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 March 31, 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 March 31, 2000
----- -----------------------------
Common Stock, par value 198,937,985
$.00003 per share
<PAGE>
QUEST PRODUCTS CORPORATION
INDEX
PART 1 - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Report of Independent Accountants 3
Balance Sheet (unaudited) 4 - 5
Statements of Operations (unaudited) 6
Statements of Cash Flows 7
Notes to Financial Statements 8 - 10
Item 2 Management's Discussion and Analysis 11 - 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports 13
Signatures 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Quest Products Corporation
We have reviewed the balance sheet of Quest Products Corporation at March 31,
2000 and the related statement of operations and statement of cash flows for the
three months then ended as set forth in the accompanying unaudited financial
statements. These 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 financial statements for the three months ended
March 31, 2000 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 financial statements do
not include any adjustments to the financial statements that might be necessary
should the Company be unable to continue as a going concern.
As discussed in Note 4 to the financial statements, the Company has been subject
to certain governmental regulatory matters by the U.S. Food and Drug
Administration. At the present time, the outcome of these matters is uncertain.
These matters, if pursued by this agency, may have a material adverse effect on
the operation of the Company.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet at December 31, 1999 and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated March 21, 2000, we expressed an
unqualified opinion on these financial statements, which included a "Going
Concern" matter and a potential litigation issue involving the US Food and Drug
Administration, the outcome of which was uncertain.
RAICH ENDE MALTER LERNER & CO
East Meadow, New York
May 5, 2000
3
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
March 31, 2000
(Unaudited)
Assets
Current Assets
Cash $ 47,287
Inventory 7,153
Prepaid expenses 6,234
--------
60,674
--------
Investment and Advances - PhaseOut Partners 85,874
Furniture and Equipment - at cost - net of accumulated
depreciation of $38,040 35,960
Deferred Royalties 10,000
License acquisition cost - net of accumulated
amortization of $1,058 27,942
Patents - at cost - net of accumulated amortization
$16,616 32,819
Security Deposits 3,861
--------
196,456
--------
$257,130
========
4
See accompanying notes and accountants' report.
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
March 31, 2000
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including
accrued interest of $8,150 $ 18,150
Accounts payable 487,841
Accrued officer and director's compensation 503,142
Accrued expenses 67,486
-----------
1,076,619
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 - 198,937,985 shares issued
and outstanding 5,968
Capital in excess of par 4,551,305
Accumulated (deficit) (5,477,207)
------------
(919,934)
------------
$ 257,130
============
5
See accompanying notes and accountants' report.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Sales - net $ 882 $ 120
Cost of Sales 148 13
------------- -------------
734 107
------------- -------------
Selling Expenses 19,522 8,078
General and Administrative Expenses 161,789 100,509
------------- -------------
181,311 108,587
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (180,577) (108,480)
------------- -------------
Other Income (Expenses)
Interest (expense) (716) (5,412)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (181,293) (113,892)
Equity in Net income of PhaseOut Partners -- 9,448
------------- -------------
Net (Loss) $ (181,293) $ (104,444)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 194,000,000 161,000,000
============= =============
</TABLE>
6
See accompanying notes and accountants' report.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(181,293) $(104,444)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 2,527 2,157
Amortization 1,318 760
Accrued interest 716 5,412
Equity in net income of PhaseOut Partners -- (9,448)
(Increase) decrease in:
Inventories 148 14
Increase (decrease) in:
Accounts payable 2,552 14,125
Accrued officer compensation 75,000 75,000
Accrued expenses (1,434) 5,182
--------- ---------
(100,466) (11,242)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (25,585) --
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 60,000 --
--------- ---------
Net Decrease in Cash (66,051) (11,242)
Cash - beginning 113,338 12,600
--------- ---------
Cash - end $ 47,287 $ 1,358
========= =========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ 334,716 $ --
========= =========
</TABLE>
7
See accompanying notes and accountants' report.
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 2000
1. BACKGROUND AND STATUS OF 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
consumer products, including the 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 has instituted legal proceedings
against SAS to recover all monies for which it is entitled under the joint
venture agreement, which the Company believes is in excess of $750,000. The
outcome of litigation cannot be reasonably predicted at this time.
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 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 March 31, 2000, current liabilities exceed current
assets by $1,015,945. 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.
8
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 2000
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.
2. UNAUDITED INTERIM STATEMENTS
The accompanying unaudited 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 three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. These 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. 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 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 current
quarter, potentially dilutive securities of approximately 54,000,000 shares
that related to shares issuable upon the exercise of warrants granted by
the Company were excluded, as their effect was antidilutive.
At March 31, 2000, the amount of shares issuable on exercise of all
convertible securities would exceed the number of authorized shares by
approximately 68,000,000.
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.
9
<PAGE>
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 2000
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.
5. RELATED PARTY TRANSACTIONS AND ISSUANCES OF EQUITY SECURITIES
During the quarter ended March 31, 2000 the Company raised $60,000 through
the issuance of 3,000,000 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.
10
<PAGE>
QUEST PRODUCTS CORPORATION
Item 2 - Management's Discussion and Analysis
Results of Operations
Three Months Ended March 31, 2000 Compared
to Three Months Ended March 31, 1999
The Company incurred a net loss of $181,293 for the three months ended March 31,
2000 as compared to the loss of $104,444 for the three months ended March 31,
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 March 31, 2000.
Sales increased by $762 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.
Cost of sales increased by $135 because of the change in the Company's
operations as described above.
The increase in the Company's selling expenses of $11,444 was attributable to
expenses incurred in connection with the sunglass program.
11
<PAGE>
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
General and administrative expenses increased by approximately $61,000 from
$101,000 to $162,000. This increase is attributable to an increase in
professional and consulting fees and other operating expenses.
Interest expense decreased by approximately $4,000 from $5,000 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 March 31, 2000 of $1,015,495 as
compared to a working capital deficit at December 31, 1999 of $1,105,108. During
the quarter ended March 31, 2000, the Company used $100,466 in operating
activities and $25,585 in investing activities to purchase equipment and
generated $60,000 from financing activities from the sale of equity securities.
The Company currently has $47,287 in cash.
The Company has historically funded its cash flow needs through the sale of
equity securities in private placements. The Company has raised $858,700 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.
12
<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, Quest Products Corporation 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
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
None
Item 6. Exhibits and Reports on Form 8-K
None
13
<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: May 15, 2000
/S/:__________________________
Herbert M. Reichlin, President
14
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