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 June 30, 1999
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
(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, 1999
- ----------------------- ---------------------------------
Common Stock, par value 174,162,985
$.00003 per share
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
QUEST PRODUCTS CORPORATION
FINANCIAL STATEMENTS (Unaudited)
June 30, 1999
Financial Statements Page
----
Balance Sheet 3 - 4
Statements Operations 5 - 6
Statements of Shareholders' (Deficit) 7
Statements of Cash Flows 8 - 9
Notes to Financial Statements 10 - 12
Management's Discussion and Analysis 13 - 15
Other Information 16
Signatures 17
2
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
June 30, 1999
(Unaudited)
Assets
Current Assets
Cash $152,432
Inventory 7,479
--------
159,911
--------
Investment and Advances - PhaseOut Partners 326,922
Furniture and Equipment - at cost - net of accumulated
depreciation of $31,119 17,296
Patents - at cost - net of accumulated amortization of
$14,335 35,100
Security Deposits 3,506
--------
382,824
--------
$542,735
========
See notes to financial statements.
3
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
June 30, 1999
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $7,400 $ 17,400
Accounts payable 540,896
Accrued officer and director's compensation 601,493
Loans from director and officer 87,438
Accrued expenses 43,713
-----------
1,290,940
-----------
Other Liabilities
Shareholder's loan 199,674
-----------
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 - 167,662,985 shares issued and
outstanding 4,832
Capital in excess of par 3,740,920
Accumulated (deficit) (4,693,631)
-----------
(947,879)
-----------
$ 542,735
===========
See notes to financial statements.
4
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Sales - net $ 170 $ 24,099
Cost of Sales 20 8,732
------------- -------------
150 15,367
------------- -------------
Selling Expenses 12,530 23,156
General and Administrative Expenses 222,561 277,782
------------- -------------
235,091 300,938
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (234,941) (285,571)
------------- -------------
Other Income (Expenses)
Interest income -- 15
Interest (expense) (10,824) (8,324)
------------- -------------
(10,824) (8,309)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (245,765) (293,880)
Equity in Net income of PhaseOut Partners 12,310 72,310
------------- -------------
Net (Loss) $ (233,455) $ (221,570)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 162,000,000 124,000,000
============= =============
</TABLE>
See notes to financial statements.
5
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Sales - net $ 50 $ 4,629
Cost of Sales 7 2,069
------------- -------------
43 2,560
------------- -------------
Selling Expenses 4,452 3,611
General and Administrative Expenses 122,052 132,098
------------- -------------
126,504 135,709
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (126,461) (133,149)
------------- -------------
Other Income (Expenses)
Interest income -- 8
Interest (expense) (5,412) (4,162)
------------- -------------
(5,412) (4,154)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (131,873) (137,303)
Equity in Net income of PhaseOut Partners 2,862 6,522
------------- -------------
Net (Loss) $ (129,011) $ (130,781)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 163,000,000 125,000,000
============= =============
</TABLE>
See notes to financial statements.
6
<PAGE>
QUEST PRODUCTS CORPORATION
Statement of Shareholders' (Deficit)
For the Six Months Ended June 30, 1999
(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, 1998 160,912,985 $ 4,827 $ 3,555,925 $(4,460,176)
Proceeds from sale of stock 6,750,000 5 134,995 --
Proceeds from issuance of stock options -- -- 50,000 --
Net (loss) -- -- -- (233,455)
----------- ----------- ----------- -----------
Balance - June 30, 1999 167,662,985 $ 4,832 $ 3,740,920 $(4,693,631)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
7
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(233,455) $(221,570)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 4,314 1,352
Amortization 1,520 1,546
Accrued interest 10,824 8,324
Equity in net income of PhaseOut Partners (12,310) (72,176)
(Increase) decrease in:
Accounts receivable -- 2,712
Inventories 21 56,177
Increase (decrease) in:
Accounts payable 736 (35,663)
Accrued officer compensation 150,000 162,000
Loans from directors -- (1,863)
Accrued expenses 8,182 111
--------- ---------
(70,168) (99,050)
--------- ---------
Cash Flows from Investing Activities
Investment and advances - PhaseOut Partners 25,000 (67,283)
--------- ---------
25,000 (67,283)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of common stock 135,000 146,200
Proceeds from issuance of stock options 50,000 --
--------- ---------
185,000 146,200
--------- ---------
Net Increase in Cash 139,832 (20,133)
Cash - beginning 12,600 27,588
--------- ---------
Cash - end $ 152,432 $ 7,455
========= =========
</TABLE>
See notes to financial statements.
8
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(129,011) $(130,781)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 2,157 676
Amortization 760 773
Accrued interest 5,412 4,162
Equity in net income of PhaseOut Partners (2,862) (6,522)
(Increase) decrease in:
Accounts receivable -- 435
Inventories 7 2,985
Increase (decrease) in:
Accounts payable (13,389) (10,437)
Accrued officer compensation 75,000 81,000
Loans from directors -- (463)
Accrued expenses 3,000 (1,614)
--------- ---------
(58,926) (59,786)
--------- ---------
Cash Flows from Investing Activities
Investment and advances - PhaseOut Partners 25,000 --
--------- ---------
25,000 --
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of common stock 135,000 --
Proceeds from issuance of stock options 50,000 --
--------- ---------
185,000 --
--------- ---------
Net Increase in Cash 151,074 (59,786)
Cash - beginning 1,358 67,241
--------- ---------
Cash - end $ 152,432 $ 7,455
========= =========
</TABLE>
See notes to financial statements.
9
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1999
1. BACKGROUND AND BASIS OF PRESENTATION
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"), which have
been concluded.
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:
Six Months Ended June 30, 1999
Net sales $ 43,067
Gross profit 39,335
Net income 24,620
As of June 30, 1999
Current assets $ 611,560
Equity $ 611,560
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 ($233,455 in 1999 and $221,570 in 1998), 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 may 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.
10
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1999
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, 1998. 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, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies - There were no changes in
significant accounting policies during the current period.
3. RELATED PARTY TRANSACTIONS
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 June 30, 1999 amounted to
$3,486.
Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals which acquired an 18% ownership interest for
$500,000 was awarded two seats on the Board of Directors and one officer's
position. 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. 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 June 30, 1999, the two individuals were owed $267,500 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 June 30, 1999, he
is owed $66,493 in accrued salary, consulting fees and expenses.
4. 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 June 30, 1999.
11
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1999
5. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS.
Dependence on Major Customers and Suppliers - Domestic retail sales
represent approximately 99% of sales with only one retail customer
representing more than 10% of total sales.
The Company is currently purchasing 100% of its products from one vendor.
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).
12
<PAGE>
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
Results of Operations
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998
The Company incurred a net loss of $233,455 for the six months ended June
30, 1999 as compared to the loss of $221,570 for the six months ended June 30,
1998.
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 are reported in this separate "equity in net income of the joint
venture" line item.
Sales decreased by $23,929 principally because of the change in the
Company's operations as described above.
Cost of sales decreased by $8,752 principally because of the change in the
Company's operations as described above.
Selling expenses decreased by $10,626 principally because of the change in
the Company's operations as described above. The decrease in the Company's
expense was primarily attributable to an approximately $16,000 decrease in
expenses incurred in connection with the after market automobile products
program which ended in January 1998, less an increase of $7,000 in expenses
incurred in connection with the sunglass program.
General and administrative expenses decreased by approximately $55,000 from
$278,000 to $223,000. This decrease is primarily attributable to a decrease in
professional and consulting fees ($27,000), insurance expense ($9,000) and
telephone expense ($9,000).
Interest expense increased by approximately $3,000 from $8,000 to $11,000
due to additional borrowing.
The Company maintains a $1,000,000 liability insurance policy.
13
<PAGE>
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
Liquidity and Capital Resources
Cash of $70,168 was used for operations for the 6 months ended June 30, 1999 as
compared to $99,050 used in the same period of last year. Cash increased during
the 6 months ended June 30, 1999 by $139,832.
The Company's working capital has deteriorated due to the use of current assets
for operations. Working capital and current ratios were:
June 30, December 31, June 30,
1999 1998 1998
---- ---- ----
Working capital
(deficiency) $1,131,029 $1,108,922 $1,092,364
Current ratios 0.12:1 0.15:1 0.02:1
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 $900,000
of financing under the same terms and conditions as offered to the officers and
directors. As of June 30, 1999, the Company has received $553,700. There is no
assurance that the Company will be able to obtain additional financing.
Distribution and Marketing
Marketing (Domestic)
In March 31, 1998, the Company entered 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 2nd quarter of 2000.
14
<PAGE>
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
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
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).
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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
16
<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
Dated: January 25, 2000
/S/: Herbert M. Reichlin
------------------------------
Herbert M. Reichlin, President
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 152432
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7479
<CURRENT-ASSETS> 159911
<PP&E> 48415
<DEPRECIATION> (31119)
<TOTAL-ASSETS> 542735
<CURRENT-LIABILITIES> 1290940
<BONDS> 0
0
0
<COMMON> 4832
<OTHER-SE> (952711)
<TOTAL-LIABILITY-AND-EQUITY> 542735
<SALES> 170
<TOTAL-REVENUES> 170
<CGS> 20
<TOTAL-COSTS> 20
<OTHER-EXPENSES> 235091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10824
<INCOME-PRETAX> (233455)
<INCOME-TAX> 0
<INCOME-CONTINUING> (233455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233455)
<EPS-BASIC> (.001)
<EPS-DILUTED> (.001)
</TABLE>
