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...3/31/99
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 March 31, 1999
Commission file number 000-24355.
WebQuest International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 86-0894019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 March 31, 1999 there were 4,382,118 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 March 31, 1999
and September 30 ,1998
Unaudited Condensed Statements of Operations, for the three and six
months ended March 31, 1999 and 1998, and from inception on
November 5, 1996 through March 31, 1999
Unaudited Condensed Statements of Comprehensive income, for the three
and six months ended March 31, 1999 and 1998, and from inception on
November 5, 1996 through March 31, 1999
Unaudited Condensed Statements of Cash Flows, for the three and six
months ended March 31, 1999 and 1998, and from inception on
November 5, 1996 through March 31, 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
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ITEM 1. FINANCIAL STATEMENTS
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
ASSETS
March 31, September 30,
1999 1998
___________ ___________
CURRENT ASSETS:
Cash $26,591 $ 4,682
Marketable Securities, available-
for sale - 107,451
Employee advances 258 258
___________ ___________
Total Current Assets 26,849 112,391
___________ ___________
PROPERTY AND EQUIPMENT, net 23,171 21,875
___________ ___________
OTHER ASSETS:
Software licensing rights, net 775,000 825,000
Refundable deposits 3,751 3,751
___________ ___________
Total Other Assets 778,751 828,751
___________ ___________
$ 828,771 $ 963,017
___________ ___________
[Continued]
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
[Continued]
LIABILITIES AND STOCKHOLDER'S EQUITY
March 31, September 30,
1999 1998
___________ ___________
CURRENT LIABILITIES:
Accounts payable $ 89,204 $ 71,114
Advances - related parties 559 6,500
Notes payable - related parties 109,410 17,582
Other accrued liabilities 157,231 100,989
Accrued dividends payable 49,176 30,779
Current portion - capital lease obligation 2,851 2,420
___________ ___________
Total Current Liabilities 408,431 229,384
___________ ___________
CAPITAL LEASE OBLIGATION, less current
portion 5,793 7,137
___________ ___________
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
5,000,000 shares authorized,272,500 and
396,000 shares of 12% Series B convertible
preferred stock issued and outstanding
for which 500,000 shares have been
authorized 273 396
Common stock, $.001 par value, 20,000,000
shares authorized, 4,382,118 and
4,258,618 shares issued and outstanding 4,382 4,259
Capital in excess of par value 2,630,515 2,630,515
Deficit accumulated during the
development stage (2,066,319) (1,548,718)
___________ ___________
568,851 1,086,452
Less: Receivable stock subscription (36,114) (36,114)
Deferred compensation expense
in accordance with APB 25 (118,190) (239,407)
Unrealized (loss) - marketable
securities - (84,435)
___________ ___________
Total Stockholders' Equity 414,547 726,496
___________ ___________
$ 828,771 $ 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 Six From Inception
Months Ended Months Ended on November 5,
March 31, March 31, 1996 Through
_____________________ _____________________ March 31,
1999 1998 1999 1998 1999
__________ __________ __________ __________ ____________
REVENUE $ 1,000 $ - $ 1,000 $ - $ 1,000
__________ __________ __________ __________ ____________
EXPENSES:
Selling expense 27,921 58,250 38,008 92,600 375,204
General and
administrative 222,083 400,560 472,049 550,493 1,387,102
Compensation
expense recorded
in accordance with
APB 25 for stock
options issued below
market value - 116,774 - 188,238 273,313
___________ __________ __________ __________ ____________
Total Expenses 250,004 575,584 510,057 831,331 2,035,619
___________ __________ __________ __________ ____________
LOSS FROM OPERATIONS (249,004) (575,584) (509,057) (831,331) (2,034,619)
___________ __________ __________ __________ ____________
OTHER INCOME (EXPENSE):
Gain (loss) on sale of
marketable securities (7,241) - 14,743 - 28,106
Interest income 9 - 21 - 21
Interest (expense) (2,620) (1,098) (4,911) (1,499) (10,651)
___________ __________ __________ __________ ____________
Total Other Income
(Expense) (9,852) (1,098) 9,853 (1,499) 17,476
___________ __________ __________ __________ ____________
LOSS BEFORE INCOME TAXES (258,856) (576,682) (499,204) (832,830) (2,017,143)
CURRENT TAX EXPENSE - - - - -
DEFERRED TAX EXPENSE - - - - -
___________ __________ __________ __________ ____________
NET LOSS $ (258,856) $(576,682) $(499,204) $(832,830) $(2,017,143)
LESS: PREFERRED DIVIDEND
REQUIREMENTS (8,623) (26,070) (18,397) (26,070) (49,176)
___________ __________ __________ __________ ____________
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (267,479) $(602,752) $(517,601) $(858,900) $(2,066,319)
___________ __________ __________ __________ ____________
LOSS PER COMMON SHARE $ (.06) $ (.16) $ (.12) $ (.24) $ (.62)
___________ __________ __________ __________ ____________
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 COMPREHENSIVE INCOME
For the Three For the Six From Inception
Months Ended Months Ended on November 5,
March 31, March 31, 1996 Through
_____________________ _____________________ March 31,
1999 1998 1999 1998 1999
__________ __________ __________ __________ ____________
NET LOSS $(258,856) $(576,682) $(499,204) $(832,830) $(2,017,143)
OTHER COMPREHENSIVE
INCOME (LOSS):
Adjusted for realized
gains on available
for sale securities
which were recognized
in prior periods as
unrealized holding
losses on marketable
securities available
for sale 8,978 - 84,435 - -
__________ __________ __________ __________ ____________
COMPREHENSIVE INCOME
(LOSS) $(249,878) $(576,682) $(414,769) $(832,830) $(2,017,143)
__________ __________ __________ __________ ____________
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 CASH FLOWS
Net Increase (Decrease) In Cash
For the Three For the Six From Inception
Months Ended Months Ended on November 5,
March 31, March 31, 1996 Through
_____________________ _____________________ March 31,
1999 1998 1999 1998 1999
__________ __________ __________ __________ ____________
Cash Flows from Operating
Activities:
Net loss applicable to
common stockholders $(267,453) $(203,760) $(517,601) $(459,908) $(2,066,319)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Depreciation and
amortization 26,696 25,557 53,435 51,066 231,973
Non-cash expense (54,057) 1,000 9,046 4,000 141,617
APB 25 compensation
recorded for stock
options issued below
market value 121,217 45,310 121,217 116,774 394,530
Changes in assets and
liabilities:
(Increase) decrease
in employee advances 300 (150) - (150) (258)
Increase (decrease)
in accounts payable 24,108 26,822 18,090 (7,162) 89,204
Increase (decrease) in
advances -- related
parties - (401) (5,941) - 559
Increase (decrease) in
accrued liabilities (621) 27,713 56,242 34,036 157,231
__________ __________ __________ __________ ____________
Net Cash (Used)
by Operating
Activities (149,810) (77,909) (265,512) (261,344) (1,051,463)
__________ __________ __________ __________ ____________
Cash Flows from Investing
Activities:
(Increase) in refundable
deposits - - - (1,005) (3,751)
Purchase of equipment (289) - (4,731) (7,042) (30,144)
Purchase of software
licensing rights - - - - (300,000)
Proceeds from marketable
securities sales 41,879 - 184,668 - 255,031
__________ __________ __________ __________ ____________
Net Cash Provided
(Used) by
Investing
Activities 41,590 - 179,937 (8,047) (78,864)
__________ __________ __________ __________ ____________
Cash Flows from Financing
Activities:
Proceeds from notes
payable - 15,000 40,000 15,000 168,500
Payments on notes payable - (5,000) - (5,000) (113,532)
Proceeds from notes
payable - related party 50,000 - 50,000 - 50,000
Payments on capital lease
obligation (381) - (913) - (1,245)
Proceeds from preferred
stock issuance - 30,000 - 123,500 344,750
Proceeds from common stock
issuance - 35,800 - 129,300 659,269
Increase in accrued
dividends payable 8,623 - 18,397 - 49,176
__________ __________ __________ __________ ____________
Net Cash Provided
by Financing
Activities 58,242 75,800 107,484 262,800 1,156,918
__________ __________ __________ __________ ____________
[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 Three For the Six From Inception
Months Ended Months Ended on November 5,
March 31, March 31, 1996 Through
_____________________ _____________________ March 31,
1999 1998 1999 1998 1999
__________ __________ __________ __________ ____________
Net Increase (Decrease)
in Cash (49,978) (2,109) 21,909 (6,591) 26,591
Cash at Beginning of
Period 76,569 4,839 4,682 9,321 -
__________ __________ __________ __________ ____________
Cash at End of Period $ 26,591 $ 2,730 $ 26,591 $ 2,730 $ 26,591
__________ __________ __________ __________ ____________
Supplemental Disclosures of Cash Flow information:
Cash paid during the year and from inception for:
Interest $ 6,422 $ 1,499 $ 7,202 $ 1,499 $ 12,942
Income taxes $ - $ - $ - $ - $ -
Supplemental schedule of Non-cash Investing and Financing Activities:
For the six month period ended March 31, 1999 (Unaudited):
The Company issued 123,500 shares of common stock in the conversion of
123,500 preferred shares.
Amortization of deferred compensation on stock options amounted to
$121,217.
For the six month period ended March 31, 1998 (Unaudited):
The Company issued 38,750 shares of common stock in the conversion of
38,750 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, $59,398 in current compensation
expense was recorded and $99,722 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 $57,376.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
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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 is considered a development stage company as
defined in SFAS No. 7. The Company is engaging in the business of developing
and marketing an interactive game arcade, known as the iPONG Game Arcade on
the Internet. 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
March 31, 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
March 31, 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 are stated at cost. The
Company is amortizing the software licensing rights on a straight-line basis
over ten-years (the original term of the agreement).
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.
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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.
Earnings (Loss) Per Share - The Company presents Earnings (Loss) Per Share
according to Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share", which requires the Company to present basic earnings
(loss) per share and dilutive earnings (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 six month period ended March 31, 1999, the Company sold all of
their remaining marketable securities for proceeds totaling $184,668. During
the six months ended March 31, 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.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 3 - SOFTWARE LICENSE RIGHTS
Licensing and Marketing Agreement - At March 31, 1999 the Company was party to
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 as because it has the same controlling
shareholders as the Company. The agreement, as amended, provides for a ten
year term and an automatic renewal for an additional ten years. The agreement
requires 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
is 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.
The following is a summary of software licensing rights - at cost, less
accumulated amortization as of March 31, 1999:
1999
___________
Cash paid for licensing rights $ 300,000
Stock issued for licensing rights 700,000
___________
1,000,000
Less: accumulated amortization (225,000)
___________
$ 775,000
___________
Amortization expense for the six month periods ended March 31, 1999 and 1998
amounted to $50,000 and $50,000, respectively.
Subsequent to March 31, 1999 (during May, 1999) the Company entered into a new
agreement with Homeseekers.com wherein the above license and marketing
agreement was terminated. 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. The Company will continue
its business relationship with Homeseekers.com for such things as
consultation, programming services and Website hosting. [See Note 13]
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 3 - SOFTWARE LICENSE RIGHTS [Continued]
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 six month periods ended March 31, 1999 and 1998
amounted to $6,667 and $10,000, respectively.
NOTE 4 - NOTES PAYABLE - RELATED PARTIES
Notes payable consist of the following at March 31:
1999
_________
Notes payable to a shareholder of the Company,
annual compounding interest at 12%, due upon
demand, unsecured $ 17,062
Notes payable to a shareholder of the Company,
interest at 10% and 12% per annum, due upon
demand, unsecured 294
Note payable to a shareholder of the Company,
interest at 12% per annum, due upon demand,
unsecured 54
Note payable to an entity related to a shareholder
of the Company, annual compounding interest
at 12%, due upon demand, unsecured 2,000
Note payable to an individual, interest at 12%
per annum, due on February 7, 1999, unsecured
and in default at March 31, 1999. Subsequently
paid in full 20,000
Note payable to an individual, interest at 12%
per annum, due on May 1, 1999, unsecured 20,000
Note payable to a related entity, which is a
shareholder of the Company, interest at 12%
per annum, due upon demand, unsecured 50,000
_________
Total Long-term obligations 109,410
Less: current maturities (109,410)
_________
Long-term obligations, excluding current portions $ -
_________
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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 holders of 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 March 31, 1999, the Company has accrued preferred dividends
totaling $49,176. None of the dividends had been paid as of March 31, 1999.
As of March 31, 1999, a total of 217,250 shares of preferred stock have been
accounted for as converted to 217,250 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 the 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 through October 28, 2002.
During March 1999, the Company renegotiated the $20,000 note and granted an
additional 5,000 warrants to purchase the Company's common stock at $1.00 per
share. This note became due and was in default from November 28, 1998 through
March, 1999 when it was renegotiated by extending the due date to May 1, 1999.
During March 1999, the Company also granted a total of 85,000 warrants to
purchase the Company's common stock at $1.00 per share in payment of the 5,000
warrants for every week the note was delinquent. During April 1999, the
Company paid this note in full and as of March 31, 1999 no warrants have been
exercised.
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 ($2,500
to each individual), $5,000 due on January 9, 1999 (an additional $2,500 to
each individual), and 10,000 shares (5,000 shares of common stock to each
individual) of its common stock valued at $10,000 or $1.00 per share. During
January 1999, the Company paid the remaining $5,000 ($2,500 to each
individual).
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
March 31, 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. Also 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 March 31, 1999,
none of these options have been exercised.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
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 March 31, 1999, the total of all deferred tax
assets was approximately $630,000 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
$549,622 as of March 31, 1999, which has been offset against the deferred tax
assets. The net change in the valuation allowance during the period ended
March 31, 1999 amounted to approximately $169,604.
NOTE 7 - RELATED PARTY TRANSACTIONS
Notes Payable - During the six months ended March 31, 1999, the Company
accrued a total interest of $973 on related party notes payable. At March 31,
1999 and September 30, 1998, related party notes payable amounted to $109,410
(of which $1,828 was an additional compounding of interest) and $17,582,
respectively.
During the six months ended March 31, 1999, the Company paid a total of $0 to
a shareholder for non-interest bearing and due upon demand advances made to
the Company. At March 31, 1999 and September 30, 1998, advances from a
shareholder totaled $259 and $6,200.
Employment Agreements - As of March 31, 1999, 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.
-14-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS [Continued]
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. As of March 31, 1999, the Company owes
the former CEO a total of $10,000 in back wages. This amount has been accrued
and is included in other accrued liabilities.
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.
Subsequent to March 31, 1999, the Company entered into an employment agreement
for a Vice-President of Advertising. [See Note 13]
Related Entity - Certain officers or shareholders of the Company are also
affiliated with an entity with whom the Company has a licensing and marketing
agreement [See Note 3]. Cash of $300,000 and common stock valued at $700,000
was paid to the affiliated company for the licensing rights.
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
September 1998 and effective November 1998, the Company amended the original
lease in Minden, Nevada. The lease amendment calls for monthly rents of
$1,204 and is for one year (which automatically renews for another year with a
monthly rent increase of .75% or $1,213).
NOTE 9 - CONCENTRATION OF RISK
The Company's operations are currently dependent upon the use of software
which is licensed from a related entity and from an unrelated entity [See Note
3]. In the event the Company is unable to renew these software licenses, when
they expire, a disruption or termination of the Company's operations could
occur. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
-15-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 10 - 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 $381,582 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.
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 ($42,000 total). During November
1998, this agreement terminated and was not renewed.
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).
-16-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 12 - EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings (loss) per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock for the periods ended March 31, 1999 and 1998
and from inception on November 5, 1996 through March 31, 1999:
For the Three For the Six From Inception
Months Ended Months Ended on November 5,
March 31, March 31, 1996 Through
_____________________ _____________________ March 31,
1999 1998 1999 1998 1999
__________ __________ __________ __________ ____________
Income (loss) from
continuing operations
applicable to common
stock $(258,856) $(576,682) $(499,204) $(832,830) $(2,017,143)
Less: preferred
dividends (8,623) (26,070) (18,397) (26,070) (49,176)
__________ __________ __________ __________ ____________
Income (loss) available
to common stockholders
used in earnings
(loss) per share $(267,479) $(602,752) $(517,601) $(858,900) $(2,066,319)
__________ __________ __________ __________ ____________
Weighted average number
of common shares
outstanding used in
earnings (loss) per
share during the
period 4,363,174 3,713,237 4,347,151 3,682,371 3,315,988
__________ __________ __________ __________ ____________
Dilutive earnings (loss) per share was not presented, as its effect is anti-
dilutive.
NOTE 13 - SUBSEQUENT EVENTS
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 gave $5,000 down, 10,000 shares of its common stock valued at
$10,000 or $1.00 per share, and will pay an additional $5,000 by July 1999.
Confidential Offering Memorandum - The Company has 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. The promissory notes mature on June 1,
2,000. 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. Although the offering
is still underway the Company did receive $200,000 during April 1999 as it
reached the minimum amount for the offering.
-17-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS [Continued]
Purchase of Technology Rights - Subsequent to March 31, 1999 (during May,
1999) the Company entered into a new agreement with Homeseekers.com wherein
the license and marketing agreement between the two companies was terminated.
The new agreement provided for the transfer of ownership to the Company of the
technology rights, software and source code for an interactive advertising
game for use on the internet (commonly known as "iPONG"). The technology and
software was previously licensed by the Company [See Note 3]. As
consideration, the Company agreed to pay a royalty of 7% of gross revenues for
a period of five years and issued 100,000 shares of common stock to
Homeseekers.com. The Company will continue its business relationship with
Homeseekers.com for such things as consultation, programming services and
Website hosting.
Employment Agreement - 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 will also receive
options to purchase 10,000 shares of common stock at an exercise price of $.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.
-18-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDING MARCH 31, 1999 TO THE SIX MONTHS ENDING
MARCH 31, 1998
Total revenues increased from $0.00 for the six months ended March 31, 1998 to
$1,000 for the six months ended March 31, 1998. This increase resulted primarily
from advertising revenue.
Cost of Sales decreased 59% from $92,600 for the six months ended March 31, 1998
to $38,008 for the six months ended March 31, 1999. This decrease was due
primarily to reduced programming expenses.
Operating expenses decreased 39% from $831,331 for the six months ended March 31
1998 to $510,057 for the six months ended March 31, 1999. This decrease was due
primarily to decreased programming expense and officer and administrative
salaries.
Interest expense increased 69% from $1,499 for the six months ending March 31,
1998 to $4,911 for the six months ending March 31, 1999. This increase was due
primarily to interest on additional loans.
The net loss for the six months ending March 31, 1999 of $517,601, or ($0.12)
per share, decreased $341,299 from the net loss of $858,900, or ($0.24) per
share, for the period ending March 31, 1998. This was due primarily to the
reductions in operating expense and cost of sales.
-19-
<PAGE>
COMPARISON OF THE THREE MONTHS ENDING MARCH 31, 1999 TO THE THREE MONTHS ENDING
MARCH 31, 1998
Total revenues increased from $0.00 for the three months ending March 31, 1998
to $1000 for the three months ending March 31, 1998. This increase resulted
primarily from advertising revenue.
Cost of Sales decreased 52% from $58,250 for the three months ending March 31,
1998 to $27,921 for the three months ending March 31, 1999. This decrease was
due primarily to reduced programming expenses.
Operating expenses decreased 57% from $575,584 for the three months ending March
31, 1998 to $250,004 for the three months ending March 31, 1999. This was due
primarily to a decrease in contract labor, travel and salaries.
Interest expense increased 139% from $1,098 for the three months ending March
31, 1998 to $2,620 for the three months ending March 31, 1999. This increase
was due primarily to interest on additional loans.
The net loss for the three months ending March 31, 1999 is $267,479, or ($0.06)
per share, decreased $335,273 from the net loss of $602,752, or ($0.16) per
share, for the three months ending March 31, 1998. The decrease in net loss is
primarily due to lower operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the quarter ending March 31, 1999 was
financed primarily by the sale of Homeseekers stock and a $50,000 loan from
Homeseekers.com, dated March 15, 1999 at 12% APR for 90 days. The Company
expects to repay this loan in full by June 15, 1999.
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.
-20-
<PAGE>
PART II-Other Information
Item 1. Legal Proceedings.
The Company is not engaged in any legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
The Company has accrued dividends of $49,176 on its Preferred Stock and
expects to pay such accrued dividends in the near future.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Rider A
Effective as of January 31, 1999, Bob Horn resigned as an officer and director
of the Company to pursue other interests. The Company's Board of Directors has
elected Kirk Johnson, formerly the Vice President of the Company, to serve as
President and Chief Executive Officer. Mr Johnson also continues to serve as the
Company's Secretary and Treasurer and as a member of the Board Of Directors.
Items 6 Exhibits and Reports on Form 8-K
None
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
May 14, 1999
-21-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements for the six month period ended March 31, 1999,
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
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<PP&E> 23,171
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<TOTAL-ASSETS> 828,771
<CURRENT-LIABILITIES> 408,431
<BONDS> 0
273
0
<COMMON> 4,382
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<TOTAL-LIABILITY-AND-EQUITY> 828,771
<SALES> 1,000
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