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...12/31/98
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from October 1, 1998 to December 31, 1998
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 December 31, 1998 there were 4,258,618 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 December 31, 1998
and September 30, 1998
Unaudited Condensed Statements of Operations for the three
months ended December 31, 1998 and 1997
Unaudited Condensed Statements of Comprehensive Income for
the three months ended December 31, 1998 and 1997
Unaudited Condensed Statements of Cash Flows for the three
months ended December 31, 1998 and 1997
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
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
ASSETS
December 31, September 30,
1998 1998
___________ ___________
CURRENT ASSETS:
Cash $ 76,569 $ 4,682
Marketable Securities, available-
for-sale 40,119 107,451
Employee advances 558 258
___________ ___________
Total Current Assets 117,246 112,391
___________ ___________
PROPERTY AND EQUIPMENT, net 24,578 21,875
___________ ___________
OTHER ASSETS
Software licensing rights, net 800,000 825,000
Refundable deposits 3,751 3,751
___________ ___________
Total Other Assets 803,751 828,751
___________ ___________
$ 945,575 $ 963,017
___________ ___________
[Continued]
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
[Continued]
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1998 1998
___________ ___________
CURRENT LIABILITIES:
Accounts payable $ 65,096 $ 71,114
Advances - related parties 559 6,500
Notes payable - related parties 59,410 17,582
Other accrued liabilities 157,852 100,989
Accrued dividends payable 40,553 30,779
Current portion - capital
lease obligation 2,627 2,420
___________ ___________
Total Current Liabilities 326,097 229,384
___________ ___________
CAPITAL LEASE OBLIGATION,
less current portion 6,398 7,137
___________ ___________
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
5,000,000 shares authorized,
302,500 and 396,000 shares of
12% Series B convertible preferred
stock issued and outstanding for which
500,000 shares have been authorized 303 396
Common stock, $.001 par value,
20,000,000 shares authorized,
4,352,118 and 4,258,618 shares
issued and outstanding 4,352 4,259
Capital in excess of par value 2,630,515 2,630,515
Deficit accumulated during the
development stage (1,798,866) (1,548,718)
___________ ___________
836,304 1,086,452
Less:Receivable stock subscription (36,114) (36,114)
Deferred compensation expense
in accordance with APB 25 (178,132) (239,407)
Unrealized (loss) - marketable
securities (8,978) (84,435)
___________ ___________
Total Stockholders' Equity 613,080 726,496
___________ ___________
$ 945,575 $ 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 financial statements.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the
Three Months From Inception
Ended on November 5,
December 31, 1996 Through
________________________ December 31,
1998 1997 1998
___________ ___________ ___________
REVENUE $ - $ - $ -
___________ ___________ ___________
EXPENSES:
Selling expense 10,087 34,350 347,283
General and administrative 249,965 149,933 1,165,018
Compensation expense recorded
in accordance with APB 25 for
stock options issued below
market value - 71,464 273,313
___________ ___________ ___________
Total Expenses 260,052 255,747 1,785,614
___________ ___________ ___________
LOSS FROM OPERATIONS (260,052) (255,747) (1,785,614)
___________ ___________ ___________
OTHER INCOME (EXPENSE):
Gain on sale of marketable
securities 21,957 - 35,320
Interest income 12 - 12
Interest (expense) (2,291) (401) (8,031)
___________ ___________ ___________
Total Other Income
(Expense) 19,678 (401) 27,301
___________ ___________ ___________
LOSS BEFORE INCOME TAXES (240,374) (256,148) (1,758,313)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
___________ ___________ ___________
NET LOSS $(240,374) $(256,148) $(1,758,313)
LESS: PREFERRED DIVIDEND
REQUIREMENTS (9,774) - (40,553)
___________ ___________ ___________
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(250,148) $(256,148) $(1,798,866)
___________ ___________ ___________
LOSS PER COMMON SHARE $ (.06) $ (.07) $ (.56)
___________ ___________ ___________
The accompanying notes are an integral part of these financial statements.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the
Three Months From Inception
Ended on November 5,
December 31, 1996 Through
________________________ December 31,
1998 1997 1998
___________ ___________ ___________
NET LOSS $ (240,374) $ (256,148) $(1,758,313)
___________ ___________ ___________
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains
(losses) on Marketable
securities available
For sale 75,457 - (8,978)
___________ ___________ ___________
COMPREHENSIVE INCOME (LOSS) $(164,917) $ (256,148) $ (1,767,291)
___________ ___________ ___________
The accompanying notes are an integral part of these 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 Months From Inception
Ended on November 5,
December 31, 1996 Through
____________________ December 31,
1998 1997 1998
__________ _________ _________
Cash Flows from Operating Activities:
Net loss applicable to
common stockholders $(250,148) $(256,148) $(1,798,866)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation and amortization 26,739 25,509 205,277
Non-cash expense 63,103 3,000 195,674
APB 25 compensation recorded
for stock options issued
below market value - 71,464 273,313
Changes in assets
and liabilities:
(Increase) in employee advances (300) - (558)
Increase in accounts payable (6,018) (33,984) 65,096
Increase in advances -
related parties (5,941) 401 559
Increase in accrued
liabilities 56,863 6,323 157,852
__________ _________ _________
Net Cash (Used) by
Operating Activities (115,702) (183,435) (901,653)
__________ _________ _________
Cash Flows from Investing Activities:
(Increase) in refundable deposits - (1,005) (3,751)
Purchase of equipment (4,442) (7,042) (29,855)
Purchase of software licensing rights - - (300,000)
Proceeds from marketable
securities sales 142,789 - 213,152
__________ _________ _________
Net Cash Provided (Used) by
Investing Activities 138,347 (8,047) (120,454)
__________ _________ _________
Cash Flows from Financing Activities:
Proceeds from notes payable 40,000 - 168,500
Payments on notes payable - - (113,532)
Payments on capital lease obligation (532) - (864)
Proceeds from preferred stock issuance - 93,500 344,750
Proceeds from common stock issuance - 93,500 659,269
Increase in accrued dividends payable 9,774 - 40,553
__________ _________ _________
Net Cash Provided by
Financing Activities 49,242 187,000 1,098,676
__________ _________ _________
Net Increase (Decrease) in Cash 71,887 (4,482) 76,569
Cash at Beginning of Period 4,682 9,321 -
__________ _________ _________
Cash at End of Period $ 76,569 $ 4,839 $ 76,569
__________ _________ _________
[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 Months From Inception
Ended on November 5,
December 31, 1996 Through
____________________ December 31,
1998 1997 1998
__________ _________ _________
Supplemental Disclosures of
Cash Flow information:
Cash paid during the year
and from inception for:
Interest $ 780 $ - $ 2,039
Income taxes $ - $ - $ -
Supplemental schedule of Non-cash Investing and Financing Activities:
For the period ended December 31, 1998 (Unaudited):
None
For the period ended December 31, 1997 (Unaudited):
The Company issued 3,000 shares of common stock in exchange for programming
costs valued at $3,000.
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, $43,095 in current compensation
expense was recorded and $115,843 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 $28,369.
The accompanying notes are an integral part of these 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 as IPONG International, Inc., but subsequently
reorganized with WebQuest International, Inc. (which was formed to serve as a
vehicle for a reorganization of the Company). During April 1997, the Company
entered into a plan and agreement of merger with Phaser Enterprises, Inc.
["Phaser"], a publicly held Utah corporation wherein the operations of the
Company is the surviving entity. 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 anticipates that it will
derive 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 December 31, 1998 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
December 31, 1998 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) [See Note 3].
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 plans to receive revenues from
advertising but has not yet generated any revenues.
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.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 2 - MARKETABLE SECURITIES
At December 31, 1998, the Company held marketable securities with a market
value of $40,119 in an entity, which is a shareholder of the Company. During
the three months ended December 31, 1998, the Company recorded a realized
gain on the sale of securities of $21,957 and also recorded an unrealized
increase in the market value of the securities held during the period of
$75,457.
NOTE 3 - SOFTWARE LICENSE RIGHTS
Licensing and Marketing Agreement - During December 1996, the Company paid
$300,000 for an option to acquire licensing rights to an interactive
advertising game for use on the Internet. On January 5, 1997, the Company
exercised its option and entered into a licensing and marketing agreement
(with technical support) with a Nevada corporation, Homeseekers.com, Inc.
(formerly, NDS Software, Inc.), that owns the software rights. The license
agreement has a ten-year term, which automatically renews for an additional
ten-year term, and allows the Company to develop, use, and market the product
on an exclusive basis. Licensing rights are capitalized and amortized on a
ten-year basis (the original life of the agreement). Database management
costs (including programming costs) are expensed as incurred and amounted to
$6,191 for the period ended December 31, 1998. As consideration for this
agreement the Company agreed: i) to pay $58,333 per month for a year,
commencing January 5, 1997. During September 1997, the Company issued
700,000 shares of restricted common stock at an agreed upon value of $700,000
(or $1.00 per share) for full consideration of the one year, $58,333 per
month payment. ii) 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. iii) to pay $20,000 per month commencing
at the live date for "website" fees to the Nevada corporation. During July
1998, the payment of $20,000 per month was amended to a pro-rata charge for
services. and iv) to pay $125 per hour for Webpage development, website
changes or customization, and management consulting, plus $0.50 per question
for question development to the Nevada corporation for technical support.
Upon merger with IPONG International, Inc. on April 18, 1997, Webquest
assumed the rights and obligations to this agreement. Homeseekers.com, Inc.
is considered to be an affiliate of the Company because it has the same
controlling shareholders as the Company.
The following is a summary of software licensing rights - at cost, less
accumulated amortization as of December 31, 1998:
1998
___________
Cash paid for licensing rights $300,000
Stock issued for licensing rights 700,000
___________
1,000,000
Less: accumulated amortization (200,000)
___________
$800,000
___________
Amortization expense for the periods ended December 31, 1998 and 1997
amounted to $25,000 and $25,000, respectively.
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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 amounted to $1,667 for the period ended December
31, 1998.
NOTE 4 - NOTES PAYABLE - RELATED PARTIES
Notes payable consist of the following at December 31:
1998
_________
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 currently in default 20,000
Note payable to an individual, interest at 12%,
per annum, due on November 28, 1998,
unsecured and currently in default accruing a
late penalty of 5,000 warrants to purchase the
Company's common stock at $1.00 per share
for every week the loan is delinquent. 20,000
_________
$ 59,410
_________
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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 shall be payable 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 September 30, 1998, the Company has accrued preferred
dividends of $30,779. During the year ended September 30, 1998, 93,750
shares of preferred stock have been accounted for as converted to 93,750
shares of common stock due to the automatic conversion of preferred to common
at one year from date of issuance. During the three months ended December
31, 1998, 93,500 shares of preferred stock were accounted for as converted to
common stock and $9,774 was accrued as dividends payable.
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.
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.
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.
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 December 31, 1998, the total
of all deferred tax assets was approximately $542,000 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 $462,000 as of December 31, 1998, which has been offset
against the deferred tax assets. The net change in the valuation allowance
during the period ended December 31, 1998 amounted to approximately $82,000.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS
Notes Payable - During the three months ended December 31, 1998, the Company
accrued a total interest of $1,498 on related party notes payable. At
December 31, 1998 and September 30, 1998, related party notes payable
amounted to $19,410 (of which $1,828 was an additional compounding of
interest) and $17,582.
During the three months ended December 31, 1998, the Company paid a total of
$5,941 to a shareholder for non-interest bearing and due upon demand advances
made to the Company. At December 31, 1998 and September 30, 1998, advances
from a shareholder totaled $259 and $6,200.
Employment Agreements - As of December 31, 1998, the Company had entered into
four employment agreements with officers and employees of the Company.
The employment agreement for the Chief Executive Officer was effective as of
September 22, 1997 and has a term of two years. The agreement provides for a
base salary of $120,000 per year. The employee may terminate the agreement
on 30 days notice. The agreement also provides for stock options to purchase
400,000 shares of registered common stock of the Company. Options to
purchase 100,000 shares of common stock vest immediately while the remainder
of the options vest at the rate of 100,000 shares on each yearly anniversary.
There are no restrictions on 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 is less than the current market value of the stock on
the date the agreement took effect and the options were granted.
The employment agreement for the position, which includes Vice-President,
Secretary and Treasurer, was 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 stock options as
follows: 10,000 upon signing and 2,500 per week. The options vest on a
monthly basis. At November 30, 1997, all 30,000 options received were fully
vested. Beginning December 1, 1997, the employee can elect to receive
options in lieu of cash salary at the rate of 2,500 options per week. The
options will vest on a monthly basis. The employee may terminate the
agreement on 30 days notice. No such election was made. 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 vest on October 1, 1998 while the remainder of the
options (75,000 shares) 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 is less
than the current market value of the stock on the date the agreement took
effect and the options were granted.
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WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS [Continued]
The employment agreement for the Director of Promotions was effective as of
September 15, 1998 and is an at-will agreement. The agreement provides for a
base salary of $45,000 per year, $150 per month vehicle allowance and
commission on monthly revenues generated through advertising sales as
follows: 10% on revenue up to the first 14,999 during each month (5% on
revenue up to the first 10,000 and then 10% as stated from 10,001 to $14,999
during the first year), 14% on revenue from $15,000 to $24,999 during each
month, 18% on revenue from $25,000 and above during each month. The
agreement also provides for a 20% commission on net revenue generated by
first time memberships to play iPONG head to head which are direct traceable
sales efforts of employee. 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. The option vests each fiscal quarter
during the employment at a rate of 313 shares per quarter with the first 313
shares vesting on September 30, 1998. Once vested the options are
exercisable for a three-year period from the date of vesting unless the
employee is no longer employed by the Company. Subsequent to the year ended
September 30, 1998, the employee left the Company and the options were
cancelled.
The employment agreement for the Vice President of Marketing was effective as
of August 3, 1998 and is an at-will agreement. The agreement provides for a
base salary of $60,000 per year, $300 per month vehicle allowance and
commission on monthly revenues generated through the marketing division as
follows: 10% on revenue from 10,000 to 14,999 during each month, 14% on
revenue from $15,000 to $24,999 during each month, 18% on revenue from
$25,000 and above during each month. The agreement also provided for stock
options to be granted to purchase 200,000 shares of the Company's common
stock at an exercise price of $.80 per share. The option vests each fiscal
quarter during the employment at a rate of 12,500 shares per quarter with the
first 12,500 shares vesting on September 30, 1998. Once vested the options
are exercisable for a three-year period from the date of vesting unless the
employee is no longer employed by the Company. During September 30, 1998,
the employee left the Company and the options were cancelled.
Office Space - Prior to September 30, 1997, the Company had no office
facilities. Officers of the Company conducted the Company's business from
their own residences or offices at no expense to the Company. During the
period ended December 31, 1998, the Company rented two office facilities from
unrelated parties.
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 - 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.
-14-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 8 - GOING CONCERN [Continued]
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 $208,851 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 9 - 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 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 10 - CONSULTING AGREEMENTS
During November 1997, the Company entered into a consulting agreement with a
Colorado corporation in which the Colorado corporation will provide various
consulting and financial public relations with broker-dealers, shareholders
and members of the general public. This agreement has a term of one year and
provides for monthly cash payments of $3,500 ($42,000 total). During
November 1998, this agreement terminated and was not renewed.
Also during November 1997, the Company entered into a consulting agreement
with a British Virgin Island Corporation in which the British Virgin Island
Corporation will develop, implement and maintain an on-going stock market
support system that increases broker awareness of the Company's activities
and stimulates investor interest in the Company. This agreement 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 $3.00 per share, which for
a three-year period are subject to piggyback registration rights. During
November 1998, this agreement terminated and was not renewed. During May
1998, the Company entered into an additional agreement with the British
Virgin Island Corporation in which the British Virgin Island Corporation will
develop, implement and maintain an on-going stock market support system that
increases broker awareness of the Company's activities and stimulates
investor interest in the Company. This agreement 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, which for a three-year
period are subject to piggyback registration rights. 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).
-15-
<PAGE>
WEBQUEST INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 11 - 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 December 31, 1998 and
1997 and from inception on November 5, 1996 through December 31, 1998:
For The Three From Inception
Months Ended on November 5,
__________________________ 1996 Through
December 31, December 31, December 31,
1998 1997 1998
___________ ___________ ___________
Income (loss) from continuing
operations applicable to
common stock (240,374) $(256,148) $(1,758,313)
Less: preferred dividends (9,774) - (40,553)
___________ ___________ ___________
Income (loss) available to
common stockholders used in
earnings (loss) per share (250,148) $(256,148) $(1,798,866)
___________ ___________ ___________
Weighted average number of
common shares outstanding
used in earnings (loss) per
share during the period 4,331,477 3,675,451 3,196,082
___________ ___________ ___________
Dilutive earnings (loss) per share was not presented, as its
effect is anti- dilutive.
NOTE 12 - 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.
-16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
There were no revenues during the three months ending December 31, 1998.
The company did receive income from the sale of stock.
Operating expenses for the three months ending December 31, 1998 were
$261,000 representing a 2% increase over the same period in 1997. This
increase is due primarily to an increase
in purchasing and shipping prizes.
Net loss for Q1 FY98 is$241,000 or $(.06) per share decreased $16,000
from the net loss of $257,000 or $(.07)
Liquidity and Capital Resources
Net cash used in operations during Q1FY98 116,000 was financed by the
previous equity sales from the 504 private offering and through two loans
totaling $40,000
The Company's current financial conditions will carry the operations
for approximately 60 days from the date of this report.
The Company is conducting a private offering of convertible debt in
which the Company is
seeking to raise up to $1,500,000 and the minimum will be $500,000. The
Company anticipates reaching the minimum in Q2FY99. There can be no
assurance, however, that the Company will be successful in raising all or
any significant portion of such amount.
The acquisition of Scavengernet, an online scavenger hunt to be included
in the Arcade by Q2FY99. Playing Scavengernet is simple, we email you a list
of 20 items to find on the Internet (We don't even know if they exist!) Send
us the URLs where you found them, first one who responds wins the GRAND PRIZE!
Balance of the names go into a drawing for nine additional prizes.
The multi player version of Power iPONG + with a Chat feature, which is
currently in the Alpha testing stage and will be online for Beta testing
Q2FY99.
The iPONG Newsletter which will be available online to allow the use of
graphics and banners for advertisers. It will also be archived with
informative Special Features in each edition to encourage people to view past
issues. Each newsletter will contain a link back to The Arcade and
advertiser's banner ads.
<PAGE>
Additional click-through advertising spots now appear on various pages
throughout the site, allowing players to visit advertisers without
interruption of game play.
Development of an online Survey Contest to encourage players to provide
accurate demographics which are essential to attracting advertisers.
Preparation of a comprehensive online Media kit and Rate Card to provide
potential advertisers the information they need to determine the best level
of advertising within the site.
The Company expects to have these enhancements completed by Q2FY99,
The number of registered players has increased substantially in the past
three months and numerous prizes have been awarded. The number of games
played each week nearly doubled in the three months covered in this report.
The Company plans to operate additional games in 1999, including
OctiPong, Multi-player PONG, Multi-player Checkers and Multi-player Chess.
WebQuest will continue to develop new games, license and adapt existing games
and add more amenities, all the while enticing visitors to the iPONG The
number of employees is expected to increase from four to eight.
The positions expected to be filled are Chief Financial Officer,
Advertising Sales Rep, Administrative Assistant and Games Manager.
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.
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 on it's Preferred stock and expects
to pay it in the near future.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
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
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
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
February 19, 1999
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<PERIOD-END> DEC-31-1998
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<SECURITIES> 40,119
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