FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) [X ] Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended...6/30/99
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from January 1, 1999 to June 30,
1999
Commission file number 000-24355.
WebQuest International, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of Identification No.)
86-0894019
(I.R.S. Employer incorporation or organization)
1662 N. Hwy 395, Suite 203 Minden NV 89403
(Address of principal executive offices)
775-782-0350
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such that the registrant was
required to file such reports), and
(2) has shorter period been subject to such filing
requirements for the past 90 days.
Yes_X__ No_____
As of June 30, 1999 there were 4,608,118 outstanding shares
of the issuer's Common stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format
Yes_____ No__X___
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TABLE OF CONTENTS
Part I. Financial Information
Item 1.
Financial Statements Unaudited Condensed Balance Sheets, as
of June 30, 1999 and September 30 ,1998
Unaudited Condensed Statements of Operations, for the three
and nine months ended June 30, 1999 and 1998, and from
inception on November 5, 1996 through June 30, 1999
Unaudited Condensed Statements of Comprehensive income, for
the three and nine months ended June 30, 1999 and 1998, and
from inception on November 5, 1996 through June 30, 1999
Unaudited Condensed Statements of Cash Flows, for the nine
months ended June 30, 1999 and 1998, and from
inception on November 5, 1996 through June 30, 1999
Notes to Unaudited Condensed Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Part II Other Information
Item 1.
Legal Proceedings
Item 2.
Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K Signatures -2-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
ASSETS
June 30, September 30,
1999 1998
___________ ___________
CURRENT ASSETS:
Cash $ 100 $ 4,682
Marketable Securities, available-
for sale - 107,451
Employee advances 258 258
___________ ___________
Total Current Assets 358 112,391
___________ ___________
PROPERTY AND EQUIPMENT, net 70,673 21,875
___________ ___________
OTHER ASSETS:
Refundable deposits 3,555 3,751
Software licensing rights, net - 825,000
___________ ___________
Total Other Assets 3,555 828,751
___________ ___________
$ 74,586 $ 963,017
___________ ___________
[Continued]
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
[Continued]
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
June 30, September 30,
1999 1998
___________ ___________
CURRENT LIABILITIES:
Bank overdraft $ 2,165 $ -
Accounts payable 109,983 71,114
Advances - related parties 559 6,500
Notes payable - related parties 69,650 17,582
Other accrued liabilities 162,083 100,989
Accrued dividends payable 56,974 30,779
Current portion - capital lease
obligation 3,095 2,420
Notes payable 215,000 -
___________ ___________
Total Current Liabilities 619,509 229,384
___________ ___________
LONG-TERM OBLIGATIONS:
Capital lease obligation, less
current portion 4,724 7,137
___________ ___________
Total Long-Term Obligations 4,724 7,137
___________ ___________
624,233 236,521
___________ ___________
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value,
5,000,000 shares authorized,
212,500 and 396,000 shares of 12%
Series B convertible preferred
stock issued and outstanding as of
1999 and 1998, respectively 213 396
Common stock, $.001 par value,
20,000,000 shares authorized,
4,608,118 and 4,258,618 shares
issued and outstanding as of 1999
and 1998, respectively 4,608 4,259
Capital in excess of par value 2,811,369 2,630,515
Deficit accumulated during the
development stage (3,272,142) (1,548,718)
___________ ___________
(455,952) 1,086,452
Less: Receivable stock subscription (36,114) (36,114)
Deferred compensation expense
in accordance with APB 25 (57,581) (239,407)
Unrealized (loss) - marketable
securities - (84,435)
___________ ___________
Total Stockholders' Equity
(Deficit) (549,647) 726,496
___________ ___________
$ 74,586 $ 963,017
___________ ___________
NOTE: The balance sheet at September 30, 1998 was taken from the audited
financial statements at that date and condensed.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three For the Nine From Inception
Months Ended Months Ended on November 5,
June 30, June 30, 1996 Through
_______________________ _______________________ June 30,
1999 1998 1999 1998 1999
____________ __________ ____________ __________ ____________
REVENUE $ 2,250 $ - $ 3,250 $ - $ 3,250
____________ __________ ____________ __________ ____________
EXPENSES:
Selling expense 25,634 21,048 63,642 84,298 400,838
General and
administrative 1,166,084 135,194 1,638,133 413,980 2,553,186
Compensation expense
recorded in
accordance with APB
25 for stock options
issued below market
value - 45,889 - 162,663 273,313
____________ __________ ____________ __________ ____________
Total Expenses 1,191,718 202,131 1,701,775 660,941 3,227,337
____________ __________ ____________ __________ ____________
LOSS FROM
OPERATIONS (1,189,468) (202,131) (1,698,525) (660,941) (3,224,087)
____________ __________ ____________ __________ ____________
OTHER INCOME
(EXPENSE):
Gain (loss) on
sale of marketable
securities - - 14,743 - 28,106
Interest income - - 21 - 21
Interest (expense) (8,557) (696) (13,468) (1,794) (19,208)
____________ __________ ____________ __________ ____________
Total Other
Income (Expense) (8,557) (696) 1,296 (1,794) 8,919
____________ __________ ____________ __________ ____________
LOSS BEFORE INCOME
TAXES (1,198,025) (202,827) (1,697,229) (662,735) (3,215,168)
CURRENT TAX EXPENSE - - - - -
DEFERRED TAX EXPENSE - - - - -
____________ __________ ____________ __________ ____________
NET LOSS $(1,198,025) $(202,827) $(1,697,229) $(662,735) $(3,215,168)
LESS: PREFERRED
DIVIDEND
REQUIREMENTS (7,798) (14,644) (26,195) (40,714) (56,974)
____________ __________ ____________ __________ ____________
NET LOSS APPLICABLE
TO COMMON
STOCKHOLDERS $(1,205,823) $(217,471) $(1,723,424) $(703,449) $(3,272,142)
____________ __________ ____________ __________ ____________
LOSS PER COMMON
SHARE $ (.26) $ (.06) $ (.39) $ (.19) $ (.95)
____________ __________ ____________ __________ ____________
The accompanying notes are an integral part of these unaudited condensed
financial statements.
-4-
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the Three For the Nine From Inception
Months Ended Months Ended on November 5,
June 30, June 30, 1996 Through
_______________________ _______________________ June 30,
1999 1998 1999 1998 1999
____________ __________ ____________ __________ ____________
NET LOSS $(1,198,025) $(202,827) $(1,697,229) $(662,735) $(3,215,168)
OTHER COMPREHENSIVE
INCOME (LOSS):
Adjusted for
realized losses
on available for
sale securities
which were
recognized in
prior periods as
unrealized holding
losses on
marketable
securities
available for sale - - 84,435 - -
____________ __________ ____________ __________ ____________
COMPREHENSIVE INCOME
(LOSS) $(1,198,025) $(202,827) $(1,612,794) $(662,735) $(3,215,168)
____________ __________ ____________ __________ ____________
The accompanying notes are an integral part of these unaudited condensed
financial statements.
-5-
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Net Increase (Decrease) In Cash
For the Nine From Inception
Months Ended on November 5,
June 30, 1996 Through
______________________ June 30,
1999 1998 1999
____________ __________ ____________
Cash Flows from Operating
Activities:
Net loss applicable to common
stockholders $(1,723,424) $(703,449) $(3,272,142)
Adjustments to reconcile net loss
to net cash used by operating
activities
Depreciation and amortization 1,023,228 75,810 1,201,766
Non-cash expense 204,176 3,998 336,747
APB 25 compensation recorded
for stock options issued
below market value - 162,663 273,313
Changes in assets and liabilities:
(Increase) in employee advances - (150) (258)
Increase in bank overdraft 2,165 - 2,165
Increase in accounts payable 38,869 23,141 109,983
Increase (decrease) in advances
related parties (5,941) 200 559
Increase in accrued liabilities 61,094 66,807 162,083
____________ __________ ____________
Net Cash (Used) by Operating
Activities (399,833) (370,980) (1,185,784)
____________ __________ ____________
Cash Flows from Investing Activities:
(Increase) decrease in refundable
deposits 196 (1,005) (3,555)
Purchase of equipment (46,026) (7,042) (71,439)
Purchase of software licensing
rights - - (300,000)
Proceeds from marketable securities
sales 206,624 - 276,987
____________ __________ ____________
Net Cash Provided (Used) by
Investing Activities 160,794 (8,047) (98,007)
____________ __________ ____________
Cash Flows from Financing Activities:
Proceeds from notes payable 200,000 - 200,000
Proceeds from notes payable -
related party 90,000 25,000 218,500
Payments on notes payable -
related party (40,000) (23,038) (153,532)
Payments on capital lease
obligation (1,738) - (2,070)
Proceeds from preferred stock
issuance - 183,500 344,750
Proceeds from common stock issuance - 189,300 659,269
Increase in accrued dividends
payable 26,195 40,714 56,974
Stock offering costs (40,000) - (40,000)
____________ __________ ____________
Net Cash Provided by Financing
Activities 234,457 415,476 1,283,891
____________ __________ ____________
Net Increase (Decrease) in Cash (4,582) 36,449 100
Cash at Beginning of Period 4,682 9,321 -
____________ __________ ____________
Cash at End of Period $ 100 $ 45,770 $ 100
____________ __________ ____________
[Continued]
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<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Net Increase (Decrease) In Cash
[Continued]
For the Nine From Inception
Months Ended on November 5,
June 30, 1996 Through
______________________ June 30,
1999 1998 1999
____________ __________ ____________
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year and
from inception for:
Interest $ 4,376 $ - $ 5,091
Income taxes $ - $ - $ -
Supplemental schedule of Non-cash Investing and Financing Activities:
For the nine month period ended June 30, 1999 (Unaudited):
The Company issued 100,000 shares of common stock valued at $175,000 for
the purchase of the technology rights, source code, and documentation of
iPONG from a related party [See Note 4].
The Company issued 20,000 shares of common stock valued at $20,000 as an
incentive to acquire $200,000 in convertible promissory notes [See Note 5].
The Company issued 20,000 shares of common stock valued at $20,000 for a
finder's fee in acquiring $200,000 in convertible promissory notes [See
Note 5].
The Company issued 10,000 shares of common stock valued at $10,000 for the
purchase of SCAVENGERnet. The Company issued 10,000 shares of common stock
valued at $10,000 for the purchase of BannerClicks. The Company issued
6,000 shares of common stock valued at $6,000 for the purchase of Nancy's
Kitchen.
The Company has expensed its remaining software licensing rights in the net
amount of $825,000 due to the termination of the license agreement.
The Company has accounted for 183,500 shares of common stock as being
issued in the conversion of 183,500 preferred shares.
Amortization of deferred compensation on stock options amounted to
$181,826.
[Continued]
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Net Increase (Decrease) In Cash
[Continued]
For the nine month period ended June 30, 1998 (Unaudited):
The Company issued 48,750 shares of common stock in the conversion of
48,750 preferred shares.
The Company issued 3,000 shares of common stock in exchange for programming
costs valued at $3,000.
The Company issued 1,000 shares of common stock to an employee of the
Company in payment of $1,000 bonus.
The Company issued stock options to purchase 180,000 shares of common stock
to an officer of the Company at below market value prices. Additional paid
in capital of $159,120 was recorded, $75,928 in current compensation
expense was recorded and $83,192 of deferred compensation expense (a
reduction to stockholders' equity) was recorded.
Amortization of deferred compensation on stock options granted prior to
October 1, 1997 amounted to $88,078.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
-8-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Company was organized under the laws of the State of Nevada
on November 5, 1996. The Company has commenced principal operations, but has
not generated any significant revenues therefrom. Accordingly, the Company is
considered a development stage company as defined in SFAS No. 7. The Company
develops and markets an interactive game arcade, known as the iPONG Game
Arcade on the Internet. The Company also purchases other websites for use in
an interactive chat room. The Company derives revenue from the sale of
advertising. The Company may also pursue other Internet related businesses.
Condensed Financial Statements - The accompanying financial statements have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 1999 and for all the periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's September 30, 1998
audited financial statements. The results of operations for the period ended
June 30, 1999 is not necessarily indicative of the operating results for the
full year.
Marketable Securities - The Company's investments in marketable equity
securities are held for an indefinite period and thus are classified as
available-for-sale. Available-for-sale securities are recorded at fair value
under the caption "marketable securities" on the balance sheet, with the
change in fair value during the period excluded from earnings and recorded as
a separate component of equity. Fair value of the equity securities was
determined on a specific identification basis in computing unrealized gain or
loss.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized, upon being placed in service.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets, which ranges from three
to seven years.
Software Licensing Rights - Software licensing rights were stated at cost.
The Company was amortizing the software licensing rights on a straight-line
basis over ten-years (the original term of the agreement). During May 1999,
the Company fully expensed the licensing rights [See Note 4].
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires an asset and liability approach for
accounting for income taxes.
Dividend Policy - The Company has not paid any dividends on common stock to
date and does not anticipate paying dividends on common stock in the
foreseeable future. The Company has a dividend requirement with respect to
its preferred stock.
-9-
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Revenue Recognition - The Company receives revenues from the sale of
advertising.
Loss Per Share - The Company presents Loss Per Share according to Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share", which
requires the Company to present basic loss per share and dilutive loss per
share when the effect is dilutive.
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers all highly liquid debt investments purchased with a maturity
of three months or less to be cash equivalents.
Stock Based Compensation - The Company accounts for its stock based
compensation in accordance with Statement of Financial Accounting Standard 123
"Accounting for Stock-Based Compensation". This statement establishes an
accounting method based on the fair value of equity instruments awarded to
employees as compensation. However, companies are permitted to continue
applying previous accounting standards in the determination of net income with
disclosure in the notes to the financial statements of the differences between
previous accounting measurements and those formulated by the new accounting
standard. The Company has adopted the disclosure only provisions of SFAS No.
123; accordingly, the Company has elected to determine net income using
previous accounting standards.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities, the disclosures 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 estimated
by management.
NOTE 2 - MARKETABLE SECURITIES
During the nine month period ended June 30, 1999, the Company sold all of
their remaining marketable securities for proceeds totaling $206,624. During
the nine months ended June 30, 1999, the Company recorded a realized gain on
the sale of securities of $14,743. The marketable securities sold consisted
of common stock in an entity, which is also a shareholder of the Company,
NOTE 3 - NOTES PAYABLE
During April 1999, the Company commenced an offering to raise up to
$1,500,000. The offering allows accredited investors to purchase units,
consisting of $10 in principal amount of 12% Convertible Subordinated
Promissory Notes issued by the Company and one share of common stock of the
Company. Each unit will sell for $10. Interest on the notes compound
annually and the promissory notes mature on June 1, 2000. The outstanding
principal and accrued interest on the notes may be converted, at the option of
the holder of the note, at any time beginning one year following the issuance
date thereof into shares of common stock at a conversion rate of $1.25 per
share. The securities to be sold have not been registered with the Securities
and Exchange Commission. As of June 30, 1999, 20,000 units have been
purchased for total proceeds of $200,000. Also as of June 30, 1999, the
Company has accrued $5,195 in accrued interest on the notes.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE [Continued]
During February 1999, the Company issued a $15,000 12% note payable, maturing
August 1999 to a consulting firm in consideration for cancellation of a
consulting agreement.
NOTE 4 - SOFTWARE LICENSE RIGHTS
Licensing and Marketing Agreement - During September 1997, the Company entered
into a licensing and marketing agreement with Homeseekers.com (formerly known
as NDS Software, Inc.) for the use of an interactive advertising game for use
on the Internet (commonly known as "iPONG"). Homeseekers.com is considered to
be an affiliate of the Company because it has the same controlling
shareholders as the Company. The agreement, as amended, provided for a ten-
year term and an automatic renewal for an additional ten years. The agreement
required the Company to pay 7% of gross revenues for the first year after the
live date (April 1, 1998), 10% of gross revenues for the second year after the
live date, and 15% thereafter and also to pay $20,000 per month commencing at
the live date for "website" fees. During July 1998, the payment of $20,000
per month was amended to a pro-rata charge for services. Further, the Company
was to pay $125 per hour for Webpage development, website changes or
customization, and management consulting, plus $0.50 per question for question
development and support. As partial consideration for the license agreement
the Company issued 700,000 shares of common stock (valued at $700,000) to
Homeseekers.com during September 1997.
During May 1999, the license agreement was canceled and the Company fully
expensed the licensing rights. Amortization expense for the nine-month period
ended June 30, 1999 amounted to $825,000. Also during May 1999, the Company
entered into a new agreement with Homeseekers.com wherein the new agreement
provided for the transfer of ownership to the Company of the technology
rights, software and source code that was previously licensed. As
consideration, the Company agreed to pay a royalty of 7% of gross revenues for
a period of five years and to issue 100,000 shares of common stock to
Homeseekers.com valued at $175,000. As the technology was purchased from a
related party, the company recorded the purchase at the carry over-basis of
the technology of $0, resulting in the $175,000 being expensed. The Company
will continue its business relationship with Homeseekers.com for such things
as consultation, programming services and Website hosting. Website,
consulting and question development fees are expensed as incurred. Website,
consulting and question development expense for the nine-month periods ended
June 30, 1999 and 1998 amounted to $37,791 and $69,298, respectively.
Non-exclusive License Agreement - On July 3, 1997, the Company entered into a
non-exclusive licensing agreement with a Delaware corporation, Atari-JTS Corp.
that owns the software, programs, trade names, trademarks, promotional
material, and intellectual property for use on the Internet. The agreement
with the Company has a five year term, which is renewable for an additional
five years if minimum royalty fees received are at least $400,000 over the
five year period, and allows the Company to license and use the game (Pong) in
connection with its website on a non-exclusive basis. As consideration for
this agreement the Company paid a $5,000 non-refundable execution of agreement
fee. The Company also agreed to pay a quarterly 1/10 of one cent ($.001)
royalty fee for each player who accesses Pong; with a base amount of $5,000
per quarter to the Delaware corporation if the number of Pong players fails to
exceed 5,000,000 in each quarter. Royalty fees are expensed as incurred.
Royalty expense for the nine-month periods ended June 30, 1999 and 1998
amounted to $11,667 and $15,000, respectively.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK
Series B Convertible Preferred Stock - The Company authorized 500,000 shares
of preferred stock to be designated as Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock pays dividends at the rate of 12% and
is fully cumulative. The Series B Convertible Preferred Stock shall be
entitled to receive dividends, commencing December 1, 1998, at an annual rate
of 12% per share out of the funds legally available and to the extent declared
by the Board of Directors. The dividends were to be paid in semi-annual
installments on December 1 and June 1 commencing December 1, 1998. The
dividends may be paid either in cash, in common stock of the corporation or a
combination thereof. The Series B Convertible Preferred Stock will be
automatically converted to one (1) share common stock one year from the date
of issuance. The holders of Series B Convertible Preferred Stock shall be
entitled to one (1) vote for each share of Series B Convertible Preferred
Stock held. As of June 30, 1999, no dividends have been paid and the Company
has accrued preferred dividends totaling $56,974. As of June 30, 1999, a
total of 277,250 out of 489,750 originally issued shares of preferred stock
have been accounted for as converted to 277,250 shares of common stock due to
the automatic conversion of preferred stock to common stock at one year from
date of issuance.
Warrants - In connection with the issuance of a $20,000 note payable on
October 28, 1998 to an individual, the Company granted warrants to purchase
20,000 shares of the Company's common stock at $1.00 per share. The warrants
expire on October 28, 2002. The note was due on November 28, 1998 with 5,000
warrants due to be granted as payment of the default penalty for each week the
note is in default. During March 1999, the Company renegotiated the $20,000
note by extending the due date to May 1, 1999. The Company granted an
additional 5,000 warrants to purchase the Company's common stock at $1.00 per
share as consideration for the renegotiation and granted a total of 85,000
warrants to purchase the Company's common stock at $1.00 per share as payment
of the default penalty. During April 1999, the Company paid this note in full
with its corresponding interest of $1,025. As of June 30, 1999, no warrants
have been exercised.
During April 1999, the Company granted warrants to purchase 16,000 shares of
the Company's common stock at $1.25 per share to the finder as part of the fee
in obtaining $200,000 in convertible promissory notes [See Note 7].
Confidential Offering Memorandum - During April 1999, the Company issued
20,000 shares of its common stock as an incentive to acquire $200,000 in
convertible promissory notes [See Note 3]. Also during April 1999, the
Company issued 20,000 shares of its common stock as a finder's fee in
acquiring the $200,000 in convertible promissory notes [See Note 7].
SCAVENGERnet - During October 1998, the Company entered into a purchase
agreement with two individuals to purchase a game (with all rights, software,
programs, source codes, copyrights, trade secrets, patent rights, and other
applicable rights for use on the Internet) called SCAVENGERnet. As
consideration for this purchase agreement the Company gave $5,000 down, $5,000
due on January 9, 1999, and 10,000 shares of its common stock valued at
$10,000 or $1.00 per share. During January 1999, the Company paid the
remaining $5,000.
BannerClicks - During April 1999, the Company entered into a purchase
agreement with an individual to purchase a banner exchange program (with all
rights, software, programs, customer lists, licenses, and other applicable
rights for use on the Internet). As consideration for this purchase agreement
the Company paid $10,000 cash and issued 10,000 shares of its common stock
valued at $10,000 or $1.00 per share.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK [Continued]
iPONG - During May 1999, the Company issued 100,000 shares of common stock for
the purchase of the previously licensed Internet software called iPONG valued
at $175,000 or $1.75 per share [See Note 4].
Nancy's Kitchen - During May 1999, the Company entered into a purchase
agreement with an individual to purchase a website (with all right, software,
programs, source codes, copyrights, trade secrets, patent rights, and other
applicable rights for use on the Internet) called Nancy's Kitchen. As
consideration for this purchase agreement the Company paid $19,000 cash during
May and June 1999 and issued 6,000 shares of its common stock valued at $6,000
or $1.00 per share. Also during May 1999, the Company granted the former
owner of Nancy's Kitchen stock options to purchase 10,000 shares of the
Company's common stock at $0.50 per share [See Note 7].
Stock Options - During December 1998, the Company granted options to the Vice-
President of the Company to purchase 200,000 shares of common stock at $1.00
per share. These options vest immediately and expire in December 2003. As of
June 30, 1999, none of these options have been exercised.
During February 1999, the Company granted options to the operations manager of
the Company to purchase 10,000 shares of common stock at $1.00 per share.
2,500 options vested immediately and the remaining options vest at a rate of
2,500 every 3 months for the next 9 months. As of June 30, 1999, none of
these options have been exercised.
During February 1999, a new member of the Board of Directors was granted
options to purchase 10,000 shares of stock at $1.00 per share with immediate
vesting. As of June 30, 1999, none of these options have been exercised.
During April 1999, the Company granted options to an officer of the Company to
purchase 11,000 shares of common stock at $.50 per share. 2,500 options
vested immediately and the remaining options vest at a rate of 2,125 per
quarter. As of June 30, 1999, none of these options have been exercised.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 Accounting for Income taxes [FASB 109].
FASB 109 requires the Company to provide a net deferred tax asset or liability
equal to the expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available operating loss
or tax credit carryforwards. At June 30, 1999, the total of all deferred tax
assets was approximately $867,700 and the total of the deferred tax
liabilities was approximately $80,000. The amount of and ultimate realization
of the benefits from the deferred tax assets for income tax purposes is
dependent, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be determined.
Because of the uncertainty surrounding the realization of the deferred tax
assets, the Company has established a valuation allowance of approximately
$787,300 as of June 30, 1999, which has been offset against the deferred tax
assets. The net change in the valuation allowance during the period ended
June 30, 1999 amounted to approximately $407,280.
-13-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS
At June 30, 1999, the Company is indebted to related parties for the following
notes payable and advances payable:
1999
_________
12% unsecured demand notes payable to a
shareholder of the Company with interest
compounding annually ($4,442 of the balance
owing represents compounding interest),
the Company has accrued $1,015 of interest
as of June 30, 1999 $ 17,062
10% unsecured demand notes payable to a
shareholder of the Company, the Company
has accrued $3 of interest as of June 30,
1999 15
12% unsecured demand note payable to a
shareholder of the Company, the Company
has accrued $35 of interest as of June 30,
1999 279
Unsecured demand advances payable to a
shareholder and officer of the Company 259
12% unsecured demand note payable to a
shareholder of the Company, the Company
has accrued $7 of interest as of June 30,
1999 54
12% unsecured demand note payable to an
entity related to a shareholder of the Company
with interest compounding annually ($240 of
the balance owing represents compounding
interest), the Company has accrued $45 of
interest as of June 30, 1999 2,240
12% unsecured demand note payable to a
related entity, which is a shareholder of the
Company, the Company has accrued $1,710
of interest as of June 30, 1999 50,000
Unsecured demand advances payable to a
shareholder of the Company 300
_________
Total Long-term obligations 70,209
Less: current maturities (70,209)
_________
Long-term obligations, excluding current portions $ -
_________
-14-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS [Continued]
Finder's Fee - During April 1999, the Company entered into an agreement for a
finder's fee to an individual related to an officer of the Company. The
agreement is for the finder to use its reasonable best efforts to arrange
introductions with institutional and/or individual investors for purposes of
potential participation in the offering. As consideration for the agreement,
the Company is to pay a finder's fee equal to 20% of the gross proceeds
received by the Company from the sale of units to those investors in the
offering introduced to the Company by the finder. 50% of this fee is paid in
cash and 50% is paid by issuance of the Company's common stock at the rate of
$1.00 per share. The Company also gave as consideration warrants to purchase
that number of shares of the Company's common stock at an exercise price of
$1.25 per share as is equal to 10% of the gross proceeds received by the
Company from the sale of Units divided by 1.25. Such warrants shall have a
term of two years. As of June 30, 1999, the Company has paid $20,000 in cash
and issued 20,000 shares of its common stock [See Note 5].
Employment Agreements - As of September 30, 1997, the Company had an
employment agreement for the position, which includes Vice-President,
Secretary and Treasurer, which became effective as of October 1, 1997 and has
a term of two years. The agreement provides for a base salary of $2,000 per
week ($104,000 per year) commencing December 1, 1997. For the period from
October 1, 1997 through November 30, 1997 the employee received 30,000 stock
options. All 30,000 options received were fully vested. The agreement also
provided for stock options to be immediately granted to purchase 150,000
shares of registered common stock of the Company. Options to purchase 75,000
shares of common stock vested on October 1, 1998 while the remainder of the
options (75,000 shares) will vest on October 1, 1999. There are no
restrictions on any of the underlying common stock except for those imposed
under Rule 144 of the Securities Act of 1933, as amended. Once vested the
options are exercisable for a five-year period from the date of vesting
whether or not the employee is still employed by the company. However, the
employee must be employed by the company on the date of vesting or the options
for that date will not vest. The options are exercisable at $.116 per share
which was less than the current market value of the stock on the date the
agreement took effect and the options were granted. During January 1999, the
Vice-President, Secretary and Treasurer became the acting President and Chief
Executive Officer of the Company.
During May 1999, the Company entered into an employment agreement with the
former owner of Nancy's Kitchen, which is an at-will employment agreement.
The agreement provided for a base hourly wage of $20 per hour and granted the
employee options to purchase 10,000 shares of the Company's common stock at
$0.50 per share [See Note 5].
The Company had an employment agreement with its former Chief Executive
Officer ("CEO") which had a two-year term effective as of September 22, 1997.
The agreement provided for a base salary of $120,000 per year and provided for
stock options to purchase 400,000 shares of registered common stock of the
Company. The options were exercisable at $.116 per share which was less than
the current market value of the stock on the date the agreement took effect.
During January 1999, the CEO and the Company agreed to terminate his
employment. During the term of the employment, the CEO had vested in options
to purchase 200,000 shares of common stock but he had only exercised his
options for 100,000 shares. Options for 200,000 shares, which had not yet
vested, were canceled and options for 100,000 shares, which had vested but had
not been exercised were also canceled.
-15-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS [Continued]
The Company had also entered into an employment agreement for its Director of
Promotions which was effective September 15, 1998. The agreement provided for
a base salary of $45,000, a monthly vehicle allowance, and for commissions
based on a percentage of revenues which ranged from 10% to 20% depending on
the amount and type of revenue generated. The agreement also provided for
stock options to be granted to purchase 2,500 shares of the Company's common
stock at an exercise price of $1.00 per share. Subsequent to the year ended
September 30, 1998, the employee left the Company and the options were
cancelled.
Effective on April 28, 1999, the Company entered into an employment agreement
with its Vice-President of Advertising. The agreement provides for a base
salary of $50,000 along with commissions ranging from 5% to 12% of revenues
generated by the employee. The employee received options to purchase 11,000
shares of common stock at an exercise price of $0.50 per share. Two thousand
five hundred options vest immediately upon signing and the remaining options
vest at the rate of 2,125 options per quarter. The options are exercisable
for a period of three years from the date of vesting.
Related Entity - Certain officers or shareholders of the Company are
affiliated with an entity with whom the Company has purchased the software
technology rights [See Note 4]. 100,000 shares of the Company's common stock
was given in consideration for the purchase.
NOTE 8 - LEASE OBLIGATIONS
Operating Leases - During October 1998, the Company extended the original
lease in Del Mar, California. The lease extension is on a month by month
basis with an increase in monthly rents to $580. During February 1999, the
Company terminated the month to month lease in Del Mar, California. During
April 1999, the Company amended the lease in Minden, Nevada and added
additional office space. The lease amendment calls for monthly rents of
$1,577 and is for one year (which has the option to renew for another year
with a monthly rent increase of 1.5% or a total monthly rent of $1,600).
NOTE 9 - GOING CONCERN
The Company was formed with a very specific business plan. However, the
possibility exists that the Company could expend virtually all of its working
capital in a relatively short time period and may not be successful in
establishing on-going profitable operations. The financial statements do not
contain any allowances, liabilities or other adjustments, which may need to be
recorded if the Company is not successful in achieving profitable operations.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company is newly formed, has
incurred losses since its inception, has current liabilities in excess of
current assets of $619,151 and has not yet been successful in establishing
profitable operations. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided
by operations through loans and/or through additional sales of its common
stock. There is no assurance that the Company will be successful in raising
additional capital or achieving profitable operations. The financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
-16-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 11 - CONSULTING AGREEMENTS
The Company had a one-year consulting agreement with a Colorado corporation,
which provided various consulting and financial public relations with broker-
dealers, shareholders and members of the general public. The agreement
provided for monthly cash payments of $3,500. During November 1998, this
agreement terminated. The Company issued a note payable for the services
rendered under the agreement in the amount of $15,000. The note matures
August 25, 1999 and provides for interest at 12% per annum. The agreement was
subsequently renewed during July 1999 [See Note 13].
The Company also had a one year consulting agreement with a British Virgin
Island Corporation ("BVIC") wherein the BVIC would develop, implement and
maintain an on-going stock market support system to increases broker awareness
of the Company's activities and to stimulate investor interest in the Company.
The agreement provided for the issuance of a warrant to purchase 100,000
shares of the Company's common stock at a price of $3.00 per share. This
agreement terminated during November 1998, and was not renewed. During May
1998, the Company entered into an additional consulting agreement with the
BVIC, which has a term of one year and provides for the issuance of a warrant
to purchase 100,000 shares of the Company's common stock at a price of $2.00
per share. The agreement also provides for the issuance of 62,000 shares of
the Company's common stock valued at $62,000 (or $1.00 per share).
NOTE 12 - LOSS PER SHARE
The following data show the amounts used in computing loss per share and the
effect on income and the weighted average number of shares of dilutive
potential common stock for the periods ended June 30, 1999 and 1998 and from
inception on November 5, 1996 through June 30, 1999:
For the Three For the Nine From Inception
Months Ended Months Ended on November 5,
June 30, June 30, 1996 Through
_______________________ _______________________ June 30,
1999 1998 1999 1998 1999
____________ __________ ____________ __________ ____________
Loss from continuing
operations
applicable to
common stock $(1,198,025) $(202,827) $(1,697,229) $(662,735) $(3,215,168)
Less: preferred
dividends (7,798) (14,644) (26,195) (40,714) (56,974)
____________ __________ ____________ __________ ____________
Loss available to
common stockholders
used in loss per
share $(1,205,823) $(217,471) $(1,723,424) $(703,449) $(3,272,142)
____________ __________ ____________ __________ ____________
Weighted average
number of common
shares outstanding
used in loss per
share during the
period 4,513,151 3,858,233 4,408,821 3,740,992 3,430,437
____________ __________ ____________ __________ ____________
Dilutive loss per share was not presented, as its effect is anti-dilutive.
-17-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
During July 1999, the Company entered into one year public relations
consulting agreements with two separate firms wherein 50,000 warrants were
issued to each of the firms to purchase the Company's common stock at $0.50
per share. The Company further agreed that for a period of three years the
warrants are subject to piggyback registration rights.
Also during July 1999, the Company entered into one year public relations
consulting agreement wherein the Company agreed to pay the firm $3,500 a month
plus expenses.
-18-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDING JUNE 30, 1999 TO THE
NINE MONTHS ENDING JUNE 30, 1998
Total revenues increased from $0.00 for the nine months
ended June 30, 1998 to $18,014 for the nine months ended
June 30, 1999. This increase resulted primarily from
advertising revenue and the sale of homeseekers.com stock.
Cost of Sales decreased 24.5% from $84,298 for the nine
months ended June 30, 1998 to $63,642 for the nine months
ended June 30, 1999. This decrease was due primarily to
reduced programming expenses. Operating expenses increased
395% from $413,980 for the nine months ended June 30, 1998
to $1,638,133 for the nine months ended June 30, 1999. This
increase was due primarily to increased payroll, office
space, contest prizes, advertising and fully expensing the
homeseekers.com license agreement. Interest expense
increased 750.7% from $1,794 for the nine months ending June
30, 1998 to $13,468 for the nine months ending June 30,
1999. This increase was due primarily to interest on
additional loans. The net loss for the nine months ending
June 30, 1999 of $1,723,424, or ($.39) per share, increased
$1,019,975 from the net loss of $703,449 or ($0.19) per
share, for the nine months ending June 30, 1998. This was
due primarily from fully expensing the homeseekers.com
licensing agreement and an increase in operating expense.
COMPARISON OF THE THREE MONTHS ENDING JUNE 30, 1999 TO THE
THREE MONTHS ENDING JUNE 30, 1998 Total revenues increased
from $0.00 for the three months ending June 30, 1998 to
$1,000 for the three months ending June 30, 1999. This
increase resulted primarily from advertising revenue. Cost
of Sales increased 17.8% from $21,048 for the three months
ending June 30, 1998 to $25,634 for the three months ending
June 30, 1999. This increase was due primarily to
programming expenses. Operating expenses increased 862% from
$135,194 for the three months ending June 30, 1998 to
$1,166,084 for the three months ending June 30, 1999. This
was due primarily from fully expensing the homeseekers.com
licensing agreement and a decrease in contract labor.
Interest expense increased 1,229% from $696 for the three
months ending June 30, 1998 to $8,557 for the three months
ending June 30, 1999. This increase was due primarily to
interest on additional loans. The net loss for the three
months ending June 30, 1999 is $1,205,823, or ($0.26) per
share, increased 988,352 from the net loss of $217,471, or
($0.06) per share, for the three months ending June 30,
1998. This was due primarily from fully expensing the
homeseekers.com licensing agreement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the quarter ending June
30, 1999 was financed primarily by investors, the sale of
Homeseekers stock and advertising revenue. The Company is
conducting a private offering of convertible debt in which
the Company is seeking to raise up to $1,500,000. The
minimum was reduced to $200,000. The Company met the minimum
on April 12, 1999. The Company believes that it's current
financial conditions will carry the operations for
approximately 120 days from the date of this report.
Impact of the Year 2000 The Company does not anticipate any
material adverse consequences to it's business or financial
operations as a result of the Y2K bug.
Signatures* Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
WebQuest International, Inc. (Registrant) /s/ Kirk Johnson
..............................................
Kirk Johnson President, Chief Executive Officer Secretary
and Treasurer August 16, 19909
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from financial
statements as of June 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
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