SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2000
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 June 30, 2000
Common Stock, par value 200,271,318
$.00003 per share
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION
Page
Item 1 Consolidated Financial Statements
Report of Independent Accountants 3
Consolidated Balance Sheet (unaudited) 4 - 5
Consolidated Statements of Operations (unaudited) 6 - 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9 - 11
Item 2 Management's Discussion and Analysis 12 - 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 15
Item 6 Exhibits and Reports 15
Signatures 15
2
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Quest Products Corporation and Subsidiaries
We have reviewed the consolidated balance sheet of Quest Products Corporation
and Subsidiaries at June 30, 2000 and the related consolidated statements of
operations for each of the three and six-month periods then ended and
consolidated statement of cash flows for the six months then ended as set forth
in the accompanying unaudited consolidated financial statements. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists primarily of applying analytical procedures to financial
data and making inquires of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
As discussed in Note 1, certain conditions indicate that the Company may be
unable to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments to the consolidated financial
statements that might be necessary should the Company be unable to continue as a
going concern.
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
August 4, 2000
3
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2000
(Unaudited)
Assets
Current Assets
Cash $ 15,093
Inventory 6,898
Prepaid expenses 6,234
--------
28,225
--------
Investment and Advances - PhaseOut Partners 85,874
Furniture and Equipment - at cost - net of accumulated
depreciation of $40,567 32,277
Deferred Royalties 10,000
License acquisition cost - net of accumulated
amortization of $1,616 27,384
Patents - at cost - net of accumulated amortization
$17,376 32,059
Security Deposits 3,861
--------
191,455
--------
$219,680
========
See accompanying notes and accountants' report.
4
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2000
(Unaudited)
<TABLE>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $8,400 $ 18,400
Accounts payable 532,654
Accrued officer and director's compensation 578,142
Accrued expenses 67,486
-----------
1,196,682
-----------
Other Liabilities
Due to former officers and directors 100,445
-----------
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 -
200,271,318 shares issued and outstanding 6,008
Capital in excess of par 4,606,265
Accumulated (deficit) (5,689,720)
-----------
(1,077,447)
-----------
$ 219,680
===========
</TABLE>
See accompanying notes and accountants' report.
5
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
---------------------------------------
2000 1999
---------------------------------------
<S> <C> <C>
Sales - net $ 2,483 $ 170
Cost of Sales 403 20
------------- -------------
2,080 150
------------- -------------
Selling Expenses 42,936 12,530
General and Administrative Expenses 351,984 222,561
------------- -------------
394,920 235,091
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (392,840) (234,941)
------------- -------------
Other Income (Expenses)
Interest (expense) (966) (10,824)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (393,806) (245,765)
Equity in Net income of PhaseOut Partners -- 12,310
------------- -------------
Net (Loss) $ (393,806) $ (233,455)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 194,000,000 162,000,000
============= =============
</TABLE>
See accompanying notes and accountants' report.
6
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Sales - net $ 1,601 $ 50
Cost of Sales 255 7
------------- -------------
1,346 43
------------- -------------
Selling Expenses 23,414 4,452
General and Administrative Expenses 190,195 122,052
------------- -------------
213,609 126,504
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (212,263) (126,461)
------------- -------------
Other Income (Expenses)
Interest (expense) (250) (5,412)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (212,513) (131,873)
Equity in Net income of PhaseOut Partners -- 2,862
------------- -------------
Net (Loss) $ (212,513) $ (129,011)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 199,000,000 163,000,000
============= =============
</TABLE>
See accompanying notes and accountants' report.
7
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(393,806) $(233,455)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 5,054 4,314
Amortization 2,636 1,520
Accrued interest 966 10,824
Equity in net income of PhaseOut Partners -- (12,310)
(Increase) decrease in:
Inventories 403 21
Increase (decrease) in:
Accounts payable 47,365 736
Accrued officer compensation 150,000 150,000
Accrued expenses (1,434) 8,182
--------- ---------
(188,816) (70,168)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (25,585) --
Refund of acquisitions of equipment 1,156 --
Investment and advances - PhaseOut Partners -- 25,000
--------- ---------
(24,429) 25,000
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 115,000 135,000
Proceeds from issuance of stock options -- 50,000
--------- ---------
115,000 185,000
--------- ---------
Net Decrease in Cash (98,245) (11,242)
Cash - beginning 113,338 12,600
--------- ---------
Cash - end $ 15,093 $ 1,358
========= =========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ 334,716 $ --
========= =========
</TABLE>
See accompanying notes and accountants' report.
8
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000
1. BACKGROUND AND STATUS OF THE COMPANY
Quest Products Corporation and Subsidiaries (the "Company") was organized
as a Delaware Corporation on July 17, 1987 and operated as a development
stage company through 1993. The Company has incorporated two subsidiaries,
The ProductIncubator.Com, Inc. and Rainbow Shades, Inc. through which it
intends to identify and bring to the marketplace unique proprietary
consumer products. The Company also intends to continue to market and
distribute its patented "Phase-Out" system smoking cessation device (the
"product").
In 1998, the Company began distribution of the product into domestic retail
chain drug stores through PhaseOut Partners, an oral joint venture
arrangement with SAS Group Inc. ("SAS"). During 1999, the Company reduced
its investment to $85,874 based on information provided by SAS which
included purported price concessions given to certain retail chain drug
stores, estimates of future returns, projected future price concessions and
charges for certain other costs. The Company disputes these price
concessions and charges, which it believes were not originally agreed to
nor actually incurred in connection with the PhaseOut program.
In January 2000, the Company informed SAS that the Joint Venture was
terminated. In March 2000 the Company had instituted legal proceedings
against SAS to recover all monies for which it is entitled under the joint
venture agreement, which the Company believed to be in excess of $750,000.
In connection with the abovementioned lawsuit, a mediation settlement was
reached in principle on July 19, 2000 wherein the Company is to receive
$150,000 and approximately 25,000 PhaseOut units. Since the agreement has
not yet been executed, the effect of this settlement has not been reflected
in the financial statements.
During 1999, the Company entered into a License Agreement with the holders
of a patent for the exclusive worldwide license to make, use and sell
inventions related to an adjustable lens to be used in products such as
sunglasses, ski goggles or diving masks. The Company intends to market
these products through its Rainbow Shades subsidiary.
The consolidated 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 June 30, 2000, current liabilities exceed current
assets by $1,168,457. Those factors, as well as the Company's inability,
thus far, to establish a market for the product, create an uncertainty
about the Company's ability to continue as a going concern.
9
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000
The Company has intentions of expanding and refining its marketing efforts
to include other products. In addition, the Company is continuing its
efforts to obtain long-term financing through the issuance of long-term
debt and equity securities. The consolidated 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.
2. UNAUDITED INTERIM STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10-Q SB and
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (which consist only of normal
recurring adjustments) necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. These consolidated financial statements and notes should
be read in conjunction with the financial statements and notes thereto
included in the Company's annual report on Forms 10-K SB for the year ended
December 31, 1999.
3. COMMON STOCK
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 dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of warrants. For the six months
and the current quarter, potentially dilutive securities of approximately
49,000,000 and 47,000,000 shares that related to shares issuable upon the
exercise of warrants granted by the Company were excluded, as their effect
was antidilutive.
At June 30, 2000, issued shares exceed the number of authorized shares by
approximately 271,000 and the amount of shares issuable on exercise of all
convertible securities would exceed the number of authorized shares by
approximately 69,000,000.
10
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000
4. COMMITMENTS AND CONTINGENCIES
Regulatory Matters - On June 1, 1993, the 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. The Company feels that, even
if the FDA prohibited the Company from marketing the product, since the
Company's dependence on the product has been substantially reduced based on
its present and future plans, any prohibition would not have a material
adverse effect on the Company.
5. RELATED PARTY TRANSACTIONS AND ISSUANCES OF EQUITY SECURITIES
During the six months ended June 30, 2000 the Company raised $115,000
through the issuance of 4,333,333 shares. In addition, two officers
converted $200,000 owed to them into 10,000,000 shares and a director
converted $31,730 owed to him into 1,600,000 shares.
11
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Item 2 - Management's Discussion and Analysis
The Company intends, through its newly incorporated subsidiaries, to identify
and bring to the marketplace, unique proprietary consumer products.
Results of Operations
Six Months Ended June 30, 2000 Compared
to Six Months Ended June 30, 1999
The Company incurred a net loss of $393,806 for the six months ended June 30,
2000 as compared to the loss of $233,455 for the six months ended June 30, 1999.
During 1998, the Company began distribution of the PhaseOut product into retail
chain stores, totaling approximately 12,000 stores, through an oral joint
venture with SAS Group, Inc. ("SAS"), for which it was entitled to 50% of the
income. SAS handled all the marketing and operational activities of the joint
venture. The investment in the joint venture was accounted for under the equity
method whereby the investment account was 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 included 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 were reported in this separate "equity in net
income of the joint venture" line item. In January 2000, the Company terminated
the joint venture arrangement with SAS Group Inc. and, on March 30, 2000, the
Company initiated a lawsuit in the United States District Court for the Southern
District of New York against SAS Group, Inc., Michael Sobo, Scott Sobo and
Century Factors. The lawsuit asserts claims for patent and trademark
infringement, unfair competition, breach of the joint venture agreement, fraud,
conversion and breach of fiduciary duty, and seeks injunctive relief, monetary
damages in excess of $750,000 and punitive damages of at least $7,500,000. As a
result, there were no sales, cost of sales and selling expenses of the joint
venture reported in the financial statements for the period January 1, 2000
through June 30, 2000. In connection with the SAS lawsuit, on July 19, 2000 a
mediation settlement was reached in principle wherein the Company is to receive
$150,000, and approximately 25,000 PhaseOut units. The execution of this
agreement should take place before the end of August, 2000. Since the agreement
has not yet been executed, the effect of this settlement has not been reflected
in the financial statements.
Sales increased by $2,313 as a result of the Company's initiating sales via
e-commerce beginning in July 1999. In addition to selling its PhaseOut product
through its website, the Company also intends to market its PhaseOut product
directly to retail stores now that the joint venture has been terminated.
12
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
Cost of sales increased by $383 because of the change in the Company's
operations as described above.
The increase in the Company's selling expenses of $30,406 was attributable to
expenses incurred in connection with the sunglass program.
General and administrative expenses increased by approximately $129,000 from
$223,000 to $352,000. This increase is attributable to an increase in
professional and consulting fees and other operating expenses.
Interest expense decreased by approximately $10,000 from $11,000 in 1999 to
$1,000 in 2000 due to settlement of a shareholder loan in November 1999 and a
former director's loan in February 2000.
The Company maintains a $1,000,000 liability insurance policy.
Liquidity and Capital Resources
The Company has a working capital deficit at June 30, 2000 of $1,168,457 as
compared to a working capital deficit at December 31, 1999 of $1,105,108. During
the six months ended June 30, 2000, the Company used $188,816 in operating
activities and $24,429 in investing activities to purchase equipment and
generated $115,000 from financing activities from the sale of equity securities.
The Company currently has $15,093 in cash.
The Company has historically funded its cash flow needs through the sale of
equity securities in private placements. The Company has raised $913,700 since
July of 1997 through such private placements and will attempt to raise
additional cash in a similar manner to fund its ongoing operations.
In October 1999, the Company 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. Management will strive to begin
worldwide distribution of this product in 2001. The Company's plans for the
marketing of this new product in the near future will require additional funding
above and beyond the normal amount of cash required for recurring operations.
There can be no assurance that the Company will be able to obtain the required
additional financing.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999, a former officer and director, Bernard Gutman, brought an
action against the Company in New York State Supreme Court, Nassau County, for
alleged consulting fees and loan repayments due him in the amount of $100,445.
The Company has counterclaimed for fraud and breach of contract. The action has
been settled as of March 6, 2000, although the final settlement documents have
not yet been executed. The parties have agreed to issue to the former director
400,000 shares of common stock that, on the date of settlement, was valued at 17
cents per share based upon its closing price on that date.
On March 30, 2000, the Company initiated a lawsuit in the United States
District Court for the Southern District of New York against SAS Group Inc.,
Michael Sobo, Scott Sobo and Century Factors. SAS Group Inc. has been the
Company's joint venture partner since 1998 in connection with the distribution
of the Company's patented PhaseOut product to drug stores and other retailers.
The lawsuit asserts claims for patent and trademark infringement, unfair
competition, breach of the joint venture agreement, fraud, conversion and breach
of fiduciary duty, and seeks injunctive relief, monetary damages in excess of
$750,000 and punitive damages of at least $7,500,000
In connection with the SAS lawsuit, on July 19, 2000 a mediation settlement
was reached in principle wherein the Company is to receive $150,000, and
approximately 25,000 PhaseOut units. The execution of this agreement should take
place before the end of August, 2000. Since the agreement has not yet been
executed, the effect of this settlement has not been reflected in the financial
statements.
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
14
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUEST PRODUCTS CORPORATION
Dated: August 4, 2000
/S/:
-----------------------------------
Herbert M. Reichlin, President
15
