On October 3, 1996, the Court granted the Company summary judgment and
dismissed the case against the Company. The plaintiff has appealed to the United
States Court of Appeals for the Third Circuit. The appeal has been briefed and
is scheduled for argument in June 1997. The Company believes the plaintiff's
claims are meritless.
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 QPI Consumer; (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.
During fiscal 1995, the Company moved out of its executive offices in Tampa with
a remaining lease term through June 2001 at approximately $6,000 rent per month.
The landlord sued the Company and obtained a judgment for past and future rents.
Such liability could materially adversely effect the Company's financial
condition.
During fiscal 1995, a creditor of QPI Consumer, the Brookwood Company threatened
to sue the Company for approximately $130,000 for goods sold to QPI Consumer.
Brookwood subsequently sued the Company in state court in Tampa, Florida, and
trial is scheduled for May, 1997. While the Company believes its defenses are
valid, a loss of such litigation could have a material adverse affect upon the
Company's financial condition.
Various 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 the Company's businesses. None of the litigation matters
currently pending against the Company, standing alone, aside from the matters
specifically discussed above, is deemed to be material by management of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The following table shows the high and low closing prices for the Company's
Common Stock as reported by: (a) the NASDAQ Small Cap Market, for the period
commencing October 1, 1994 through March 14, 1994; (b) the American Stock
Exchange (the "ASE"), for the period commencing March 15, 1994 through March 31,
1995; and (c) the NASDAQ electronic bulletin board, for the period commencing
August 1, 1995 through September 30, 1995. Such prices (except for those
reported by the ASE) do not necessarily represent actual transactions and do not
include retail markup, markdown or commissions.
1995 High Low
First Quarter - December 31, 1994 10 1/2 7 1/8
Second Quarter - March 31, 1995 6 1/4 3 1/8
Third Quarter - June 30, 1995 -- (1) --(1)
Fourth Quarter - September 30, 1995 7/8 1/8
1994 High Low
First Quarter - December 31, 1993 61 45
Second Quarter - March 31, 1994 51-1/2 29
Third Quarter - June 30, 1994 33-1/2 11 1/2
Fourth Quarter - September 30, 1994 21 8-1/4
(1) Trading was suspended throughout the third quarter of 1995.
(b) Approximate number of equity securities holders:
Approximate Number of
Record Holders (as of
Title of Class September 30, 1995)
Common Stock, $.00001 Par Value 1,210
(c) Dividends:
The Company paid no dividends in the year ending September 30, 1995. The Company
paid a cash dividend of $.20 per share in the year ended September 30, 1994.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
The following table sets forth the Company's operations by industry and the
percentage increases (decreases) of such items as compared to the prior period
(in thousands of dollars).
Year Percentage
Ended September 30, increase (decrease)
1995 1994 1995 1994
---- ---- ---- ----
Net Sales
Toys/Recreation 4,500 4,615 (2.5) (38.7)
Machine Tools 5,407 5,083 6.4 9.3
Steel Service 23,924 26,834 (10.8) N/A
------- ------- ----- -----
33,831 36,532 (7.4) 200.0
Cost of Sales
Toys/Recreation 5,530 7,273 (23.9) 51.5
Machine tools 3,733 3,583 4.2 6.5
Steel Service 23,083 24,873 (7.2) N/A
------- ------- ----- -----
32,346 35,729 (9.5) 337.6
Selling, General and Administrative
Toys/Recreation 1,963 5,551 (64.6) 210.5
Machine Tools 666 1,245 (46.5) 3.0
Steel Service 4,557 2,432 87.4 N/A
------- ------- ----- -----
7,186 9,228 (22.1) 207.9
Operating Income (loss)
Toys/Recreation (2,993) (8,209) (63.5) (976.1)
Machine Tools 1,007 255 394.9 232.2
Steel Service (3,716) (471) (788.9) N/A
------- ------- ----- -----
(5,702) (8,425) (30.5) (930.9)
Since TMC Company and QPI Consumer Products Corporation were in liquidation at
September 30, 1995, their results for the year ended September 30, 1995 and
assets and liabilities at September 30, 1995 have not been included in the
consolidated financial statements of the Company except as one-line items,
accounts receivable from liquidation. Accordingly the results for the period
ended September 30, 1995 as compared to September 30, 1994 are significantly
different.
Net sales for the year ended September 30, 1995 were $5,407,000 as compared to
$36,532,000 the year ended September 30, 1994. Cost of goods sold were
$3,733,000 as compared to $35,729,000 for the year ended September 30, 1994. The
sharp decreases in both categories is due to the non-inclusion of the results of
TMC and QPI Consumer Products as described above. Notwithstanding the decrease
in sales, gross profit increased to $1,674,000 in fiscal 1995 because of the
liquidation of the low and negative margin operations of TMC and QPI Consumer
Products.
Sales for the Machine Tools subsidiary (Multipress) were $5,407,000 for the year
ended September 30, 1995 as compared to $5,083,000 for the year ended September
30, 1994, an increase of 6.4%. Cost of Sales for the Machine Tools subsidiary
was $3,733,000 as compared to $3,583,000 a year earlier an increase of 4.2%
leaving a gross profit of $1,674,000 or 31% for the year ended September 30,
1995 as compared to $1,500,000 or 30% for the year ended September 30, 1994.
<PAGE>
Selling, General and Administrative expenses fell from $9,228,000 for the year
ended September 30, 1995 to $2,437,235 for the year ended September 30, 1994.
The decrease is due to the discontinuance of the operations of TMC and QPI
Consumer Products. Selling, General and Administrative expenses as a percentage
of sales increased from 25% in fiscal 1994 to 45% in fiscal 1995 due to the time
lag between the discontinuance of the operating subsidiaries and the resulting
immediate drop in sales and the elimination of the related expenses. Corporate
Selling, General and Administrative expenses were higher than the previous year
due to the many changes in management throughout the year and the costs
associated with that such as severance, travel and legal expenses. Additionally
corporate expenses were at levels required to monitor all three subsidiaries
even though the revenues from two of the subsidiaries, including the largest one
in terms of revenue, TMC, are not included in revenues in the consolidated
financial statements. Finally legal costs increased substantially due to
negotiations with the secured lender and the increase in lawsuits brought
against the Company.
The Company's other wholly owned subsidiary American Liberty Mining Corporation
is currently a non-operating company. ALMC's assets consist exclusively of
mining claims which contain non-economic probable and proven reserves of zinc.
If market conditions improve, the company may pursue a sale or a joint venture
of these mining claims. In the meantime, they are carried on the Company's books
at no value.
Other expenses for the year ended September 30, 1995 consisted primarily of
interest expense of $741,749. Interest expense for the year ended September 30
1994 was $263,183. Interest was much higher during the year ended September 30,
1995 due to the significantly higher levels of secured bank debt throughout the
year. Secured bank debt levels were consistently between $5,000,000 and
$7,000,000 throughout the period ended September 30, 1995 with the bulk of the
debt incurred in late fiscal 1994 for the repurchase by the Company of its own
common shares.
Interest expense was reduced slightly during the first quarter of fiscal 1996 to
approximately $225,000, and reduced more significantly during the latter part of
1996 to approximately $40,000 per quarter, as a substantial portion of the
proceeds from the liquidation of TMC and QPI Consumer Products was used to
reduce the amount of secured debt.
At September 30, 1995 the Company was being charged interest at the rate of
prime plus 3% with $10,000 monthly renewal fees.
Asset disclosed as property held for sale or rent on the September 30, 1994
financial statements were sold or written off in fiscal 1995. The mining claims
owned by the Company's wholly owned subsidiary, American Liberty Mining
Corporation were written off in the amount of $674,500 and the building held for
sale in Ft. Smith, Arkansas was sold, realizing a loss in the amount of
$287,329.
FINANCIAL CONDITION
At September 30, 1995, the Company had a working capital deficiency of $141,764
compared to working capital of $5,269,481 at September 30, 1994. The decrease at
September 30, 1995 was due primarily to the use of working capital to support
unprofitable operations in 1995, the nonrealization of certain current assets
during fiscal 1995 and also the non-inclusion of the financial statements of TMC
and QPI Consumer Products. TMC had a positive working capital position at
September 30, 1994 due primarily to its inventory position, however this
inventory position was written down substantially during 1995 and further
write-downs were necessary upon the decision to liquidate.
At September 30, 1995, the Company had bank indebtedness of $6,459,218 plus an
additional $333,202 owing to a former officer who had borrowed the amount from
the same secured lender and lent the funds to the Company. Both of these amounts
were due on demand at September 30, 1995.
In addition to the working capital problems, a number of creditors had commenced
litigation against the Company and several significant leases had fallen past
due. The Company required substantial additional funds to continue operations.
To increase the availability of funds, the Company anticipated that it would
attempt
<PAGE>
to i) reduce staffing and other costs, ii) sell additional assets, iii) reduce,
renegotiate or otherwise extend the bank indebtedness, and iv) renegotiate,
extend or settle other obligations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements annexed hereto and Item 6 above.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the years ended September 30, 1995 and September 30, 1994, there were no
disagreements on accounting and financial disclosure practices.
The company has previously reported: (a) pursuant to a Current Report on Form
8-K (the "Current Report") dated August 8, 1996 the termination of its
relationship with KPMG Peat Marwick LLP; (b) pursuant to a Current Report
dated August 8, 1996, the retention of Farber & Hass as the Company's auditors.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The names, principal occupation, and age of all Directors of the Company at
September 30, 1995 are listed below:
<TABLE>
<CAPTION>
Name Age Principal Occupation Director Since
<S> <C> <C> <C>
Thomas Raabe 43 President March 1995 to October 1996
Jonathon Reuben 40 CPA June 1995
Micah Eldred 27 Stockbroker March 1995 to October 1995
Bruce Daigle 35 Stockbroker June 1995 to October 1995
</TABLE>
(b) Identification of Executive Officers
The names, ages, and positions of all executive officers of the company at
September 30, 1995 are listed below. All officers are appointed by the Board
annually to serve for the ensuing year.
Name Age Positions and Offices
Daniel J. Sullivan 39 Vice President & CFO, and Secretary
Thomas Raabe 43 Chairman, President & CEO
Mark Prendergast 37 Vice President
Business Experience of Officers and Directors:
Mr. Sullivan joined Quality Products, Inc. as Vice President & CFO, in January,
1994. In 1993, Mr. Sullivan was Chief Financial Officer of a large industrial
gas and equipment distributor headquartered in Tampa, Florida. Prior to 1993, he
was Chief Financial Officer of Oshkosh Trailers, located in Bradenton, Florida.
Mr. Eldred was appointed to the Board of Directors of the Company and each of
its subsidiaries on March 24, 1995 by Mr. Thomas Raabe who had been appointed
the sole director on March 23, 1995. Mr. Eldred is and has been a Registered
Securities Broker, Analyst and Trader with Raymond James Financial Inc. of St.
Petersburg, Florida since 1990.
Mr. Raabe was appointed as the sole director of the Company on March 23, 1995 by
the outgoing Board of Directors at the request of a dissident shareholders
group. On March 24, 1995 Mr. Raabe appointed Mr. Eldred to the Board of
Directors of the Company and subsequently the Board appointed Mr. Raabe as
Chairman and Chief Executive Officer of the Company and each of its
subsidiaries. Mr. Raabe is a practicing attorney who, for more than the past
five years, has been self-employed in the Boulder, Colorado area specializing in
securities law matters.
<PAGE>
Mr. Daigle was appointed to the Board of Directors of the Company in June, 1995.
Mr. Daigle has been a stockbroker with Edward D. Jones & Co. since 1993.
Mr. Prendergast was appointed a Vice President of the Company and President of
QPI Consumer Products Corporation in March 1995 by the new Board of Directors.
Previous to March 1995, Mr. Prendergast was a manufacturer's representative for
a sporting goods Company in the Southeast United States since July 1994. Prior
to that he was National Sales Manager for QPI Consumer Products Corporation and
the predecessor Company to QPI Consumer Products, PI Consumer Products
Corporation.
Mr. Reuben was appointed to the Board of Directors of the Company in June 1995.
Mr. Reuben, for more than the past five years, has been a self-employed
certified public accountant practicing in the Los Angeles, California area.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation of each executive officer during the
fiscal year ended September 30, 1995. All amounts have been adjusted to reflect
the 1:4 reverse stock split of November 30, 1994:
Summary Compensation Table
<TABLE>
<CAPTION>
(a) (a) (b) (c) (d) (e)
Name Position Year Salary Bonus Other
<S> <C> <C> <C> <C> <C>
James S. Renaldo President (until 1995 77,163 3,518
March 1995) 1994 139,334 71,875(1)
Thomas Raabe Chairman & 1995 60,775(2)
CEO (March - Sept. 1995)
Mark Prendergast Vice President 1995 49,613
President - QPI
Consumer Products
Corporation (March - Sept. 1995)
Daniel J. Sullivan Chief Financial Officer 1995 109,577
</TABLE>
(1)Stock Bonus
(2)Mr. Raabe was employed pursuant to a contract providing for an annual base
salary of $120,000. In addition Mr. Raabe received or was provided with a
Company apartment costing $7,800 and the use of a Company vehicle. These
benefits are not included in the base salary.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of September 30, 1995, the Company was not aware of any person who owned more
than five per cent of any class of the Company's equity securities other than
Prudential Securities who owned 5 shares or 84% of the Company's Preferred B
stock.
At September 30, 1995, no Officer or Director of the company owned any equity of
the company other than director Micah Eldred who owned 1,000 shares and Daniel
Sullivan, the Company's Chief Financial Officer who owned 2,500 shares,
including options to acquire 2,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kennedy, an officer of the Company, in July, 1993, borrowed $90,000 from the
Company. The Note, which bore interest at 6% per anum, matured July, 1995. As of
September 30, 1994, Mr. Kennedy repaid $29,897 in principal on the note, for a
balance owing of $60,103. As of September 30, 1995, Mr. Kennedy was indebted to
the Company in the amount of $63,709. In July, 1996, the note was assigned to a
former director, Mr. Renaldo, as part of the settlement the Company reached with
Mr. Renaldo.
In July, 1995, the Company provided a loan to Mr. Raabe in the amount of
$20,000. During February 1996, $1,250 was repaid and subsequently the balance
was forgiven as part of the settlement with Mr. Raabe's employment contract upon
his resignation as a Director and Officer of the Company in 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
<PAGE>
QUALITY PRODUCTS, INC.
& SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND
FOR THE YEARS ENDED
SEPTEMBER 30, 1995 AND 1994
AND INDEPENDENT AUDITORS' REPORTS
<PAGE>
QUALITY PRODUCTS, INC.
& SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
INDEPENDENT AUDITORS' REPORT - KPMG PEAT MARWICK LLP 2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet,
September 30, 1995 3-4
Consolidated Statements of Operations
for the Years Ended September 30, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1995 and 1994 6
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1995 and 1994 7-8
Notes to Consolidated Financial Statements 9-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Quality Products, Inc.:
We have audited the accompanying consolidated balance sheet of Quality Products,
Inc. and its subsidiaries (the "Company") as of September 30, 1995 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
September 30, 1995 and the results of its operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
FARBER & HASS
February 28, 1997
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Quality Products, Inc.
We have audited the accompanying consolidated balance sheet of Quality
Products, Inc. and subsidiaries as of September 30, 1994 (not presented herein),
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quality
Products, Inc. and subsidiaries at September 30, 1994, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Petersburg, Florida
December 30, 1994
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 94,150
Restricted cash 143,132
Amounts receivable from liquidation
of QPI Consumer Products Corporation 1,012,691
Amounts receivable from liquidation
of Technical Metals Company 5,088,758
Trade accounts receivable, less allowance
for doubtful accounts of $35,000 488,316
Inventories 782,478
Other current assets 7,900
-----------
Total current assets 7,617,425
-----------
PROPERTY, PLANT AND EQUIPMENT 848,939
Less accumulated depreciation (811,292)
-----------
Property, plant and equipment, net 37,647
-----------
TOTAL ASSETS $ 7,655,072
===========
(Continued)
3
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit $ 6,459,218
Accounts payable 766,042
Accrued expenses 200,727
Note payable to former officer 333,202
------------
Total current liabilities 7,759,189
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible, voting, par
value $.00001; 10,000,000 shares authorized;
25 shares issued and outstanding 0
Common stock, $.00001 par value; 20,000,000
shares authorized; 1,976,931 shares
issued and outstanding 20
Additional paid-in capital 29,897,664
Accumulated deficit (24,975,829)
------------
4,921,855
Less: Treasury stock, 255,708 shares at cost (5,025,972)
------------
Total stockholders' deficit (104,117)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,655,072
============
See notes to consolidated financial statements.
4
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
- ----------------------------------------------------------------------
1995 1994
------------ ------------
NET SALES $ 5,407,956 $ 36,531,875
COST OF GOODS SOLD 3,733,404 35,729,265
------------ ------------
GROSS PROFIT 1,674,552 802,610
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,437,235 9,227,547
------------ ------------
LOSS FROM OPERATIONS (762,683) (8,424,937)
------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of assets held for sale (961,829)
Interest expense (741,749) (263,183)
Other non-recurring charges, net (9,344)
------------ ------------
Total other income (expense) (1,703,578) (272,527)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,466,261) (8,697,464)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS:
QPI Consumer Products Corporation (4,084,715)
Technical Metals Company (10,601,780)
Quality Toys, Inc. (1,375,499)
------------ ------------
Total loss from discontinued operations (16,061,994) -0-
------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (18,528,255) (8,697,464)
INCOME TAX BENEFIT -0- 1,258,000
------------ ------------
NET LOSS $(18,528,255) $ (7,439,464)
============ ============
NET LOSS PER SHARE $ (9.40) $ (3.79)
============ ============
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES 1,971,931 1,959,483
============ ============
See notes to consolidated financial statements.
5
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCKHOLDERS'
----------------------- COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993,
AS RESTATED 25 $-0- 1,610,944 $16 $11,848,604 $ 1,407,815
STOCK ISSUANCE:
Restricted stock 377,387 4 12,826,571
Unrestricted stock 78,750 1 4,094,999
Stock bonuses 14,125 174,990
Termination of agreement fee 2,500 45,000
Options exercised 60,000 872,500
ACQUISITION OF TREASURY SHARES (176,775) (1)
DIVIDEND OF $.05 PER SHARE (415,925)
NET LOSS -- (7,439,464)
-- ---- --------- --- ----------- ------------
BALANCES, SEPTEMBER 30, 1994 25 -0- 1,966,931 20 29,862,664 (6,447,574)
STOCK ISSUANCE - Officer Severance
Agreement 10,000 35,000
LITIGATION SETTLEMENT, DEBT FORGIVEN
NET LOSS -- (18,528,255)
-- ---- --------- --- ----------- ------------
BALANCES, SEPTEMBER 30, 1995 25 $-0- 1,976,931 $20 $29,897,664 $(24,975,829)
== ==== ========= === =========== ============
</TABLE>
<TABLE>
<CAPTION>
NOTES TOTAL
TREASURY DUE FROM STOCKHOLDERS'
STOCK OFFICERS EQUITY (DEFICIT)
----- -------- ----------------
<S> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993,
AS RESTATED $ (474) $(60,103) $ 13,195,858
STOCK ISSUANCE:
Restricted stock 12,826,575
Unrestricted stock 4,095,000
Stock bonuses 174,990
Termination of agreement fee 45,000
Options exercised 872,500
ACQUISITION OF TREASURY SHARES (5,025,498) (5,025,499)
DIVIDEND OF $.05 PER SHARE (415,925)
NET LOSS (7,439,464)
----------- -------- ------------
BALANCES, SEPTEMBER 30, 1994 (5,025,972) (60,103) 18,329,035
STOCK ISSUANCE - Officer Severance
Agreement 35,000
LITIGATION SETTLEMENT, DEBT FORGIVEN 60,103 60,103
NET LOSS (18,528,255)
----------- -------- ------------
BALANCES, SEPTEMBER 30, 1995 $(5,025,972) $ -0- $ (104,117)
=========== ======== ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(18,528,255) $ (7,439,464)
Adjustments to reconcile loss to net
cash used in operating activities:
Depreciation 38,940 935,938
Amortization of intangible assets 331,770
Provision for bad debts 4,117 318,770
Discontinued operations 16,731,787
Stock compensation 219,990
Changes in operating assets and liabilities:
Certificates of deposit 411,531
Restricted cash (143,132)
Accounts receivable 173,052 4,123,181
Inventories 232,766 (3,307,406)
Other assets (133,501)
Accounts payable 173,035 (940,764)
Income taxes 88,000 (145,000)
Accrued expenses 123,339 446,590
Deferred rent expense 290,000
Deferred income taxes (1,170,000)
------------ ------------
Net cash used by operating activities (1,106,351) (6,058,365)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of
cash acquired 59,436
Capital expenditures (12,316) (719,853)
Increase in intangible costs incurred (59,502)
------------ ------------
Net cash used in investing activities (12,316) (719,919)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowing from officer 333,202
Payments on long-term debt (7,394,338)
Bank line of credit 1,194,908 6,003,411
Payment of capital lease obligations (146,883)
Payments on short-term debt (1,768,151)
Dividends paid (415,925)
Purchase of treasury stock (5,025,499)
Stock offering proceeds net of expenses 13,699,075
------------ ------------
Net cash provided by financing activities 1,194,908 5,284,892
------------ ------------
NET INCREASE (DECREASE) IN CASH 76,241 (1,493,392)
CASH, BEGINNING OF YEAR 17,909 1,511,301
------------ ------------
CASH, END OF YEAR $ 94,150 $ 17,909
============ ============
(Continued)
7
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
- -------------------------------------------------------------------------------
1995 1994
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 741,749 $ 224,000
Cash paid for taxes $ -0- $ -0-
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the year ended September 30, 1995, the Company forgave a note receivable
from a former officer amounting to $60,103 in connection with the settlement
of certain litigation.
During the year ended September 30, 1994, the Company acquired net assets in
the amount of $4,095,000 in exchange for stock. In the same year, the Company
issued common stock in the amount of $219,990 in exchange for compensation.
Additionally, the Company obtained equipment in the amount of $520,564 by
entering into capital lease obligations.
See notes to consolidated financial statements.
8
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION - Quality Products, Inc. ("QPI" or the "Company")
is a holding company. QPI's subsidiaries operate in various industries,
including the manufacture of hydraulic presses and accessories through
its Multipress division, the processing of steel through its Technical
Metals Company subsidiary (discontinued September 30, 1995), the
manufacture of foam products and toys through its Quality Toys, Inc.
subsidiary (discontinued November 30, 1994) and the manufacture of
sporting goods and other foam recreational products through its Q.P.I.
Consumer Products Corporation subsidiary (discontinued September 30,
1995). The Company also owns a non-operating subsidiary, American
Liberty Mining Corporation, which holds certain zinc mining claims.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the financial statements of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all short-term investments with purchased maturities
of three months or less to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (using the
first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Plant and equipment under capital leases are stated at
the present value of minimum future lease payments at the inception of
the lease. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Plant and equipment held under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of
the lease term or estimated useful life of the asset.
9
<PAGE>
INCOME TAXES - The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), which is an asset and liability method of accounting that
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between tax
bases and financial reporting bases of accounting.
COMMITMENTS AND CONTINGENCIES - Liabilities for loss contingencies are
recorded when the liability is probable and can be reasonably
estimated.
EARNINGS PER SHARE - Income or loss per common share is computed on the
weighted average number of common and equivalent shares outstanding
each year.
2. RESTRICTED CASH
A Certificate of Deposit in the amount of $141,400 provides collateral
for a letter of credit issued to an insurance carrier to secure the
Company's potential obligations under its Workman's Compensation Plan.
Any amount in excess of $141,400 represents accrued interest which is
available for the Company's use.
3. AMOUNTS RECEIVABLE FROM LIQUIDATION OF SUBSIDIARY COMPANIES
QPI CONSUMER PRODUCTS CORPORATION
On August 25, 1995, QPI Consumer Products Corporation, a wholly-owned
subsidiary of QPI, was petitioned into involuntary bankruptcy by
certain of its unsecured creditors. On October 19, 1995, the petition
was converted to a voluntary Chapter 11 filing, which allowed it to
liquidate its assets with protection from creditors.
Effective September 30, 1995, the Company's Board of Directors voted to
liquidate the assets of this division. Accordingly, this division's
balance sheet and statement of operations are not included in the
consolidated financial statements of the Company at September 30, 1995
and for the year then ended, but rather disclosed as Amounts Receivable
from Liquidation of QPI Consumer Products Corporation and Loss From
Discontinued Operations, respectively.
10
<PAGE>
The liquidation of the assets of QPI Consumer Products Corporation
generated the following amounts:
Accounts receivable $ 785,414
Inventory 812,452
Fixed assets 250,000
Patents 40,443
----------
1,888,309
Less liquidation expenses 875,618
----------
Net receivable from liquidation of
QPI Consumer Products Corporation $1,012,691
==========
Summary operating results of the discontinued operations were as
follows:
1995 1994
---- ----
Sales $ 4,297,622 $ 4,278,498
Costs and expenses (5,915,698) (10,111,057)
----------- ------------
Loss from discontinued operations
before income taxes and liquidation
expense (1,618,076) (5,832,559)
Loss on liquidation of subsidiary (2,466,639)
----------- ------------
Loss from discontinued operations $(4,084,715) $ (5,832,559)
=========== ============
TECHNICAL METALS COMPANY
During fiscal 1995, the financial situation at Technical Metals
deteriorated. Gross margins were insufficient to support overhead,
turnover in senior management was high, and suppliers and creditors
fell increasingly past due. Technical Metals' main steel supplier
increased prices and due to their credit history and cash shortage,
Technical Metals could not go elsewhere for raw materials.
Additionally, the Company's line of credit was at its maximum and no
new sources of capital were available.
Effective September 30, 1995, the Company's Board of Directors voted to
liquidate this division. Accordingly, the balance sheet and statement
of operations of Technical Metals were not included in the consolidated
financial statements of the Company at September 30, 1995 and for the
year then ended, but rather are disclosed as Amounts Receivable from
Liquidation of Technical Metals Company and Loss From Discontinued
Operations, respectively.
11
<PAGE>
The liquidation of the assets of Technical Metals Company generated the
following amounts:
Accounts receivable $ 5,099,644
Inventory 3,079,530
Fixed assets 1,813,118
-----------
9,992,292
Less payment to subordinated secured creditor 936,000
Less payoff of Small Business Administration loan 373,288
Less liquidation expenses 3,594,246
-----------
Amount receivable from liquidation of
Technical Metals Company $ 5,088,758
===========
Summary operating results of the discontinued operations were as
follows:
1995 1994
---- ----
Sales $ 23,924,422 $ 26,834,077
Costs and expenses (27,640,934) (26,274,823)
------------ ------------
Income (loss) from discontinued
operations before liquidation
expense (3,716,512) 559,254
Loss on liquidation of subsidiary (6,885,268)
------------ ------------
Income (loss) from discontinued
operations $(10,601,780) $ 559,254
============ ============
QUALITY TOYS, INC.
Quality Toys, Inc., a wholly-owned subsidiary of the Company, was shut
down in November 1994 by a vote of the Company's Board of Directors.
Sales for this developmental stage subsidiary never materialized and
losses persisted throughout its short existence.
Its only material asset was a building which had been previously
disclosed as property held for sale or rent in the financial statements
of the Company at September 30, 1994. This building was sold in
February 1995.
Summary operating results of the discontinued operations were as
follows:
1995 1994
---- ----
Sales $ 202,958 $ 336,137
Costs and expenses (1,578,457) (2,494,131)
----------- -----------
Loss from discontinued operations
before liquidation expense (1,375,499) (2,157,994)
Gain/loss on liquidation of subsidiary -0- -0-
Loss from discontinued operations $(1,375,499) $(2,157,994)
=========== ===========
12
<PAGE>
4. INVENTORIES
Inventories at September 30, 1995 consist of:
Raw materials and supplies $ 873,819
Work-in-process 4,610
Finished goods 29,049
Provision for excess, obsolete and
slow-moving inventories (125,000)
Total $ 782,478
=========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1995 consist of:
Leasehold improvements $ 11,449
Machinery and equipment 669,738
Furniture and fixtures 167,752
---------
848,939
Less accumulated depreciation (811,292)
---------
Property, plant and equipment, net $ 37,647
=========
The estimated useful lives used to depreciate property and equipment
are as follows:
Buildings 40 years
Leasehold improvements Lease term
Machinery and equipment 3 - 15 years
Furniture and fixtures 3 - 15 years
6. LEASES
At September 30, 1995, the Company was obligated under several
noncancellable operating leases, primarily for facilities and
equipment, that expire over the next five years. These leases generally
contain renewal options for periods ranging from three to five years
and require the Company to pay all executory costs such as maintenance
and insurance. Rental expense for all operating leases was $227,000 in
1995 and $1,060,000 in 1994.
13
<PAGE>
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
September 30, 1995, are:
Operating
Year ending September 30: Leases
------------------------- ---------
1996 $153,746
1997 76,417
1998 74,209
1999 71,443
2000 73,900
--------
Total minimum lease payments $449,715
========
7. BANK LINE OF CREDIT
On April 26, 1994, the Company entered into a line of credit agreement
(the "Agreement") with a commercial bank. The Agreement provided for
borrowings up to $5,000,000, bore interest at prime plus 1/2%, matured
in April 1995 and was secured by all of the Company's assets including
but not limited to, accounts receivable, inventories, machinery and
equipment and patents. During each of September and December of 1994,
additional $1,000,000 notes were negotiated with the bank which bore
interest at prime plus 1% and matured May 31, 1995.
On May 31, 1995, the Company had utilized the entire amount of the two
notes and had no more availability under the Line of Credit Agreement.
Accordingly, the Company negotiated an extension with the commercial
bank with the renewal terms calling for the repayment of the two
$1,000,000 notes by increasing the line of credit facility to
$7,000,000. The Line of Credit became payable on demand, charged
interest at prime plus 3% and had renewal fees of $3,000 per month from
June through August, 1995 and $10,000 per month thereafter. In February
of 1996, the Company entered into a workout agreement with the Bank
whereby all proceeds from the sale of the secured assets of Technical
Metals and QPI Consumer Products Corporation would reduce the Line of
Credit and no further advances would be available. Interest would be
reduced to prime plus 1%, the monthly renewal fee would be deferred so
long as loan paydowns continue and the line of credit became due August
15, 1996.
14
<PAGE>
8. INCOME TAXES
Total income tax expense (benefit) for the years ended September 30,
1995 and 1994 were allocated as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loss from continuing operations $ -0- $(1,258,000)
Loss from discontinued operations -0- -0-
---------- -----------
Total $ -0- $(1,258,000)
========== ===========
</TABLE>
Income tax expense (benefit) from operations for the years ended
September 31, 1995 and 1994 consist of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CURRENT:
Federal $ -0- $ (150,000)
State -0- 62,000
----------- -----------
-0- (88,000)
----------- -----------
Federal -0- (1,170,000)
State -0- -0-
----------- -----------
-0- (1,170,000)
----------- -----------
Total $ -0- $(1,258,000)
=========== ===========
</TABLE>
Income tax expense (benefit) attributable to loss from operations was $
-0- and $(1,258,000) for the years ended September 30, 1995 and 1994,
respectively, and differed from the amounts computed by applying the
U.S. Federal income tax rate of 34 percent to the loss before income
taxes as a result of the following:
1995 1994
---- ----
Computed expected tax benefit $(6,297,000) $(2,957,000)
Increase (reduction) in income taxes
resulting from:
Change in valuation allowance 6,289,000 1,930,000
State taxes, net of Federal benefit 41,000
Permanent differences and other 8,000 (272,000)
----------- -----------
Total $ -0- $(1,258,000)
=========== ===========
15
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1995 and 1994 are presented below.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts receivable, principally due
to allowance for doubtful accounts $ 12,000 $ 108,000
Inventories, principally due to
additional costs inventoried for
tax purposes and valuation allowance 423,000
Compensated absences, principally due
to accrual for financial reporting
purposes 6,000 16,000
Net operating loss carryforwards 9,489,000 3,185,000
----------- -----------
Total gross deferred tax assets 9,507,000 3,732,000
Less valuation allowance (9,507,000) (2,655,000)
----------- -----------
Net deferred tax assets -0- 1,077,000
----------- -----------
DEFERRED TAX LIABILITIES:
Plant and equipment, principally due
to differences in depreciation (1,009,000)
Other (68,000)
----------- -----------
Total gross deferred liabilities -0- (1,077,000)
----------- -----------
NET DEFERRED TAXES $ -0- $ -0-
=========== ===========
</TABLE>
The valuation allowance increased approximately $6,852,000 in 1995,
representing primarily net operating losses incurred in 1995. In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
At September 30, 1995 and 1994, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately
$27,941,000 and $9,400,000, respectively, which are available to offset
future Federal taxable income, if any, through 2010.
9. STOCKHOLDERS' EQUITY
SERIES B PREFERRED STOCK
The Series B Preferred Stock shares are voting (1.25 votes per share)
and may be converted into common shares of the Company on the basis of
1.25 shares of common stock for each one share of
16
<PAGE>
Series B Preferred Stock, taking into consideration all previous stock
splits.
STOCK SPLIT
Effective November 30, 1994, the Company declared a reverse split of
the Company's common stock on the basis of one new share of common
stock for each four shares of common stock held by shareholders of
record as of November 30, 1994. The consolidated financial statements
reflect the reverse split as if it had occurred on September 30, 1993.
10. STOCK OPTIONS
In March 1993, the shareholders approved a non-qualified stock option
plan under which options have been granted to employees at not less
than the fair market value on the date of grant. Options granted under
the plan are generally exercisable at any time within three years of
the date of grant. Options are granted at the discretion of the Board
of Directors.
Option Price
Shares per Share
------ ------------
Outstanding at
September 30, 1994 73,750 $5.00 - $7.00
Cancelled or expired (71,250) $5.00 - $7.00
-------
Outstanding at
September 30, 1995 2,500 $7.00
=======
Subsequent to September 30, 1995, the remaining 2,500 options expired
without being exercised.
11. TREASURY STOCK
During 1994, the Board of Directors authorized the acquisition of up to
250,000 shares of the Company's common stock. Through September 30,
1994, a total of 176,775 shares of common stock were acquired.
12. EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(K) Plan for the benefit of all full-time
employees. Employees may make voluntary contributions to the Plan which
are matched by the Company at the rate of $.50 for every $1 of employee
contribution, subject to certain limitations. Contributions recognized
by the Company as expense totalled approximately $28,000 and $35,000
during 1995 and 1994, respectively.
17
<PAGE>
13. SEGMENT INFORMATION
Information with respect to industry segments is presented below.
Foreign operations are not material in relation to consolidated
revenues, operating income and identifiable assets. Intersegment sales
and transfers are accounted for at cost. Operating expenses are
allocated among industry segments based on sales volume.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS:
Steel service $23,924,422 $ 26,834,077
Toys/recreation 4,500,580 4,614,635
Machine tools 5,407,956 5,083,163
----------- ------------
33,832,958 36,531,875
----------- ------------
INTERSEGMENT SALES - Machine tools -0- 109,485
----------- ------------
NET SALES:
Steel service 23,924,422 26,834,077
Toys/recreation 4,500,580 4,614,635
Machine tools 5,407,956 5,192,648
----------- ------------
33,832,958 36,641,360
ELIMINATIONS -0- (109,485)
----------- ------------
$33,832,958 $ 36,531,875
=========== ============
OPERATING INCOME (LOSS):
Steel service $ (3,716,512) $ 559,254
Toys/recreation (2,993,575) (7,990,553)
Machine tools 1,006,969 473,038
------------ ------------
(5,703,118) (6,958,261)
ELIMINATIONS -0- (15,293)
------------ ------------
LOSS ON SALE OF ASSETS HELD FOR SALE (961,829) -0-
------------ ------------
Net loss from discontinued operations (16,061,994)
Plus operating loss:
Steel source 3,716,512
Toys/recreation 2,993,575
------------ ------------
Net loss from liquidation (9,351,907) -0-
------------ ------------
General corporate expenses and
unallocated components of other
income and expenses, net (1,769,652) (1,460,727)
Interest expense (741,749) (263,183)
------------ ------------
Loss before income taxes $(18,528,255) $ (8,697,464)
============ ============
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
IDENTIFIABLE ASSETS:
Steel service $ 5,180,668 $ 17,961,055
Toys/recreation 1,046,035 10,276,457
Machine tools 1,285,237 2,214,382
Corporate assets 143,132 23,313,669
Eliminations (23,320,861)
------------ ------------
$ 7,655,072 $ 30,444,702
============ ============
DEPRECIATION, DEPLETION AND
AMORTIZATION:
Steel service $ 396,816 $ 317,093
Toys/recreation 423,506 874,455
Machine tools 21,415 76,160
------------ ------------
$ 841,737 $ 1,267,708
============ ============
</TABLE>
14. LITIGATION
The Company is a defendant in several lawsuits, in addition to those
disclosed in Notes 15 and 16, mainly arising from the liquidation of
QPI Consumer Products Corporation, Quality Toys, Inc. and Technical
Metals Company. Although the ultimate outcome of these suits cannot be
ascertained at this time, and liabilities of indeterminate amounts may
be imposed upon the Company, it is the opinion of management that the
allegations are without merit and that the resolution of these suits
will not have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
15. SUBSEQUENT EVENTS (Unaudited)
On December 22, 1995, the Company repaid the $333,202 Due to Former
Officer by assuming an equal amount of bank debt from that former
officer. The assumed bank debt was paid in full in December 1995.
In March 1996, the Company was sued by PI, Inc. in Florida Superior
Court for $7,795,000 plus interest and costs of court. The plaintiff
alleged breach of contract for failure to register shares of restricted
stock of the Company issued to PI, Inc. In August 1996, the Company
reached a settlement with the Plaintiff by issuing a 6% convertible,
unsecured note payable in the amount of $500,000. The note is
convertible, upon demand by either party, under certain conditions,
into 500,000 to 666,666 common shares of QPI, Inc. at prices ranging
from $0.75 to $1.00 per share. The note is payable in full on August
31, 2001.
In March 1996, the Company terminated the employment of its President &
CEO. In October 1996, the Company reached a settlement with the former
officer relating to his employment contract whereby the Company would:
1) Forgive a $18,750 loan due from the officer,
19
<PAGE>
2) Issue a $75,000 unsecured note payable to the former officer. Under
the note, the Company must make an immediate payment of $10,000,
monthly payments of $5,000 commencing in October 1996 and ending in
March 1997, payments of $3,000 per month from April 1997 to August 1997
and eight quarterly payments of $2,500 thereafter, 3) Issue the former
officer 139,583 shares of the Company's common stock and 4) Issue the
former officer an option to purchase 175,000 shares of the Company's
common stock at $0.10 per share. The option is not exercisable until
1999.
In July 1996, the Company closed their Executive Offices in Tampa,
Florida and relocated the Company's headquarters to the Company's
MultiPress subsidiary in Columbus, Ohio. In connection with the Tampa
office closure, the Company returned certain leased office equipment to
the lessors and ceased all lease payments which was a violation of the
respective capital lease agreements. The leases were scheduled to
expire at various dates through August 1999. In October 1996, three
lessors notified the Company that the leases were in default and
demanded all amounts payable under the leases, totalling $81,800. In
August 1996, the Company reached a settlement with the three lessors
for the amount of $29,200.
In October 1996, the lessor of the Company's former offices in Tampa,
Florida sued the Company in Florida Superior Court for $198,375. In
December 1996, the plaintiff received a summary judgement against the
Company in the amount of $166,400.
In December 1995, the Company was sued in Florida Superior Court by a
former supplier to the Company's QPI Consumer Products Subsidiary
alleging failure to pay for delivered goods. In June 1996, the court
issued a judgement against the Company in the amount of $22,300. The
Company has filed an appeal of this judgement. The Company has made
full provision in the financial statements for the amount of the
judgement.
In May 1995, the Company was sued in Florida Superior Court for $19,712
plus interest and costs of court by a former factor to the Company's
QPI Consumer Products subsidiary. In November 1996, the court issued a
judgement against the Company in the amount sought by the plaintiffs.
The Company has made full provision in the financial statements for the
amount of this judgement.
In April 1995, the Company was sued in Delaware Chancery Court by its
former President & CEO seeking a declaration that the Company was
obligated to indemnify him for expenses incurred in connection with his
ongoing defense of actions against him in his capacity as President &
CEO of the Company. In November 1995, the court issued a final
judgement in favor of the plaintiff and ordered the Company to pay the
plaintiff the sum of $76,821. Subsequently, in August 1996, the parties
reached a settlement by agreeing to assign to the plaintiff a note
receivable owed to the Company by another officer in the amount of
$63,709.
20
<PAGE>
In November 1994, the Company's Quality Toys subsidiary ceased
operations. In November 1994, the subsidiary vacated its Oceanside,
California offices and ceased making lease payments. The lease was due
to expire in December 1997. In May 1995, the Company and its Quality
Toys subsidiary were sued in California Superior Court by the former
landlord seeking $25,000 plus interest and costs of court. The Company
is defending the suit and has made full provision in the financial
statements in the event of loss.
16. 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.
21
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
/s/ Bruce Weaver Date: March 21, 1997
Bruce Weaver
Director and President
/s/Jonathon Reuben Date: March 21, 1997
Jonathon Reuben
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 94,150
<SECURITIES> 143,132
<RECEIVABLES> 6,589,765
<ALLOWANCES> 35,000
<INVENTORY> 782,478
<CURRENT-ASSETS> 7,617,425
<PP&E> 848,939
<DEPRECIATION> 811,292
<TOTAL-ASSETS> 7,655,072
<CURRENT-LIABILITIES> 7,759,189
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> (104,137)
<TOTAL-LIABILITY-AND-EQUITY> 7,655,072
<SALES> 5,407,956
<TOTAL-REVENUES> 5,407,956
<CGS> 3,733,404
<TOTAL-COSTS> 2,437,235
<OTHER-EXPENSES> 961,829
<LOSS-PROVISION> 4,117
<INTEREST-EXPENSE> 741,749
<INCOME-PRETAX> (2,466,261)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,466,261)
<DISCONTINUED> 16,061,994
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,528,255)
<EPS-PRIMARY> (9.40)
<EPS-DILUTED> (9.40)
</TABLE>
