U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION
(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
Check whether the issuer (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 ___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
_X_
The registrant's operating revenues for its most recent fiscal year were
$44,781.
The number of shares outstanding on September 30, 1999 was 174,162,985 shares of
Common Stock, .00003 par value.
Continued...
<PAGE>
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.05) of
the Company's Common Stock, as of October 31, 1999, is approximately $6,114,610
based upon the 122,292,193 shares of Registrant's Common Stock held by
non-affiliates.
(1) "Affiliates" solely for purposes of this item refers to those persons who,
during the three months preceding the filing of this Form 10-KSB were officers
or directors of the Company and/or beneficial owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: (check one) Yes___ No_X_
2
<PAGE>
QUEST PRODUCTS CORPORATION
Form 10-KSB
Fiscal Year Ended December 31, 1998
Table of Contents
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C>
Item 1. Business 4 - 7
Item 2. Properties 7
Item 3. Legal Proceedings 7 - 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters. 9
Item 6. Management's Discussion and Analysis of Financial Condition and Results 10 - 12
of Operations.
Item 7. Financial Statements F1 - F15
Item 8. Changes in or Disagreement with Accountants on Accounting and Financial 13
Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance 13 - 15
with Section 16(a) of the Exchange Act.
Item 10. Executive Compensation 15 - 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 16 - 18
Item 12. Certain Relationships and Related Transactions 18
PART IV
Item 13. Exhibits and Reports on Form 8-K 18 - 19
Signatures 20
Supplemental Information 21
</TABLE>
3
<PAGE>
PART 1
ITEM 1. Business
The Company
Quest Products Corporation (the Company) is a corporation organized under
the laws of Delaware on July 17, 1987, has a limited operating history and has
operated at a loss since inception. Since the completion of its initial public
offering in April 1989, the Company had primarily concentrated its efforts in
two areas: the establishment of medical credibility through clinical trials
performed at an independent testing facility and the test marketing of PHASEOUT
(also referred to as the "Product" or the "device') throughout the United States
and internationally via various channels of distribution.
The Company's primary product, PHASEOUT, is a patented device developed to
help a person quit smoking without the use of any drugs, chemicals or
attachments. The device was designed to gradually reduce the amounts of
nicotine, tar and carbon monoxide consumed from cigarette smoke.
During the last four years, the Company has been concentrating its efforts
in three areas: (1) test marketing the product domestically through various
channels of distribution (2) entering into international distribution agreements
utilizing television infomercials and commercials, and (3) distributing the
product into domestic retail chain drug stores.
The Product
The PHASEOUT device is a simple, easy to use, mechanical, light-weight
instrument that allows the smoker to continue to smoke their preferred brand
cigarettes and at the same time, gradually and sequentially reduce their
nicotine intake by over 80%. This weaning process is the same type of
detoxification methodology that has proved successful with many other addictive
substances. Once the smoker has been weaned, their chances to quit for good are
greatly enhanced. PHASEOUT's weaning methodology has an important additional
psychological benefit for all smokers. It allows the smoker to continue to smoke
their preferred brand until they are ready to quit. Of course, to achieve these
results under normal smoking conditions, smokers must avoid compensatory
practices, such as smoking more cigarettes and blocking the ventilation holes
created by the PHASEOUT device.
The PHASEOUT system works without the use of any drugs, chemicals or
attachments The average retail price to consumers is $29.95 plus shipping and
handling. The wholesale price ranges between $10.00 and $17.00.
The Company is currently having the product manufactured by one vendor in
South Korea. This source of supply will be able to produce all future PhaseOut
units required for sale.
The Company had received a "warning letter" from the Food and Drug
Administration "FDA" in mid 1993, stating that the PhaseOut product was a
medical device and subject to the provisions of the FDA. The Company responded
through legal counsel, taking the position that the PhaseOut product is not a
medical device within the meaning of the Food, Drug and Cosmetics Act "FDCA"
(see Item 3, Legal Proceedings).
4
<PAGE>
How PhaseOut Works
A smoker inserts their entire unopened pack of cigarettes (filtered or
unfiltered - soft pack or box) into the PHASEOUT device. With a simple press and
release that takes just seconds, PHASEOUT processes all of the cigarettes within
the pack.
The device strategically creates from one to four microfine perforations in
the lip end of each cigarette. These perforations filter and ventilate the smoke
drawn through the cigarette, thereby reducing the amount of nicotine and other
toxins inhaled by the smoker.
One miniature filter (perforation) is created in Phase one, filtering out
up to 26% of the nicotine, and similar amounts of other toxins such as carbon
monoxide and tar. Additional perforations are created as the smoker proceeds
through each of the four Phases. With each additional perforation there is a
progressive reduction of nicotine and other harmful substances based upon
controlled laboratory studies. By Phase IV, 80.7% of the nicotine, 91.6% of the
tar, 89.2% of carbon monoxide and 90% of all other tobacco constituents (Total
Particulate Matter) have been eliminated. As discussed above, these reductions
under normal smoking conditions depend upon proper use of the product and the
treated cigarettes by smokers. The suggested period on each phase is two weeks
(eight week total), however, smokers can tailor the program to their own
individual liking and proceed at their own pace, under their own timetable. The
smoker is in control. There is no pressure, no fear of failure. Importantly, any
change in the taste, flavor or draw of the cigarette is lessened as the smoker
proceeds through the program due to the gradual transition from phase to phase.
The Smoking Cessation Market
Cigarette smoking is the number one cause of preventable illness and death
in the United States. In excess of 450,000 deaths were directly attributed to
cigarette smoking last year. More than one of every six deaths in the U.S. is
caused by cigarette smoking. Of the country's total health care budget,
approximately 25% ($65 billion) is spent for smoking related illness and
disease. This does not include an additional $35 billion in lost productivity
and higher insurance costs.
In the United States, there are currently reported to be approximately 46
million smokers and worldwide the number of smokers is estimated to be 1.2
billion.
Scientific and Clinical Testing
Scientific
The United States Testing Company, Inc., an independent testing facility
which tests cigarettes in accordance with government standards for major
cigarette manufacturers, conducted laboratory tests on the use of PHASEOUT on
cigarettes. These tests were based upon the F.T.C. method, which is used to rate
the tar, nicotine and carbon monoxide yields of cigarettes sold in the United
States. Their findings were reported in Determination of Percent Reduction of
Tar, Nicotine and Carbon Monoxide of Cigarettes with the Use of Phase-Out device
for Perforating Packaged Cigarettes/U.S. Patent #4,231,378 . This report showed
reductions of tar, nicotine and carbon monoxide yields ranging from 26% in Phase
I to 92% in Phase IV using the PHASEOUT method.
5
<PAGE>
Additional Studies
The Company conducted a scientific study at Ameritech Laboratories to
demonstrate the condensation of nicotine and tars within the filter of
cigarettes due to the use of the PhaseOut device. This study demonstrated an
increase of nicotine content within the filter, proportionate to the number of
PhaseOut perforations in the cigarette. The study concluded that the increased
weight of the filter was due to the condensation of nicotine due to the cooling
effect of the external air introduced through the wholes pierced into the
cigarette filters by the PhaseOut device.
Patents
The United States Patent Office has issued two patents for the PhaseOut
System (Patent Number 4,231,378 issued November 4, 1980 and Patent number
5,218,976 issued June 15, 1993). The Company has received patents in China,
Taiwan and Japan. In addition, the Company has applied for patents in fifteen
(15) foreign countries, including England, France, Germany and Italy.
Marketing (Domestic)
The focus of the Company's marketing to date has been to create an
awareness for the product through the use of various direct response marketing
venues. Some of these are: the use of a thirty minute television infomercial,
short form television commercials, sixty second radio commercials, mail order
catalogs, print advertising and through credit card mailings (syndication).
During 1998, the Company entered into a joint venture agreement with SAS
Group, Inc. whereby distribution began of the PhaseOut product into domestic
retail chain drug stores totalling approximately 12,000 stores. The Company is
primarily responsible for the manufacturing of the product and SAS Group, Inc.
is primarily responsible for the sale and distribution of the product.
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 2nd quarter of 2000.
New Products
In October 1999, the Company has successfully completed development of
adjustable polarized sunglasses, which allow the wearer to change the color of
the sunglass lenses to a variety of colors without changing the lenses or
altering the frame. The Company will strive to begin worldwide distribution
during 2000.
6
<PAGE>
Competition
The Company competes with numerous products and techniques designed to aid
smokers to stop smoking. Many of the companies promoting these products have
been in existence for longer periods of time, are better established than the
Company, have financial resources substantially greater than the Company and
have more extensive facilities than those which now or in the foreseeable future
will become available to the Company. In addition, other firms may enter into
competition with the Company in the near future.
One type of significant competitive product is the nicotine patch, which
requires a prescription by licensed physicians for treatment of nicotine
withdrawal. This appears to be the quit smoking method that is now most commonly
prescribed. However, management expects to counter the initial success of the
patch program because there are stirrings of adverse publicity regarding patches
due to their side effects and usage limitations.
In addition to the nicotine patch, other pharmaceutical companies are in
the process of introducing alternate nicotine delivery methods in the form of a
nasal spray, which will have many of the same side effects as the nicotine patch
and will most probably require a prescription when first brought to the market.
Recently, the FDA has allowed the nicotine gum, which was formerly only
available by prescription, to be sold over-the-counter.
Employees
At the present time, the Company has six employees, including the Company's
two officers and directors and four administrative and secretarial personnel.
Item 2. Properties
The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11791.
Item 3. Legal Proceedings
In June, 1993, the Company received a "Warning Letter" from the FDA in
which the FDA stated its belief that the Product is a "medical device" and is,
therefore, subject to the provisions of the FDA. Since the Company has been
marketing the product without seeking or obtaining pre-marketing approval from
the FDA, if the FDA's position is correct, the Company's activities are in
violation of the Food Drug and Cosmetics Act and the FDA would have the right to
enjoin further marketing by the Company of the product. The Company does not
believe that the product is a medical device within the meaning of the FDCA and
has advised the FDA of its position through the Company's Washington, D.C.
counsel, Hyman, Phelps & McNamara, specializing in FDA matters. The answer
submitted on July 7, 1993, by the Company counsel took the position that
PHASEOUT is a mechanical device that treats just the cigarette (not the smoker)
by creating additional internal filters within the existing filter or cigarette.
However, in an effort to cooperate with the FDA, the Company proposed to make
substantial revisions to the promotional statements for the product to make it
clearer to the public that the product is not intended to be used as a medical
device. Neither the Company nor its counsel has received any written or oral
response from the FDA since that time. However, no assurance can be given that
the FDA will not in the future seek to enjoin the Company from marketing the
product without complying with the FDCA and seeking other remedies against the
Company.
7
<PAGE>
Management believes that the FDA letter came as a result of the FDA's
investigation of the smoke cessation industry. As a result of that
investigation, the FDA banned the sale of certain over-the-counter smoke
cessation product using active ingredients as of December, 1993. PHASEOUT was
not affected by this ban.
The Company was advised by the FTC by letter dated October 20, 1993, that
the FTC was conducting a non-public, informal inquiry to determine whether the
Company had engaged in deceptive or unfair practices in violation of the Federal
Trade Commission Act (the "FTC Act") in connection with certain of the Company's
advertising claims. In that connection, the FTC requested that the Company
provide it with certain information and documents and also requested a meeting
on June 9. 1994, with the Company's officers. The Company supplied the FTC with
all the information they requested.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the PhaseOut device ("the
device") were unsubstantiated or false. The order required the Company to send a
postcard to identifiable past purchasers of the device notifying them of the
commission's action and advising them that the device has not been proven to
reduce the risk of smoking related diseases or make cigarettes "safer". The
order also prohibits the Company from making certain claims in its current
advertising. The Company cost to comply with this order was $15,102,
representing the cost of identifying each purchaser and to mail the post cards.
On April 7, 1999, the Company received a letter from the FTC concluding, on the
assumption that the information submitted is accurate and complete, that no
action is indicated.
In February 1995, the Company's former attorney, John B. Lowy, brought an
action against the Company in New York State Supreme Court, New York County for
unpaid attorney fees and disbursements of approximately $39,000. In July 1997,
the Company agreed to pay the balance owed of $16,603. Payments of $7,000 were
made in 1997 against this liability. The remaining balance of $9,603 was paid in
monthly installments of $1,000 through October 1998.
In January 1998, the Company's former advertising agency, Popofsky
Advertising, Inc., brought an action against the Company in New York State
Supreme Court, New York County for unpaid services rendered in the amount of
$74,000. In March 1998, the parties reached an agreement to settle all claims.
The Company paid Popofsky Advertising, Inc. $50,000 in installments of $15,000
in December 1998, and the final $35,000 in July 1999.
In July 1997, the Company's former attorney, who is a relative of a former
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. During 1997, $5,000 was paid by the Company and, therefore, the
financial statements include a liability for approximately $13,000 payable to
this party. In October 1999, the Company and the former attorney agreed to
settle this action whereby the Company issued 300,000 shares to the former
attorney in payment of any and all liabilities.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
8
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Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) Market information - The principal U.S. market in which the Company's Common
Shares ($.00003 par value) were tradable is in the over-the-counter market.
The Class A Warrants expired on November 2, 1993 and the Class B Warrants
expired on December 31, 1997. The aforesaid securities are not traded or quoted
on any automated quotation system. The OTC Bulletin Board symbol for the
Company's Common Stock is "QPRC". The following table sets forth the range of
high and low bid quotes of the Company's Common Stock per quarter as provided by
the National Quotation Bureau (which reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions).
Bid Price
Period High Low
- ------ ---- ---
Quarter Ended March 31, 1997 .02 .01
Quarter Ended June 30, 1997 .016 .01
Quarter Ended September 30, 1997 .012 .008
Quarter Ended December 31, 1997 .012 .008
Quarter Ended March 31, 1998 .018 .018
Quarter Ended June 30, 1998 .014 .011
Quarter Ended September 30, 1998 .012 .009
Quarter Ended December 31, 1998 .011 .008
(b) Holders -- As of December 31, 1998, the approximate number of the Company's
shareholders was 515.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial status
and its contemplated financial requirements, does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future.
9
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
During 1998, the Company began distribution of the PhaseOut product into
retail chain stores, totalling approximately 12,000 stores, through an informal
joint venture with SAS Group, Inc. ("SAS"), for which it is entitled to 50% of
the income. There is no written agreement for this joint venture. SAS handles
all the marketing and operational activities of the joint venture. The
investment in the joint venture is accounted for under the equity method whereby
the investment account is increased for contributions by the Company plus its
share of the income of the joint venture and reduced for distributions and its
share of any losses incurred by the joint venture. The Company's results of
operations include its 50% share of the income from the joint venture as a
separate line item. As such, sales, cost of sales and selling expenses of the
joint venture in 1998 are reported in this separate "equity in net income of the
joint venture" line item.
Sales decreased by $255,803 principally because of the change in the
Company's operations as described above. For 1998, the Company sold 3,375 units
at an average price of $13.27 for sales of $44,781 and the joint venture sold
62,659 units at an average price of $16.42 for sales of $1,028,595. For 1997 the
Company sold 35,911 units at an average price of $8.37 for sales of $300,584.
Cost of sales decreased by $126,764 principally because of the change in
the Company's operations as described above. For 1998 the Company's average cost
was $5.55 for a cost of sales of $18,735. For 1997 the Company's average cost
was $4.05 for a total cost of sales of $145,499. The average cost for the joint
venture was $2.18 for a cost of sales of $136,433 due to a decrease in unit
cost, which resulted from a change in suppliers.
Selling expenses decreased by $252,299 principally because of the change in
the Company's operations as described above. For 1998 the Company incurred
$25,428 and the joint venture incurred $347,504. For 1997 the Company incurred
$277,727. The decrease in the Company's expense was primarily attributable to an
approximately $102,000 decrease in expenses incurred in connection with the
after market automobile products program which ended in January 1998, an
approximately $71,000 decrease in promotional packaging and advertising and an
approximately $25,000 decrease in clinical study expenses. In 1998, the selling
expenses of the joint venture consisted primarily of advertising, royalties and
commissions.
General and administrative expenses increased by approximately $48,000 from
$495,000 in 1997 to $543,000 in 1998. This increase is primarily attributable to
a $63,000 increase in salaries and related payroll costs, and a $15,000 net
decrease in various other administrative costs.
Interest expense decreased by approximately $15,000 from $33,000 in 1997 to
$18,000 in 1998 due to interest no longer being charged by a major vendor.
During 1997, the Company negotiated a $61,000 reduction in the amount owed
to a major vendor.
10
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Liquidity and Capital Resources
Cash of $192,673 was used for operations for the year ended December 31,
1998 as compared to $367,809 used last year. Cash decreased during the year by
$14,988.
The Company's working capital has deteriorated due to the use of current
assets for operations. Working capital and current ratios were:
December 31, December 31,
1998 1997
---- ----
Working capital
(deficiency) $(1,108,922) $(880,433)
Current ratios 0.15:1 0.10:1
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. The Company is also seeking an additional
$400,000 of financing under the same terms and conditions as offered to the
officers and directors. As of December 31, 1998, the Company has received
$368,700. There is no assurance that the Company will be able to obtain
additional financing.
Year 2000
The "Year 2000 issue" refers to the potential harm from computer programs
that identify dates by the last two digits of the year rather than using the
full four digits. Such programs could fail due to misidentification of dates on
or after January 1, 2000. If such a failure were to occur to the Company's
internal computer-based systems or to the crucial computer-based systems
operated by third parties, the Company could be unable to process transactions,
send invoices, or engage in similar normal business operations. Such failures,
if they occurred, would have a material adverse effect on the Company's
business, results of operations and financial condition. However, because of the
complexity of the issues, the number of parties involved and the fact that many
of the issues are outside the Company's control, the Company cannot reasonably
predict with certainty the nature or likelihood of such effects.
The Company has conducted a review of most of its internal computer-based
systems. Much of the software used by the Company has been developed internally
and is regularly modified and updated to meet the changing requirements of its
business. The Company expects that its critical internal systems will be able to
process relevant date information in the future to permit the Company to
continue to provide its services without significant interruption or material
adverse effect on its business, results of operations and financial condition.
However, there can be no assurances that the Company will not experience
unanticipated negative consequence caused by undetected errors or defects in the
technology used in its internal systems.
Notwithstanding the Company's expectation that its own systems will be able
to process Year 2000 date information, the Company's business depends
significantly on receiving uninterrupted services by other parties. The Company
has made inquiries of some of these parties regarding their respective levels of
preparedness for Year 2000 issues as they may affect the Company. The Company
will continue to make such inquiries and will monitor the public disclosures of
such companies regarding their Year 2000 status. So far, the responses to such
inquiries have been generally non-committal regarding levels of preparedness or
willingness to provide assurances to the Company. In almost all cases, the
Company is not in a position to require either affirmative action or assurances
by these parties regarding continued provision of services in the Year 2000.
Accordingly, while the Company has not been advised by any
11
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of these other companies on which it depends that they do not expect to be ready
for Year 2000 issues, the Company does not believe it is in a position to
project the likelihood of such parties' abilities to provide uninterrupted
services to the Company. The failure of any of these companies to provide
uninterrupted service to the Company would likely have a material adverse effect
on the Company's business and its results of operations and financial condition.
The Company does not separately identify costs incurred in connection with
Year 2000 compliance activities. To date, however, the Company does not believe
such costs to be significant because they generally have been incurred in the
normal course of internally modifying and updating the Company's software
programs. Future expenditures are not expected to be significant and will be
funded out of cash flows.
Item 7. Financial Statements
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Independent Auditors' Report
To the Board of Directors and Shareholders
Quest Products Corporation
We have audited the accompanying balance sheet of Quest Products Corporation as
of December 31, 1998, and the related statements of operations, shareholders'
(deficit), and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quest Products Corporation as
of December 31, 1998, and the results of its operations and its cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, the Company has been
subject to certain governmental regulatory matters by the U.S. Food and Drug
Administration. At present time, neither the Company nor its legal counsel can
predict the ultimate outcome of the matters addressed by this agency. These
matters, if pursued by this agency, may have a material adverse effect on the
operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has had recurring net operating losses since
its inception, has relied upon debt and equity financing to provide funds for
operations and, as of December 31, 1998, current liabilities exceed current
assets by $1,108,922. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
September 8, 1999 except for Notes 6 and 10b
for which the date is November 23, 1999
- F1 -
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1998
================================================================================
Assets
Current Assets
Cash $ 12,600
Inventory 7,500
--------
20,100
--------
Investment and Advances - PhaseOut Partners 339,612
Furniture and Equipment - at cost - net of accumulated
depreciation of $26,805 21,610
Patents - at cost - net of accumulated amortization of
$12,815 36,620
Security Deposits 3,506
--------
401,348
--------
$421,448
========
See notes to financial statements.
- F2 -
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1998
================================================================================
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $6,900 $ 16,900
Accounts payable 540,160
Accrued officer and director's compensation 451,493
Loans from director and officer 84,938
Accrued expenses 35,531
-----------
1,129,022
-----------
Other Liabilities
Shareholder's loan 191,850
-----------
Commitments and Contingencies
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
200,000,000 shares - 160,912,985 shares issued and
outstanding 4,827
Capital in excess of par 3,555,925
Accumulated (deficit) (4,460,176)
-----------
(899,424)
-----------
$ 421,448
===========
See notes to financial statements.
- F3 -
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Sales - net $ 44,781 $ 300,584
Cost of Sales 18,735 145,499
------------- -------------
26,046 155,085
------------- -------------
Selling Expenses 25,428 277,727
General and Administrative Expenses 543,389 494,685
------------- -------------
568,817 772,412
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (542,771) (617,327)
------------- -------------
Other Income (Expenses)
Interest income 15 3,966
Interest (expense) (17,634) (33,167)
Settlement of trade payable claim -- 61,000
------------- -------------
(17,619) 31,799
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (560,390) (585,528)
Equity in Net income of PhaseOut Partners 272,329 --
------------- -------------
Net (Loss) $ (288,061) $ (585,528)
============= =============
Basic and Diluted Net (Loss) Per Share $ -0- $ (.01)
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 152,000,000 116,000,000
============= =============
</TABLE>
See notes to financial statements.
- F4 -
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Shareholders' (Deficit)
For the Years Ended December 31, 1998 and 1997
================================================================================
<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)
Proceeds from sale of stock 22,547,118 676 171,824 --
Stock issued for accrued services
rendered - officers and directors 7,166,666 215 108,535 --
Net (loss) -- -- -- (585,528)
----------- ----------- ----------- -----------
Balance - December 31, 1997 138,083,713 4,142 3,360,410 (4,172,115)
Proceeds from sales of stock 22,829,272 685 195,515 --
Net (loss) -- -- -- (288,061)
----------- ----------- ----------- -----------
Balance - December 31, 1998 160,912,985 $ 4,827 $ 3,555,925 $(4,460,176)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
- F5 -
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 1 of 2
================================================================================
For the Years Ended
December 31,
----------------------
1998 1997
======================
Cash Flows from Operating Activities
Net (loss) $(288,061) $(585,528)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 7,462 2,704
Amortization 3,041 3,041
Expenses paid through the issuance of stock -- 48,750
Accrued interest 17,634 18,009
Equity in net income of PhaseOut Partners (272,329) --
(Increase) decrease in:
Accounts receivable 2,712 1,575
Inventories 60,961 58,952
Advances for clinical study -- 25,000
Prepaid expenses 1,496 3,918
Increase (decrease) in:
Accounts payable (43,818) (30,349)
Accrued officer compensation 308,000 143,493
Accrued expenses 10,229 (57,374)
--------- ---------
(192,673) (367,809)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment -- (5,500)
Acquisition of patents -- (2,435)
Refund of security deposits 631 --
Investment and advances - PhaseOut Partners (67,283) --
--------- ---------
(66,652) (7,935)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of common stock 196,200 172,500
Repayment of notes payable - vendor -- (20,940)
Loans from directors 50,000 5,000
Repayments to directors (1,863) (3,600)
Repayments to shareholder -- (10,000)
--------- ---------
244,337 142,960
--------- ---------
See notes to financial statements.
- F6 -
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 2 of 2
================================================================================
For the Years Ended
December 31,
----------------------
1998 1997
======================
Net Decrease in Cash $ (14,988) $(232,784)
Cash - beginning 27,588 260,372
--------- ---------
Cash - end $ 12,600 $ 27,588
========= =========
Supplemental Disclosures
Non-cash investing and financing transactions:
Stock issued for accrued services rendered $ -- $ 60,000
========= =========
See notes to financial statements.
- F7 -
<PAGE>
QUEST PRODUCTS CORPORATION
Notes to Financial Statements
December 31, 1998
================================================================================
1 - The Company
Quest Products Corporation (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. 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 in 1996 due to the
ongoing negotiations with the Federal Trade Commission ("FTC") as discussed
in Note 10a.
In 1998, the Company began distribution of the product into domestic retail
chain drug stores through PhaseOut Partners, an informal joint venture
arrangement ("the Joint Venture") with SAS Group Inc. ("SAS") for which
there is no written agreement. SAS handles all the marketing and
operational activities of the joint venture. The Company invested $67,283,
consisting of cash and inventory and shares equally in the profits. The
investment in PhaseOut Partners is accounted for under the equity method,
whereby the investment account is increased for contributions by the
Company plus its share of the income of the joint venture and reduced for
distributions and its share of any losses incurred by the joint venture.
Following are condensed financial data of PhaseOut Partners:
Year Ended December 31, 1998
Net sales $1,028,595
Gross profit 892,162
Net income 544,658
As of December 31, 1998
Current assets $611,941
Equity $611,941
The Company also distributes the product overseas.
2 - Summary of Significant Accounting Policies
a. Inventory - Inventory is valued at cost (on a first-in, first-out
basis) which is not in excess of market value. Inventory is comprised
entirely of finished goods.
Continued
- F8 -
<PAGE>
b. Furniture and Equipment - Furniture and equipment are carried at cost.
Depreciation is computed on the straight-line method over the
estimated useful lives (three to seven years) of the assets.
c. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Patents - Patents represent a patent dated June 15, 1993 that was
acquired by the Company on October 25, 1994 and a foreign patent
acquired in 1997. The acquisition cost has been capitalized and
amortized (straight-line method) over the life of 16 years.
e. Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123 Accounting for Stock-Based Compensation, encourages,
but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. APB No. 25
requires no recognition of compensation expense for the stock-based
compensation arrangements provided by the Company where the exercise
price is equal to the market price at the date of the grants.
f. Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted
average numbers of shares of common stock outstanding during the
period. Diluted earnings (loss) per share is computed giving effect to
all diluted potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of stock options. For fiscal
1998, potentially dilutive securities that related to shares issuable
upon the exercise of stock options granted by the Company were
excluded, as their effect was antidilutive. See Note 4 of the
financial statements.
g. Advertising - The Company and the joint venture expense the cost of
advertising as incurred. Advertising expense was -0- and $21,000 in
1998 and 1997 respectively. The joint venture's expense was $51,000
and -0- in 1998 and 1997 respectively.
h. Revenue Recognition - The Company's customers include end users,
retailers and distributors. Revenue, less reserves for returns, is
generally recognized upon shipment to the customer.
The Joint Venture's customers are primarily retail chain drug stores.
For customers to whom sales are subject to return, revenue is
recognized upon collection, at which time the sale is considered
final. For customers to whom sales are not subject to return, revenue
is recognized upon shipment.
Continued
- F9 -
<PAGE>
3 - Status of the Company
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business over a reasonable length of time.
The Company has had recurring net operating losses since its inception and
has made use of privately-placed debt and equity financing to provide funds
for operations. As of December 31, 1998, current liabilities exceed current
assets by $1,108,922. Those factors, as well as the Company's relatively
recent entry into the marketplace, create an uncertainty about the
Company's ability to continue as a going concern.
The Company has intentions of expanding and refining its marketing efforts
to improve the efficiency of these efforts and to increase revenues. In
addition, the Company is continuing its efforts to obtain long-term
financing through the issuance of long-term debt and equity securities.
The financial statements do not include any adjustments that might be
necessary should the above or other factors affect the Company's ability to
continue as a going concern.
4 - Warrants and Convertible Debentures
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented as if the Company had accounted for
its warrants under the fair value method. The fair value of each warrant is
estimated on the date of the warrant using the Black- Scholes option
pricing model with the following weighted average assumptions:
1998 1997
-------------------------
Assumptions:
Expected life of warrants 3.6 years 4.7 years
Risk free interest rate 6.0% 5.5%
Volatility of stock 66% 553%
Expected dividend yield -- --
The weighted average fair value of the warrants granted during 1998
and 1997 was $173,561 and $220,000, respectively. Had the fair value
of the warrants been amortized to expense over the related service
period, the pro forma impact on earnings of the stock- based
compensation for the warrants under the provision would have been as
follows:
1998 1997
-------------------------
Net (Loss):
As reported $(288,061) $(585,528)
Pro forma $(660,223) $(844,053)
Earnings Per Share:
As reported $ - 0 - $ (.01)
Pro forma $ - 0 - $ (.01)
Continued
- F10 -
<PAGE>
In accordance with SFAS 123, the weighted average fair value of
warrants is required to be based on a theoretical statistical model
using the preceding assumptions. In actuality, the Company's warrants
do not trade on a secondary exchange and, therefore, the employees and
directors cannot derive any benefit from holding the warrants under
these plans without an increase in the market price of Company stock.
Such an increase in stock price would benefit all shareholders
commensurately.
a. Warrants -Presented below is a summary of warrant activity for the
years shown: All warrants are immediately exercisable upon grant.
Weighted Average
Warrants Exercise Price
----------------------------------
Balance - December 31, 1996 31,248,011 0.08
Granted 24,297,118 0.04
Expired (3,034,000) 0.25
-----------
Balance - December 31, 1997 52,511,129 0.05
Granted 12,272,216 0.04
-----------
Balance - December 31, 1998 64,783,345 0.05
===========
The following table summarizes information for warrants currently
outstanding and exercisable at December 31, 1998:
Warrants Outstanding
---------------------------------------------------
Range of Weighted Average Weighted Average
Prices Number Remaining Life Exercise Price
----------- ---------------------------------------------------
$.015 - .025 5,750,000 3 years 0.02
.030 - .040 16,500,000 3 years 0.03
.050 - .075 37,377,284 2 years 0.05
. 10 - .15 5,156,061 1 year 0.13
----------
$.015 - .150 64,783,345 2 years 0.05
==========
b. 1992 Convertible Debentures - In 1992, the Company initiated a series
of private placement offerings of two and three-year Subordinated
Convertible Debentures with an annual interest rate of 10% and with
variable conversion rates (ranging from $.05 to $.10 per share). These
offerings raised a total of $117,500. The Company is in default on
interest payments and is in violation of covenants. Of the original
$117,500 raised, $107,500 has been paid back or converted into stock.
As of December 31, 1998, $10,000 of principal and $6,900 of interest
remain unpaid or unconverted on these debentures.
Continued
- F11 -
<PAGE>
5 - Related Party Transactions
a. Loans from Former Officer and Director - A former officer is owed
$33,953 by the Company. The amount is payable with a stated interest
rate of 11%. Effective June 30, 1997, the former officer agreed to no
longer charge interest.
During 1998, the Company received $50,000 from a director payable with
a stated interest rate of 10%. Accrued interest at December 31, 1998
amounted to $986.
b. Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals acquired an 18% ownership interest for
$500,000. In addition, if and when any warrants existing at the time
of the $500,000 investment to purchase common stock of the Company are
exercised or, if during the next five years the Company raises
additional funds through issuance of equity, then the investors will
be issued, without additional payment, additional shares of common
stock of the Company pro rata so that they will own in the aggregate
18% of the then outstanding shares of common stock of the Company. The
two individuals were awarded seats on the Board of Directors and
officers positions. In addition, the two individuals each received
9,778,975 warrant shares with the same anti-dilution provisions as the
investor group. The two individuals had consulting agreements for
which the Company accrued fees of $5,000 per month for each individual
from July, 1996 through November, 1997. During 1997, these two
individuals each agreed to receive 3,333,333 shares of stock in lieu
of $50,000 in accrued consulting fees. In December, 1997, the Company
entered into employment contracts with each of these two individuals
for $150,000 per year for five years from December, 1997 through
November, 2002 and issued options to purchase 7,500,000 shares each at
an exercise price of $.03 per share. As of December 31, 1998, the two
individuals were owed $192,500 each in accrued consulting fees and
salaries. As of December 31, 1998, the investor group owns 28,064,340
shares and the two individuals have warrants to purchase 31,877,284
shares under these anti-dilution provisions.
A former director, who was previously the Company's chief executive
officer, entered into a consulting agreement with the Company for
$2,000 per month from October, 1997 through September, 1998. As of
December 31, 1998, he is owed $66,493 in accrued salary, consulting
fees and expenses.
6 - Shareholder's Loan
During 1996, the Company received $200,000 from an individual as a loan in
connection with the Company's media campaign. Repayments of $35,000 were
made in cash and $7,500 in stock. In November 1999, the Company issued
2,875,000 shares of Company stock in repayment of the $157,500 loan balance
and any accrued interest. Consequently, this debt has been reclassified to
long term liabilities at December 31, 1998.
Continued
- F12 -
<PAGE>
7 - Income Taxes
The Company has available net operating loss carryforwards of approximately
$5,300,000, which expire in 2002 until 2013. Deferred income taxes reflect
the net tax effects of net operating loss carryforwards and result in
deferred tax assets of approximately $1,590,000 and $1,350,000 respectively
at December 31, 1998 and 1997, respectively, which were fully offset by
valuation allowances due to uncertainties surrounding the ultimate
realization of these assets.
8 - Lease Commitments
The Company is obligated under a lease for office space through November,
2001. Rental expense was $60,361 and $38,760 for 1998 and 1997,
respectively. The future minimum lease payments required under this lease
are as follows:
1999 $ 60,449
2000 62,626
2001 49,941
9 - Economic Dependence
The Company purchased 100% of its products from one vendor in 1998 and from
two other vendors in 1997.
10 - Contingencies
a. Regulatory Matters - On June 1, 1993, the U.S. Food and Drug
Administration ("FDA") sent a warning letter to the Company. The
letter stated that due to the Company's marketing and promotional
materials used at the time for the product, the FDA believed the
product was being sold as a medical device and should be subject to
regulation as a medical device under the Federal Food, Drug and
Cosmetic Act ("FDC Act"), and that the product was in violation of
certain provisions of that Act.
The Company believes that the product is not a medical device within the
meaning of the FDC Act and has advised the FDA of its position. However, in
an act of cooperation with the FDA, the Company volunteered to make
revisions in its promotional material in order to make it clearer to the
public that the product is not intended to be used as a medical device.
Since these revisions have been made, the Company has not received any
communications from the FDA about this matter. However, no assurance can be
given that the FDA will not in the future continue its investigation and
prohibit the Company from marketing the product, or invoke other remedies,
without the Company complying with medical device status requirements of
the FDC Act.
Continued
- F13 -
<PAGE>
On October 20, 1993, the Federal Trade Commission ("FTC") advised the
Company that they were conducting a non-public, informal inquiry to
determine whether the Company had engaged in deceptive or unfair
practices in violation of the Federal Trade Commission Act ("FTC Act")
in connection with certain advertising claims made by the Company. The
Company provided certain information and documents requested by the
FTC.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the product were
unsubstantiated or false. The order required the Company to send a
postcard to identifiable past-purchasers of the product notifying them
of the FTC's action and advising them that the product has not been
proven to reduce the risk of smoking-related diseases or make
cigarettes safer. The order also prohibits the Company from making
certain claims in its current advertising. The Company's cost to
comply with this order was $15,102.
On April 7, 1999, the Company received a letter from the FTC
concluding, on the assumption that the information submitted is
accurate and complete, that no action is indicated.
b. Other - In February 1995, the Company's former attorney, John B. Lowy,
brought an action against the Company in New York State Supreme Court,
New York County for unpaid attorney fees and disbursements of
approximately $39,000. In July 1997, the Company agreed to pay the
balance owed of $16,603. Payments of $7,000 were made in 1997 against
this liability. The remaining balance of $9,603 was paid in monthly
installments of $1,000 through October 1998.
In January 1998, the Company's former advertising agency, Popofsky
Advertising, Inc., brought an action against the Company in New York
State Supreme Court, New York County for unpaid services rendered in
the amount of $74,000. In March 1998, the parties reached an agreement
to settle all claims. The Company paid Popofsky Advertising, Inc.
$50,000 in installments of $15,000 in December 1998, and the final
$35,000 in July 1999.
In July 1997, the Company's former attorney, who is a relative of a
former 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. During 1997, $5,000 was paid
by the Company and, therefore, the financial statements include a
liability for approximately $13,000 payable to this party. In October
1999, the Company and the former attorney agreed to settle this action
whereby the Company issued 300,000 shares to the former attorney in
payment of any and all liabilities.
11 - Disclosure About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other current assets and liabilities approximate fair value because of the
short maturity of these items.
The carrying amounts of various loans payable exceed the fair value by
approximately $3,000, based on an estimated borrowing rate of 10%.
Continued
- F14 -
<PAGE>
These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect these estimates.
12 - Fourth Quarter Adjustment - Unaudited
For the three months ended December 31, 1998, the Company recorded an
adjustment to reclassify the results of the operations of the Company's
investment in the Joint Venture from separate line items to a single line
item. This reclassification had no effect on the Company's net income. A
reconciliation of the effect of this adjustment follows:
<TABLE>
<CAPTION>
1998
Three months ended
March 31 June 30 Sept. 30
-------- -------- --------
<S> <C> <C> <C>
Net sales as previously reported $282,072 $ 54,876 $117,330
Less sales allocated to Joint Venture 262,602 50,247 112,325
-------- -------- --------
Net sales as restated $ 19,470 $ 4,629 $ 5,005
======== ======== ========
Gross profit as previously reported $232,747 $ 30,952 $101,581
Less gross profit allocated to Joint Venture 219,940 28,392 98,268
-------- -------- --------
Gross profit as restated $ 12,807 $ 2,560 $ 3,313
======== ======== ========
Selling expenses as previously reported $171,071 $ 24,979 $ 63,302
Less selling expenses allocated to Joint Venture 151,526 21,368 61,552
-------- -------- --------
Selling expenses as restated $ 19,545 $ 3,611 $ 1,750
======== ======== ========
General and administrative expenses as
previously reported $148,310 $132,600 $138,509
Less general and administrative expenses
allocated to Joint Venture 2,626 502 1,123
-------- -------- --------
General and administrative expenses
as restated $145,684 $132,098 $137,386
======== ======== ========
</TABLE>
Continued
- F15 -
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
NONE
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the directors
and executive officers of the Company:
Name Age Position(s) with the Company
- ---- --- ----------------------------
Burton A. Goldstein 63 Chairman of the Board of Directors
Secretary, Chief Executive Officer
Herbert M. Reichlin 57 President, Treasurer,
Chief Operating Officer, Director
Richard Bruno 53 Director
James F. Leary 69 Director
Luther H. Hodges, Jr. 62 Director
Alfred Fabricant 45 Director
Richard Mascola 62 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified. Each director receives $1,500 annually for
attendance fees, warrants for 500,000 shares at market price each February, and
out-of-pocket travel expenses.
A summary of the business experience of each officer and director of the
Company is as follows:
BURTON A. GOLDSTEIN has been Chairman of the Board of Directors of the
Company since March 10, 1997 and became its Secretary in December 1997. Mr.
Goldstein is President of American Employer Services Corp., a provider of
employee benefit consulting services to industry and associations. A chartered
Life Underwriter, Mr. Goldstein is also active in estate preservation for
business owners and wealthy individuals.
HERBERT M. REICHLIN has been a Director and Treasurer of the Company since
July 30, 1996 and became its President in December 1997. Mr. Reichlin is a
Certified Public Accountant and is also the President of Program Resource
Organization, a consulting company to the health industry.
13
<PAGE>
RICHARD BRUNO has been a Director of the Company since June 1998. Prior to
retirement, Mr. Bruno was employed as Managing Director of NASDAQ trading at
Paine Webber Inc. from 1964 thru June 1998.
JAMES F. LEARY has been a Director of the Company since August 1994. Mr.
Leary the President and Founder of Sunwestern Management, Inc., Dallas, Texas,
engaged in venture capital investing through two limited partnerships. Prior to
Sunwestern's inception in 1981, Mr. Leary was Senior Executive Vice President,
Chief Financial Officer and Director of the Associates Corporation of North
America, Dallas, Texas. Prior to his tenure with Associates, he served as Senior
Vice President of The National Bank of North America (now National Westminster
Bank USA) and as an Assistant Treasurer of CIT Financial Corporation. Mr. Leary
is Vice Chairman of Finance of Search Capital Group, Inc., Dallas, TX (NASDAQ)
and is a director of MaxServ, Inc. (NASDAQ), several open-end mutual stock funds
under the management of Capstone Asset Management Company, and Anthem Financial
Services, Inc. Mr. Leary has a B.A. degree in Business Administration from
Georgetown University 1951, an MBA in Banking and Finance from New York
University 1953, and is also a graduate of the Advanced Management Program of
the Harvard University Graduate School of Business in 1956.
LUTHER H. HODGES, JR. has been a Director of the Company since April 1995.
He currently serves as a member of the faculty of the Anderson Schools of
Management, the University of New Mexico; Chairman of the Board of the Santa Fe,
LLC and is a Director of Search Capital Corporation, Dallas, Texas; and a
director of Safety Floor International, Bethesda, MD., Zomeworks Corporation,
Albuquerque, and CWF Energy Company, Dallas, Texas. Additionally, Mr. Hodges
manages two closely held investment partnerships and operates the Santa Fe
Buyers Brokerage Company, a licensed real estate broker in New Mexico. He serves
on the Governor's Economic Development Commission and the State Treasurer's
Investment committee in New Mexico. Mr. Hodges is also a trustee of the North
American Institute in Santa Fe and the National Symphony Orchestra in
Washington, D.C. Previously, Mr. Hodges was Chairman and Chief Executive Officer
of Washington Bancorporation (1983-89), a regional bank holding company, and The
National Bank of Washington (1981-89) and served as Chairman of the Board of
Starlight Publishing Company, Albuquerque, N.M. He served as Undersecretary of
the U.S. Department of Commerce (1979) and as the first Deputy Secretary of
Commerce (1980). He had been a democratic candidate for the United States Senate
from North Carolina (1978) and from 1962-1977 served in various management
positions at the North Carolina National Bank (presently Nations Bank),
including Chairman of the Board (1974-77). Mr. Hodges has long been active on
the Board of Directors of numerous community, educational and corporate
organizations. Mr. Hodges was educated at the University of North Carolina
(1957) and at the Harvard Graduate School of Business Administration (1961). He
served to the rank of Lieutenant, United States Navy.
ALFRED FABRICANT has been a Director since October 7, 1997. Mr. Fabricant
is the founding partner of the New York law firm of Fabricant & Yeskoo LLP. Mr.
Fabricant was educated at the University of Miami (1975) and at the John
Marshall Law School (1978).
14
<PAGE>
DR. RICHARD F. MASCOLA has been a Director since December 16, 1997. Dr.
Mascola is a practicing Doctor of Dental Surgery and is President of the
American Dental Association. Dr. Mascola was educated at Holy Cross (1958) at
New York University College of Dentistry, D.D.S. and at Brookdale Dental Center
of New York University.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.
Item 10. Executive Compensation
The following table sets forth the annual long-term compensation for the
Company's Chief Executive Officer, and the only other executive officer during
the Company's last three fiscal years:
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Securities
Underlying
Name and Principal Positions Year Salary Warrants (#)
- --------------------------------------------------------------------------------
Burton A. Goldstein 1998 $150,000 4,511,108
(Chief Executive Officer) 1997 $ 67,500 10,648,559
1996 $ 30,000 9,778,975
Herbert M. Reichlin 1998 $150,000 4,511,108
(President and Chief Operating Officer) 1997 $ 67,500 10,648,559
Chief Operating Officer) 1996 $ 30,000 9,778,975
15
<PAGE>
Warrant Grants in Last Fiscal Year
The following table sets forth certain information concerning warrants
granted during 1998 to the named executives:
Individual Grants
Number of % of Total Exercise
Securities Warrants Granted or Base
Underlying to Employees in Price Expiration
Name Warrants Granted Fiscal Year ($/share) Date
- --------------------------------------------------------------------------------
Burton A. Goldstein 500,000 4% 0.04 2/15/01
500,000 4% 0.015 2/15/03
3,511,108 29% 0.05 7/10/01
Herbert M. Reichlin 500,000 4% 0.04 2/15/01
500,000 4% 0.015 2/15/03
3,511,108 29% 0.05 7/10/01
Aggregated Warrant Exercises in Last Fiscal Year and Fiscal Year-End Warrant
Values
The following table summarizes warrants exercised during 1998 and presents
the value of unexercised warrants held by the named executives at fiscal
year-end:
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised
Acquired Warrants at In-the-Money
on Value Fiscal Year- Warrants at
Exercise Realized End (#) All Fiscal Year-
Name (#) ($) Exercisable End ($)
- --------------------------------------------------------------------------------
Burton A. Goldstein 0 0 24,938,642 0
Herbert M. Reichlin 0 0 24,938,642 0
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth on
the charts below are known to the Company to be the beneficial owners of
more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
16
<PAGE>
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
<TABLE>
<CAPTION>
Shares of Common Beneficially Owned
Name and Address ------------------------------------
Of Beneficial Owner Shares Owned Shares Acquirable Percent Owned
- ------------------- ------------ Within 60 Days (1) -------------
------------------
<S> <C> <C> <C>
Burton A. Goldstein 5,333,333 24,938,642 16.3%
6900 Jericho Turnpike
Syosset, New York 11791
Herbert M. Reichlin 5,333,333 24,938,642 16.3%
6900 Jericho Turnpike
Syosset, New York 11791
James F. Leary 998,653 2,000,000 1.8%
6900 Jericho Turnpike
Syosset, New York 11791
Luther H. Hodges, Jr 3,412,143 2,000,000 3.3%
6900 Jericho Turnpike
Syosset, New York 11791
Alfred Fabricant 2,806,434 750,000 2.2%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Mascola 2,806,434 750,000 2.2%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Bruno 2,500,000 250,000 1.7%
6900 Jericho Turnpike
Syosset, New York 11791
Bernard Gutman 15,430,462(2) 9.6%
1950 S. Ocean Drive
Hallandale, Florida 33009
Products & Patents, Ltd. ("P&P") 1,350,349 0.8%
1950 S. Ocean Drive
Hallandale, Florida 33009
All Directors and Officers and Beneficial Owners 94,248,076 43.5%
of more than 5% of the Company's Common Stock
</TABLE>
(1) Under the rules of the Securities and Exchange Commission (the "SEC"), a
person is deemed to have "beneficial ownership" of any Common Stock over
which that person has or shares voting or investment power, plus any Common
Stock that person may acquire within 60 days, including through the
exercise of a stock option or the conversion of a convertible security.
17
<PAGE>
(2) Includes 1,350,349 shares held by P&P inasmuch as Bernard Gutman is an
officer and director of P&P. Mr. Gutman has sole discretionary power of
these shares. P&P currently has no active business operations.
Item 12. Certain Relationships and Related Transactions
a. Loans from Director and Former Officer - A former officer is owed $33,953
by the Company. The amount is payable with a stated interest rate of 11%.
Effective June 30, 1997, the former officer agreed to no longer charge
interest.
During 1998, the Company received $50,000 from a director payable with a
stated interest rate of 10%. Accrued interest at December 31, 1998 amounted
to $986.
b. Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals acquired an 18% ownership interest for
$500,000. In addition, if and when any warrants existing at the time of the
$500,000 investment to purchase common stock of the Company are exercised
or, if during the next five years the Company raises additional funds
through issuance of equity, then the investors will be issued, without
additional payment, additional shares of common stock of the Company pro
rata so that they will own in the aggregate 18% of the then outstanding
shares of common stock of the Company. The two individuals were awarded
seats on the Board of Directors and officers positions. In addition, the
two individuals each received 9,778,975 warrant shares with the same
anti-dilution provisions as the investor group. The two individuals had
consulting agreements for which the Company accrued fees of $5,000 per
month for each individual from July, 1996 through November, 1997. During
1997, these two individuals each agreed to receive 3,333,333 shares of
stock in lieu of $50,000 in accrued consulting fees. In December, 1997, the
Company entered into employment contracts with each of these two
individuals for $150,000 per year for five years from December, 1997
through November, 2002 and issued options to purchase 7,500,000 shares each
at an exercise price of $.03 per share. As of December 31, 1998, the two
individuals were owed $192,500 each in accrued consulting fees and
salaries.
A former director, who was previously the Company's chief executive
officer, entered into a consulting agreement with the Company for $2,000
per month from October, 1997 through September, 1998. As of December 31,
1998, he is owed $66,493 in accrued salary, consulting fees and expenses.
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Articles of Incorporation (4)
3.2 By-laws (4)
10.01 Agreement dated August 21, 1995 with J&R Intercontinental (3)
10.02 Consulting Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (2)
10.03 Consulting Agreement dated July 9, 1996 between the Company and
American Employer Service Corporation (2)
10.04 Warrant Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (2)
10.05 Warrant Agreement dated July 9, 1996 between the Company and
Burton A. Goldstein (2)
18
<PAGE>
10.06 Warrant Agreement dated July 9, 1996 between the Company and
Milton J. Walters (2)
10.07 Securities Purchase Agreement dated July 9, 1996 (2)
10.08 Agreement dated April 30, 1997 with Kingdom Blinds Manufacturing,
Inc. (1)
10.09 Employment Agreement dated December 1, 1997 between the Company
and Burton A. Goldstein. (1)
10.10 Employment Agreement dated December 1, 1997 between the Company
and Herbert M. Reichlin. (1)
10.11 Consulting Agreement dated December 9, 1997 between the Company
and Bernard Gutman. (1)
(1) Incorporated by reference to Exhibits to Form 10K for fiscal
year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to Form 10K for fiscal
year ended December 31, 1996.
(3) Incorporated by reference to Exhibits to Form 10K for fiscal
year ended December 31, 1995.
(4) Incorporated by reference to Exhibits to Form 10K for fiscal
year ended December 31, 1989.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: December 1, 1999 By: /s/:
----------------------------
Herbert M. Reichlin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES AND TITLE DATE
-------------------- ----
December 15, 1999
- -----------------------------------
Burton A. Goldstein
Chairman of the Board of Directors
Secretary, Chief Executive Officer
December 15, 1999
- -----------------------------------
Herbert M. Reichlin
President, Treasurer, Chief
Operating Officer, Director
December 15, 1999
- -----------------------------------
Richard Bruno
Director
December 15, 1999
- -----------------------------------
James F. Leary
Director
December 15, 1999
- -----------------------------------
Luther H. Hodges, Jr.
Director
December 15, 1999
- -----------------------------------
Alfred Fabricant
Director
December 15, 1999
- -----------------------------------
Richard Mascola
Director
20
<PAGE>
SUPPLEMENTAL INFORMATION
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to
Section 12 of the Act.
NONE
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,600
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7,500
<CURRENT-ASSETS> 20,100
<PP&E> 48,415
<DEPRECIATION> (26,805)
<TOTAL-ASSETS> 421,448
<CURRENT-LIABILITIES> 1,129,022
<BONDS> 0
0
0
<COMMON> 4,827
<OTHER-SE> (904,251)
<TOTAL-LIABILITY-AND-EQUITY> 421,448
<SALES> 44,781
<TOTAL-REVENUES> 44,781
<CGS> 18,735
<TOTAL-COSTS> 18,735
<OTHER-EXPENSES> 568,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,634
<INCOME-PRETAX> (288,061)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,061)
<EPS-BASIC> (.002)
<EPS-DILUTED> (.002)
</TABLE>
