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, 1996
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 $4,759,567.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 30, 1996, was $553,543 based on the average of the
bid and asked price of $0.28 as reported by the NASDAQ electronic bulletin board
on such date.
As of September 30, 1996, there were 2,395,680 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 Board of Directors decided to
discontinue operations at the Company's other operating subsidiaries during 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.
During fiscal years 1992 through 1994, the Company acquired all of its operating
subsidiaries. All of the subsidiaries, except Multipress, failed to generate
operating profits. These acquisitions resulted in revenue growth from
$12,175,683 in fiscal 1993 to $36,531,875 in fiscal 1994. However, the operating
losses, 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. In March 1995, 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 by
the board 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 cash flow 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 approximately $7 million
during fiscal 1995. By the end of fiscal 1995, QPI Consumer Products Corporation
was in bankruptcy and TMC Company was 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 subsidiary, Multipress. In
February 1996, Mr. Weaver became a director and replaced Mr. Raabe as President
and CEO. Mr. Raabe resigned as a director in October 1996, leaving Mr. Weaver
and Mr. Reuben as the sole directors. Since the end of fiscal year 1995, the
Company has closed down all subsidiaries' operations except Multipress,
liquidated its subsidiaries' other assets, repaid substantial debt and settled
numerous other material obligations. The Company is still saddled with serious
financial problems, virtually all of which were inherited from the Company's
previous management, and there are still serious impediments to the Company's
ability to continue as a going concern.
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.
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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 outside sales
representatives. Multipress' primary market has been Ohio, Michigan, Indiana and
Illinois.
Multipress(R) does not market directly abroad; however it has sold presses
through sales representatives to customers overseas.
No one customer accounted for more than 10% of sales in 1996.
Multipress'(R) backlog generally varies from quarter to quarter as customer
purchasing is not seasonal. Multipress'(R) backlog at September 30, 1996 was
approximately $831,010, which is consistent with Multipress' average backlog of
$800,000. The backlog is usually shipped within a few months from order and
rarely later than six months from the date ordered.
QUALITY TOYS
Quality Toys (formerly known as QYP, Inc. and Playtime Toys, Inc.), a Nevada
corporation, was acquired in 1992 for 896,292 shares of the Company's common
stock. At the time of the acquisition, it was still a development stage
corporation, with assets consisting mainly of cash, inventory, property and
equipment used in its operations.
Until operations ceased in 1995, 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 significant 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. The
Company's
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<PAGE>
board of directors decided to discontinue operations in fiscal 1995. The
liquidation of this subsidiary was consummated in fiscal 1996.
Q.P.I. CONSUMER PRODUCTS (QPI Consumer)
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
and 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. The Company's board of directors decided to discontinue operations of
this subsidiary in September 1995. On October 17, 1995, QPI Consumer filed a
voluntary petition, thus converting the proceeding to a voluntary chapter 11
case. Then 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.
TECHNICAL METALS CORPORATION (TMC)
The Company acquired TMC in 1994 for approximately $6.8 million cash plus 78,750
shares of common stock. 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
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<PAGE>
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.
The liquidation produced $2,600,000 for TMC's secured lender and $966,000 for
the mortgagee of TMC's facilities, which were sold in the liquidation.
EMPLOYEES
The Company and its subsidiaries employed a total of 31 employees as of
September 30, 1996, none of whom belonged to any union.
ITEM 2. PROPERTY OF THE COMPANY
Locations Descriptions
--------- ------------
560 Dublin Avenue A year to year lease for approximately
Columbus, Ohio 50,000 square feet of manufacturing
and office space currently expiring
July, 1998 used by QPI Multipress
Inc., and since August 1996 also used
as the executive office of the
Company. The property is in good
condition.
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
administratively 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
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common stock at $.75 to $1.00 per share. The note is payable in full in August
2001, and contains certain acceleration clauses.
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 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
of approximately $162,000, in 1997.
A supplier for QPI Consumer, the Brookwood Companies sued the Company in
December 1995 in Hillsborough County court in Tampa, Florida, for approximately
$150,000 for goods sold for use by QPI Consumer. The trial took place in May,
1997, and in June 1997, the Court awarded Brookwood judgment against the Company
for the full amount plus statutory interest from December 1995 for a total of
approximately $170,000 to the date of judgment. The Company intends to appeal,
but no assurance can be given that such appeal will be successful. Such judgment
has a material adverse effect on 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
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<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 American Stock Exchange (the "ASE"), for
the period commencing October 1, 1994 through March 31, 1995; and (b) the NASDAQ
electronic bulletin board, for the period commencing August 1, 1995 through
September 30, 1996. 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
1996 High Low
---- ---- ---
First Quarter - December 31, 1995 $ 5/16 $ 1/8
Second Quarter - March 31, 1996 3/16 1/4
Third Quarter - June 30, 1996 3/4 1/16
Fourth Quarter - September 30, 1996 7/16 1/8
(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 320
(c) Dividends:
The Company paid no dividends in the years ending September 30, 1995 or 1996.
The Company is currently prohibited from paying dividends pursuant to agreements
with its secured lenders, and does not anticipate paying dividends in the
foreseeable future.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Sales for the year ended September 30, 1996 were $4,759,567 as compared to
$5,407,956 for the year ended September 30, 1995 a decrease of $648,389 or 12%.
The decrease in sales is a direct result of the poor financial condition of the
Company. The lack of working capital and high debt levels prevented Multipress
from operating its business efficiently, as payments to suppliers fell behind,
certain orders were delayed and marketing and sales efforts were severely
hampered.
Costs of sales were $3,198,076 or 67% of sales for the year ended September 30,
1996 as compared to $3,733,404 or 69% of sales for the year ended September 30,
1995. Cost of sales as a percentage of sales was improved slightly due to some
operating efficiencies implemented during the period.
Selling, General and Administrative expenses were $1,955,080 for the year ended
September 30, 1996 as compared to $2,437,235 for the year ended September 30,
1995. Selling, General and Administrative as a percentage of sales fell from 45%
of sales in 1995 to 41% in fiscal 1996, despite the decrease in sales of
$648,389 or 12% during fiscal 1996, as staff was reduced, offices closed, leases
terminated and travel and entertainment significantly curtailed. However, legal
expenses were unusually high during the year as the Company defended itself
against lawsuits brought against it primarily resulting from the acts and
omissions of former management, and the Company incurred substantial accounting
expenses in connection with attempting to cure delinquencies in filing periodic
reports with the Securities and Exchange Commission.
Selling, General and Administrative expenses are continuing to decline and are
expected to be significantly lower in fiscal 1997 in amount and as a percentage
of sales as most of such litigation has terminated and the Company cures its SEC
delinquencies.
Interest expense for the year ended September 30, 1996 was $444,727 as compared
to $741,749 for the year ended September 30, 1995. The decrease is due to the
reduction in the principal amount of bank indebtedness during the year and the
interest rate charged on that indebtedness. Bank indebtedness declined from
$6,792,420 at September 30, 1995 to $1,468,310 at September 30, 1996, and the
interest the Company was charged was reduced from prime plus 3% to prime plus
1%. However, in August 1996 the Company incurred $500,000 of unsecured
convertible debt at 6% to settle certain litigation, adding $30,000 per year of
interest expense.
Litigation settlement expense of $711,206 (including issuance of the $500,000
unsecured convertible note) for the year ended September 30, 1996, as compared
to nothing for the year ended September 30, 1995, is due to the settling of most
of the substantial litigation that had previously been brought against the
Company. Included in this expense is $500,000 for settling the claim brought
against the Company by PI, Inc. and $81,979 for the cost of settling the claims
of a former officer and director. Since the majority of the significant
litigation against the Company had been settled by the end of the fiscal year,
it is expected that this expense will decline significantly in fiscal 1997.
Litigation Judgment expense was $296,269 for the year ended September 30, 1996
as compared to nothing for the year ended September 30, 1995, due to judgments
granted against the Company and amounts reserved for outstanding litigation. All
litigation judgment expense was unpaid at September 30, 1996.
At September 30, 1996, the Company had a working capital deficiency of
$1,453,344 as compared to a deficiency of $141,764 at September 30, 1995. The
increase is due primarily to the loss for the year, unpaid litigation judgment
and litigation settlement expenses and the reclassification of long term leases
which are in default as current liabilities.
Despite the working capital deficiency, the Company's debt was reduced
significantly during the year, and most creditors (other than Multipress
vendors) had agreed to concessions on the amounts owed by the Company and
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satisfactory payment plans to pay the settled amounts. Most important litigation
was resolved by year end or shortly thereafter. Multipress remains profitable.
However, the Company still has outstanding judgments against it and is in need
of substantial additional funds to settle the remaining problems and continue to
operate, particularly since substantially all assets of other liquidated
subsidiaries have now been sold and proceeds collected. The Company's bank
indebtedness, though substantially reduced during the year, remains in default
and due on demand. The Company is still operating under a workout agreement with
its secured lender and although the Company considers its relationship good with
the lender, the Company, at the lender's request, it looking for a new lender to
replace the existing one.
To achieve the foregoing goals, the Company is taking steps to increase
profitability of Multipress and continuing efforts to renegotiate and settle
outstanding liabilities which are unrelated to Multipress' operations. Once the
Company is current with its filings with the Securities and Exchange Commission,
it will review all refinancing possibilities including the issuance of
securities. No assurance can be given that the Company will be able to continued
as a going concern.
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, 1996 and September 30, 1995, 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.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors and Executive Officers
The names, principal occupation, and age of all Directors of the Company at
September 30, 1996 are listed below:
Name Age Position Director Since
---- --- -------- --------------
Bruce Weaver 36 President and Director February 1996
Jonathon Reuben 41 Secretary and Director June 1995
Thomas Raabe 44 Director March 1995
Mr. Weaver became a consultant to the Company in November 1995, and in February
1996, he became president and a director. For more than the past five years, Mr.
Weaver has been self-employed as an accountant in Canada and consultant to
financially troubled companies in the United States and Canada.
Mr. Reuben became a director in June 1995 and secretary of the Company in
December 1995. For more than the past five years, Mr. Reuben has been
self-employed as a certified public accountant in the Los Angeles, California
area.
Mr. Raabe became president and a director in March 1995, was replaced as
president in February 1996, and resigned as a director in October 1996. For more
than the past five years, Mr. Raabe has been self-employed as a lawyer in the
Boulder, Colorado area.
Significant Employee Age Position
- -------------------- --- --------
William Harrison, Jr. 63 Vice President of Operations of Multipress
Mr. Harrison joined Multipress as plant manager in September 1993. Since October
1993, Mr. Harrison has also been vice president of operations at Multipress and
its principal operating officer. For more than two years prior to September
1993, Mr. Harrison was manufacturing manager for Horton Emergency Vehicles, a
manufacturer of emergency and rescue vehicles.
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ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation of each executive officer and
significant employee during the fiscal years ended September 30, 1995 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
(a) (a) (b) (c) (d) (c)
Name Position Year Salary Bonus Other
- ---- -------- ---- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Bruce Weaver President (since 1996 $50,250(1) $11,939(3)
February 1996) 1995 ------ ------
Thomas Raabe Chairman & CEO 1996 $65,571(2) $ 6,939(4)
(March 1995 - 1995 60,775(2)
February 1996)
Jonathon Reuben Secretary/Treasurer 1996 $21,923 $ 7,939(3)
1995 ------ ------
William Harrison, Jr. Vice President of 1996 $80,696 $20,000
Multipress 1995 57,376 ------
</TABLE>
The Company has no employment contracts with any employee.
(1) Mr. Weaver receives salary at the rate of $72,000 annually. Mr. Weaver has
no employment contract, lives in Canada, and does not work solely for the
Company. Mr. Weaver does not receive any Company employee benefits.
(2) Mr. Raabe was employed pursuant to a contract providing for an annual base
salary of $120,000. In addition, Mr. Raabe, who lives in Colorado, received or
was provided with use of a Company apartment in Tampa, Florida costing $7,800 in
1995 and $6,000 in 1996 and the use of a Company vehicle while in Tampa until
his termination as an officer. The cost of these items are not included in the
above table. In October 1996, Mr. Raabe became a consultant to the Company and
agreed to render consulting services to the Company through October 31, 1999 for
total compensation of $75,000, payable in installments over the life of the
consultancy, plus reimbursement for medical insurance for one year to the extent
of approximately $4,600 in fiscal 1997.
(3) Includes stock bonus of 139,583 shares of common stock to each of Mr. Weaver
and Mr. Reuben.
(4) Represents 139,583 shares of common stock issued in connection with the
settlement of Mr. Raabe's employment agreement.
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The following table shows the stock options granted to each executive officer
during the fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
#Options/ % of Total Options/
SARs SARs Granted to Exercise or
Name Granted(1) Employees in Fiscal Year Base Price (#/sh) Expiration
---- ---------- ------------------------ ----------------- ----------
<S> <C> <C> <C> <C>
Bruce Weaver 175,000 33.3% $0.10 2000
Jonathon Reuben 175,000 33.3% $0.10 2000
Thomas Raabe 175,000 33.3% $0.10 1999
</TABLE>
(1) The 175,000 options issued to Thomas Raabe become exercisable April 15,
1999, and expire December 31, 1999. The 350,000 options issued to Bruce Weaver
and Jonathon Reuben become exercisable September 15, 1999 and expire June 30,
2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 31, 1997
regarding the ownership of each class of the Company's equity securities,
beneficially owned by each director, each executive officer, all executive
officers and directors of the Company as a group and beneficial owners of more
than 5% of any class of securities.
<TABLE>
<CAPTION>
Amount of
Title of Class Name and Address (2) Nature of Ownership Percent of Class (1)
- -------------- ---------------- ------------------- ----------------
<S> <C> <C> <C>
Common Bruce Weaver 139,583(1) 5.8%
Common Jonathon Reuben 139,583(1) 5.8%
Common Thomas Raabe 139,583(1) 5.8%
Common PI, Inc. 666,666(3) 21.8%
Common Directors and Officers as a Group (3 persons) 418,749 17.5%
</TABLE>
(1) Does not include options to purchase 175,000 shares of common stock for each
person named, all such options not being exercisable until 1999.
(2) The address for each of such persons is c/o Multipress, Inc., 560 Dublin
Avenue, Columbus, Ohio 43215- 2388, except that the address for PI, Inc. is P.O.
Box S, 70 Airport Road, Hyannis, MA 02601.
(3) Represents shares issuable upon conversion of the promissory note in
principal amount of $500,000 issued to such entity and assuming a conversion
price of $.75.
-12-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company terminated Thomas Raabe's employment without his
consent. At that time, Mr. Raabe had an employment agreement which provided him
with potential severance claims of $120,000 in the event of an involuntary
termination of his employment. In addition, Mr. Raabe had potential claims to
issuance of 425,000 shares of common stock and 425,000 stock options. Mr. Raabe
remained a director of the Company. In September 1996, the Company and Thomas
Raabe settled all claims between them by submitting their differences to the
binding determination of the Company's outside legal counsel as arbitrator.
Pursuant to the arbitrator's decision, Mr. Raabe resigned as a director in
October 1996 and is obligated to render consulting services to the Company on a
limited as-requested basis through September 1999. The Company was ordered to
pay Mr. Raabe a total of $70,000 over the term of the consultancy plus reimburse
him for one year of health insurance benefits at the same rate paid for
Multipress employees (approximately $4,600). In addition, the issues of Mr.
Raabe's total entitlement to shares and options were fixed at the issuance of a
total of 139,583 shares to Mr. Raabe and 175,000 options to purchase shares at
$.10 per share exercisable April 15, 1999 - December 31, 1999. Mr. Raabe is
obligated to give a voting proxy on his shares to Jonathon Reuben. In connection
with such settlement, Mr. Weaver and Mr. Reuben also agreed to limit to 139,583
shares and 175,000 options at $.10 per share, each, their claims to shares and
options pursuant to prior action of the board of directors, and to limit the
exercisability of such options to the period September 15, 1999 - June 30, 2000.
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 of claims between the Company and Mr.
Raabe in 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
Mr. Weaver failed, on three occasions, to timely file reports required by
Section 16(a) ("Section 16(a)") of the Securities Exchange Acts of 1934, as
amended. One late report pertained to his election as a director of the Company
and the other two transactions reported late pertained to the Company's issuance
of stock and options, respectively, in March 1996 and September 1996. PI, Inc.
failed to timely file one report pertaining to one transaction involving the
Company's securities. Mr. Reuben failed, on two occasions, to timely file
reports required by Section 16(a). One late report pertained to his election as
a director and the other late report pertained to the issuance to him of Company
stock options.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 - Forbearance and Collateral Liquidation Agreement Dated as of
March 15, 1996 (including related mutual release agreement) (1)
2.2 - Agreement of Reorganization effective September 30,
1995 by and between Quality Products, Inc. and QPI
Multipress, Inc.
4.1 - Promissory Note Dated August 31, 1996 issued to PI, Inc. (1)
10.2 - Workout Agreement by and among the Company, The Provident
Bank et. al (1)
27.1 - Financial Data Schedule
- ---------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the period ended March 31, 1996.
(b) Reports on Form 8-K
Not applicable
-13-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized:
Quality Products, Inc.
By: /s/Bruce Weaver Date: June 23, 1997
----------------------------------------
Bruce Weaver, President
In accordance with the Exchange Act, 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: June 23, 1997
----------------------------------------
Bruce Weaver
Director
/s/Jonathon Reuben Date: June 23, 1997
----------------------------------------
Jonathon Reuben
Director
No annual report or proxy materials were sent to security holders with respect
to any annual or other meeting of security holders during fiscal year 1996 or
subsequent thereto.
-14-
<PAGE>
QUALITY PRODUCTS, INC.
& SUBSIDIARIES
Consolidated Financial Statements
As of September 30, 1996 and
For the Years Ended
September 30, 1996 and 1995
and Independent Auditors' Report
<PAGE>
QUALITY PRODUCTS, INC.
& SUBSIDIARIES
Page
----
TABLE OF CONTENTS F-1
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet,
September 30, 1996 F-3
Consolidated Statements of Operations
for the Years Ended September 30, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1996 and 1995 F-6
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-18
- --------------------------------------------------------------------------------
F-1
<PAGE>
FARBER
& HASS
- --------------------------------------------------------------------------------
Certified Public Accountants
741 South A. Street Telephone: (805) 385-3077
Oxnard, California 93030 Facsimile: (805) 385-3076
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, 1996 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended September 30, 1996 and 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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, 1996 and the results of its operations and cash flows for the
years ended September 30, 1996 and 1995 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 16. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
FARBER & HASS
April 13, 1997
F-2
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 8,094
Restricted cash 141,893
Trade accounts receivable, less allowance
for doubtful accounts of $11,867 652,230
Inventories 593,507
Other current assets 14,616
-----------
Total current assets 1,410,340
-----------
PROPERTY, PLANT AND EQUIPMENT 846,380
Less accumulated depreciation (819,507)
-----------
Property, plant and equipment, net 26,873
-----------
TOTAL ASSETS $ 1,437,213
===========
(Continued)
F-3
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - Continued
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank lines of credit $ 1,468,033
Accounts payable 1,040,891
Accrued expenses 282,260
Note payable to former officer 75,000
------------
Total current liabilities 2,866,184
------------
NOTE PAYABLE 500,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible, voting, par
value $.00001; 10,000,000 shares authorized;
25 shares issued and outstanding
Common stock, $.00001 par value; 20,000,000
shares authorized; 2,395,680 shares
issued and outstanding 24
Additional paid-in capital 29,918,597
Accumulated deficit (26,821,620)
Less: Treasury stock, 176,775 shares at cost (5,025,972)
------------
Total stockholders' deficit (1,928,971)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,437,213
============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-4
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
------------ ------------
NET SALES $ 4,759,567 $ 5,407,956
COST OF GOODS SOLD 3,198,076 3,733,404
------------ ------------
GROSS PROFIT 1,561,491 1,674,552
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,955,080 2,437,235
------------ ------------
LOSS FROM OPERATIONS (393,589) (762,683)
------------ ------------
OTHER EXPENSE:
Loss on sale of assets held for sale (961,829)
Interest expense (444,727) (741,749)
Litigation settlement expense (711,206)
Litigation judgement expense (296,269)
------------ ------------
Total other expense (1,452,202) (1,703,578)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,845,791) (2,466,261)
------------ ------------
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 -0- (16,061,994)
------------ ------------
NET LOSS $ (1,845,791) $(18,528,255)
============ ============
NET LOSS PER SHARE $ (0.84) $ (9.40)
============ ============
WEIGHTED AVERAGE COMMON SHARES 2,186,305 1,971,931
============ ============
See notes to consolidated financial statements.
F-5
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES B
PREFERRED COMMON STOCK ADDITIONAL
-------------------- --------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
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)
STOCK ISSUANCE:
Officer Severance Agreement 139,583 1 6,978
Officer bonus 279,166 3 13,955
NET LOSS (1,845,791)
BALANCES, SEPTEMBER 30, 1996 25 $-0- 2,395,680 $24 $29,918,597 $(26,821,620)
See notes to consolidated financial statements.
<CAPTION>
NOTES TOTAL
TREASURY DUE FROM STOCKHOLDERS'
STOCK OFFICERS EQUITY (DEFICIT)
----- -------- ----------------
<S> <C> <C> <C>
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)
STOCK ISSUANCE:
Officer Severance Agreement 6,979
Officer bonus 13,958
NET LOSS (1,845,791)
BALANCES, SEPTEMBER 30, 1996 $(5,025,972) $ -0- $ (1,928,971)
</TABLE>
- --------------------------------------------------------------------------------
F-6
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,845,791) $(18,528,255)
Adjustments to reconcile net loss to net
cash provided by (used by) operating
activities:
Depreciation 21,323 38,940
Provision for bad debts 4,117
Loss on disposition of fixed assets 10,323
Note payable, litigation settlement 502,500
Discontinued operations 16,731,787
Stock compensation 20,937
Changes in operating assets and liabilities:
Restricted cash 1,239 (143,132)
Accounts receivable (163,914) 173,052
Receivable from liquidation of
discontinued subsidiaries 6,101,449
Inventories 188,971 232,766
Other assets (6,716)
Accounts payable and accrued expenses 353,882 296,374
Income taxes 88,000
------------ ------------
Net cash provided by (used by) operating
activities 5,184,203 (1,106,351)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES -
Capital expenditures (20,872) (12,316)
------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Bank line of credit, net (4,991,185) 1,194,908
Payments on short-term debt (258,202)
------------ ------------
Net cash provided by (used by) financing
activities (5,249,387) 1,194,908
------------ ------------
NET INCREASE (DECREASE) IN CASH (86,056) 76,241
CASH, BEGINNING OF YEAR 94,150 17,909
------------ ------------
CASH, END OF YEAR $ 8,094 $ 94,150
============ ============
(Continued)
F-7
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 444,727 $ 741,749
Cash paid for taxes $ -0- $ -0-
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In the year ended September 30, 1996, the Company issued 139,583 shares of
common stock in connection with the settlement of certain litigation; and issued
279,166 shares of common stock as bonuses to an officer and a director of the
Company.
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-8
<PAGE>
QUALITY PRODUCTS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description - Quality Products, Inc. (the "Company") is a holding
company. The Company's subsidiaries operated in various industries,
including the manufacture of hydraulic presses and accessories through its
QPI Multipress subsidiary, the processing of steel through its Technical
Metals Company subsidiary (discontinued September 1995), the manufacture of
foam products and toys through its Quality Toys, Inc. subsidiary
(discontinued November 1994) and the manufacture of sporting goods and
other foam recreational products through its Q.P.I. Consumer Products
Corporation subsidiary (discontinued September 1995). The Company also owns
a non-operating subsidiary, American Liberty Mining Corporation, which
holds certain zinc mining claims. At September 30, 1996, the Company's only
operating subsidiary was QPI Multipress.
Going Concern - The Company has experienced operating losses for the years
ended September 30, 1996 and 1995, and at September 30, 1996, current
liabilities exceeded current assets by approximately $1,450,000 and the
Company had a stockholders' deficit of approximately $1,900,000. The
consolidated financial statements have been prepared assuming the Company
will continue to operate as a going concern which contemplates the
realization of assets and the settlement of liabilities in the normal
course of business. No adjustment has been made to the recorded amount of
assets or the recorded amount or classification of liabilities which would
be required if the Company were unable to continue its operations. As
discussed in Note 16, management is attempting to raise additional funds
and reduce expenses in order to continue as a going concern.
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.
F-9
<PAGE>
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.
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 - Loss per common share is computed on the weighted
average number of common shares outstanding each year. Common stock
equivalents would have an antidilutive effect on loss per share.
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. INVENTORIES
Inventories at September 30, 1996 consist of:
Raw materials and supplies $495,996
Work-in-process 55,648
Finished goods 41,863
--------
Total $593,507
========
F-10
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1996 consist of:
Leasehold improvements $ 11,449
Machinery and equipment 663,640
Furniture and fixtures 171,291
---------
846,380
Less accumulated depreciation (819,507)
---------
Property, plant and equipment, net $ 26,873
=========
The estimated useful lives used to depreciate property and equipment are as
follows:
Leasehold improvements Lease term
Machinery and equipment 3 - 15 years
Furniture and fixtures 3 - 15 years
5. LEASES
At September 30, 1996, the Company was obligated under several
noncancellable operating leases, primarily for facilities and equipment,
that expire over the next two years. These leases generally contain renewal
options for periods ranging from one to five years and require the Company
to pay all executory costs such as maintenance and insurance. Rental
expense for all operating leases was $103,867 in 1996 and $227,000 in 1995.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of September 30,
1996, are:
Year ending September 30:
1997 $104,235
1998 77,672
--------
Total minimum lease payments $181,907
========
6. BANK LINES 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.
F-11
<PAGE>
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, bore 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 was reduced to prime plus 1%, the monthly renewal fee would be
deferred so long as principal repayments continue and the line of credit
became due August 15, 1996. On August 15, 1996, the note became payable
upon demand.
In September 1996, the Company entered into a $50,000 unsecured revolving
line of credit with a commercial bank at a rate of prime plus 1.5% (10.5%
at September 30, 1996). $41,000 was outstanding under the line at September
30, 1996. The line is payable on demand.
7. NOTE PAYABLE
In August 1996, the Company entered into a note payable in the amount of
$500,000 with a shareholder in connection with the settlement of certain
litigation. The note is convertible, upon demand, into 500,000 shares of
common stock of the Company at a price of $1.00 per share. The Company is
required to make quarterly interest only payments at 6% per annum. The
agreement contains certain acceleration clauses. The principal amount of
the note and unpaid interest are payable in full in August 2001.
8. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at September 30, 1996 and 1995 are
substantially composed of the Company's net operating loss carryforwards,
for which the Company has made a full valuation allowance.
The valuation allowance increased approximately $553,000 and $6,852,000 in
the years ended September 30, 1996 and 1995, respectively, representing
primarily net operating losses incurred in those years. 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, 1996 and 1995, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $29,558,000
and $27,941,000, respectively, which are available to offset future Federal
taxable income, if any, through 2010.
F-12
<PAGE>
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 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, 1994.
10. STOCK OPTIONS
In March 1993, the shareholders approved a non-qualified stock option plan
under which options were 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, 1995 2,500 $7.00
Cancelled or expired (2,500) $7.00
Granted during the year 525,000 $0.10
-------
Outstanding at
September 30, 1996 525,000 $0.10
=======
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.
F-13
<PAGE>
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. Plan
expenses incurred by the Company totalled approximately $7,000 and $28,000
during 1996 and 1995, respectively.
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.
1996 1995
------------ ------------
NET SALES TO UNAFFILIATED CUSTOMERS:
Steel service $ -0- $ 23,924,422
Toys/recreation -0- 4,500,580
Machine tools 4,759,567 5,407,956
------------ ------------
$ 4,759,567 $ 33,832,958
============ ============
OPERATING INCOME (LOSS):
Steel service $ -0- $ (3,716,512)
Toys/recreation -0- (2,993,575)
Machine tools 831,605 1,006,969
------------ ------------
831,605 (5,703,118)
------------ ------------
ELIMINATIONS -0- -0-
------------ ------------
LOSS ON SALE OF ASSETS HELD FOR SALE -0- (961,829)
------------ ------------
Net loss from discontinued operations -0- (16,061,994)
Plus operating loss:
Steel source -0- 3,716,512
Toys/recreation -0- 2,993,575
------------ ------------
Net loss from liquidation -0- (9,351,907)
------------ ------------
General corporate expenses and
unallocated components of other
income and expenses, net (2,232,669) (1,769,652)
Interest expense (444,727) (741,749)
------------ ------------
(2,677,396) (2,511,401)
------------ ------------
Loss before income taxes $ (1,845,791) $(18,528,255)
============ ============
F-14
<PAGE>
1996 1995
---------- ----------
IDENTIFIABLE ASSETS:
Steel service $ -0- $5,180,668
Toys/recreation -0- 1,046,035
Machine tools 1,295,320 1,285,237
Corporate assets 141,893 143,132
Eliminations -0- -0-
---------- ----------
$1,437,213 $7,655,072
========== ==========
DEPRECIATION, DEPLETION AND
AMORTIZATION:
Steel service $ -0- $ 396,816
Toys/recreation -0- 423,506
Machine tools 21,323 38,940
---------- ----------
$ 21,323 $ 859,262
========== ==========
14. LITIGATION
The Company is a defendant in several lawsuits, in addition to those
disclosed in Note 15, 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. COMMITMENTS AND CONTINGENCIES
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. The Company has made full provision in
the financial statements for the amount of the judgement.
In December 1995, the Company was sued in Florida State Court by a former
supplier to the Company's QPI Consumer Products subsidiary. The plaintiff
seeks damages of $146,080 for failure to pay for product delivered. The
Company has made a full provision in the financial statements for the
amount sought by the plaintiff.
In March 1995, a shareholder 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
F-15
<PAGE>
losses incurred. In October 1996, the Company was granted summary judgement
and the case was dismissed. Subsequently, the plaintiff appealed the
decision 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 without merit and that summary
judgement was properly granted.
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.
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.
16. GOING CONCERN
Management has evaluated the Company's current financial situation and its
available resources and has implemented a plan to reduce expenses and
conserve cash flows. Based upon estimates of projected cash flows for the
year ending September 30, 1997, management believes that the Company's
ability to continue in existence is dependent upon receiving additional
financing, general revenues from Multipress, negotiating settlements with
secured and unsecured creditors or additional equity capital, as to any of
which there can be no assurance.
17. SUBSEQUENT EVENTS (Unaudited)
In November 1996, the Company utilized $46,287 of restricted cash to pay
Workman's Compensation Insurance obligations and $39,843 to partially repay
the bank line of credit.
F-16
<PAGE>
Quality Products, Inc.
Exhibits To Annual Report on Form 10-KSB
For The Fiscal Year Ended September 30, 1996
Commission file number: 0-18145
<PAGE>
Exhibits to Quality Products, Inc.'s Form 10-KSB
For the Fiscal Year Ended September 30, 1996
Item Exhibits
---- --------
2.2 Agreement of Reorganization effective September 30, 1995 by
and between Quality Products, Inc. and QPI Multipress, Inc.
27.1 Financial Data Schedule
Exhibit 2.2
AGREEMENT OF REORGANIZATION
---------------------------
This agreement is entered into effective September 30, 1995, by and between
Quality Products, Inc. ("Quality") a Delaware corporation having its principal
place of business at 1718 East Seventh Avenue, Suite 201, Tampa, Florida 33605,
and QPI Multipress, Inc. ("Subsidiary"), an Ohio corporation having its
principal offices at 560 Dublin Avenue, Columbus, Ohio 43215.
Background Information
----------------------
A. Quality is, and since 1988 has been, actively engaged in the business of
acquiring and selling companies.
B. Quality is also actively engaged through its Multipress Division ("Division")
in the business of manufacturing Hydraulic Presses.
C. Quality has offered to transfer the assets of Division (the "Assets") set
forth on Schedule 1 to the Bill of Sale (the "Bill of Sale"), attached hereto as
Exhibit A and incorporated herein by reference, subject to the liabilities of
the Division (the "Liabilities") set forth on Schedule 2 of the Bill of Sale, to
Subsidiary, a newly organized Ohio corporation, in exchange for the original
issue of 100 shares of common stock, without par value, of Subsidiary, which,
together with the 100 shares of common stock, without par value, of Subsidiary
previously acquired to Quality by Subscription Agreement dated July 27, 1995,
shall constitute all of the outstanding common stock of Subsidiary, in a
transaction qualifying as a tax-free exchange under Section 351 of the Internal
Revenue Code of 1954, as amended ("Code").
Statement of Agreement
----------------------
The parties to this agreement hereby acknowledge the accuracy of the above
Background Information and hereby agree as follows:
1. Sale of Assets. Quality shall sell to Subsidiary, and Subsidiary shall
purchase and acquire all of Division's Assets, subject to the liabilities,
together with the trade name, going concern value, and all other intangible
assets of the business owned and operated by Division, under the name of
Multipress, subject to such changes as have occurred in the ordinary course of
Division's business between September 30, 1995 and October 26, 1995 (the
"Closing Date"). Subsidiary shall only acquire the assets set forth on Schedule
1 to the Bill of Sale and assume only the liabilities set forth on Schedule 2 to
the Bill of Sale.
All of the remaining assets and liabilities of Quality shall remain the sole
property and obligation of Quality. In the event that any claim, action or
proceeding is asserted or commenced against Subsidiary which arises out of any
asset or liability not specifically acquired or assumed pursuant to this
agreement, Quality agrees to indemnify and hold Subsidiary harmless from and
against all costs and expenses including reasonable attorneys fees arising from
such claim, action or proceeding.
2. Purchase Price. In consideration for such sale, Subsidiary shall issue to
Quality, 100 shares of common stock, without par value, of Subsidiary.
Agreement of Reorganization Page 3 September 30, 1995
<PAGE>
3. Assumption of Liabilities and Contracts.
(a) Other Business Liabilities. In further consideration of such sale,
Subsidiary shall assume and discharge, and shall Indemnify and hold Quality
harmless from and against, all debts, liabilities, and obligations of the
Division which have arisen in the ordinary course of Division's business from
September 30, 1995 to The Closing Date, and all income, franchise, sales, and
other liabilities incurred for all taxable periods up to the Closing Date,
including all income, franchise, sales, and other tax liabilities arising out of
this transaction.
(b) Tax Return. All income, franchise, sales, and other tax returns and
reports of Quality for the period from October 1, 1994 to the Closing Date shall
be prepared jointly by the parties' accountants, but all returns shall be
executed by Quality's officers or directors as required by law.
(c) Indemnity. Subsidiary shall have the benefit of and perform all the
obligations under all contracts and commitments made in the ordinary course of
Division's business which are outstanding on the Closing Date, and shall
indemnify Quality against all liabilities under such contracts and commitments.
Notwithstanding the above, Subsidiary, at its sole and exclusive option shall
not be responsible for the breach of any such contract or commitment which
occurs prior to the Closing Date.
4. Representations and Warranties of Quality. Quality represents and warrants:
(a) as of the Closing Date, Quality shall have obtained all necessary
internal corporate authorizations and approvals required for the execution,
delivery and consummation of the transaction provided for in this Agreement.
(b) Quality has the right to sell and convey the Assets to Subsidiary.
(c) At any time and from time to time after the Closing Date, upon request
of Subsidiary and without the payment of any further consideration, Quality
shall duly execute, acknowledge and deliver all such further assignments,
conveyances and other instruments of transfer and other assurances and
documents, and will take such other action, consistent with the terms of this
agreement, as reasonably may be requested for the purpose of better assigning,
transferring and conveying to Subsidiary or reducing to its possession any and
all of the assets, properties, business and goodwill of Division.
(d) At the request of Subsidiary, Quality will prosecute or otherwise
enforce in its own name for the benefit of Subsidiary, and at Subsidiary's
expense, any and all claims or rights in the name of Quality which, or the
benefits of which, are transferred to Subsidiary; pursuant to this Agreement and
which are required to be prosecuted or otherwise enforced in Quality's name.
5. Representations and Warranties of Subsidiary.
Agreement of Reorganization Page 4 September 30, 1995
<PAGE>
(a) Subsidiary is a corporation duly organized and existing and in good
standing under the laws of the state of Ohio and will have all necessary
corporate power and authority to own and conduct the business now being
conducted by Division.
(b) On the Closing Date, the authorized capital of Subsidiary shall consist
of 850 shares of common stock, no par value per share, of which 200 shares shall
be issued and outstanding.
(c) As of the Closing Date, Subsidiary shall have obtained all necessary
authorizations and approvals required for the execution, delivery and
consummation of the transaction provided for in this agreement.
6. Closing Date. The closing hereunder shall take place on or before October 26,
1995, at the offices of Quality at the address set forth for Quality on the
first page of this agreement or at such other time and place as the parties may
determine by written agreement.
7. No Violation or Breach. Each party hereby represents to the other that its
performance of this agreement, including any conditions or surviving warranties
or representations, is not in violation of any law, statute, local ordinance,
state or federal regulation, court order, or administrative order or ruling, and
thus such performance is not in violation of any agreement by which it is bound.
8. Governing Law. This Agreement shall he construed and interpreted under the
laws of the state of Ohio.
9. Binding Effect. This Agreement shall inure to the benefit of and be binding
upon the parties and their respective successors and assigns.
10. Counterparts. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Notices. All notices, requests, demands and other communications hereunder
shall be in writing, and be deemed to have been duly given if delivered or
mailed, first class postage prepaid, to the address of the appropriate party as
shown on the first page of this agreement.
12. Non-waiver. No delay or failure by either party to exercise any right
hereunder, and no partial or single exercise of any such right, shall constitute
a waiver of that or any other right, unless otherwise expressly provided herein.
13. Headings. Headings in this Agreement are for reference and convenience only
and shall not be used to interpret or construe its provisions.
Agreement of Reorganization Page 5 September 30, 1995
<PAGE>
14. Entire Agreement; Modification. This Agreement supersedes all prior
agreements and constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof. It may not be amended or modified except
by an instrument executed by the parties.
Wherefore, the parties acknowledge their agreement hereto by their signatures
below, effective as of the date written on the first page of this agreement.
QUALITY PRODUCTS, INC. QPI MULTIPRESS, INC.
By /s/Thomas P. Raabe By /s/Thomas P. Raabe
---------------------------------------- --------------------------
Thomas P. Raabe, Chief Executive Officer Thomas P. Raabe, President
Agreement of Reorganization Page 6 September 30, 1995
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 149,987
<SECURITIES> 0
<RECEIVABLES> 652,230
<ALLOWANCES> 11,867
<INVENTORY> 593,507
<CURRENT-ASSETS> 1,410,340
<PP&E> 846,380
<DEPRECIATION> (819,507)
<TOTAL-ASSETS> 1,437,213
<CURRENT-LIABILITIES> 1,410,340
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> (1,928,995)
<TOTAL-LIABILITY-AND-EQUITY> 1,437,213
<SALES> 4,759,567
<TOTAL-REVENUES> 4,759,567
<CGS> 3,198,076
<TOTAL-COSTS> 3,198,076
<OTHER-EXPENSES> 1,955,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444,727
<INCOME-PRETAX> (1,845,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,845,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,845,791)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
