<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, 2000
------------------
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 W. Nationwide Blvd., Columbus, OH 43215
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (614) 228-0185
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 revenues for its most recent fiscal year were $7,091,238.
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of November 9, 2000, was $2,428,677 based on the average
of the bid and asked price of $1.11 as reported by the OTC electronic
bulletin board on such date.
As of September 30, 2000, there were 2,551,333 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", a Delaware corporation) is a holding
company, originally organized in 1988 under the name "Analytics Inc." 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 in October 1996, the assets and
liabilities relating to the Multipress division were transferred to a new Ohio
corporation, QPI Multipress, Inc. The trade name "MultiPress" has been in use
for almost 60 years.
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.
Approximately half of 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.
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<PAGE>
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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<PAGE>
No one customer accounted for more than 10% of sales in fiscal 2000.
Multipress' order backlog has no discernable pattern, as customer purchasing
is not seasonal. Multipress' backlog at September 30, 2000 was approximately
$885,000, which is within 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 35 employees, with 34 of those
full-time, as of September 30, 2000, none of whom belonged to any union.
The Company has a trademark on the tradename "Multipress".
The Company does not require government approval of its products or services.
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 2000 or
1999.
The Company incurred no material costs or effects due to compliance with
environmental laws.
ITEM 2. PROPERTY OF THE COMPANY
Location Description
-------- -----------
560 W. Nationwide Blvd. A lease for approximately 50,000
Columbus, Ohio 43215-2388 square feet of manufacturing and
office space currently expiring
June, 2003, used by QPI Multipress
Inc., and since August 1996 also used
as the executive office of the Company.
The rental rate is $8,473 per month.
The property is in good condition.
ITEM 3. LEGAL PROCEEDINGS
None
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 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, 1998 to September 30,
2000. Such prices reflect inter-dealer prices, may not represent actual
transactions, and do not include retail markup, markdown or commissions.
<TABLE>
<CAPTION>
2000 High Low
------ ------- -------
<S> <C> <C>
First Quarter - December 31, 1999 $0.5312 $0.3125
Second Quarter - March 31, 2000 1.6875 0.3438
Third Quarter - June 30, 2000 1.4375 0.9375
Fourth Quarter - September 30, 2000 1.3750 0.2969
</TABLE>
<TABLE>
<CAPTION>
1999 High Low
------ ------- -------
<S> <C> <C>
First Quarter - December 31, 1998 $0.5312 $0.1563
Second Quarter - March 31, 1999 1.0156 0.2969
Third Quarter - June 30, 1999 0.6250 0.4063
Fourth Quarter - September 30, 1999 0.6719 0.4063
</TABLE>
(b) Approximate number of equity securities holders:
<TABLE>
<CAPTION>
Approximate Number of
Record Holders (as of
Title of Class September 30, 2000)
-------------- ---------------------
<S> <C>
Common Stock, $.00001 Par Value 350
</TABLE>
(c) Dividends:
The Company paid no dividends in the years ending September 30, 1999 or 2000.
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 expired on September 30, 2000, and the Series
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<PAGE>
B Warrants may be exercised through September 30, 2001. The balance due on the
Note as of December 29, 2000 will be $900,000. The Company expects to either
refinance or extend the Note. The Company has entered into a non-binding
agreement with a local bank to finance repayment of the Note. The agreement is
subject to final approval by the bank and the Company's Board of Directors.
Additionally, on November 28, 2000 the Board of Directors approved an offer to
investors in the Note to extend the Note for two years at the same rate of
interest (6%) plus new Series A Warrants to purchase 6,500 shares of the
Company's common stock for each $50,000 originally invested, exercisable at
$1.00 per share for one year plus Series C Warrants for 10,000 shares of common
stock for each $50,000 originally invested, exercisable at $1.50 per share for
two years. The Company made the extension offer to conserve capital for business
development.
The Note is repaid quarterly by principal payments in the amount of $50,000 each
December, March, June and September together with any accrued interest. The
$900,000 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, which
expired September 30, 1999, and Series B Warrants to purchase 45,000 shares of
common stock exercisable through September 30, 2001. 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 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net sales for the year ended September 30, 2000 were $7,091,238 as compared to
$6,503,795 for the year ended September 30, 1999, an increase of $587,443 or
9.0%. The Company shipped 243 units in fiscal 2000 compared to 241 in 1999. The
increase in sales is primarily due to increases in the Company's selling prices.
The Company expects net sales for fiscal 2001 to decrease to approximately
$6,000,000 due to a significant slowdown in new orders the Company experienced
in the fourth quarter of fiscal 2000 and continues to experience in the first
quarter of fiscal 2001. The slowdown appears to be industry-wide and not Company
specific. In October 2000 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
2001.
Cost of sales were $4,342,379 or 61.2% of sales for the year ended September 30,
2000 as compared to $4,394,111 or 67.6% of sales for the year ended September
30, 1999. Resulting gross profit for the periods were $2,748,859 or 38.8% of
sales for the period ended September 30, 2000 and $2,109,684 or 32.4% of sales
for the corresponding period a year earlier. The increased gross profit
percentage is primarily due to customers continuing requests for standard
machines based on design changes the Company implemented, as opposed to custom
machines, which are more labor intensive. We anticipate the future product mix
will return to more custom machines based on our past history. We believe our
gross margins in fiscal 2001 will reduce to historical levels of approximately
35%.
Selling, general and administrative expenses ("SG&A") were $1,796,582 or 25.3%
of sales for the year ended September 30, 2000 as compared to $1,591,308 or
24.5% of sales for the period ended September 30, 1999. The increase is
primarily due to non-recurring expenses for the investigation of new business
opportunities. The Company expects SG&A expenses to decrease slightly in fiscal
2001.
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<PAGE>
Net interest expense for the year ended September 30, 2000 was $15,322 as
compared to $93,016 for the year ended September 30, 1999. The decrease is due
to the reduction of the principal on the Company's outstanding indebtedness, the
reversal of $18,000 of previously accrued interest, which was not realized, and
the increased interest earned on the Company's cash.
The Company currently has $1,100,000 of 6% debt represented by $900,000 first
secured debt issued in November 1997 and $200,000 second secured convertible
debt. An additional $200,000 of the second secured convertible note is
non-interest bearing as of March 1, 1998. Additionally, the Company's
subsidiary, QPI Multipress, Inc., has $50,586 of 8.04% debt, which is to be
repaid monthly through November 2001.
Net income for the period was $957,076 compared to $406,117 during the
corresponding period a year earlier, an increase of $550,959 or 135.7%. The
increase is primarily related to the significant improvement in gross profit.
Net income is expected to decrease significantly in the next period due to the
slowing customer demand the Company is experiencing.
The income tax provision for the period ending September 30, 2000 and 1999
includes a benefit related to utilization of NOL carry forwards of approximately
$ 27,400,000 and $ 28,400,000, respectively. The fiscal 2000 tax provision
relates to federal alternative minimum tax, state income tax and city income
tax.
Liquidity and Capital Resources
As of September 30, 2000, the Company had a working capital surplus of $698,672
as compared to a working capital surplus of $1,102,770 at September 30, 1999.
The decrease is due to the transition of a majority of the Company's non-current
debt into current liabilities, as the debt is now due within one year. However,
the surplus should increase as the Company anticipates continuing cash flow from
profitable operations in the future. The Company's major source of liquidity
continues to be from operations.
The Company is evaluating various options for disposing of $900,000 of its
short-term debt, which is due December 29, 2000. The Company has entered into a
non-binding agreement with a local bank to finance repayment of the Note. The
agreement is subject to final approval by the bank and the Company's Board of
Directors. Additionally, the Company has asked each of the existing noteholders
to extend the maturity date of the current debt until December 29, 2002 at the
existing 6% interest rate. Each noteholder approving the request will receive
6,500 series A warrants for each $50,000 originally invested, exercisable at
$1.00 per share, expiring December 29, 2001 and 10,000 Series C warrants,
exercisable at $1.50 per share, expiring December 29, 2002. It is not known how
many, if any, of the noteholders will accept the proposal. The Company expects
to receive responses by late December. In the unlikely event the debt cannot be
refinanced or extended, the Company has sufficient cash available to pay the
noteholders at maturity. However, the Company's business operations would be
severely restricted in the short-term.
Year 2000 Compliance
On June 1, 1999 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 Company borrowed
approximately $143,000 and has a balance of $50,586 remaining. The software and
hardware is certified year 2000 compliant. To date, the Company has experienced
no problems relating to the year 2000 computer issue either internally or from
any of its suppliers or customers.
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<PAGE>
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
a $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 expired September 30, 2000, and the Series B
Warrants may be exercised through September 30, 2001. Additionally, the Company
has asked each of the noteholders to extend the maturity date until December 29,
2002 at the existing 6% interest rate. Each noteholder approving the request
will receive 6,500 series A warrants for each $50,000 originally invested,
exercisable at $1.00 per share, expiring December 29, 2001 and 10,000 Series C
warrants, exercisable at $1.50 per share, expiring December 29, 2002. It is not
known how many, if any, of the noteholders will accept the proposal. The Company
expects to receive responses by late December.
The existing Note is repaid quarterly 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.
Currently, in addition to the extension request discussed previously, the
Company has entered into a non-binding agreement with a local bank to finance
repayment of the Note. The agreement is subject to final approval by the bank
and the Company's Board of Directors.
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, which
expired September 30, 2000 and Series B Warrants to purchase 45,000 shares of
common stock, which are exercisable through September 30, 2001. The placement
agent also has a three year right of first refusal on future financings of the
Company.
In August 1998, QPI Multipress, Inc. entered into a loan agreement with a local
bank to provide financing for new computer equipment. The loan permitted
Multipress to draw up to $150,000 at 8.04% interest, over a three-month period
during which interest was paid monthly on the outstanding principal. Currently,
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, 2000 and September 30, 1999, there were no
disagreements with the Company's accountants on accounting and financial
disclosure practices.
-8-
<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, 2000 are listed below:
<TABLE>
<CAPTION>
Name Age Position Director Since
------- ----- ---------- --------------
<S> <C> <C> <C>
Bruce Weaver 40 President and Director February 1996
Ed Varon 55 Director May 1998
Murray Koppelman 69 Director May 1998
William Harrison, Jr. 67 Director May 1998
Tac Kensler 33 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 November 1997 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 became a consultant to QPI Multipress, Inc., the Company's sole
operating subsidiary in January 2000. For more than five years prior to January
2000 he was Vice-President of Operations for QPI Multipress, Inc.
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.
None of the directors are directors of any other reporting company.
<TABLE>
<CAPTION>
Significant Employees Age Position
--------------------------- ----- --------
<S> <C> <C>
Theodore P. Schwartz 63 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 39 years. Mr. Schwartz was an officer of
Multipress, Inc. until 1990. For more than the five years prior to December
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<PAGE>
1997, 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, 1998, 1999 and
2000 whose compensation in any of these years exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
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OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND COMPEN- AWARD(S) OPTIONS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION ($) SARS (#) SATION ($)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce Weaver - 2000 $ 85,615 $12,700 - - - -
President (since February 1999 $ 84,000 $ 1,200 - - - -
1996) 1998 $ 84,000 - - - 50,000 -
----------------------------------------------------------------------------------------------------------------------
Jonathon Reuben - 2000 - - - - - -
Secretary/Treasurer 1999 - - - - - -
Chief Financial Officer 1998 $ 30,000 - 86,250(1) - 50,000 -
Until May 1998
----------------------------------------------------------------------------------------------------------------------
William Harrison, Jr. - 2000 $ 85,365(2) $25,200 - - - -
Vice President of QPI 1999 $128,052(2) $ 600 - - - -
Multipress, Inc. 1998 $123,564(2) $24,500 - - - -
Until January 2000
----------------------------------------------------------------------------------------------------------------------
Theodore Schwartz 2000 $133,472(2) $25,200 - - - -
President of QPI 1999 $121,730(2) $ 600 - - 50,000 $23,750(3)
Multipress, Inc. 1998 $ 95,228(2) $10,500 - - - -
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) 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.
(3) 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's 3-year employment contract with the Company to serve as
President expired September 30, 2000. Currently, he is working without a
contract. 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 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.
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<PAGE>
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, 2000.
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 2000, 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information as of September 30, 2000
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
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
Common Dale B. Newburg 531,450 14.6%
550 N. Island
Golden Beach, FL 33160
------------------------------------------------------------------------------------------------------
</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(1) 170,783(2) 4.7%
------------------------------------------------------------------------------------------------------
Common Murray Koppelman 438,332(3) 12.1%
575 Lexington Avenue
New York, N.Y. 10022
------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
AMOUNT AND
TITLE OF CLASS NAME AND ADDRESS NATURE OF BENEFICIAL PERCENT OF CLASS
OWNERSHIP
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common William Harrison, Jr.(1) 387(4) *
------------------------------------------------------------------------------------------------------
Common Tac Kensler(1) 500(5) *
------------------------------------------------------------------------------------------------------
Common Ted Schwartz(1) 55,000(6) 1.5%
------------------------------------------------------------------------------------------------------
Ed Varon
Common 575 Lexington Avenue 15,000(7) *
New York, NY 10022
------------------------------------------------------------------------------------------------------
Common Directors of Office as a 680,002(8) 18.7%
group (6 people)
------------------------------------------------------------------------------------------------------
</TABLE>
* - indicates less than 1%
(1) Mailing address is c/o Quality Products, Inc., 560 W. Nationwide Blvd.,
Columbus, OH 43215
(2) For Mr. Weaver, represents owned shares.
(3) 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 45,000 shares at $2.00 per share which
are included in this table.
(4) For Mr. Harrison, represents owned shares.
(5) For Mr. Kensler, represents owned shares.
(6) For Mr. Schwartz, represents 5,000 owned shares and options for 50,000
shares at $2.00 per share.
(7) For Mr. Varon, represents options for 15,000 shares at $2.00 per share.
(8) For entire group, includes options or warrants for 376,666 shares acquirable
within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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.
-13-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) Exhibits
<S> <C>
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.
4.6 - 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 Multipress and William B. Harrison,
Jr. effective January 1, 2000.
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.
10.9 - National City Bank Loan Agreement incorporated by reference from
10-KSB for the period ending September 30, 1998.
10.10 - Building Lease Agreement effective July 1, 2000.
21 - Subsidiaries of Quality Products, Inc.
27.1 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Not applicable
-14-
<PAGE>
SIGNATURES
No proxy statement or annual report has been sent to security holders. 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 15, 2000
-----------------------
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 15, 2000
----------------------------------------
Bruce Weaver
Director and Principal Executive Officer
/s/Tac D. Kensler Date: December 15, 2000
----------------------------------------
Tac D. Kensler
Chief Financial Officer and Principal
Accounting Officer
/s/William B. Harrison, Jr. Date: December 15, 2000
----------------------------------------
William B. Harrison, Jr.
Director
/s/Murray Koppelman Date: December 15, 2000
----------------------------------------
Murray Koppelman
Director
/s/Edward Varon Date: December 15, 2000
----------------------------------------
Edward Varon
Director
-15-
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND
FOR THE YEARS ENDED
SEPTEMBER 30, 2000 AND 1999
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, 2000 2-3
Consolidated Statements of Income
for the Years Ended September 30, 2000 and 1999 4
Consolidated Statements of Stockholders'
Equity (Deficit)
for the Years Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-16
</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, 2000 and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for the
years ended September 30, 2000 and 1999. 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, 2000 and the results of its operations and its cash flows for the
years ended September 30, 2000 and 1999 in conformity with generally accepted
accounting principles.
/s/Farber & Hass LLP
November 17, 2000
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 976,499
Trade accounts receivable, less allowance
for doubtful accounts of $11,867 947,936
Inventories 734,268
Other current assets 71,499
-----------
Total current assets 2,730,202
-----------
PROPERTY AND EQUIPMENT 910,937
Less accumulated depreciation (737,958)
-----------
Property and equipment, net 172,979
-----------
OTHER ASSET 9,458
-----------
TOTAL ASSETS $ 2,912,639
===========
</TABLE>
(Continued)
2
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET - CONTINUED
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Accounts payable $ 335,289
Accrued expenses 154,093
Accrued payroll and commissions 117,968
Customer deposits 78,980
Capitalized lease obligation, current portion 1,841
Notes payable, current portion 583,359
Notes payable, related parties 760,000
------------
Total current liabilities 2,031,530
------------
NON-CURRENT LIABILITIES:
Capitalized lease obligation, non-current 5,449
Notes payable, non-current 7,227
------------
Total non-current liabilities 12,676
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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; 2,551,333 shares
issued and outstanding; 1,733,333 shares
reserved 25
Additional paid-in capital 25,027,312
Accumulated deficit (24,158,904)
------------
Total stockholders' equity 868,433
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,912,639
============
</TABLE>
See notes to consolidated financial statements.
-------------------------------------------------------------------------------
3
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
NET SALES $ 7,091,238 $ 6,503,795
COST OF GOODS SOLD 4,342,379 4,394,111
----------- -----------
GROSS PROFIT 2,748,859 2,109,684
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,796,582 1,591,308
----------- -----------
INCOME FROM OPERATIONS 952,277 518,376
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (64,799) (114,551)
Interest income 49,477 21,535
Miscellaneous other income (expense) 72,276 (13,976)
----------- -----------
Other income (expense), net 56,954 (106,992)
----------- -----------
INCOME BEFORE INCOME TAXES 1,009,231 411,384
PROVISION FOR INCOME TAXES 52,155 5,267
----------- -----------
NET INCOME $ 957,076 $ 406,117
=========== ===========
EARNINGS PER SHARE:
Basic $ .38 $ .16
=========== ===========
Diluted $ .36 $ .16
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-------------------------------------------------------------------------------
4
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
STOCK-
PREFERRED STOCK COMMON STOCK ADDITIONAL HOLDERS'
-------------------- ----------------------- PAID-IN ACCUMULATED TREASURY EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK (DEFICIT)
------ ------ ------ ------ ------- ------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
OCTOBER 1, 1998 -0- $-0- 2,544,909 $ 25 $30,053,284 $(25,522,097) $(5,025,972) $(494,760)
TREASURY STOCK
RETIREMENT (5,025,972) 5,025,972
REVERSE STOCK
SPLITS 4-TO-1 87 0
NET INCOME 406,117 406,117
--------- --------- ----------- --------- ------------ ------------- ----------- ----------
BALANCES,
SEPTEMBER 30, 1999 2,544,996 25 25,027,312 (25,115,980) -0- (88,643)
REVERSE STOCK
SPLITS 4-TO-1 6,337 0
NET INCOME 957,076 957,076
--------- --------- ----------- --------- ------------ ------------- ----------- ----------
BALANCES,
SEPTEMBER 30, 2000 -0- $-0- 2,551,333 $ 25 $25,027,312 $(24,158,904) $ -0- $868,433
=== ==== ========= ==== =========== ============ ============ =========
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
5
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 957,076 $ 406,117
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 53,304 43,131
Inventory reserve 42,194
Changes in operating assets and liabilities:
Restricted cash 15,662
Accounts receivable 61,802 (383,107)
Inventories (194,553) 144,131
Other assets 24,414 44,787
Accounts payable and accrued expenses (107,647) 23,245
Customer deposits (231,388) (49,139)
Income taxes 17,230 (2,000)
--------- ---------
Net cash provided by operating activities 622,432 242,827
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (51,962) (57,302)
Long-term investment (9,458)
--------- ---------
Net cash used in investing activities (61,420) (57,302)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (171,936) (187,627)
Payments on related party long-term debt (80,000)
--------- ---------
Net cash used in financing activities (251,936) (187,627)
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 309,076 (2,102)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 667,423 669,525
--------- ---------
CASH AND EQUIVALENTS, END OF YEAR $ 976,499 $ 667,423
========= =========
</TABLE>
(Continued)
6
<PAGE>
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $63,799 $96,551
Cash paid for taxes $44,653 $20,067
</TABLE>
NON-CASH RELATED DISCLOSURES:
During the year ended September 30, 2000, the Company entered into a capital
lease agreement for a vehicle. The capitalized asset and liability was $9,153
(see Note 5).
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, 2000, the
Company had substantially all cash and cash equivalents on deposit with one
financial institution.
At September 30, 2000, one customer accounted for 10.6% of trade accounts
receivable. 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 deposits 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. No options were granted
or vested during the years ended September 30, 2000 and 1999.
Information regarding stock options outstanding as of September 30, 2000 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 standard cost (which
approximates 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.
9
<PAGE>
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.
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 $35,447 and
$60,693 in 2000 and 1999, respectively.
2. INVENTORIES
Inventories at September 30, 2000 consist of:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies $ 550,625
Work-in-process 229,655
---------
Total 780,280
Less reserve (46,012)
---------
Inventories, net $ 734,268
=========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 consist of:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements $ 18,259
Machinery and equipment 436,146
Furniture and fixtures 313,810
Software 133,569
Vehicle 9,153
---------
Total property and equipment 910,937
Less accumulated depreciation (737,958)
---------
Property and equipment, net $ 172,979
=========
</TABLE>
The estimated useful lives used to depreciate property and equipment are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements Lease term
Machinery and equipment 5 years
Furniture and fixtures 5 years
Software 5 years
Vehicle Lease term
</TABLE>
10
<PAGE>
4. LEASES
At September 30, 2000, 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 $116,104 in 2000 and $128,160
in 1999.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of September 30,
2000, are:
<TABLE>
<CAPTION>
Year ending September 30:
------------------------
<S> <C>
2001 $116,186
2002 109,821
2003 84,009
2004 7,752
--------
TOTAL $317,768
========
</TABLE>
5. CAPITALIZED LEASE OBLIGATION
The Company has a capitalized lease obligation which provides for monthly
payments of $293. The lease matures in 2003 and is collateralized by a
vehicle with a net book amount of approximately $7,055. Future payments on
the lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 $ 3,519
2002 3,519
2003 3,519
--------
Total minimum lease payments 10,557
Less interest (3,267)
--------
Present value of net minimum lease payments $ 7,290
========
</TABLE>
6. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
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 contains certain acceleration
clauses. The principal amount of the note and unpaid interest are payable
in full in August 2001.
11
<PAGE>
In August 1997, the note was purchased by two related parties (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 totalling $400,000,
convertible at $0.75 per share and bearing interest at 6%, remain
outstanding at September 30, 2000. Total interest paid was $12,000 for each
of the years ended 2000 and 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.
$900,000 remains outstanding at September 30, 2000 ($360,000 of which is
held by related parties). Each unit represents: a) a $50,000 interest in a
6%, $1,500,000 note due December 29, 2000; b) a warrant (Series A) 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
(Series B) to purchase 15,000 shares of the Company's common stock at $2
per share during the period October 1, 1999 through September 30, 2001. In
November 2000, the Company offered to replace the expired series A warrants
in consideration of unitholders extending the original $1,500,000 note,
(see Note 13). Total interest expense in connection with the note was
$61,500 and $73,400 for 2000 and 1999, respectively. Related party interest
expense was $24,600 and $27,300, respectively.
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. $50,586 was outstanding under this agreement at September 30,
2000.
Maturities of notes payable for the years succeeding September 30, 2000
are:
<TABLE>
<CAPTION>
<S> <C>
2001 $1,343,359
2002 7,227
----------
Total $1,350,586
==========
</TABLE>
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at September 30, 2000 and 1999 are
substantially composed of the Company's net operating loss carryforwards,
for which the Company has made a full valuation allowance.
12
<PAGE>
The valuation allowance decreased approximately $995,000 and $340,000 in
the years ended September 30, 2000 and 1999, 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, 2000, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $27,400,000 and
$28,100,000, respectively, which are available to offset future taxable
income, if any, through 2013.
The tax provision for the year ended September 30, 2000 is composed of
Federal alternative minimum tax, state, and city income taxes; 1999 is
composed of state and city income tax.
8. REVERSE STOCK SPLIT
During fiscal 1991 through 1994, the Company declared three separate
reverse stock splits ranging from 5-to-1 through 4-to-1. The reverse stock
splits shown in the consolidated statements of stockholders deficit relate
to conversions of predecessor entity stock. As of September 30, 2000,
approximately 22,000 shares of predecessor entity stock remain unconverted.
These predecessor entity shares may be converted, at the holder's option,
into approximately 1,400 shares of the Company's common stock.
9. 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.
13
<PAGE>
No shares were granted, cancelled or exercised in 1999 and 2000.
<TABLE>
<CAPTION>
Option Price
Shares per Share
------ ---------
<S> <C> <C>
Outstanding at
September 30, 1999
and 2000 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 2001. Options are granted at the discretion of the Board of
Directors.
In the two years ended September 30, 2000, options to acquire 150,000
shares of the Company's common stock at $1.00 per share were outstanding.
No options were granted, exercised or cancelled in 1999 and 2000.
10. BASIC INCOME PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", that established standards for the
computation, presentation and disclosure of earnings per share ("EPS"),
replacing the presentation of Primary EPS with a presentation of Basic EPS.
It also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for entities with complex capital structures. Basic
EPS is based on the weighted average number of common shares outstanding
during each period.
Basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
2000 1999
---- ----
<S> <C> <C>
BASIC:
Net Income Available To Common
Shareholders $ 957,076 $ 406,117
Weighted Average Shares Outstanding 2,551,333 2,544,996
Basic Earnings Per Share (FAS 128) $ .38 $ 0.16
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
2000 1999
---- ----
<S> <C> <C>
DILUTED:
Net Income Available to Common
Shareholders $ 957,076 $ 406,117
Weighted Average Shares Outstanding 2,551,333 2,544,996
Net Effect of Dilutive Stock
Options and Warrants Based on
the Treasury Stock Method
Using Average Market Price 88,889 -0-
Total Shares 2,640,222 2,544,996
Diluted Earnings Per Share (FAS 128) $ .36 $ 0.16
Average Market Price of Common Stock $ .90 $ 0.51
Ending Market Price of Common Stock $ 1.25 $ 0.50
</TABLE>
The following securities were excluded from the calculation of diluted
earnings per share at September 30, 2000 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.
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 incentive stock
option plan to purchase 150,000 shares @ $1.00 per share.
11. 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. During
the year ended September 30, 2000, the Company made an elective 10%
matching contribution to all employee calendar 1999 contributions. Plan
expenses incurred by the Company totalled approximately $14,500 and $8,700
during 2000 and 1999, respectively.
15
<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.
13. SUBSEQUENT EVENT (UNAUDITED)
In November 2000, the Company's Board of Directors approved a resolution to
offer to holders of the Company's $1,500,000 note payable (see Note 6) to
extend the due date of the note from December 29, 2000 to December 29,
2002. In consideration of the extension, Series A warrants that expired in
September 2000 would be replaced by new Series A warrants, convertible into
6,500 shares (per $50,000 unit) of the Company's common stock at $1.00 per
share, that would expire in September 2001. In addition, each unitholder
that agreed to extend would receive a new Series C warrant, to purchase
10,000 shares of the Company's common stock at $1.50 per share, that would
expire two years after the date of issuance. As of early December 2000, no
unitholders had accepted the Company's offer to extend the due date of the
note.
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