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Previous: CALIFORNIA HOTEL & CASINO, 10-Q, 1997-11-14 |
Next: INFORMATION MANAGEMENT TECHNOLOGIES CORP, 10-Q, 1997-11-14 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364 - 3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) 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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at September 30, 1997
- ----------------------- ---------------------------------
Common Stock, par value 121,536,595
$.00003 per share
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
FINANCIAL STATEMENTS (Unaudited)
September 30, 1997
Financial Statements Page
----
Balance Sheet 3 - 4
Statements Operations 5 - 6
Statements of Shareholders' (Deficit) 7
Statements of Cash Flows 8 - 11
Notes to Financial Statements 12 - 13
Management's Discussion and Analysis 14 - 16
Other Information 17
Signatures 18
2
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Balance Sheet
September 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Assets
Current Assets
Cash $ 26,450
Accounts receivable - net of allowance for doubtful accounts of $1,000 10,458
Inventory 80,928
Advances for clinical study 25,000
Advances to Automotive Marketing, Inc. 85,909
Prepaid expenses 5,414
--------
234,159
Furniture and Equipment - at cost - net of accumulated
depreciation of $18,649 29,766
Patents - at cost - net of accumulated amortization
of $8,938 40,497
Deferred preoperating and developmental costs 17,987
Security Deposits 4,137
--------
$326,546
========
</TABLE>
See notes to financial statements.
3
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Balance Sheet
September 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued
interest of $8,575 $ 18,575
Shareholder's loan - current portion 44,805
Taxes payable 4,387
Accounts payable 532,016
Accrued officer and director's compensation 87,500
Loans from directors 34,415
Accrued expenses 30,427
-----------
752,125
Shareholder's Loan - net of current portion 127,500
-----------
Shareholders' (Deficit)
Series A Convertible Preferred Stock -
par value $.001 - authorized 600,000 shares -
no shares issued and outstanding
Series B Convertible Preferred Stock -
par value $.001 - authorized 5,000,000 shares -
no shares issued and outstanding
Common Stock - par value $.00003 -
authorized 130,000,000 shares -
121,536,595 shares issued and outstanding 3,646
Capital in excess of par 3,248,406
Accumulated (deficit) (3,805,131)
-----------
(553,079)
-----------
$ 326,546
===========
</TABLE>
See notes to financial statements.
4
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Operations
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------
1997 1996
---- ----
Sales - net $ 281,084 $ 1,308,520
Cost of Sales 111,042 252,247
------------- -------------
170,042 1,056,273
------------- -------------
Selling Expenses 59,899 988,706
General and Administrative Expenses 364,695 558,448
------------- -------------
424,594 1,547,154
------------- -------------
(Loss) Before Other Income (Expenses) (254,552) (490,881)
------------- -------------
Other Income (Expenses)
Interest income 3,953 2,467
Interest (expense) (28,945) (69,525)
Forgiveness of indebtedness 61,000 --
------------- -------------
36,008 (67,058)
------------- -------------
Net (Loss) $ (218,544) $ (557,939)
============= =============
(Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 110,000,000 77,000,000
============= =============
See notes to financial statements.
5
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Operations
(Unaudited)
For the Quarter Ended
September 30,
--------------------------------
1997 1996
---- ----
Sales - net $ 94,843 $ 226,473
Cost of Sales 38,273 64,611
------------- -------------
56,570 161,862
------------- -------------
Selling Expenses 13,960 85,344
General and Administrative Expenses 70,005 151,772
------------- -------------
83,965 237,116
------------- -------------
(Loss) Before Other Income (Expenses) (27,395) (75,254)
------------- -------------
Other Income (Expenses)
Interest income 217 2,342
Interest (expense) (5,641) (13,265)
------------- -------------
(5,424) (10,923)
------------- -------------
Net (Loss) $ (32,819) $ (86,177)
============= =============
(Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 113,000,000 96,000,000
============= =============
See notes to financial statements.
6
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statement of Shareholders' (Deficit)
For the Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Common Stock Amount Capital in
Shares $.00003 Excess of Accumulated
(Post-Split) Par Value Par Value Deficit
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 108,369,929 $ 3,251 $ 3,080,051 ($3,586,587)
Stock issued for accrued services rendered:
Officers and Directors 7,166,666 215 108,535 --
Proceeds from sales of stock to
Officers and Directors 6,000,000 180 59,820 --
Net (Loss) -- -- -- (218,544)
----------- ----------- ----------- -----------
Balance - September 30, 1997 121,536,595 $ 3,646 $ 3,248,406 ($3,805,131)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Cash Flows Page 1 of 2
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(218,544) $(557,939)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 4,215 4,605
Expenses paid through the issuance of
restricted common stock 108,750 43,700
(Increase) decrease in:
Accounts receivable (6,171) 45,830
Inventories 46,485 39,387
Advances to Automotive Marketing, Inc. (85,909) --
Funds placed in escrow -- (121,697)
Accrued interest on debentures and bonds 15,541 --
Prepaid expenses -- 16,583
Deferred preoperating and developmental costs (17,987) --
Increase (decrease) in:
Notes payable - vendor (20,940) --
Accounts payable (82,311) 230,635
Accrued officers' and directors' compensation 27,500 --
Taxes payable 90 679
Loans from directors 1,246 --
Accrued expenses (47,952) --
--------- ---------
(275,987) (298,217)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (5,500) (168)
Patent payments (2,435) --
--------- ---------
(7,935) (168)
--------- ---------
Cash Flows from Financing Activities
Letter of credit collateral -- (168,000)
Proceeds from sales of common stock 60,000 484,050
Repayment of advances from officer/stockholder -- (9,000)
Temporary media funds received, net of
repayments and client fund account balances -- 170,000
Conversion/proceeds on senior subordinated debentures (10,000) (14,865)
--------- ---------
50,000 462,185
--------- ---------
(Decrease) Increase in Cash (233,922) 163,800
Cash - beginning 260,372 176,818
--------- ---------
Cash - end $ 26,450 $ 340,618
========= =========
</TABLE>
See notes to financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Cash Flows Page 2 of 2
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Supplemental Disclosures
Interest paid $ -- $ 35,560
======== ========
Temporary media funds received $ -- $265,000
======== ========
Debt conversions to common stock $ -- $408,708
======== ========
Conversion of accrued officer salary
to common stock $ 8,750 $144,160
======== ========
Stock issued for accrued services rendered $100,000 $ --
======== ========
</TABLE>
See notes to financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Cash Flows Page 1 of 2
(Unaudited)
For the Quarter Ended
September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (32,819) $ (86,177)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,405 1,535
Expenses paid through the issuance of
restricted common stock -- --
(Increase) decrease in:
Accounts receivable (10,458) 21,935
Inventories 25,673 64,611
Advances to Automotive Marketing, Inc. (67,709) --
Funds placed in escrow -- (10,338)
Accrued interest on debentures and bonds 5,016 4,339
Prepaid expenses -- (6,896)
Deferred preoperating and developmental costs 2,341 --
Increase (decrease) in:
Accounts payable (68,695) (73,924)
Accrued officers' and directors' compensation 42,500 --
Taxes payable (18) 82
Accrued expenses 1,293 --
--------- ---------
(101,471) (84,833)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of common stock 60,000 484,050
Letter of credit collateral -- (168,000)
Conversion/proceeds on senior subordinated debentures -- (14,865)
--------- ---------
60,000 301,185
--------- ---------
(Decrease) Increase in Cash (41,471) 216,352
Cash - beginning 67,921 124,266
--------- ---------
Cash - end $ 26,450 $ 340,618
========= =========
</TABLE>
See notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Statements of Cash Flows Page 2 of 2
(Unaudited)
For the Quarter Ended
September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Supplemental Disclosures
Interest paid $ -- $11,875
========= =======
Debt conversions to common stock $ -- $10,516
========= =======
</TABLE>
See notes to financial statements.
11
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 1997
1. BACKGROUND AND BASIS OF PRESENTATION
PhaseOut of America, Inc. (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. On September 24, 1997, the Company's certificate of
incorporation was amended, changing its name from PhaseOut of America, Inc.
to Quest Products Corporation. The Company's purpose is to market and
distribute its patented phase-out system smoking cessation device (the
"product").
The Company had primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials. This domestic marketing was curtailed due to the ongoing
negotiations with the Federal Trade Commission ("FTC"). Once advertising
claims are approved, the Company intends to reenter the domestic retail
market. The Company also distributes the product overseas.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations ($218,544 in 1997 and $557,939 in 1996), and has had limited
liquidity causing difficulty in meeting its current operating expense
obligations and debt service requirements. The Company is actively
marketing the product to help improve revenues and is planning to seek
additional financing through private placement of debt and securities. The
financial statements do not include any adjustments that might result
should the continued existence of the Company be threatened by any
continued losses or the failure of the above factors to influence the
financial viability of the Company.
The interim statements were prepared pursuant to the requirements for
reporting on Form 10-QSB. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes included in the Company's latest Annual Report on Form 10-KSB for the
year ended December 31, 1996. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for interim periods. The
current period results of operations are not necessarily indicative of the
results for the entire year ending December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies - There were no changes in
significant accounting policies during the current period.
3. STOCKHOLDERS' EQUITY
Stock Issued to Officers, Consultants and Employees - Through September 30,
1997, the Company issued 13,166,666 shares to officers and directors.
12
<PAGE>
4. RELATED PARTY TRANSACTIONS
Loan from Director - A former officer/shareholder, who is still a director
of the Company, is owed $34,415 by the Company. The amount is payable on
demand with a stated interest rate of 11%. Effective June 30, 1997, the
former officer/shareholder agreed to no longer charge interest.
Accrued Officer and Director's Compensation - During 1996, an investor
group consisting of two individuals, which acquired an 18% ownership
interest for $500,000, was awarded two seats on the Board of Directors and
two officer positions. The two individuals each receive a consulting fee of
$60,000 per annum for their management duties. During the second quarter of
1997, 3,333,333 shares of stock were issued to each individual for accrued
services rendered of $50,000 each.
5. SHAREHOLDER'S LOAN
During 1996, the Company received $200,000 from a shareholder as a loan in
connection with the Company's media campaign. The loan is to be paid at the
rate of $2,500 per month. Interest accrues at 10% and will be paid with a
final balloon payment. The shareholder originally agreed to a moratorium on
the monthly $2,500 payments from May 1997 through August 31, 1997, but
subsequently extended the moratorium indefinitely.
6. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS.
Dependence on Major Customers and Suppliers - Export sales represent
approximately 100% of sales with only one export customer representing more
than 10% of total sales.
The Company is currently purchasing 100% of its products from three
vendors.
Regulatory Matters - There have been no changes in the status of regulatory
inquiries by the Food and Drug Administration (FDA) and the Federal Trade
Commission (FTC).
Litigation - In July 1997, the Company's former attorney, who is a relative
of a Director, brought an action against the Company in New York State
Supreme Court, New York County for unpaid attorney fees and disbursements
of approximately $18,000. Legal counsel has not rendered an opinion as to
the ultimate outcome of this matter.
13
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Management's Discussion and Analysis
Results of Operations
Nine Months Ended September 30, 1997 Compared
to Nine Months Ended September 30, 1996
The Company incurred a net loss of $218,544 for the nine months ended
September 30, 1997 as compared to the loss of $557,939 for the nine months ended
September 30, 1996. Nine-month sales decreased $1,027,436. The decrease in sales
resulted from no retail sales in 1997 of the product through television direct
response methods which results in substantially higher unit selling prices as
well as increases in unit volume. The Company's domestic marketing activities
were curtailed due to the ongoing negotiations with the FTC. Once advertising
claims are approved, the Company intends to reenter the domestic retail market.
Selling expenses decreased from $988,706 to $59,899 as a result of the
elimination in 1997 of the substantial additional costs associated with the
distribution of the product through television response channels.
General and administrative expenses decreased from $558,448 to $364,695 as
a result of a decrease in officer salaries ($109,617) and a decrease in
professional fees ($127,322).
The gross profit margin decreased to 60% from 81%, due to the elimination
of the high volume of direct response television sales.
The Company maintains a $500,000 liability insurance policy.
14
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Management's Discussion and Analysis
Liquidity and Capital Resources
Cash of $275,987 was used for operations for the 9 months ended September 30,
1997 as compared to $298,217 used in the same period of last year. Cash
decreased during the 9 months ended September 30, 1997 by $233,922.
The Company's working capital has deteriorated due to the use of current assets
for operations. Working capital and current ratios were:
September 30, December 31, September 30,
1997 1996 1996
---- ---- ----
Working capital
(deficiency) $(517,966) $(436,465) $(378,408)
Current ratios 0.31:1 0.49:1 0.67:1
In order to meet short-term marketing goals, in July 1997 certain officers and
directors agreed to acquire an aggregate of 10,000,000 shares of the Company's
common stock (representing 8% of total shares outstanding) for an aggregate
purchase price of $100,000. As of September 30, 1997, the Company has received
$60,000. The Company is also seeking an additional $200,000 of financing under
the same terms and conditions as offered to the officers and directors. There is
no assurance that the Company will be able to obtain additional financing.
Distribution and Marketing
Marketing (Domestic)
During the second half of 1996, the Company's domestic marketing activities
were curtailed due to the negotiations with the Federal Trade Commission as to
what advertising claims could be made to describe the PhaseOut product. Once
advertising claims are approved, management intends to aggressively enter the
U.S. retail market under the category of smoke cessation products.
Marketing (International)
On August 21, 1995, the Company entered into an agreement with a South
Korean trading company for the distribution and manufacture of a modified
(design) PhaseOut product in South Korea. Because of the improved design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers and Japan has 35 million smokers.
Distribution in South Korea is expected to begin in the 1st quarter of 1998.
PhaseOut has started distribution through television infomercials and
commercials in the following countries: Portugal, Spain, South Africa, Romania,
Hungary, Australia, Italy and Germany.
15
<PAGE>
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
Management's Discussion and Analysis
New Products
In February 1997, the Company executed a letter of intent with Andrea
Eyewear, Inc, (Andrea) whereby the Company agreed to fund the pre-operating and
developmental costs of a patented sunglass product owned by Andrea. In
consideration for the funding, the Company would receive an exclusive license to
commercialize the sunglass product worldwide. As of September 30, 1997, the
Company has incurred $17,987 of pre-operating and developmental costs. In
September 1997, Andrea terminated the letter of intent claiming that the Company
had not performed in accordance with its terms. The Company believes that it has
valid defenses against Andrea and intends to pursue its defenses vigorously.
In May 1997, the Company entered into a joint venture with Automotive
Marketing, Inc. to manufacture and distribute aftermarket automobile products.
As of September 30, 1997, the Company has made advances of $85,909 to the joint
venture with the understanding that any such advances will be reimbursed when
revenue-producing operations commence.
Regulatory Matters
There have been no material changes in the status of matters pending before
the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC).
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been sued by a former attorney for fees it alleges are
due but unpaid in the amount of approximately $18,000. Legal counsel
has not rendered an opinion as to the ultimate outcome of this matter.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See notes to the financial statements
Item 6. Exhibits and Reports
None
17
<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.
QUEST PRODUCTS CORPORATION
(formerly PHASEOUT OF AMERICA, INC.)
Dated: November 10, 1997
/s/ Herbert M. Reichlin
-------------------------------------
Herbert M. Reichlin
Chief Operating Officer and Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,450
<SECURITIES> 0
<RECEIVABLES> 11,458
<ALLOWANCES> (1,000)
<INVENTORY> 80,928
<CURRENT-ASSETS> 234,159
<PP&E> 48,415
<DEPRECIATION> (18,649)
<TOTAL-ASSETS> 326,546
<CURRENT-LIABILITIES> 752,125
<BONDS> 0
0
0
<COMMON> 3,646
<OTHER-SE> (556,725)
<TOTAL-LIABILITY-AND-EQUITY> 326,546
<SALES> 281,084
<TOTAL-REVENUES> 346,037
<CGS> 111,042
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 424,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,945
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (218,544)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
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