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 September 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 September 30, 2000
----- ---------------------------------
Common Stock, par value 203,875,834
$.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 (unaudited) 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 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on form 8-K 15
Signatures 16
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 September 30, 2000 and the related consolidated statements
of operations for each of the three and nine-month periods then ended and
consolidated statement of cash flows for the nine 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 that might be necessary should the
Company be unable to continue as a going concern.
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
October 24, 2000
3
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2000
(Unaudited)
Assets
Current Assets
Cash $180,927
Inventory 36,067
Prepaid expenses 4,638
--------
221,632
--------
Furniture and Equipment - at cost - net of accumulated
depreciation of $43,014 28,959
Deferred Royalties 10,000
License acquisition cost - net of accumulated
amortization of $2,174 26,826
Patents - at cost - net of accumulated amortization
$18,173 31,262
Security Deposits 4,266
--------
101,313
--------
$322,945
========
See accompanying notes and accountants' report.
4
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QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2000
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $8,650 $ 18,650
Accounts payable 523,736
Accrued officers' and directors' compensation 657,924
Accrued expenses 38,486
-----------
1,238,796
-----------
Commitments and Contingencies
Shareholders' (Deficit)
Convertible Preferred Stock - par value $.00003 -
authorized 10,000,000 shares - no shares issued and
outstanding
Common Stock - par value $.00003 - authorized
390,000,000 shares - 203,875,834 shares issued and
outstanding 6,116
Capital in excess of par 4,874,933
Accumulated (deficit) (5,796,900)
-----------
(915,851)
-----------
$ 322,945
===========
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 Nine Months Ended
September 30,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Sales - net $ 4,558 $ 589
Cost of Sales 519 91
------------- -------------
4,039 498
------------- -------------
Selling Expenses 115,988 36,362
General and Administrative Expenses 513,606 351,661
------------- -------------
629,594 388,023
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (625,555) (387,525)
------------- -------------
Other Income (Expenses)
Gain on settlement of debt 32,374 --
Gain on settlement of lawsuit 93,411 --
Interest (expense) (1,216) (16,622)
------------- -------------
124,569 (16,622)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (500,986) (404,147)
Equity in Net income of PhaseOut Partners -- 15,381
------------- -------------
Net (Loss) $ (500,986) $ (388,766)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 197,000,000 165,000,000
============= =============
</TABLE>
See accompanying notes and accountants' report.
6
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
September 30,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Sales - net $ 2,075 $ 419
Cost of Sales 116 71
------------- -------------
1,959 348
------------- -------------
Selling Expenses 73,052 26,903
General and Administrative Expenses 161,622 126,029
------------- -------------
234,674 152,932
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (232,715) (152,584)
------------- -------------
Other Income (Expenses)
Gain on settlement of debt 32,374 --
Gain on settlement of lawsuit 93,411 --
Interest (expense) (250) (5,798)
------------- -------------
125,535 (5,798)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (107,180) (158,382)
Equity in Net income of PhaseOut Partners -- 3,071
------------- -------------
Net (Loss) $ (107,180) $ (155,311)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 202,000,000 172,000,000
============= =============
</TABLE>
See accompanying notes and accountants' report.
7
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2000 1999
-------------------------
Cash Flows from Operating Activities
Net (loss) $(500,986) $(388,766)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 7,501 6,471
Amortization 3,991 2,280
Warrants issued for compensation 15,000 --
Gain on settlement of debt (32,374) --
Gain on settlement of lawsuit (93,411) --
Accrued interest 1,215 16,236
Proceeds from settlement of lawsuit 150,000 (15,381)
(Increase) decrease in:
Inventories 519 91
Prepaid expenses 1,596 --
Security deposits (405) --
Increase (decrease) in:
Accounts payable 40,153 (35,738)
Accrued officer compensation 229,782 205,000
Accrued expenses (1,434) 5,682
--------- ---------
(178,853) (204,125)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (25,585) --
Refund of acquisitions of equipment 2,027 --
Investment and advances - PhaseOut Partners -- 25,000
--------- ---------
(23,558) 25,000
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 270,000 265,000
Proceeds from issuance of stock options -- 50,000
--------- ---------
270,000 315,000
--------- ---------
Net Increase in Cash 67,589 135,875
Cash - beginning 113,338 12,600
--------- ---------
Cash - end $ 180,927 $ 148,475
========= =========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ 404,958 $ --
========= =========
See accompanying notes and accountants' report.
8
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 disputed these price
concessions and charges, which it believed 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 was 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 received $150,000
and approximately 17,000 PhaseOut units and is still waiting for delivery
on additional inventory of approximately 2,000 more PhaseOut units.
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 Inc. 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 September 30, 2000, current liabilities exceed
current assets by $1,017,164. Those factors, as well as the Company's
inability, thus far, to establish a marketable product, create an
uncertainty about the Company's ability to continue as a going concern.
9
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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-QSB 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 nine months ended September 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 Form 10-KSB for the year
ended December 31, 1999.
3. 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 nine months
and the current quarter, potentially dilutive securities of approximately
52,000,000 and 46,000,000 shares that related to shares issuable upon the
exercise of warrants granted by the Company were excluded, as their effect
was antidilutive.
During the current quarter, the Company has increased its authorized shares
from 200,000,000 to 390,000,000. The Company also replaced its
authorization of its series A and B convertible preferred stock with
authorization to issue 10,000,000 shares of convertible preferred stock,
none of which has been issued.
10
<PAGE>
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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
PhaseOut 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
The following table presents the Company's equity activity during the nine
months ended September 30, 2000:
Shares $
---------- ----------
Sales of stock 3,000,000 60,000
Sales of stock and warrants* 4,100,000 205,000
Exercise of warrants 333,333 5,000
Conversion of debt to equity:
-- Officers 10,000,000 200,000
-- Directors 2,954,516 136,958
-- Other 400,000 68,000
---------- ----------
20,787,849 674,958
========== ==========
* Included warrants to purchase 4,100,000 shares at $.05 per share.
11
<PAGE>
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
Nine Months Ended September 30, 2000 Compared
to Nine Months Ended September 30, 1999
The Company incurred a net loss of $500,986 for the nine months ended September
30, 2000 as compared to a loss of $388,766 for the nine months ended September
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 September 30, 2000. In connection with the SAS lawsuit, on July 19, 2000
a mediation settlement was reached in principle wherein the Company received
$150,000, and approximately 17,000 PhaseOut units and is still waiting for
delivery of an additional inventory of approximately 2,000 more PhaseOut units.
Accordingly, a gain of $93,411 was recognized on the settlement of this lawsuit.
During the current quarter, the Company issued 400,000 shares to a former
officer and director in settlement of the debts owed to him. Accordingly, a gain
of $32,374 was recognized as the settlement of the debt.
Sales increased by $3,969 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 $428 because of the change in the Company's
operations as described above.
The increase in the Company's selling expenses of $86,293 was attributable to
expenses incurred in connection with the sunglass program and travel and
entertainment expenses.
General and administrative expenses increased by approximately $158,000 from
$352,000 to $510,000. This increase is attributable to an increase in
professional and consulting fees and other operating expenses.
Interest expense decreased by approximately $15,000 from $16,000 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 September 30, 2000 of $1,017,164 as
compared to a working capital deficit at December 31, 1999 of $1,105,108. During
the nine months ended September 30, 2000, the Company used $178,853 in operating
activities and $23,558 in investing activities to purchase equipment and
generated $270,000 from financing activities from the sale of equity securities.
The Company currently has $180,927 in cash.
The Company has historically funded its cash flow needs through the sale of
equity securities in private placements. The Company has raised $1,068,700 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, and the final settlement documents have been
executed. The Company has issued 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 received $150,000, and
approximately 17,000 PhaseOut units and is still waiting for delivery of an
additional inventory of approximately 2,000 more PhaseOut units.
Item 2. Changes in Securities
On June 8, 2000 the Company filed a Certificate of Incorporation Amendment
with the Delaware Secretary of State whereby the aggregate number of shares of
capital stock that the Company has authority to issue is 400,000,000, consisting
of 390,000,000 shares of common stock with a par value of $.00003 per share and
10,000,000 shares of preferred stock with a par value of $.00003 per share.
Item 3. Defaults Upon Senior Securities
None
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
In June 2000, the Company received the written consent of a majority of its
stockholders increasing the number of authorized shares of common stock from
200,000,000 shares to 390,000,000 and issuing 10,000,000 shares of preferred
stock.
In September 2000, the Company mailed notices to all stockholders informing
them of these corporate actions taken by the written consent of the holders of
the majority of the outstanding shares of common stock of the Company.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
15
<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: October 27, 2000
/s/ Herbert M. Reichlin
-------------------------------
Herbert M. Reichlin, President
16
