<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
------------------------------------
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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) 228-0185
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under 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[X] No[ ]
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 $6,503,795.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of December 28, 1999, was $753,060 based on the average of the
bid and asked price of $0.34375 as reported by the OTC electronic bulletin board
on such date.
As of September 30, 1999, there were 2,554,056 shares of Common Stock, $.00001
Par Value issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
There is no annual report, proxy statement, or prospectus to
incorporate by reference.
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
QUALITY PRODUCTS, INC.
FORM 10-KSB
PART I
ITEM 1. BUSINESS
GENERAL
Quality Products, Inc. (the "Company") is a Delaware corporation, originally
organized in 1988 under the name "Analytics Inc." The Company is a holding
company and has only one subsidiary. The Company's sole operating subsidiary is
QPI Multipress, Inc., an Ohio corporation ("Multipress"), a manufacturer of
hydraulic presses and accessories. Multipress previously was a division of the
Company and on October 1, 1996, the assets and liabilities relating to the
Multipress division were transferred to QPI Multipress, Inc.
The Company previously had four other subsidiaries, all in varying businesses.
In Fiscal 1995, these money losing subsidiaries were sold or liquidated and
proceeds were used to repay the Company's secured lender and provide working
capital to fund the elimination of the Company's remaining debts and its return
to profitability.
QPI MULTIPRESS, INC.
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-Registered Trademark- line, which consists of 27
different standard models, is adaptable to CIM (Computer Integrated
Manufacturing), a combination of hydraulic presses with robotics. Multipress
has provided turnkey operations to a number of Fortune 500 companies. Turnkey
systems include a combination of any number of peripheral automation devices
supplied by third party companies used in conjunction with a Multipress.
At least half the machines Multipress 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 platen can
be furnished up to 1000 ton capacity. Many special designs and configurations
have been furnished in the 58 years Multipresses have been produced. These
include ultra high speed, special frames, variations in daylight, throat, bed
size, dual or triple units, and several units located around a large dial table.
Multipress requires several different raw material components for its presses.
Multipress 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 competes in its market with about a
half dozen other companies, none of which is dominant. Multipress competes
primarily based on its ability to customize its presses, the excellent quality
and longevity of its product, its excellent service, and competitive pricing.
Multipress markets its presses through an in house force consisting of three
sales agents and through more than 25 exclusive outside machine tool
distributors. Historically, Multipress' primary markets have been in the
Midwestern United States, principally Ohio, Michigan, Indiana and Illinois.
Multipress does not market directly abroad; however, it has sold presses through
sales representatives to customers outside of the United States.
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No one customer accounted for more than 10% of sales in fiscal 1999.
Multipress' order backlog has no discernable pattern as customer purchasing is
not seasonal. Multipress backlog at September 30, 1999 was approximately
$1,600,000, which is higher than Multipress' historical average backlog of
$800,000 to $1,000,000. The backlog is usually shipped within a few months from
order and rarely later than six months from the date ordered.
The Company and Multipress employed a total of 34 employees as of September 30,
1999, none of whom belonged to any union.
The Company has a trademark on the tradename "Multipress".
The Company is not aware of any existing or probable governmental regulations
which will have a material effect on the business.
The Company had no research and development expenses in fiscal years 1999 or
1998.
The Company incurred no material costs or effects due to compliance with
environmental laws.
ITEM 2. PROPERTY OF THE COMPANY
<TABLE>
<CAPTION>
Location Description
-------- -----------
<S> <C>
560 Dublin Avenue A lease for approximately 50,000
Columbus, Ohio 43215-2388 square feet of manufacturing and
office space currently expiring
July, 2000, used by QPI Multipress
Inc., and since August 1996 also used
as the executive office of the Company.
The rental rate is $8,050 per month.
The property is in good condition.
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) The following table shows the high and low bid prices for the Company's
Common Stock as reported by the NASD electronic bulletin board (BULLETIN BOARD
SYMBOL - "QPDC"), for the period commencing October 1, 1997 to September 30,
1999. Such prices reflect inter-dealer prices, may not represent actual
transactions, and do not include retail markup, markdown or commissions.
<TABLE>
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
First Quarter - December 31, 1998 $17/32 $ 5/32
Second Quarter - March 31, 1999 1 1/64 19/64
Third Quarter - June 30, 1999 5/8 13/32
Fourth Quarter - September 30, 1999 43/64 13/32
1998 High Low
---- ---- ---
First Quarter - December 31, 1997 $ 1 3/4 $ 11/16
Second Quarter - March 31, 1998 1 3/8 1 1/32
Third Quarter - June 30, 1998 1 3/8 53/64
Fourth Quarter - September 30, 1998 1 1/32 1/2
</TABLE>
(b) Approximate number of equity securities holders:
<TABLE>
<CAPTION>
Approximate Number of
Record Holders (as of
Title of Class September 30, 1999)
---------------- ---------------------
<S> <C>
Common Stock, $.00001 Par Value 300
</TABLE>
(c) Dividends:
The Company paid no dividends in the years ending September 30, 1998 or 1999.
The Company does not anticipate paying dividends in the foreseeable future. The
Company is restricted from paying dividends under the terms of a Credit
Agreement dated November 25, 1997 with Eastlake Securities, Inc. The Company is
permitted to declare or pay dividends only in shares of capital stock, options,
warrants, or other rights to purchase stock and cash in lieu of fractional
shares, unless otherwise approved by Eastlake Securities, Inc. The restriction
is effective for the entire time of the Credit Agreement, which expires on
December 29, 2000.
RECENT SALE OF UNREGISTERED SECURITIES
On November 25, 1997, the Company completed a $1,530,000 financing with Eastlake
Securities, Inc. ("Eastlake"), a New York investment banking firm. The financing
consisted of 30 units, each unit consisting of a $50,000 beneficial interest in
$1,500,000 principal amount 6% secured note, a Series A Warrant to purchase
10,000 common shares at $1.00 per share and a Series B Warrant to purchase
15,000 common shares at $2.00 per share. The Note is due December 29, 2000 and
is issued jointly by the Company and QPI Multipress, Inc. to Eastlake as agent
for the unit holders pursuant to a Credit Agreement between the Company and
Eastlake. The Series A Warrants may be exercised at any time until September 30,
2000, and the Series B Warrants may be exercised during the period October 1,
1999 to September 30, 2001.
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The Note is to be repaid quarterly, starting December 31, 1997, by principal
payments in the amount of $50,000 each December, March, June and September
together with any accrued interest. The entire unpaid principal balance and
accrued interest are due December 29, 2000. The Company may prepay the loan at
any time without penalty as long as accrued interest up to the point of
prepayment is paid also.
The Company paid Eastlake a placement agent fee of $75,000 and issued to
Eastlake Series A Warrants to purchase 30,000 shares of common stock and Series
B Warrants to purchase 45,000 shares of common stock. The placement agent also
has a three year right of first refusal on future financing of the Company.
The Company sold these securities without registering them with either federal
or state authorities in reliance on Rules 505 and 506 of Regulation D under the
Securities Act of 1933 and related state law exemptions from registration.
In the year ended September 30, 1998, the Company issued 44 common shares to
acquire and cancel 22 Class B Preferred shares. Such issuance was deemed by
management to be exempt from registration in reliance upon Section 4 (2) of the
Securities Act of 1993.
In August 1997, two affiliates of the Company, a former company officer and a
current member of the board of directors, acquired a $500,000 note from a third
party and converted $100,000 principal into 133,332 shares. The issuance of the
note and shares of common stock upon its partial conversion were not registered
under the Securities Act of 1933 in reliance upon Section 4(2).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Net sales for the year ended September 30, 1999 were $6,503,795 as compared to
$6,483,450 for the year ended September 30, 1998, an increase of $20,345 or
0.3%. The Company shipped 241 units in fiscal 1999 compared to 249 in 1998.
Additionally, the Company experienced approximately $85,000 in returns relating
to changing needs of customers. This compared to approximately $35,000 in 1998.
The Company does not expect the increased level of returns to continue in fiscal
2000. The Company expects net sales for fiscal 2000 to reach approximately
$6,600,000.
Cost of sales were $4,394,111 or 68% of sales for the year ended September 30,
1999 as compared to $4,447,498 or 69% of sales for the year ended September 30,
1998. Resulting gross profit for the periods were $2,109,684 or 32% of sales for
the period ended September 30, 1999 and $2,035,952 or 31% of sales for the
corresponding period a year earlier. In October 1999 the Company instituted a
price increase in an effort to offset increases in labor and benefits costs.
However, the Company does not expect the price increase to have a material
effect on net income in fiscal 2000.
Selling, general and administrative expenses ("SG&A") were $1,591,308 or 24% of
sales for the year ended September 30, 1999 as compared to $1,676,082 or 26% of
sales for the period ended September 30, 1998. The decrease is due to the
elimination of several one time payments occurring in fiscal 1998 totaling
$151,000, composed of $65,000 paid to the Company's President and former Chief
Financial Officer as part of an agreement to reprice their 350,000 stock options
from $0.10 to $1.00, a subsequent buyout of the former CFO's stock options
totaling $26,250 and accelerated payments on his employment contract of $60,000.
However the reductions were partially offset by increases in labor and benefits
expenses as the Company attempts to remain competitive in a tight labor market.
Additionally, the Company incurred approximately $80,000 in consulting fees as a
result of installing and implementing a new business information system. The
Company expects the consulting fees to decrease beginning in April 2000.
Overall, the Company expects SG&A expenses to increase slightly in fiscal 2000.
Net interest expense for the year ended September 30, 1999 was $114,551 as
compared to $111,390 for the year ended September 30, 1998. The increase is due
primarily to an accrual for interest on a $200,000 note payable.
The Company currently has $1,500,000 of 6% debt represented by $1,300,000 first
secured debt issued in November 1997 and $200,000 second secured convertible
debt which also bears interest at 6%. An additional $200,000 of the second
secured convertible note is interest free as of March 1, 1998. In August 1998,
QPI Multipress, Inc. entered into a loan agreement with a local bank to finance
computer equipment. The loan is for a maximum of $150,000 at 8.04% interest
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<PAGE>
and will be repaid over 39 months. Currently, there is $104,666 outstanding
on this loan and it is expected to decrease as the principal is paid monthly.
Liquidity and Capital Resources
As of September 30, 1999, the Company had a working capital surplus of
$1,102,770 as compared to a working capital surplus of $895,155 at September
30, 1998. The increase in working capital surplus is due to the profitable
operations of the Company. This surplus should continue to increase as the
Company anticipates profitable operations through the foreseeable future. The
Company's major source of liquidity continues to be from available cash on
hand which is generated from profitable cash flow from operations.
Year 2000 Compliance
The Company utilizes a number of computer programs in its operations. Any of
the Company's programs that recognize a date using "00" as the year 1900
rather than the year 2000 could result in errors or system failures. On June
1, the Company activated new hardware and software systems and is operating
all aspects of business on this new system. Financing for the system is
provided under a three-year term loan from a local bank. The software and
hardware is certified year 2000 compliant. The Company believes that this
purchase will materially reduce the exposure of the Company to future year
2000 compliance expenses.
The Company is unaware of any supplier or customer who would pose a material
risk to the Company in the event the supplier or customer is not compliant by
January 1, 2000. The Company is not dependent on any one supplier or customer
and the Company has alternate suppliers and customers available in the event
of failure.
Many of the Company's products contain programmable logic controls (PLC's)
operated by computer hardware and software. The Company's suppliers have
stated all PLC's are year 2000 compliant, and it is unlikely the Company will
be required to replace any existing components.
In the event of complete failure in all year 2000 areas, the Company could
continue to operate at a significantly reduced level of efficiency resulting
in materially increased costs to the Company. The Company is capable of
switching suppliers and transaction processing could be performed manually to
achieve continuing operations. The Company incurred expenditures of
approximately $235,000 for hardware, software, consulting, and education in
fiscal 1999.
FINANCING
On November 25, 1997, the Company completed a $1,530,000 financing with
Eastlake Securities, Inc. ("Eastlake"), a New York investment banking firm.
The financing consisted of 30 units, each unit consisting of a $50,000
beneficial interest in $1,500,000 principal amount 6% secured note, a Series
A Warrant to purchase 10,000 common shares at $1.00 per share and a Series B
Warrant to purchase 15,000 common shares at $2.00 per share. The Note is due
December 29, 2000 and is issued jointly by the Company and QPI Multipress,
Inc. to Eastlake as agent for the unit holders pursuant to a Credit Agreement
between the Company and Eastlake. The Series A Warrants may be exercised at
any time until September 30, 2000, and the Series B Warrants may be exercised
during the period October 1, 1999 to September 30, 2001.
The Note is to be repaid quarterly by principal payments in the amount
$50,000 each December, March, June and September together with any accrued
interest. The entire unpaid principal balance and accrued interest are due
December 29, 2000. The Company may prepay the loan at any time without
penalty as long as accrued interest up to the point of prepayment is paid
also.
The Company paid Eastlake a placement agent fee of $75,000 and issued to
Eastlake Series A Warrants to purchase 30,000 shares of common stock and
Series B Warrants to purchase 45,000 shares of common stock. The placement
agent also has a three year right of first refusal on future financings of
the Company.
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<PAGE>
In August 1998, QPI Multipress, Inc. entered into a loan agreement with a
local bank to provide financing for new computer equipment. The loan allows
Multipress to draw up to $150,000 at 8.04% interest, over a three-month
period during which interest must be paid monthly on the outstanding
principal. The Company makes monthly payments of $4,703.48, including
principal and interest, which will be paid through August 2001.
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, 1999 and September 30, 1998, there were
no disagreements with the Company's accountants on accounting and financial
disclosure practices.
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<PAGE>
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 and officers of the
Company at September 30, 1999 are listed below:
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
Bruce Weaver 39 President and Director February 1996
Ed Varon 54 Director May 1998
Murray Koppelman 68 Director May 1998
William Harrison, Jr 66 Director May 1998
Tac Kensler 32 Chief Financial Officer --
</TABLE>
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 a consultant to
financially troubled companies in the United States and Canada.
Mr. Varon has been self-employed as an investor since September 1996. For more
than five years prior to September 1996, he was a founding partner of E.D.
Michaels, Inc., a women's apparel manufacturer and distributor. In November
1997, he invested $50,000 in the Company's $1,500,000 note.
Mr. Koppelman is currently President and owner of Eastlake Securities, Inc. in
New York. Eastlake Securities arranged the Company's recent refinancing of its
bank debt and acts as collateral agent for the participants in that financing.
For more than the past 5 years, Mr. Koppelman has been President and owner of
Eastlake Securities, Inc. In November 1997, he invested $300,000 in the
Company's $1,500,000 note.
Mr. Harrison is Vice President of Operations of QPI Multipress, Inc., the
Company's sole operating subsidiary and has been for the past five years.
Mr. Kensler was promoted to Chief Financial Officer of the Company in May 1998.
Prior to that position, he was the Controller for QPI Multipress, Inc., the
Company's sole operating subsidiary since December 1994. Prior to joining the
Company in January 1994, he was employed in the accounting department of the
Worthington Steel Company, a steel processing manufacturer.
<TABLE>
<CAPTION>
Significant Employees Age Position
- --------------------- --- --------
<S> <C> <C>
Theodore P. Schwartz 62 President of QPI Multipress, Inc.
</TABLE>
Mr. Schwartz became President of QPI Multipress, Inc. on December 15, 1997
pursuant to a five-year contract. Mr. Schwartz has been involved in the
hydraulic press business for the past 38 years. Mr. Schwartz was an officer of
Multipress, Inc. until 1990. For more than the past five years, Mr. Schwartz was
an officer and director of PH Group, Inc., a manufacturer and marketer of
hydraulic presses.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation of each executive officer and
significant employee during the fiscal years ended September 30, 1997, 1998 and
1999.
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
NAME AND YEAR SALARY BONUS RESTRICTED SECURITIES ALL OTHER OTHER
PRINCIPAL POSITION STOCK UNDERLYING COMPENSATION ANNUAL
AWARD(S) OPTIONS/ ($) COMPENSATION
($) SARS (#)
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce Weaver - 1999 $ 84,000 $1,200 - - -
President (since February 1998 $ 84,000 - - 50,000 $37,500(3) -
1996) 1997 $ 72,000 $75,935(1) - 100,000 14,038(2)
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
Jonathon Reuben - 1999 - - - - -
Secretary/Treasurer 1998 $ 30,000 - - 50,000 $47,424(3) 86,250(4)
Chief Financial Officer 1997 $ 30,000 $27,576(1) - - -
Until May 1998
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
William Harrison, Jr. - 1999 $128,052(5) $600 - -
Vice President of QPI 1998 $123,564(5) $ 24,500 - -
Multipress, Inc. 1997 $103,176(5) $ 39,967 35,000 -
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
Theodore Schwartz 1999 $121,730(5) $600 50,000 $23,750(6)
President of QPI 1998 $95,228(5) $10,500
Multipress, Inc. 1997 - -
- --------------------------- ---------- ---------------- ------------- ------------- ------------- -------------- --------------
</TABLE>
(1) In fiscal 1997, the directors were paid these amounts as cash bonuses
pursuant to a Multipress employee bonus plan and discretionary director bonuses.
(2) Represents base salary compensation foregone by Mr. Weaver in fiscal 1996.
(3) Represents cash paid to Mr. Weaver and Mr. Reuben in fiscal 1997 as part of
an agreement to reprice their 350,000 stock options from $0.10 to $1.00.
(4) Represents cash paid to Mr. Reuben in the amount of $26,250 for the buyback
of his 225,000 stock options and $60,000 for the accelerated payout of his
employment contract.
(5) Mr. Schwartz and Mr. Harrison were each provided with premium reimbursement
for life insurance as part of salary. The cost of this item is included in the
above table.
(6) Represents cash paid to Mr. Schwartz as a result of the Company's
contributions towards the settlement of litigation between Mr. Schwartz and his
former employer.
Mr. Weaver has an employment contract with the Company to serve as President for
the period October 1, 1997 through September 30, 2000. Mr. Weaver's salary is
$84,000 annually, plus a bonus equal to 5% of the Company's annual audited net
income to the extent it exceeds $750,000 in any fiscal year. Mr. Weaver, a
Canadian citizen, is not required to reside or work in or near Columbus, Ohio
where the Company's operations are located.
Mr. Reuben had a three-year employment contract with the Company to serve as
Chief Financial Officer for the period October 1, 1997 through September 30,
2000 at a rate of $30,000 annually. Due to the demands
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of Mr. Reuben's full time accounting practice in Los Angeles, Mr. Reuben did
not stand for reelection as a Director or Officer. As a severance, the Company
repurchased his stock options for $26,250 and paid the remainder of his
contract by September 30, 1998.
Theodore P. Schwartz has an employment contract with Multipress to serve as its
President for the period December 15, 1997 through December 31, 2002. Mr.
Schwartz receives a base salary of $120,000, subject to cost of living
increases, plus benefits and an annual bonus based upon Multipress' gross
margins to the extent they exceed $2,000,000 in any fiscal year.
There were no stock options granted to any executive officer during the fiscal
year ended September 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information as of September 30, 1999
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>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ------------------------- ---------------------------- -------------------------- -------------------------
Amount and
TITLE OF CLASS NAME AND ADDRESS NATURE OF BENEFICIAL PERCENT OF CLASS
OWNERSHIP
- ------------------------- ---------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Common Richard W. Cohen 333,332(1) 9.2%
Lowey Dannenberg
One N. Lexington
White Plains, NY 10601
- ------------------------- ---------------------------- -------------------------- -------------------------
</TABLE>
(1) For Mr. Cohen, such number of shares represents 66,666 owned and 266,666
shares issuable upon conversion of his 2001 Note, in the principal amount
of $200,000 with a conversion price of $.75 per share.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------- ---------------------------- -------------------------- -------------------------
Amount and
TITLE OF CLASS NAME AND ADDRESS NATURE OF BENEFICIAL PERCENT OF CLASS
OWNERSHIP
- ------------------------- ---------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Common Bruce Weaver 495,783 13.7%
- ------------------------- ---------------------------- -------------------------- -------------------------
Common Murray Koppelman 528,332(2) 14.6%
575 Lexington Avenue
New York, N.Y. 10022
- ------------------------- ---------------------------- -------------------------- -------------------------
Common All other Directors & 130,887 3.6%
Officers
- ------------------------- ---------------------------- -------------------------- -------------------------
Common Directors and Officers as 1,155,002 31.9%
a group (6 people )
- ------------------------- ---------------------------- -------------------------- -------------------------
</TABLE>
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<PAGE>
(2) For Mr. Koppelman, such number of shares represents 66,666 owned and
266,666 shares issuable upon conversion of his 2001 Note, in the principal
amount of $200,000 with a conversion price of $.75 per share. Additionally,
Mr. Koppelman has warrants to purchase 30,000 shares at $1.00 per share and
45,000 shares at $2.00 per share which are included in this table.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1998, Mr. Reuben agreed not to remain as an officer or director of the
Company. As a severance package, the Company agreed to pay Mr. Reuben $26,250 in
exchange for cancelling 225,000 options to purchase the Company's common shares.
In addition, the Company agreed to pay the remainder of Mr. Reuben's three-year
contract by September 30, 1998.
Effective October 1, 1997, Mr. Weaver and Mr. Reuben each agreed to increase the
exercise price of their respective options to purchase 175,000 shares, granted
in February 1996, from $.10 per share to $1.00 per share. In consideration the
Company agreed to pay Mr. Weaver and Mr. Reuben $75,000 each in 1998 and issued
to them new options to purchase 50,000 shares each at $2.00 per share during the
period September 15, 1999 through June 30, 2000.
In August 1996, the Company issued a note payable in the amount of $500,000 (the
"note") in connection with the settlement of certain litigation. The Note is
convertible, upon demand, into 500,000 to 666,666 shares of common stock of the
Company at a price of $0.75 to $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.
In August, 1997, Richard Cohen purchased $250,000 of the Company's $500,000 Note
and Murray Koppelman purchased the remaining $250,000. Mr. Cohen and Mr.
Koppelman immediately exercised the conversion option in the note to convert
$50,000 each into 66,666 shares each of the Company's common stock. The
remaining notes totaling $400,000, convertible at $0.75 per share and bearing
interest at 6%, remain outstanding.
Mr. Cohen agreed to waive all interest after March 1, 1998, on his share of the
Note. In December 1999, Mr. Cohen claimed that he only agreed to postpone and
not waive such interest. The Company disputes this claim. The Company has
accrued a liability in the amount of $18,000 for the disputed interest.
Mr. Cohen was a partner in a law firm that provided legal services to the
Company and received payments of $98,242 for the year ended September 30, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company for fiscal year 1999, the Company is not aware of any director,
officer, or beneficial owner of more than 10% of its outstanding common stock
that failed to file on a timely basis reports required by Section 16(a) of the
Securities Exchange Act.
Statements in this Form 10-KSB that are not historical facts, including
statements about the Company's prospects, about the future impact of litigation,
and the possible conversion of notes to stock, are forward-looking statements
that involve risks and uncertainties. These risks and uncertainties could cause
actual results to differ materially from the statements made, including the
impact of the litigation against the Company.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 - Restated Certificate of Incorporation of the Company
incorporated by reference from 10-KSB for the period
ending September 30, 1997.
3.2 - Amended and Restated By-Laws of the Company
incorporated by reference from 10-KSB for the period
ending September 30, 1997.
4.2 - Promissory Note dated August 29, 1997 issued to
Murray Koppelman incorporated by reference from
10-KSB for the period ending September 30, 1997.
4.3 - Promissory Note dated August 29, 1997 issued to
Richard W. Cohen incorporated by reference from
10-KSB for the period ending September 30, 1997.
4.4 - Promissory Note dated November 25, 1997 issued to
Eastlake Securities, Inc. incorporated by reference
from 10-KSB for the period ending September 30, 1997.
4.5 - Form of Series A Warrant incorporated by reference
from 10-KSB for the period ending September 30, 1997.
4.6 - Form of Series B Warrant incorporated by reference
from 10-KSB for the period ending September 30, 1997.
10.3 - Employment Agreement between the Company and Bruce
Weaver incorporated by reference from 10-KSB for the
period ending September 30, 1997.
10.4 - Employment Agreement between the Company and Jonathon
Reuben effective October 1, 1997 incorporated by
reference from 10-KSB for the period ending September
30, 1997.
10.5 - Employment Agreement between Multipress and Theodore
P. Schwartz effective December 15, 1997 incorporated
by reference from 10-KSB for the period ending
September 30, 1997.
10.6 - 1997 Stock Option Plan incorporated by reference from
10-KSB for the period ending September 30, 1997.
10.7 - Credit Agreement dated November 25, 1997 among the
Company, Multipress and Eastlake Securities, Inc.
incorporated by reference from 10-KSB for the period
ending September 30, 1997.
10.8 - Security Agreement dated November 25, 1997 among the
Company, Multipress and Eastlake Securities, Inc.
incorporated by reference from 10-KSB for the period
ending September 30, 1997.
21 - Subsidiaries of Quality Products, Inc.
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
-12-
<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: December 29, 1999
-----------------------------
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: December 29, 1999
---------------------------------
Bruce Weaver
Director and Principal Executive Officer
/s/Tac D. Kensler Date: December 29, 1999
---------------------------------
Tac D. Kensler
Chief Financial Officer
-13-
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND
FOR THE YEARS ENDED
SEPTEMBER 30, 1999 AND 1998
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
QUALITY PRODUCTS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet,
September 30, 1999 2-3
Consolidated Statements of Income
for the Years Ended September 30, 1999 and 1998 4
Consolidated Statements of Stockholders' Deficit
for the Years Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1999 and 1998 6-7
Notes to Consolidated Financial Statements 8-17
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Quality Products, Inc.:
We have audited the accompanying consolidated balance sheet of Quality Products,
Inc. (the "Company") as of September 30, 1999 and the related consolidated
statements of income, stockholders' deficit and cash flows for the years ended
September 30, 1999 and 1998. 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, 1999 and the results of its operations and its cash flows for the
years ended September 30, 1999 and 1998 in conformity with generally accepted
accounting principles.
November 23, 1999
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 667,423
Trade accounts receivable, less allowance
for doubtful accounts of $11,867 1,009,738
Inventories 581,909
Other current assets 95,913
------------
Total current assets 2,354,983
------------
PROPERTY AND EQUIPMENT 849,823
Less accumulated depreciation (684,654)
------------
Property and equipment, net 165,169
------------
TOTAL ASSETS $ 2,520,152
============
(Continued)
</TABLE>
2
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Accounts payable $ 422,949
Accrued expenses 270,812
Customer deposits 310,368
Notes payable 188,084
Notes payable, related parties 60,000
------------
Total current liabilities 1,252,213
------------
NON-CURRENT LIABILITIES
Notes payable, non-current 896,582
Notes payable, related parties, non-current 460,000
------------
Total non-current liabilities 1,356,582
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible, voting, par
value $.00001; 10,000,000 shares authorized;
no shares issued and outstanding
Common stock, $.00001 par value; 20,000,000
shares authorized; 2,554,056 shares
issued and outstanding; 1,733,333 shares
reserved 25
Additional paid-in capital 25,027,312
Accumulated deficit (25,115,980)
------------
Total stockholders' deficit (88,643)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,520,152
============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET SALES $6,503,795 $6,483,450
COST OF GOODS SOLD 4,394,111 4,447,498
---------- ----------
GROSS PROFIT 2,109,684 2,035,952
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,591,308 1,676,082
---------- ----------
INCOME FROM OPERATIONS 518,376 359,870
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (114,551) (111,390)
Interest income 21,535 28,175
Miscellaneous other income (expense) (13,976) 39,079
---------- ----------
Other expense, net (106,992) (44,136)
---------- ----------
INCOME BEFORE INCOME TAXES 411,384 315,734
PROVISION FOR INCOME TAXES 5,267 25,887
---------- ----------
NET INCOME $ 406,117 $ 289,847
========== ==========
EARNINGS PER SHARE:
Basic $ .16 $ .11
========== ===========
Diluted $ .16 $ .10
========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- ------------------------------------------------
<TABLE>
<CAPTION>
SERIES B ADDITIONAL TOTAL
PREFERRED COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK DEFICIT
------ ------ ------ ------ ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
SEPTEMBER 30, 1997 22 $-0- 2,554,012 $25 $30,023,284 $(25,811,944) $(5,025,972) $(814,607)
STOCK ISSUANCE:
Convertible debentures
issuance 30,000 30,000
Preferred shares conversion (22) 44
NET INCOME 289,847 289,847
--- ---- --------- --- ----------- ------------ ----------- ---------
BALANCES,
SEPTEMBER 30, 1998 2,554,056 25 30,053,284 (25,522,097) (5,025,972) (494,760)
TREASURY STOCK RETIREMENMT (5,025,972) 5,025,972
NET INCOME 406,117 406,117
--- ---- --------- --- ----------- ------------ ---------- ---------
BALANCES,
SEPTEMBER 30, 1999 -0- $-0- 2,554,056 $25 $25,027,312 $(25,115,980) $ -0- $ (88,643)
=== ==== ========= === =========== ============ ========== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- -----------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 406,117 $ 289,847
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 43,131 13,898
Changes in operating assets and
liabilities:
Restricted cash 15,662 26,574
Accounts receivable (383,107) 75,964
Inventories 144,131 82,277
Other assets 44,787 (113,153)
Accounts payable and accrued expenses 23,245 (158,337)
Customer deposits (49,139) 97,466
Income taxes (2,000) (26,000)
--------- -----------
Net cash provided by operating
activities 242,827 288,536
--------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES -
Capital expenditures (57,302) (40,635)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit (1,180,000)
Debenture issuance 1,530,000
Payments on long-term debt (187,627) (335,000)
--------- ----------
Net cash provided by (used in)
financing activities (187,627) 15,000
--------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (2,102) 262,901
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 669,525 406,624
--------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 667,423 $ 669,525
========= ===========
</TABLE>
(Continued)
6
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 96,551 $ 113,297
Cash paid for taxes $ 20,067 $ 77,084
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
QUALITY PRODUCTS, INC.
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 only operating subsidiary is QPI
Multipress Inc., a manufacturer of industrial hydraulic presses. 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 AND CASH EQUIVALENTS - Cash and cash equivalents include certain
investments with original maturities of three months or less.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of cash and trade accounts receivable. The Company places
its temporary cash investments in reputable financial institutions. At
September 30, 1999, the Company had substantially all cash and cash
equivalents on deposit with one financial institution.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base and their dispersion across different geographic areas.
The Company routinely assesses the financial strength of its customers.
The Company normally requires prepayments to support large customer
orders.
8
<PAGE>
OPERATING SEGMENT INFORMATION - The Company predominantly operates in
one industry segment, industrial hydraulic presses. Substantially all
of the Company's assets and employees are located at the Company's
headquarters in Columbus, Ohio.
ACCOUNTING FOR STOCK BASED COMPENSATION - Stock option grants are set
at the closing price of the Company's common stock on the day prior to
the date of grant. Therefore, under the principles of APB Opinion No.
25, the Company does not recognize compensation expense associated with
the grant of stock options. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models to provide
supplemental information regarding options granted after 1994. Pro
forma information regarding net income and earnings per share shown
below was determined as if the Company had accounted for its employee
stock options under the fair value method of that statement.
The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.0%; dividend yields
of 0% for 1999 and 1998; volatility factors of the expected market
price of the Company's common stock of 50% for 1999 and 1998; and
expected life of the options of one year. These assumptions resulted in
weighted average fair values of $.01 per share for stock options
granted in 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee
stock options have characteristics significantly different from those
of traded options such as vesting restrictions and extremely limited
transferability.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option vesting periods. The pro forma
effect on net income for 1999 and 1998 is not representative of the pro
forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants
made prior to 1995. Pro forma information in future years will reflect
the amortization of a larger number of stock options granted in several
succeeding years. The Company's pro forma information is as follows (in
thousands except share data) for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
---- -----
<S> <C> <C>
Pro forma net income $406 $ 289
Pro forma earnings per share:
Basic $.16 $0.11
Diluted $.16 $0.10
</TABLE>
9
<PAGE>
Information regarding stock options outstanding as of September 30,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING
PRICE RANGE SHARES EXERCISE PRICE CONTRACTUAL LIFE
------------- ------- -------------- ----------------
<S> <C> <C> <C>
$1.00 - $2.00 375,000 $1.13 1 year
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
-----------------------------------
WEIGHTED
AVERAGE
PRICE RANGE SHARES EXERCISE PRICE
------------- ------- --------------
<S> <C> <C>
$1.00 - $2.00 375,000 $1.13
</TABLE>
INVENTORIES - Inventories are stated at the lower of cost (using the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Based on borrowing rates
currently available to the Company for bank loans with similar terms
and maturities, the fair value of the Company's long-term debt
approximates the carrying value. Furthermore, the carrying value of all
other financial instruments potentially subject to valuation risk
(principally consisting of cash and cash equivalents, accounts
receivable and accounts payable) also approximates fair value.
ADVERTISING COSTS - Costs incurred for producing and communicating
advertising are expensed when incurred and included in selling, general
and administrative expenses. Advertising expense amounted to $60,693
and $40,868 in 1999 and 1998, respectively.
10
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting Comprehensive
Income", establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The
Company adopted the provisions of SFAS No. 130 in 1998, but had no
elements of comprehensive income in 1999 or 1998.
SFAS No., 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes a new model for segment reporting, called the
"management approach" and requires certain disclosures for each
segment. The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. The Company adopted the
provisions of SFAS No. 131 in 1998, but currently operates in one
industry segment.
2. INVENTORIES
Inventories at September 30, 1999 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $548,793
Work-in-process 33,116
--------
Total $581,909
========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 consist of:
<TABLE>
<S> <C>
Leasehold improvements $ 18,259
Machinery and equipment 426,605
Furniture and fixtures 271,390
Software 133,569
---------
Total property and equipment 849,823
Less accumulated depreciation (684,654)
---------
Property and equipment, net $ 165,169
=========
The estimated useful lives used to depreciate property and equipment
are as follows:
Leasehold improvements Lease term
Machinery and equipment 5 years
Furniture and fixtures 5 years
Software 5 years
</TABLE>
11
<PAGE>
4. LEASES
At September 30, 1999, the Company was obligated under several
noncancellable operating leases, primarily for facilities and
equipment, that expire over the next four 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 $128,160 in 1999
and $124,553 in 1998.
Future minimum lease payments under noncancellable operating leases
(with initial or remaining lease terms in excess of one year) as of
September 30, 1999, are:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
-------------------------
<S> <C>
2000 $ 92,464
2001 10,138
2002 3,519
2003 3,519
--------
TOTAL $109,640
========
</TABLE>
5. NOTES PAYABLE
In August 1996, the Company entered into a note payable in the amount
of $500,000 with a former shareholder in connection with the settlement
of certain litigation. The note was convertible, upon demand, into
500,000 to 666,666 shares of common stock of the Company at a price of
$0.75 to $1.00 per share. The Company was required to make quarterly
interest-only payments at 6% per annum. The agreement contained certain
acceleration clauses. The principal amount of the note and unpaid
interest were payable in full in August 2001.
In August 1997, the note was purchased by two individuals (including a
current member of the Board of Directors of the Company and a former
Company officer) who immediately converted $100,000 ($50,000 each) into
133,332 common shares (66,666 each). The remaining notes totaling
$400,000, convertible at $0.75 per share and bearing interest at 6%,
remain outstanding at September 30, 1999.
In November 1997, the Company initiated and consummated a private
placement offering of 30 units of Company debentures in the amount of
$1,530,000. $1,100,000 remains outstanding at September 30, 1999. Each
unit represents: a) a $50,000 interest in a 6%, $1,500,000 note
payable, b) a warrant to purchase 10,000 shares of the Company's common
stock at $1 per share during the period November 1, 1997 through
September 30, 2000, and c) a warrant to purchase 15,000 shares of the
Company's common stock at $2 per
12
<PAGE>
share during the period October 1, 1999 through September 30, 2001.
The Company incurred expenses of approximately $150,000 in
connection with this offering. The Company utilized the proceeds of
the offering to repay the bank line of credit, a $135,000 note
payable and expenses associated with the offering.
In August 1998, the Company entered into an agreement with a local bank
to borrow up to $150,000 to replace the Company's computer information
systems. $104,666 was outstanding under this agreement at September 30,
1999.
Maturities of notes payable for the years succeeding September 30, 1999
are:
<TABLE>
<C> <S>
2000 $ 248,084
2001 1,348,084
2002 8,498
----------
Total $1,604,666
==========
</TABLE>
6. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at September 30, 1999 and 1998 are
substantially composed of the Company's net operating loss
carryforwards, for which the Company has made a full valuation
allowance.
The valuation allowance decreased approximately $330,000 and $284,000
in the years ended September 30, 1999 and 1998, respectively,
representing primarily net taxable income 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, 1999, the Company had net operating loss carryforwards
for Federal and state income tax purposes of approximately $28,400,000
and $29,200,000, respectively, which is available to offset future
taxable income, if any, through 2010.
The tax provisions for the years ended September 30, 1999 and 1998 are
composed of Federal alternative minimum tax and city income taxes.
13
<PAGE>
7. STOCK OPTIONS
NON-QUALIFIED STOCK OPTION PLAN
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.
In October 1997, the Company entered into an agreement with two
officers of the Company to reprice options for 350,000 shares of common
stock to $1.00 per share in exchange for the payment of $75,000 to each
of the option holders and the grant of an additional option to purchase
50,000 shares of common stock at $2.00 per share.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------ ---------
<S> <C> <C>
Outstanding at
September 30, 1997 350,000 $0.10
Cancelled (225,000) $0.10 - $2.00
Granted during the year 100,000 $2.00
--------
Outstanding at
September 30, 1998 225,000 $1.00 - $2.00
Cancelled -0- N/A
Granted during the year -0- N/A
--------
Outstanding at
September 30, 1999 225,000 $1.00 - $2.00
========
</TABLE>
INCENTIVE STOCK OPTION PLAN
In May 1998, the Board of Directors approved an incentive 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 two to three years after the date of grant
and expire in September 2000. Options are granted at the discretion of
the Board of Directors.
In the two years ended September 30, 1999, options to receive 150,000
shares of the Company's common stock at $1.00 per share were
outstanding. No options were granted, exercised or cancelled during
that period.
14
<PAGE>
8. EARNINGS PER SHARE
In December 1997, the Company adopted Financial Accounting Statement
No. 128 issued by the Financial Accounting Standards Board. Under
Statement 128, the Company is required to change the method previously
used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options are excluded.
The impact of Statement 128 on the calculation of earnings per share is
as follows:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------------
1999 1998
---- ----
<S> <C> <C>
BASIC:
Net Income Available To Common
Shareholders $ 406,117 $ 289,847
Weighted Average Shares Outstanding 2,554,056 2,554,034
Basic Earnings Per Share (FAS 128) $ 0.16 $ 0.11
DILUTED:
Net Income Available to Common
Shareholders $ 406,117 $ 289,847
Weighted Average Shares Outstanding 2,554,056 2,554,034
Net Effect of Dilutive Stock
Options and Warrants Based on
the Treasury Stock Method
Using Average Market Price -0- 229,242
Total Shares 2,554,056 2,783,276
Diluted Earnings Per Share (FAS 128) $ 0.16 $ 0.10
Average Market Price of Common Stock $ 0.51 $ 1.10
Ending Market Price of Common Stock $ 0.50 $ 0.75
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at September 30, 1999 because they are considered
anti-dilutive under FAS 128:
1. Options granted to a Company officer and director to purchase 50,000
and 175,000 shares of the Company's common stock at $2.00 and $1.00,
respectively, per share.
15
<PAGE>
2. Warrants issued pursuant to the Company's debentures to
purchase 495,000 and 330,000 shares of common stock @ $2.00
and $1.00, respectively, per share.
3. Options granted to employees under the Company's qualified
stock option plan to purchase 150,000 shares @ $1.00 per
share.
4. Warrants issued pursuant to the Company's convertible note
payable subsequently purchased by a current member of the
Board of Directors and a former Company officer to purchase
533,333 shares of common stock @ $.75 per share (see Note 5).
9. 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. No
shares have been reacquired since September 1994. In 1999, the Company
retired and cancelled the treasury stock.
10. 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 $8,700 during
1999 and $6,600 during 1998.
11. RELATED PARTY TRANSACTIONS
In the year ended September 30, 1997, a shareholder and a member of the
Board of Directors each purchased $250,000 of the $500,000 note payable
(see Note 5). Each note holder immediately exercised a conversion
option in the note to convert $50,000 of the note into 66,666 shares of
the Company's common stock. The shareholder was a partner in a law firm
that served as the Company's outside general counsel through March
1998. The law firm received payments of $113,315 for the year ended
September 30, 1998, for legal services rendered to the Company. Total
interest paid was $12,000 and $18,000 for the years ended 1999 and
1998, respectively.
In connection with the Company's private placement debenture offering
in November 1997 (see Note 5), a member of the Board of Directors and
related family members purchased a total of 10 units. An immediate
family member of a former Company officer purchased 1 unit. Another
member of the Board of Directors purchased 1 unit. The total interest
paid in connection with the notes was $27,323 and $29,173 for the years
ended September 30, 1999 and 1998, respectively.
16
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
In November 1993, the Company and its QPI 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 third party. The
plaintiff seeks unspecified monetary damages for a personal injury that
occurred in her employer's facility. Although the Company's subsidiary
carries full product liability insurance, the Company's former
management did not notify the insurance carrier within the prescribed
time period. Accordingly, this claim is not covered by insurance. Based
upon consultation with the Company's counsel, the Company does not
believe that the litigation will have a material adverse affect on the
consolidated financial position, results of operations or cash flows of
the Company. The Company has recorded a provision for this matter that
is immaterial to the consolidated financial statements.
17
<PAGE>
Exhibit 21 - Subsidiaries of Quality Products, Inc.
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF INCORPORATION BUSINESS NAME
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
QPI Multipress, Inc. Ohio QPI Multipress, Inc.
American Liberty Mining Corp. (non-operating) Nevada American Liberty Mining Corp.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 667,423
<SECURITIES> 0
<RECEIVABLES> 1,021,605
<ALLOWANCES> (11,867)
<INVENTORY> 581,909
<CURRENT-ASSETS> 2,354,983
<PP&E> 849,823
<DEPRECIATION> (684,654)
<TOTAL-ASSETS> 2,520,152
<CURRENT-LIABILITIES> 1,252,213
<BONDS> 1,604,666
0
0
<COMMON> 25
<OTHER-SE> (88,618)
<TOTAL-LIABILITY-AND-EQUITY> 2,520,152
<SALES> 6,503,795
<TOTAL-REVENUES> 6,503,795
<CGS> 4,394,111
<TOTAL-COSTS> 5,985,419
<OTHER-EXPENSES> 13,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,551
<INCOME-PRETAX> 411,384
<INCOME-TAX> 5,267
<INCOME-CONTINUING> 406,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406,117
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
