U.S. Securities and Exchange Commission
Washington, D.C. 20549
Fifth Amendment to
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
THE QUANTUM GROUP, INC.
(Name of Small Business Issuer in its charter)
NEVADA 95-4255962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PARK IRVINE BUSINESS CENTER,
14771 MYFORD ROAD, BUILDING B,
TUSTIN, CALIFORNIA 90744
(Address of principal executive Offices) (Zip Code)
Issuer's telephone number: (714) 508-1470
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class to be registered
________________ __________________________
________________ __________________________
Securities to be registered under Section 12(g) of the Act:
COMMON
(Title of Class)
<PAGE>
NOTICE - THE FORM 10-KSB FOR THE QUANTUM GROUP, INC., FOR FISCAL YEAR ENDED
DECEMBER 31, 1996 AS FILED WITH THE COMMISSION IS INCORPORATED IN ITS
ENTIRETY BY REFERENCE AND IS ATTACHED TO THIS FORM 10-SB AS AN EXHIBIT.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
Item 1. Description of Business.
The Quantum Group, Inc., (the "Company") is engaged in the tire
recycling industry. The Company, through its approximately 85% owned
subsidiary, Eurectec, Inc., ("Eurectec") performs world-wide marketing of
tire recycling equipment manufactured by CISAP SpA ("CISAP"), an Italian
corporation. In addition to marketing tire recycling equipment, the
Company markets territorial rights to sell CISAP equipment in North
America.
The Company was organized on December 2, 1968, under the laws of the
state of California, as Acqualytic Systems, Inc. Pursuant to an agreement
of merger filed on June 27, 1989 in the state of Nevada, Acqualytic
Systems, Inc., merged with Country Maid, Inc., a Nevada Corporation.
Country Maid, Inc., was incorporated in the state of Nevada on June 13,
1988. Country Maid, Inc., was the survivor Corporation pursuant to the
merger agreement. The surviving Corporation changed its name to
Transcontinental Video Robotics, Inc., on June 27, 1989. On September 18,
1992, the Company changed its name to The Quantum Group, Inc.
Prior to entering the tire recycling industry, the Company marketed
various products in North America through franchised distribution centers.
The Company sold electronic acupuncture devices and a complete line of
nutritional supplements. In 1992, the Company decided it could more
effectively market its products through a multi-level network, which it
wished to market on an international basis. Pursuant to this desire, in
early December 1992, the Company acquired Safety Products Innovations
Limited, ("SPI") in a stock for stock transaction. The Company issued
418,816 restricted common shares to acquire all of the issued and
outstanding shares of SPI. The parties deemed the per share value of the
Company's stock to be $3.00.
SPI had an established international multi-level network, through
which it sold a line of home, auto and personal alarms. The Company
believed it could continue to use SPI's network to market the home, auto
and personal alarms, as well as the electronic acupuncture devices and
nutritional supplement products marketed by the Company. However, after
acquiring SPI, the Company realized it could not profitably market the
electronic acupuncture devices and the nutritional supplements through
SPI's multi-level network. The Company also determined that it could not
profitably market the alarms, therefore effective January 1, 1993, the
Company discontinued all operations of SPI and chose to focus its efforts
and resources into marketing tire recycling equipment.
2<PAGE>
In 1992, through Eurectec, the Company acquired the exclusive license
to market tire recycling equipment in the United States, Canada and Mexico.
At that time the Company also acquired a non-exclusive world-wide license
to market and sell the recycling equipment. The licenses acquired from
CISAP are to continue until April 26, 1998. On April 26, 1998 the
agreement will be automatically renewed for a period of two years unless
terminated by either party pursuant to six months prior notice. This
arrangement shall continue to renew every two years in perpetuity unless
terminated by either party pursuant to six months notice prior to the
closing of any given two year period. The license agreements provide that
CISAP will manufacture, ship and install the equipment the Company sells.
CISAP will also provide training in equipment operation to the purchaser.
The exclusive North America license agreement further provides that the
Company has the right to sell sub-licenses to other entities. This allows
the Company to sell the exclusive right to market CISAP equipment within a
designated territory in North America, to interested buyers. The Company
has the right to define a territory based on geography, population or
whatever criteria it deems appropriate.
To maintain the exclusive marketing rights to North America, the
Company must purchase a minimum of eight granulator machines, or equipment
of similar value, during each year. (In addition to manufacturing
granulators, CISAP manufactures other tire recycling equipment including
shredders and various presses.) The Company has failed to meet the minimum
number of granulator purchases or purchases of other equipment of similar
value each year since the exclusive license agreement became effective.
Part of the difficulty the Company has encountered in meeting its minimum
purchase requirements is directly related to problems CISAP has had in the
production and operation of its equipment. For instance, the crumb rubber
output levels calculated by CISAP and used by the Company in selling the
CISAP machinery quote a certain level of crumb rubber production. However,
when the equipment was installed in China and put to use the output
realized by the Chinese differed from the output levels represented by
CISAP and the Company. Upon further investigation, CISAP found that the
tires the Chinese were recycling contained a much higher fabric content
than the tires used to calculate production figures, as a result the crumb
rubber output at the Chinese plant was lower than projected. From this
experience, CISAP and the Company realized that greater research and
testing needed to be done on the CISAP equipment to better understand the
outputs attainable by the equipment based on different variables.
Based on the Chinese experience and its research and development,
CISAP has made significant improvements to its equipment in the past few
years. In the last year, CISAP has redesigned its granulator to increase
output while decreasing down-time and wear and tear on the machinery.
CISAP accomplished this by redesigning the way the tires are processed
prior to granulation. CISAP's older granulators would shred the tires and
then send the entire contents of the tire through the granulation process.
In other words, the steel and fabric used in the tires were sent through
the granulation process. This caused considerable wear and tear to the
granulating equipment, which led to excessive maintenance and down-time and
decreased production. In CISAP's new equipment, almost all of the steel
and fabric is sorted out from the rubber and removed from the system prior
to the granulation process. With the new equipment, the material that
enters the granulation process is at least 90% pure rubber, this helps
decrease the wear and tear on the granulation equipment and the associated
down-time while increasing output levels. These changes have helped
improve the output and reliability of the CISAP equipment.
3<PAGE>
In recognition of the difficulties CISAP and the Company have
encountered with the CISAP equipment, the two parties have continued to
operate as though the exclusive license agreement was in force, even though
the Company was in default of said agreement for not meeting its minimum
purchase requirements. Based on their experience over the past several
years, CISAP and the Company recently renegotiated certain provisions of
the exclusive licensing agreement. The major emphasis of the renegotiated
agreement, dated March 31, 1996, was to affirm the continuance of the
Company's exclusive marketing rights in North America if it purchases eight
granulators or machines of similar value per year. Should the Company fail
to meet its purchase quota, CISAP may, in its discretion revoke the
exclusive license or allow it to continue in force.
In the event the Company does not maintain its exclusive right in
North America the license agreement provides that CISAP will honor the
sub-licenses negotiated by the Company.
While the Company hopes to maintain the exclusive marketing license,
it believes that even though it is not currently a major player in the tire
recycling industry, it could continue to operate in the industry without
the exclusive marketing license for various reasons. It bases this belief
on its friendly relations with CISAP which would allow the Company to
maintain a non-exclusive marketing right, the specialized nature of the
industry with its barriers to entry and the name recognition the Company
has achieved through participation in trade shows and industry gatherings
during the past three years.
As stated, there are substantial barriers to entering into the tire
recycling industry. These barriers include high start-up costs and long-term
sales cycles. As of September 1996, the estimated cost of
establishing a fully operational tire recycling facility utilizing the
CISAP equipment was approximately $1,742,735. Based solely on the cost of
establishing an operational facility, the number of potential clients for
the product the Company markets is fairly limited. In addition to the cost
of equipment, potential clients for the equipment must have a location
capable for use as a tire recycling plant. A tire recycling facility must
be large enough to house the machinery and must have sufficient storage
space to store tires for recycling. While a recycler may not have to store
its full supply of tires at the facility, it would need space to store
enough tires to keep the plant operating between delivery periods of
additional tires. Thus, the costs associated with the space requirements
of operating a profitable tire recycling plant significantly limit the
number of potential clients available to purchase the tire recycling
equipment the Company markets.
The barriers to entry into the tire recycling industry make it
difficult for new companies to compete, for this reason the Company does
not have a lot of companies to compete with for business. Because of the
high cost of tire recycling equipment, competition is based to a great deal
on price. However, competition also focuses around customer service, as
clients expect a great deal of customer service after paying so much money
for the tire recycling machinery.
4<PAGE>
The costs and space requirements associated with tire recycling plants
also tend to elongate the sales cycle for tire recycling equipment.
Typically, it takes six to eighteen months from the time the Company first
contacts a potential customer until the sales transaction is completed, the
machinery is installed and the Company is paid in full. Generally, it
takes the customer time to arrange financing and find and secure the
necessary physical facilities. Further, it takes roughly six months for
CISAP to manufacture a granulator and CISAP does not manufacture the
equipment until the Company orders it. The Company does not order the
equipment until it has received a letter of credit from the prospective
client because the Company could not sustain the loss if it were to pre-order
the granulator and then have the sales transaction fail. After the
equipment is finished, depending upon the location, it takes anywhere from
six to eight weeks to ship and install the granulator at the customer's
facility. Another problem is that the Company must rely on the efforts of
its officers and directors to generate sales, in addition to their other
duties, with such a small sales force it has been difficult for the Company
to establish any type of steady sales volume. The extended period of time
it takes for the Company to complete a sales transaction is not atypical
for the industry and poses a substantial burden to entry in the recycling
industry.
The Company has struggled with these barriers to entry since deciding
to engage in the marketing of tire recycling equipment. Because of the
time required to complete sales transactions, the Company has experienced
cash flow difficulties. The Company has also encountered cash flow
difficulties because the tire recycling industry is highly competitive.
Many of the Company's competitors have longer operating histories and are
financially stronger than the Company which has made it difficult for the
Company to establish itself in the industry. The Company believes that the
equipment it sells is superior to the equipment used by its competitors in
several respects. The competing equipment tends to be large and require a
great deal of space, whereas the equipment sold by the Company is compact
and can be operated in smaller facilities. In addition, the principal
method used by many of its competitors to separate the rubber from the
other materials used in the tire is a cryogenic (freezing) process. This
process is cumbersome and expensive and reduces the elasticity of the
rubber, which limits the usefulness of the crumb rubber for after market
products. The process employed by the CISAP equipment does not require the
tires be frozen to extract the non-rubber materials. Thus, the Company
believes, the process employed by the CISAP equipment is superior to it
competitors because it does not incur the costs associated with the
cryogenic process nor does it have an adverse effect on the elasticity of
the rubber. Another advantage of the equipment the Company sells is its
ability to granulate the rubber into many different sizes, which allows the
Company's granulated rubber (known in the industry as "crumb rubber") to be
marketed for widely varying uses from use as an additive to asphalt paving
to use in the production of interlocking tiles, mats and even carpet.
While sales volume has increased more slowly than hoped, the Company
has engaged in various sales transactions. Pursuant to its agreement with
CISAP, the Company has sold various exclusive sub-licenses. The Company
has entered into exclusive sub-license agreements in Utah and Canada. The
Company had negotiated an exclusive sub-license agreement in Mexico,
however, in 1995, the Mexican Group discontinued its sub-licensing
agreement in default of the agreement. The Mexican Group returned its
licensing right to the Company and forfeited the licensing fees it paid in
5<PAGE>
1995 and previous years. Also during 1995, the Company restructured its
relationship with its Canadian licensee, Evergreen Recycling, Ltd.,
("Evergreen"). The Company agreed to cancel the outstanding accounts
receivable on the Evergreen sub-license in return for the cancellation of
Evergreen's exclusive and non-exclusive territorial right, including its
right to be the sole provider of CISAP equipment in Canada, except in
Alberta, where Evergreen continues to maintain an exclusive sub-license to
market and sell CISAP equipment. The Company also agreed to cancel the
accounts receivable for the equipment balance, in part due to problems in
the delivery and set-up of the equipment, in return for an equity interest
in the Canadian company. (See Note 12 of the Financial Statements.)
The Company has sold tire recycling equipment to facilities in Canada,
China, Saudi Arabia and Germany. The Company also purchased equipment
several years ago for use in a demonstrational facility the Company setup
in Wilmington, California. The facility was fully operational and was used
to demonstrate CISAP recycling equipment to potential buyers. In March
1995, the Company closed the Wilmington facility and began to use
Evergreen's facility to demonstrate the tire recycling equipment. The
Canadian facility uses newer, larger capacity equipment than the Wilmington
facility and is currently an operating tire recycling facility rather than
merely a demonstrational facility. The Company is storing the equipment
from the Wilmington facility while it contemplates selling the equipment or
keeping it and establishing its own fully functional recycling facility.
In addition to its agreement with CISAP, the Company, through
Eurectec, recently entered an agreement with SMS Sondermaschinen GmbH, a
German corporation, ("SMS") which grants the Company the exclusive right to
sell and market SMS equipment and machinery on a worldwide basis. SMS has
expertise in the manufacturing of machinery and equipment used in the
recycling of tires and the manufacturing of after-market products using
crumb rubber. The agreement grants to the Company the exclusive right to
market and sell worldwide any machinery, equipment, product, binder,
process, application or license using any of the know-how, trade secrets,
patents, confidential information or other technology of SMS (collectively
"SMS products"), which is either currently owned by SMS or developed or
acquired by SMS in the future. To date, the Company has not sold any SMS
products, however, the Company believes this agreement will enhance its
ability to compete in the tire recycling industry. As stated, SMS
manufactures various products. Of the products SMS manufactures, the
Company intends, at this time, to focus its efforts on marketing the SMS
molds and presses that are used to create after-market products from crumb
rubber. In acquiring the exclusive right to market and sell SMS products,
the Company now has the ability to supply its customers with both tire
recycling equipment and the molds or presses necessary to turn the crumb
rubber into finished product. The Company believes its ability to sell
equipment to customers wishing to establish tire recycling facilities will
be enhanced by the SMS agreement because it now has the ability to sell a
customer both tire recycling equipment and the machinery required to turn
those recycled tires into marketable after-market rubber products.
The other benefit of the SMS agreement is that it significantly
decreases the Company's dependence on CISAP. The Company's ability to
continue as a going concern in the tire recycling industry is no longer
6<PAGE>
dependent on a single manufacturer because SMS also produces a line of tire
recycling equipment similar to the equipment produced by CISAP. At this
time, the Company's relationship with CISAP is positive, and the Company
intends to continue selling the CISAP tire recycling equipment as its
primary line of tire recycling equipment. The Company intends to focus its
sales efforts of SMS products on SMS's other lines of equipment and
machinery, particularly its presses and molds for producing after-market
products.
The SMS agreement provides that it will continue in perpetuity unless
terminated by SMS for a breach by the Company of one of the agreements
provisions. The Company may terminate the agreement at any time. If
either party wishes to terminate the agreement it must give the other party
6 months notice of its intention to terminate.
Currently the Company has no employees. The Company contracts with an
employee service agency to provide office staff and secretarial services.
The Company relies heavily on the efforts of its President, Ehrenfried
Liebich, it also relies upon the services of various consulting agencies
including agencies owned and operated by Keith Fryer, a Company Vice
President and Director and John Pope, the Company Secretary, Treasurer, a
Vice President and Director. (See "Item 12 Certain Relationships and
Related Transactions.")
COMPANY SUBSIDIARIES
The majority of the Company's business is transacted through its 85%
owned subsidiary Eurectec. The remaining 15% interest in Eurectec is held
by 67 shareholders, none of whom are officers, directors, control persons
or affiliates of the Company. As discussed earlier, the Company negotiated
its licensing agreements with CISAP through Eurectec and the Company uses
Eurectec to market and sell the tire recycling equipment. Eurectec also
markets and sells sub-licenses for the Company. Eurectec was formed by the
Company, to be a subsidiary, in accordance with the laws of the State of
Nevada in 1991. The Company expects to enter into various other businesses
most of which will be related either directly or indirectly to the tire
recycling industry. Pursuant to that expectation, the Company has formed
various subsidiaries of Eurectec which will be used to transact the
Company's business dealings in these areas.
Eurectec International, Ltd., is a wholly owned subsidiary of
Eurectec. Eurectec International was established pursuant to the laws of
the Province of British Columbia and was incorporated in May 1991. The
Company setup Eurectec International to transact the international affairs
of the Company and its subsidiaries. The initial operations of Eurectec
International were funded from proceeds of sales made by Eurectec.
Eurectec International is currently engaging in business transactions.
Eurectec Industries, Ltd., is a wholly owned subsidiary of Eurectec
International. Eurectec Industries was formed by the Company pursuant to
the laws of the Province of Alberta and was incorporated in February 1996.
The Company believes that many business opportunities may develop in the
tire recycling and related industries and Eurectec Industries was
established to take advantage of these opportunities. Particularly, the
7<PAGE>
Company believes that opportunities will develop for aftermarket products
made from the crumb rubber produced from tires. Should sufficient markets
develop, the Company expects to enter into the production of aftermarket
products, the assembly and sales of mixers and presses necessary to produce
aftermarket products, or any other tire recycling related industry.
Eurectec Industries is currently unfunded and transacting no business.
Pacific Rubber Recycling LTD, ("Pacific Rubber") is a wholly owned
subsidiary of Eurectec International. Pacific Rubber was organized
pursuant to the laws of the Province of British Columbia and was
incorporated in May 1995. When cash flow improves, the Company hopes to
open its own tire recycling facility. The Company organized Pacific Rubber
to be the entity that will purchase the equipment, setup a facility and
handle the operations of the facility. The Company currently has not
decided upon a time frame or location for establishment of a fully
operational facility. Pacific Rubber is currently unfunded and transacting
no business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash of $26,140 on hand.
The management of the Company made the decision at year end 1992 to
concentrate its resources and management efforts on the Company's tire
recycling operations. This start up effort eliminated the Company's
ability to generate revenue throughout 1993 and most of 1994, as sales take
six to twenty months to complete. As such the Company experienced cash
flow difficulties through 1993, 1994, and most of 1995.
Management believes that pending sales transactions to Florida, the
second phase of the Saudi project, and current sales activities, with the
loan arrangement reached during the 1995 year will provide sufficient
capital and liquidity to meet the company's needs. The Company anticipates
the sale of a territorial license and a tire recycling and after product
manufacturing equipment in the approximate value of $1,600,000 in Florida.
A portion of anticipated sale includes equipment currently in inventory.
Phase two of the Saudi project involves an additional $2,400,000 equipment
package, which the company anticipates will be delivered in 1996. Sales
discussions and or negotiations are underway with qualified prospects in
Mexico, Germany, Hungary, Lithuania, The United Kingdom and Ireland.
Although contracts with these prospects are not finalized, management
believes that one or more of these sales will be signed and sales deposits
will be received in 1996.
Although the loss for the year ended December 31, 1995 ($958,841) is
larger than the loss in the year ended December 31, 1994 ($170,419), the
1995 loss includes an Accounts Receivable write off of $992,384 which is a
non cash expense and does not effect the Company's cash for current period
8<PAGE>
cash flow reporting purposes. The write off reduces cash by the amounts the
company would have received had the receivables been collected or
collectable.
Net cash used in operations during the year ended December 31, 1995
increased to $182,156 compared to $58,849 in the year ended December 31,
1994. This resulted primarily from the receivables write offs, the
reduction of Customer deposits and expensing of prepaid commissions because
of the delivery of the phase one equipment package to Saudi Arabia.
Accounts Receivable decreased in the year ended December 31, 1995 by
$453,182. Accounts Receivable increased $306,896 in 1994. The decrease in
Accounts Receivable in the year ended December 31, 1995, is the net result
of the write off $627,385 categorized as a current receivable and the
addition of $174,203 from 1995 sales transactions. In Addition to the
current Asset receivables the Company had recorded $$326,249 as a
Receivable under "Other Assets". This Receivable was also written off.
Customer deposit increased $488,938 in the year ended December 31, 1994
because of the receipt of the deposit for the Saudi Arabia order. Customer
deposits were reduced $244,464 in 1995 with the application of that amount
to revenue because of the delivery of the first phase of the project.
Prepaid commissions were expensed in the year ended December 31, 1995,
also, because of the delivery of the first phase of the Saudi project.
Liquidity was unaffected by a sale to a German company as the cash
received roughly equaled the disbursement for cost of sales.
Because of the larger net loss, minority interest was reduced by
$172,679 during the year ended December 31, 1995 compared to a reduction of
$28,403 during 1994.
The receipt of loan proceeds of $273,158 during the year ended
December 31, 1995 allowed for a decrease in Accounts Payable of $136,579.
Accounts Payable had increased $385,674 in the year ended December 31, 1994
when there was no comparable loan account.
Arrangements have been made for further borrowing during 1996. The
Company received a loan in the year ended December 31, 1995 of $273,158
from a non US lender. The debt is due December 31, 1997 and is at an
interest rate of 16.67%. The Company has arranged, should the need arise,
that it will be able to borrow a like amount during 1996 at the same
interest rate and due date. There are no restrictive covenants associated
with this loan. The purpose of the loan was to cover shortages in working
capital. It is anticipated the loan will be paid from working capital
generated from future period sales.
While Eurectec desires to maintain the exclusive marketing rights,
management believes that Eurectec could continue to operate without the
exclusive marketing license. It bases this belief on the success to date
which Eurectec has had in making sales in areas outside the exclusive
territory, the close working relationship that has been developed with
CISAP, the specialized nature of the industry, and the industry recognition
Eurectec has achieved through participation in trade shows and industry
gatherings during the past three years.
9<PAGE>
The benefit of the SMS agreement is that it diversifies Eurectec's
rubber recycling product line which in turn significantly decreases the
Company's dependence on CISAP equipment sales. At this time, Eurectec's
relationship with CISAP is positive, and it intends to continue selling the
CISAP granulating equipment as its primary line of tire recycling
equipment. The Company also intends to focus its sales efforts on SMS
products, particularly its mixers, presses and molds for producing
after-market products. The Company believes that the SMS equipment gives
Eurectec a competitive advantage by enabling Eurectec to offer a complete
line of tire recycling equipment to produce crumb rubber and a complete
line of equipment to manufacture several after-market products from the
recycled rubber.
The Company has no material commitments for capital expenditures.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995, AND THE YEAR ENDED DECEMBER
31, 1994.
Revenue for the year ended December 31, 1995 was $2,334,790. This is
a $765,830 or 48% increase over the revenues of $1,568,960 generated in the
year ended 1994. This change is the result of increased sales volume,
consisting of phase one of the Saudi project and the German sale. The
Company's sales are recorded only when the equipment is shipped and title
passes to the buyer. Typical sales are by letter of credit, with the funds
being released by the bank when the equipment is placed on the ship. The
Company's projects lend themselves to large, periodic revenue generation
rather than smaller amounts over smaller periods of time. Almost all of
the Company's sales were shipped and recorded during the fourth quarter of
1995.
Cost of Sales consists of the equipment wholesale costs to the Company
plus freight and insurance, which are billed to the client. The increase in
equipment sales in the year ending December 31, 1995, results in an
increased cost of sales compared to 1994. Different ancillary pieces of
support equipment carry differing profit margins, but changes in support
equipment configurations are not sufficient as to constitute a change in
product mix as they merely support the company's line of tire granulators.
Commission expense for the year ended December 31, 1995 of $329,960
exceeded the 1994 expense of $113,000 by $216,960. This is due to the
increased sales and higher commission rates to secure the sales.
Travel expenses in the year ended December 31, 1995 exceeded 1994 by
$32,980. ($45,468 in 1995 vs. $12,288 in 1994). This was due to the
efforts of completing the Saudi Arabia sale, customer service prior years
sales and an increased domestic sales effort.
Because of the opening of the Canadian licensee's plant, the need for
the Eurectec, Inc. demonstration facility in Wilmington, Ca was reviewed
during the first quarter of 1995. The decision was made to close the
10<PAGE>
facility and move the Company offices to a small office in an office
building rather than using a portion of the demonstration plant. This move
took place at the end of March, 1995. As a result of the move, leasehold
improvements were abandoned and abandonment expenses of $10,000 we recorded
during the three months ended March 31, 1995. The physical relocation was
accomplished with Company personnel at minimum incremental costs. Such
costs were under $2,000.
Occupancy related expenses were reduced as a result of the redefined
space needs. Office expense of $23,846 in the year ended December 31, 1995
are a reduction of $11,587 (32%) from the 1994 expense of $35,433. Rent
and Utility expenses were reduced from $98,170 in the year ended December
31, 1994 to $57,221 in 1995. Administrative expense was reduced 47% from
the 1994 level of $131,700 to $69,301 in the year ended December 31, 1995
due primarily to reduction in administrative staff from 3 people in 1994 to
the use of contract services from an outside agency throughout the last
three quarters of 1995.
The use of outside consultants was reduced during 1995 and the expense
reduced from $274,478 in 1994 to $164,178 in 1995. Outside consultants were
used for production, marketing and finance and accounting during 1994 and
for marketing and accounting in 1995.
Interest expense was increased during 1995 by $27,871 ($69,617 vs.
$41,746) due to the loan arrangements and borrowing completed during 1995.
During the quarter ended June 30, 1995, the Company restructured its
relationship with its Canadian licensee. Due to change in ownership, the
objectives of the Canadian group also changed. The Company agreed to
cancel the outstanding Accounts Receivable for the Canadian license in
return for the return of the license rights to the Company. The Company
also agreed to cancel the Accounts Receivable equipment balance in return
for an equity interest in the Canadian company. Because the valuation of
the equity interest is immaterial and of uncertain value, the Company
choose to write of the entire receivable rather than establish an asset of
uncertain income generation potential.
During the year ended December 31, 1994, the Company sold and
delivered an minimum equipment package (Granulator, Shredder and conveyor
only) to a customer in mainland China. Ninety percent of the purchase price
was release under the terms of the letter of credit at the time of
shipment. The final 10% was to be released subsequent to installation.
Due to communication difficulties about the tire and misunderstandings, the
client has refused to release the balance and the letter of credit has
expired. The Company wrote off the balance of $98,136 during the year
ended December 31, 1995 as uncollectible.
During the three months ended June 30, 1995, the Company was able to
sell half of it's interest in Texas Securities, Inc. The Company had
written off this holding in 1993, when Texas Securities filed for Chapter 7
liquidation under Federal bankruptcy law. A group of investors, of which
the Company is not a party, have challenged the proceedings and wished to
consolidate the ownership of the Texas Securities, Inc. shares. The Company
retained the balance of its interest in the hope of benefiting from this
11<PAGE>
effort in excess of the $12,500 received. Only the cash receipt for the
portion sold was recognized as the value of the remaining portion is
uncertain.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994, AND THE YEAR ENDED DECEMBER
31, 1993.
For the year ended December 31, 1994, the Company had revenue of
$1,568,960. This revenue consisted of sales of equipment to China and
Canada ($1,398,960), sale of a licenses for the State of Utah ($120,000)
and a forfeiture of a deposit from Mexico ($50,000). Revenue for the year
ended December 31, 1993 was $745,712, which was from the sale of the
territorial license for Canada. Cost of Sales of $980,549 in 1994 relate
to the equipment sales only. No comparable cost was incurred in 1993 due
to the sales being an intangible.
Commission expenses of $113,000 were incurred in 1994 from the
equipment sales. No comparable expense was incurred in the year ended
December 31, 1993 as the license sale was generated by a company officer
who was not paid a commissions.
Depreciation Expense increased in the year ended December 31, 1994 due
to the leasehold improvements in the Eurectec, Inc. demonstration facility
opened in 1993 and to the additions to furniture and fixtures for that
facility in 1993 and 1994. Depreciation expense was $16,535 in 1994
compared to $10,454 in 1993.
Occupancy related expenses related to the demonstration facility also
increased in the year ended December 31, 1994 compared to the year ended
December 31, 1993. Office expenses increase from $31,774 in 1993 to $35,433
in 1994. Rent and Utility expense increased from $42,151 in 1993 to
$98,170 in 1994. Administrative expense increased to $131,700 for 1994
compared to $66,907 in 1993.
Consultant expense increased in the year ended December 31, 1994 from
$78,191 in 1993 to $274,478. This increase was due to increased use of
consultants and the placing of three individuals on retainer to secure
almost full time use of their services in the fields of marketing, plant
operations and accounting and finance.
Interest expense increased from $22,684 in the year ended December 31,
1993 to $41,746 in the year ended December 31, 1994 due to the 1993
refinancing of the Company' property in Florida.
ITEM 3. DESCRIPTION OF PROPERTY
On June 25, 1996 the Company entered into a new lease agreement to
lease an industrial condominium in a multi-tenant building for use as its
principal executive office. The Company will pay $3281.00 per month in
return for 4,495 square feet. The building is located at Park Irvine
Business Center, 14771 Myford Road, Building B, Tustin, California 92780.
Prior to entering the lease, the Company had been leasing space in an
12<PAGE>
executive office complex and space in a storage facility on a month to
month basis. The new space the Company is leasing is sufficiently large to
accommodate all of its administrative and storage needs.
On March 25, 1991, the Company issued 250,000 shares of common stock,
restricted pursuant to Rule 144, to an unrelated third party to purchase a
residence and a boat house at 900 N.E. 78th Street, Miami, Florida. The
residence was constructed in 1936 and is assessed by Dade County as having
a value of $250,000. The property is currently subject to a mortgage. The
Company used the house as its corporate headquarters when it was based in
Miami. The Company sold the Miami property because it was no longer
needed. The Company sold the house to an unrelated third party. A term of
the sale was that the Company purchase the adjoining lot from its current
owner and sell that lot along with the property owned by the Company to the
third party. The Company acquired the lot in early 1996, in an arms-length
transaction with an unaffiliated third party. The Company paid $65,000 for
the lot, which was its fair market value. The purchaser paid $382,500 for
the Company's property and the adjoining lot, this price is in accord with
the fair market value of the combined properties. The sale of the property
closed on February 19, 1996 and the Company has received the full purchase
price from the buyer.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of April 18, 1996, the name and the
number of shares of the Registrant's Common Stock, par value $0.001 per
share, held of record or beneficially by each person who held of record, or
was known by the Registrant to own beneficially, more than 5% of the
9,456,696 issued and outstanding shares of the Registrant's Common Stock,
and the name and shareholdings of each director and of all officers and
directors as a group.
<TABLE>
<CAPTION>
Title of Amount and Nature of Beneficial Percentage
Class Name of Beneficial Owner Ownership of Class
_____________________________________________________________________
<S> <C> <C> <C>
Common Ehrenfried Liebich 4,074,363 43.1%
Park Irvine Business Center
14771 Myford Road, Building B
Tustin, CA 90744
Common Keith J. Fryer 10,000(1) 0.1%
Park Irvine Business Center
14771 Myford Road, Building B
Tustin, CA 90744
Common John F. Pope 131,000(2) 1.4%
Park Irvine Business Center
14771 Myford Road, Building B
Tustin, CA 90744
13<PAGE>
Common Dr. Markus J. Lenger 0 0.0%
Park Irvine Business Center
14771 Myford Road, Building B
Tustin, CA 90744
___________________________________________________________________________
Common Officers, Directors and
Nominees 4,215,636 44.6%
as a Group:
___________________________________________________________________________
</TABLE>
(1) These shares are owned by Keith Fryer Associates
California, Inc. Mr. Fryer is the owner operator of that business and is
deemed to be the beneficial owner of these shares.
(2) Mr. Pope's total shares includes 106,000 shares held of
record by Parallex Capital Corporation which he may be considered to be a
beneficial owner.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth as of December 31, 1995, the name, age, and
position of each executive officer and director and the term of office of
each director of the Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR OR OFFICER SINCE
<S> <C> <C> <C>
Ehrenfried Liebich 53 President March 1989
Director March 1989
Keith J. Fryer 46 Vice President March 1995
Director March 1995
John F. Pope 53 Vice President January 1991
Secretary January 1991
Treasurer January 1991
Director March 1989
Markus J. Lenger 31 Vice President October 1995
___________________________________________________________________________
</TABLE>
All officers hold their positions at the will of the Board of
Directors. All directors hold their positions for one year or until their
successors are elected and qualified.
Set forth below is certain biographical information regarding each of
the Company's executive officers and directors:
Ehrenfried Liebich is the President and a Director of the Company. Mr.
Liebich first became involved with the Company in March 1989. Mr. Liebich
was born and educated in Germany. After his formal secondary education in
Germany he joined the Merchant Marine, which he left as a Ship's Officer
with the Court Line, London, U.K. Mr. Liebich immigrated to Canada in 1965
where he started various businesses in the areas of real estate,
investment, chemical distribution and electronics. In March of 1989 he
became the President, a Director and controlling shareholder of the
Company. Mr. Liebich is not currently employed in any other business.
14<PAGE>
Keith J. Fryer is a Vice President and a Director of the Company. Mr.
Fryer first became involved with the Company in August 1992. Mr. Fryer was
educated in England and graduated from the Cheshire College of Further
Education. He also studied at several UK colleges of management and became
a member of the Institute of Marketing London in 1974. He has been a
member of the Marketing Society London since 1989. He is also a life
member of the Wig & Pen Club, The Strand, London. Mr. Fryer successfully
operates Keith Fryer Associates England, a business he formed in 1986,
that provides consulting services in various business areas. In 1992, Mr.
Fryer also established Keith Fryer Associates California, Inc. Mr. Fryer
became a Vice President and Director of the Company in March 1995. Mr.
Fryer is not currently employed in any other business.
John F. Pope is the Secretary, Treasurer, a Vice President and a Director
of the Company. Mr. Pope first became involved with the Company in March
1989. Mr. Pope received a B.S. degree in business administration from
Seton Hall University in 1963. He has also done post-graduate study at New
York University and University of Miami. Mr. Pope has been certified as a
Certified Management Accountant by the Institute of Management Accountants.
From November 1987 through January 1991, Mr. Pope was self-employed as an
independent financial consultant to various public and private companies.
Mr. Pope became a Company Director in March 1989. He became the
Secretary, Treasurer and a Vice President of the Company in January 1991.
In addition to his duties as an officer and director of the Company, to
which Mr. Pope dedicates approximately 20 hours a week, Mr. Pope continues
to operate his independent financial consulting firm, John F. Pope, Inc.,
which he founded in 1991.
Dr. Markus J. Lenger became a Company Vice President in October 1995. Dr.
Lenger first became involved with the Company in October 1995. Dr. Lenger
received a B.S. in electronic engineering from The University in St. Gallen
Switzerland. He also has a Doctorate degree in high energy physics from
the Max Plank Institute in Munich, Germany. Dr. Lenger was a Vice
President of Research and Development for Green Earth Technologies from
September 1993 to May 1995. He was also a Vice President of Research and
Development with BioVersal from January 1989 to November 1991. Dr. Lenger
has eight years experience in developing bioremediation technologies. His
technologies have been used in Europe to successfully decontaminate more
than 600,000 tons of highly contaminated soil. Dr. Lenger also spent eight
months in Valdez, Alaska during the Exxon Valdez oil spill where he
developed systems for waste water processing, soil remediation and
biological mixed surfactant systems. Dr. Lenger was self-employed during
the eight months he spent in Alaska. Dr. Lenger is not currently employed
in any other business.
To the knowledge of management, during the past five years, no present
or former director, executive officer or person nominated to become a
director or an executive officer of the Company:
(1) filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years before
the time of such filing, or any corporation or business association of
which he was an executive officer at or within two years before the time of
such filing;
(2) was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations or other minor
offenses); 15<PAGE>
(3) was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from or otherwise
limiting, the following activities;
(I) acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, associated person of any of the foregoing, or as an
investment advisor, underwriter, broker or dealer in securities, or as an
affiliate person, director or employee of any investment company, or
engaging in or continuing any conduct or practice in connection with such
activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws;
(4) was the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or state
authority barring, suspending, or otherwise limiting for more than 60 days
the right of such person to engage in any activity described above under
this Item, or to be associated with persons engaged in any such activity;
(5) was found by a court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission to have violated any federal
or state securities law, and the judgment in such civil action or finding
by the Securities and Exchange Commission has not been subsequently
reversed, suspended, or vacated
(6) was found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company is not subject to the requirements of Section 16(a) of the
Exchange Act.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information concerning
the compensation paid or accrued for each of the Registrant's last three
completed fiscal years to the Registrant's or its principal subsidiaries
chief executive officers and each of its other executive officers that
received compensation in excess of $100,000 during such period (as
determined at December 31, 1995, the end of the Registrant's last completed
fiscal year).
16<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal Other Annual
Position Year Salary Bonus Compensation
- ----------------------- ------ -------- ------- -------------
<S> <C> <C> <C> <C>
Ehrenfried Liebech 1995 -0- -0- -0-
President/Director 1994 -0- -0- -0-
1993 -0- -0- -0-
John F. Pope (2) 1995 -0- -0- -0-
Vice President/Secretary 1994 -0- -0- -0-
Treasurer/Director 1993 -0- -0- -0-
Gayle Hicock 1995 -0- -0- -0-
Vice President 1994 -0- -0- -0-
1993 -0- -0- -0-
Keith J. Fryer 1995 -0- -0- -0-
Vice President 1994 -0- -0- -0-
1993 -0- -0- -0-
<CAPTION>
Long Term Compensation
Awards Payouts
Restricted
Stock Options/ LTIP All Other
Awards SARs Payout Compensation
---------- -------- -------- -------------
<S> <C> <C> <C> <C>
Ehrenfried Liebech -0- -0- -0- -0-
President/Director -0- -0- -0- -0-
-0- -0- -0- -0-
John F. Pope -0- -0- -0- $31,400(3)
Secretary/Director -0- -0- -0- 60,000(4)
Vice President/Director -0- -0- -0- -0-
Gayle Hickok -0- -0- -0- -0-
Vice President -0- -0- -0- 12,000(5)
-0- -0- -0- -0-
Keith J. Fryer -0- -0- -0- 77,950(6)
Vice President -0- -0- -0- -0-
-0- -0- -0- -0-
</TABLE>
(3) Mr. Pope provided consulting services to the Company through his private
consulting business, John F. Pope, Inc. Mr. Pope was paid this money for
accounting and financial services he provided to the Company, which
corresponds to the business areas for which he is responsible as a Company
officer. Due to the uncertain nature of the Company's cash flow, and its
desire to avoid burdensome fixed costs, the Company pays no salary to its
officers, rather, each officer provides services on an as needed basis and is
compensated as an independent contractor for those services. By structuring
compensation in this manner, the Company feels it avoids burdensome salary
responsibilities when Mr. Pope's services are not required and limits his
compensation to services rendered. The Company believes it to be in its best
interest to remunerate Mr. Pope, and its other officers, for their services
in this manner. When cash flow so justifies, the Company anticipates that it
will employ Mr. Pope, at which time he will no longer be compensated as an
independent contractors. For the time being, however, Mr. Pope and the other
Company officers will not be employed by the Company and will not be paid
salaries by the Company. The services provided by Mr. Pope to the Company
were provided on terms at least as favorable as could have been negotiated
with an independent party.
(4) See footnote 3.
(5) Mr. Hicock provided various services to the Company and this money
was paid directly to Mr. Hicock for those services. This money was paid to
him as an independent contractor and not as a salary for services rendered by
Mr. Hicock in his capacity as an officer of the Company. As stated above,
due to the uncertain nature of the Company's cash flow, and its desire to
avoid burdensome fixed costs, the Company pays no salary to its officers,
rather, each officer provides services on an as needed basis and is
compensated as an independent contractor for those services. By structuring
compensation in this manner, the Company feels it avoids burdensome salary
responsibilities when the services of a particular officer are not needed and
limits executive compensation to services rendered. The Company believed it
to be in its best interest to compensate Mr. Hickok for his services in this
manner. These services were provided to the Company on terms at least as
favorable as could have been negotiated with an independent party.
17<PAGE>
(6) Mr. Fryer provided consulting services to the Company through his
private consulting business, Keith Fryer Associates California, Inc. Mr.
Fryer was paid this money for sales and marketing services he provided for
the Company, which corresponds to the business areas for which he is
responsible as a Company officer. Due to the uncertain nature of the
Company's cash flow, and its desire to avoid burdensome fixed costs, the
Company pays no salary to it officers, rather, each officer provides services
on an as needed basis and is compensated as an independent contractor for
those services. By structuring compensation in this manner, the Company
feels it avoids burdensome salary responsibilities when Mr. Fryer's services
are not required and limits his compensation to services rendered. The
Company believes it to be in its best interest to remunerate Mr. Fryer in
this manner. When cash flow so justifies, the Company anticipates employing
Mr. Fryer, at which time he will be paid a salary and will no longer be
compensated as an independent contractor. For the time being, however, Mr.
Fryer and the other Company officers will not be employed by the Company and
will not be paid salaries by the Company. The services rendered by Mr. Fryer
were provided to the Company on terms at least as favorable as could have
been negotiated with and independent party.
CASH COMPENSATION
None.
BONUSES AND DEFERRED COMPENSATION
None.
COMPENSATION PURSUANT TO PLANS
None.
PENSION TABLE
None
OTHER COMPENSATION
None.
COMPENSATION OF DIRECTORS
None.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including payments to
be received from the Company, with respect to any person named in Cash
Compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment with the company or its subsidiaries, or any change
in control of the Company, or a change in the person's responsibilities
following a changing in control of the Company.
18<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 31, 1995 the Company borrowed directly from Ehrenfried
Liebich an amount equaling $58,701. The loan is non-interest bearing and is
payable on demand. Mr. Liebich is the President, a Director and a beneficial
owner of more than 5% of the Company's outstanding Common Stock. All of
these funds were utilized to provide the Company with needed working capital.
This loan was made on terms at least as favorable as terms the Company could
have negotiated with an independent third party.
Keith Fryer provided consulting services to the Company through Keith
Fryer Associates California, Inc., his private consulting business. Mr.
Fryer is a Company Vice President and a Director. Keith Fryer Associates
California was paid $77,950 for consulting services rendered by Keith Fryer
during 1995. These services were provided on terms at least as favorable as
could have been negotiated with an independent third party. See the fourth
footnote to the Summary Compensation Table for more details.
John Pope provided consulting services to the Company through his
private consulting business John F. Pope, Inc. Mr. Pope is a Company Vice
President, the Secretary and Treasurer and a Director. John F. Pope, Inc.,
was paid $31,400 for accounting and financial services which John Pope
rendered during 1995. These services were provided on terms at least as
favorable as could have been negotiated with an independent third party. See
the first footnote to the Summary Compensation Table for more details.
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is presently authorized to issue 50,000,000 shares of $.001
par value Common Stock. All Shares, when issued, will be fully paid and
nonassessable. All shares are equal to each other with respect to liquidation
and dividend rights. Holders of voting shares are entitled to one vote for
each share they own at any Shareholders' meeting.
Holders of Shares of Common Stock are entitled to receive such dividends
as may be declared by the Board of Directors out of funds legally available
therefor, and upon liquidation are entitled to participate pro-rata in a
distribution of assets available for such a distribution to Shareholders.
There are no conversion, pre-emptive or other subscription rights or
privileges with respect to any Shares.
The Common Stock of the Company does not have cumulative voting rights
which means that the holders of more than 50% of the voting shares voting for
election of directors may elect all of the directors if they choose to do so.
In such event, the holders of the remaining Shares aggregating less than 50%
will not be able to elect any directors.
19<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS.
The Company's common stock is listed in the "Pink Sheets" published by
the National Quotation Bureau, Inc. ("NQB"), under the symbol "QTMG". As of
April 18, 1996, the Company had 264 shareholders holding 9,456,696 shares of
common stock. Of the issued and outstanding common stock, 2,213,749 are free
trading, the balance are restricted stock as that term is used in Rule 144.
The Company has never declared a dividend on its Common Stock.
The published bid and ask quotations for the previous two fiscal years
and the first quarter of 1996 are included in the chart below. These
quotations represent prices between dealers and do not include retail markup,
markdown or commissions. In addition, these quotations do not represent
actual transactions.
<TABLE>
<CAPTION>
BID PRICES ASK PRICES
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 HIGH LOW HIGH LOW
Jan. 2 thru
Mar. 29 7/16 1/16 7/8 5/8
- -------------------------------------------------------------------------------
Apr. 1 thru
Mar. 29 3/16 1/8 3/4 3/4
- -------------------------------------------------------------------------------
July 1 thru
Sept. 6 1/8 1/8 3/4 3/4
- -------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------
Jan. 3 thru
Mar. 31 1/4 1/8 7/8 1/2
- -------------------------------------------------------------------------------
Apr. 3 thru
June 30 3/16 1/16 13/16 5/8
- -------------------------------------------------------------------------------
July 3 thru
Sept. 29 3/16 1/16 13/16 9/16
- -------------------------------------------------------------------------------
Oct. 2 thru
Dec. 29 3/16 1/16 13/16 7/16
- -------------------------------------------------------------------------------
1994
- -------------------------------------------------------------------------------
Jan. 3 thru
Mar. 31 Not Trading
- -------------------------------------------------------------------------------
20<PAGE>
- -------------------------------------------------------------------------------
Apr. 1 thru
Apr. 14 Not Trading
- ------------------------------------------------------------------------------
Apr. 15 thru
June 30 1 3/8 1/2 2 1 1/4
- --------------------------------------------------------------------------------
July 1 thru
Sept 30 3/4 1/8 1 1/2 3/4
- ------------------------------------------------------------------------------
Oct. 3 thru
Dec. 30 3/8 1/16 1 3/8 1/2
- -------------------------------------------------------------------------------
</TABLE>
On March 25, 1991, the Company granted stock options to acquire 500,000
shares of its common stock at $1.00 per share to its officers and other
related parties. These options expire five years from the date of issuance.
As of December 31, 1995, none of the options had been exercised. As of the
date of this filing, all of the options expired unexercised.
ITEM 2. LEGAL PROCEEDINGS.
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following persons acquired shares of common stock of the Registrant
in transactions exempt from registration under section 4(2) of the Securities
Act of 1933. The Registrant did not pay any sales commissions or discounts
to any person for the cash sales of any shares. All shares were sold in
isolated private transactions not involving any public solicitation or
offering.
<TABLE>
<CAPTION>
DATE NAME NUMBER OF SHARES CONSIDERATION
<S> <C> <C> <C>
02-12-93 Seemonger, N.V. 418,806 SPI Shares (1)
09-17-93 Diaji Yamada 60,000 $50,000.00 (2)
10-18-94 Mike Holt 12,000 Services (3)
</TABLE>
(1) The Company issued these shares to acquire all of the outstanding
shares of Safety products Innovations, Ltd., ("SPI") a British corporation
which, at the time of acquisition, was marketing a line of home, auto, and
personal alarms. Shortly after the acquisition the Company discontinued
SPI's operations.
(2) These shares were sold at a share price of $8.33 per share. No
sales commissions of underwriting discounts were paid. These securities
were sold pursuant to Section 4(2) of the Securities Act which provides a
private placement exemption for the sales of securities to persons who are
sophisticated investors or whoa re sufficiently acquainted with the Company
to fend for themselves. Mr. Diaji is such a person.
(3) The Company issued 12,000 shares to Mike Holt in lieu of payment
for services he rendered to the Company. The shares were issued to him for
at $1.00 per share.
21
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
There are no provisions in the Nevada corporation law or the Articles
of Incorporation of the Registrant requiring the corporation to indemnify
any of the Registrant officers and directors. The by-laws of the
registrant provide for indemnification as follows:
No officer or director shall be personally liable for any
obligations arising out of any acts or conduct of said officer or director
performed for or on behalf of the Corporation. The Corporation shall and
does hereby indemnify and hold harmless each person and his heirs and
administrators who shall serve at any time hereafter as a director or
officer of the Corporation from and against any and all claims, judgments
and liabilities to which such persons shall become subject by reason of
any action alleged to have been heretofore or hereafter taken or omitted to
have been taken by him as such director or officer, and shall reimburse
each such person for all legal and other expenses reasonably incurred by
him in connection with any such claim or liability; including power to
defend such person from all suits as provided for under the provisions of
the Nevada Corporation Laws; provided, however that no such person shall be
indemnified against, or be reimbursed for, any expense incurred in
connection with any claim or liability arising out of his own negligence
or willful misconduct. The rights accruing to any person under the
foregoing provisions of this section shall not exclude any other right to
which he may lawfully be entitled, nor shall anything herein contained
restrict the right of the Corporation to indemnify or reimburse such person
in any proper case, even though not specifically herein provided for. The
Corporation, its directors, officers, employees and agents shall be fully
protected in taking any action or making any payment or in refusing so to
do in reliance upon the advice of counsel.
The indemnification herein provided shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled
under any bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer or employee and
shall inure to the benefit of the heirs, executors and administrators of
such a person.
22
<PAGE>
THE QUANTUM GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1996
&
DECEMBER 31, 1995
F-1<PAGE>
/Letterhead/ Darrell T. Schvaneveldt
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392
Darrell T. Schvaneveldt C.P.A.
Independent Auditors Report
---------------------------
Board of Directors
The Quantum Group, Inc., and Subsidiaries
I have audited the accompanying balance sheets of The Quantum Group, Inc.,
and Subsidiaries, as of December 31, 1996 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for the years ended December
31, 1996, 1995, and 1994. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. 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 the significant
estimates made by management, as well as evaluating the overall financial
statements presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of The Quantum Group, Inc., and
Subsidiaries, as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994, in conformity with generally accepted accounting principles.
/s/ Schvaneveldt & Company
Salt Lake City, Utah
March 27, 1996
F-2<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,602 $ 26,140
Accounts Receivable 204,522 179,963
Inventory 490,579 490,579
Deposit on Inventory -0- 424,820
Notes Receivable -0- 83,960
------------ ------------
Total Current Assets 701,703 1,205,462
PROPERTY & EQUIPMENT
Furniture & Fixtures 10,651 10,693
Residential Property -0- 236,586
Vehicles -0- 2,248
Equipment 170,144 -0-
------------ ------------
Total Property & Equipment 180,795 249,527
OTHER ASSETS
Accounts Receivable -0- 254,221
Loan Receivable -0- 38,750
Investments -0- 6,250
Cash Pledged 5,122 -0-
License Rights 464,377 -0-
Deposit 3,281 661
Tax Benefit Deferred 80 80
------------ ------------
Other Assets 472,860 229,962
------------ ------------
TOTAL ASSETS $ 1,355,358 $ 1,754,951
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets -Continued-
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
------------ ------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued Expenses $ 158,822 $ 226,886
Accounts Payable 205,332 476,379
Due Officers 151,152 58,701
Customer Deposits -0- 244,474
Capitalized Lease Payable -0- 16,741
Current Maturities 785,197 268,835
------------ ------------
Total Current Liabilities 1,300,503 1,292,016
LONG TERM LIABILITIES
Note Payable - Machinery 170,519 -0-
Note Payable - Technology 347,547 -0-
Note Payable 267,131 266,871
Vehicle Note Payable -0- 4,781
Mortgage Payables -0- 165,000
Less Current Maturities (785,197) (268,835)
------------ ------------
Total Long Term Liabilities -0- 167,817
Minority Interest in Subsidiary 84,739 97,782
STOCKHOLDERS' EQUITY
Common Stock 50,000,000 Shares
Authorized; Par Value of $0.001
Per Share
9,456,696 Shares Issued 9,457 9,457
Paid In Capital 1,678,363 1,676,763
Accumulated Deficit (1,717,704) (1,488,884)
------------ ------------
Total Stockholders' Equity (29,884) 197,336
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 1,355,358 $ 1,754,951
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
December December December
31, 1996 31, 1995 31, 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Equipment Sales $ 2,872,679 $ 2,679,790 $ 1,398,960
License Sales 35,000 -0- 120,000
Other Income -0- -0- 50,000
------------ ------------ ------------
Total Revenues 2,907,679 2,679,790 1,568,960
Cost of Sales 1,895,468 1,688,947 980,549
------------ ------------ ------------
Gross Profit 1,012,211 990,843 588,411
EXPENSES
Commission 195,077 329,960 113,000
Depreciation 22,926 14,342 16,535
Amortization 33,169 -0- 113
Travel 67,586 45,468 12,488
Professional Fees 68,147 46,925 63,566
Office 21,546 23,846 35,433
Rent & Utilities 83,103 57,221 98,170
Administrative Expenses 87,283 69,301 131,700
Consultant Fees 265,375 164,178 274,478
Interest 88,161 69,617 41,746
Accounts Receivable
Written Off 376,931 953,634 -0-
Foreign Currency
Translation (6,344) 532 -0-
------------ ------------ ------------
Total Expenses 1,302,960 1,775,024 787,229
------------ ------------ ------------
Net Profit or (Loss)
From Operations (290,749) (784,181) (198,818)
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations -Continued-
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
December December December
31, 1996 31, 1995 31, 1994
------------ ------------ ------------
<S> <C> <C> <C>
OTHER INCOME & (EXPENSES)
Interest Income $ 122 $ -0- $ -0-
Gain on Sale of Residence 38,327 -0- -0-
Loss on Investment (6,250) -0- -0-
Sale of Securities
Previously Written Off -0- 12,500 -0-
Asset Abandonment -0- (10,500) -0-
Income - Capital Lease 16,741 -0- -0-
------------ ------------ ------------
Total Other Income
& (Expense) 48,940 2,000 -0-
------------ ------------ ------------
Net Profit or (Loss) (241,809) (782,181) (198,818)
------------ ------------ ------------
Taxes & Minority Interest
Minority Interest 12,989 122,621 28,399
Provisions for Taxes -
Current -0- 34,785 -0-
Provisions for Taxes -
Deferred -0- 80 -0-
------------ ------------ ------------
Total Taxes &
Minority Interest 12,989 157,486 28,399
------------ ------------ ------------
Net Profit or (Loss) $ (228,820) $ (624,695) $ (170,419)
============ ============ ============
Net Profit or (Loss)
Per Share (.02) (.07) (.02)
Weighted Average Shares
Outstanding 9,456,696 9,456,696 9,456,696
Diluted Net Profit
Per Share N/A N/A N/A
Weighted Average Shares
and Options Outstanding N/A N/A N/A
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6 <PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Stockholders' Equity
From January 1, 1994 to December 31, 1996
<TABLE>
<CAPTION>
Common Stock Paid In Accumulated
Stock Amount Capital Deficit
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
January 1, 1994 9,444,696 $ 9,445 $ 1,664,775 $ (693,770)
Shares Issued for
Commission in
Lieu of Cash 12,000 12 11,988
Loss for
Year Ended
December 31, 1994 (170,419)
--------------------------------------------------
Balance,
December 31, 1994 9,456,696 9,457 1,676,763 (864,189)
Loss for
Year Ended
December 31, 1995 (624,695)
--------------------------------------------------
Balance ,
December 31, 1995 9,456,696 9,457 1,676,763 (1,488,884)
Contributed
Capital 1,600
Profit for
Year Ended
December 31, 1996 (228,820)
-------------------------------------------------
Balance,
December 31, 1996 9,456,696 $ 9,457 $ 1,678,363 $ (1,717,704)
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Profit or (Loss) $ (228,820) $ (624,695) $ (170,419)
Adjustments to Reconcile Net
Profit or (Loss) to Net Cash:
Write Off Investment 6,250 -0- -0-
Write Off Loan Receivable 38,750 -0- -0-
Write Off Long Term Receivable 338,181 -0- -0-
Amortization & Depreciation 56,095 14,342 16,648
Foreign Currency Remeasurement (6,344) -0- -0-
Non Cash Income (16,741) -0- -0-
Non Cash Expenses -0- -0- 12,000
Gain on Sale TSI Stock -0- (12,500) -0-
Loss on Abandonment of Asset -0- 10,500 -0-
Reserve for Discontinued Operations -0- -0- (25,000)
Minority Interest (12,989) (122,621) (28,403)
Changes in Operating Assets
& Liabilities:
(Increase) Decrease in
Accounts Receivable (24,559) 453,182 (306,896)
(Increase) Decrease in Inventory -0- 12,900 1,535
(Increase) Decrease in
Deposit on Inventory 424,820 -0- (150,000)
Decrease (Increase) in
Long-Term Accounts Receivable -0- (11,932) -0-
Decrease (Increase) in
Long-Term Loan Receivable -0- 7,816 (7,816)
(Increase) Decrease in
Prepaid Insurance -0- 984 974
Decrease (Increase) in
Prepaid Commissions -0- 273,500 (273,500)
(Increase) Decrease in Deposits (3,281) 8,335 (600)
Increase (Decrease) in
Accrued Expenses (68,034) 136,579 (1,984)
Increase (Decrease) in
Accounts Payable (271,047) (49,217) 385,674
(Decrease) Increase in Tax
Payable - Current -0- (34,785) -0-
(Decrease) Increase in
Customer Deposits (244,464) (244,464) 488,938
Increase in Taxes Payable
Deferred -0- (80) -0-
Increase in Cash Pledged (5,122) -0- -0-
Rounding (3) -0- -0-
------------ ------------ ------------
Net Cash (Used) by
Operating Activities (17,308) (182,156) (58,849)
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows -Continued-
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES
Gross Proceeds from Sale
TSI Stock -0- 12,500 -0-
Purchase of Equipment (182,295) -0- -0-
Purchase of License Rights (497,547) -0- -0-
Sale of Residential Property 252,532 -0- -0-
Purchase of Furniture (11,086) -0- (3,684)
------------ ------------ ------------
Net Cash Provided (Used)
by Investing Activities (438,396) 12,500 (3,684)
CASH FLOWS FROM FINANCING
ACTIVITIES
Payment on Long Term Debt (169,781) (1,997) (1,751)
Increase (Decrease) in Notes
Payable 511,896 266,871 -0-
Increase (Decrease) in Amounts
Due Officers 92,451 (69,900) 58,545
Contributed Capital 1,600 -0- -0-
------------ ------------ ------------
Net Cash Provided by Financing
Activities 436,166 194,974 56,794
------------ ------------ ------------
Increase (Decrease) in Cash (19,538) 25,318 (5,739)
Cash at Beginning of Period 26,140 822 6,561
------------ ------------ ------------
Cash at End of Period $ 6,602 $ 26,140 $ 822
============ ============ ============
Disclosures from Operating
Activities:
Interest $ 88,161 $ 69,617 $ 41,746
Taxes 8,675 -0- -0-
Significant Non Cash Transactions:
12,000 Shares Common Stock
Issued to Pay Commissions $ -0- $ -0- $ 12,000
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9 <PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements
NOTE #1 - CORPORATE HISTORY
The Company was organized on December 2, 1968, under the laws of the
state of California, as Acqualytic Systems, Inc. The Company was
suspended on June 1, 1971 for failure to comply with statutory laws of
California. On June 15, 1989, the Company was reinstated after paying
the applicable taxes and fees to the state of California. During the
period of its suspension the Company transacted no business with the
exception of its President, Mr. Frank Scoville, transferring stock
previously issued to him to a number of other individuals. The Company
acted as its own transfer agent.
Pursuant to an agreement of merger filed on June 27, 1989, in the state
of Nevada, Acqualytic Systems, Inc., a California Corporation, merged
with Country Maid, Inc., a Nevada Corporation. The Nevada Corporation
was incorporated in the state of Nevada on June 13, 1988 and on June 30,
1989 Country Maid, Inc., filed applicable documents with the state of
Nevada and received a Certificate of Reinstatement. Country Maid, Inc.,
was the survivor Corporation pursuant to the merger agreement. The
surviving Corporation changed its name to Transcontinental Video
Robotics, Inc., on June 27, 1989. On September 18, 1992, the name of the
Company was changed to The Quantum Group, Inc.
During 1991, and 1992, the Company marketed electronic acupuncture
devices and a complete line of nutritional supplements through franchised
distribution centers. In December 1992, all operations of the subsidiary
involved with the acupuncture devices and nutritional supplements were
suspended. Losses incurred in these operations have been treated as
operating losses in 1991 and 1992.
In 1992, the Company acquired rights to import and market equipment used
in the tire recycling industry. The tire recycling operation is the
thrust of the Company's operations at December 31, 1996. (See Note #11)
NOTE #2 - SIGNIFICANT ACCOUNTING POLICIES
(A) The Company uses the accrual method of accounting.
(B) Revenues and directly related expenses are recognized in the period
when the goods are shipped to the customer.
(C) The Company considers all short term, highly liquid investments that
are readily convertible, within three months, to known amounts as cash
equivalents. The Company currently has no cash equivalents.
(D) Primary Earnings Per Share amounts are based on the weighted average
number of shares outstanding at the dates of the financial statements.
Fully Diluted Earnings Per Shares shall be shown on stock options and
other convertible issues that may be exercised within ten years of the
financial statement dates.
(E) Inventories: Inventories are stated at the lower of cost,
determined by the FIFO method or market.
F-10
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #2 - SIGNIFICANT ACCOUNTING POLICIES -CONTINUED-
(F) Consolidation Policies: The accompanying consolidated financial
statements include the accounts of the company and its majority - owned
subsidiary. Intercompany transactions and balances have been eliminated
in consolidation.
(G) Foreign Currency Translation / Remeasurement Policy: The company
has no on site operations in foreign countries. All purchases and sales
in foreign countries are concluded in American dollars. If at future
dates assets and liabilities occur in foreign countries they will be
recorded at historical cost and translated at exchange rates in effect at
the end of the year. Income Statement accounts are translated at the
average exchange rates for the year. Translation gains and losses shall
be recorded as a separate line item in the equity section of the
financial statements.
(H) Depreciation: The cost of property and equipment is depreciated
over the estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated (amortized) over the lesser of the
length of the related assets or the estimated lives of the assets.
Depreciation is computed on the straight line method for reporting
purposes and for tax purposes.
(I) Issuance of Subsidiary's Stock: The Company has elected to accounts
for shares issued by its subsidiary as an equity transactions.
(J) Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates
NOTE #3 - INVENTORY AND DEPOSITS
In November 1992, Eurectec, Inc., a subsidiary purchased a granulator
compact 3000 machine from an Italian manufacturer for $605,000 (DM), or
$379,577 (USD). In 1993, Eurectec, Inc., purchased equipment, paid
import fees thereon, freight, and set up fees for an additional $125,437
(USD) bringing the inventory to $505,014 (USD) at December 31, 1993. In
1994, the Company received credit from the manufacturer adjusting the
total inventory to $503,479 (USD). In 1995, the Company used a Model 66
Electric De-Beader machine with a cost of $12,900 (USD) to settle claims
for consulting fees by a former employee.
In 1993, the Company deposited with CISAP (the Italian manufacturing
firm) $274,820 (USD) for future purchases of equipment. This deposit was
increased to $424,820 (USD) in 1994, and was used in 1996.
The inventory is subject to a Sheriff's lien placed in 1996, see Note #16
Litigation Matters. The inventory has also been committed to Atlanta
Rubber Recyclers, Inc., See Note #19 Subsequent Events.
F-11<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #4 - NONCASH INVESTING AND FINANCING ACTIVITIES
Texas Securities, Inc.:
On December 6, 1990, the Company issued to Texas Securities, Inc., (TSI),
100,000 shares of its common stock, restricted as to Rule 144, for
1,000,000 shares of stock of TSI. At the date of the exchange TSI, was
trading at $.25 to $.30 per share. Inasmuch as shares exchanged were
restricted and the Company acquired approximately 9% of the shares
outstanding. The shares received were valued at $75,000, which was
approximately 9% of the book value of the stockholders' equity of TSI, as
per their audited financial reports at year end July 31, 1990.
In 1991, the Company made adjustments reducing its investments in TSI,
based upon the audited financial statements of TSI. In 1992, the
Company's position in TSI, did not decline and no revaluation was made.
In 1994, TSI filed bankruptcy in North District Bankruptcy Court of
Texas. Because of the uncertainty created by the bankruptcy filing as a
subsequent event, the Company has written off its entire investment in
TSI.
In 1995, an unrelated party and a stockholder of TSI offered to buy the
Company's shares in TSI to enhance his position for a lawsuit he sought
to bring against TSI. The Company sold him 500,000 shares of the TSI
stock for $12,500.
Residential, Real Estate
Dade County, Florida:
Pursuant to an agreement dated March 25, 1991, the Company issued 250,000
shares of its common stock restricted, as to Rule 144 to an unrelated
seller in consideration for a residence and a boat house in Miami,
Florida. At the time of the exchange, shares of the Company were trading
for $1.50 to $2.50 per share. The residence constructed in 1936 is
assessed by Dade County, as having a value of $250,000. Other real
estate valuation techniques were applied and found that similar
properties were selling at approximately the same price or higher.
On February 16, 1996, the Company concluded provisions of the escrow
agreement entered into in 1995, and sale of the residential property in
Florida was concluded. As a term of the sale the Company purchased the
adjoining lot from its current owner for $65,000 and sold it to the
purchaser. The purchaser paid $382,500 for the company's property and the
adjoining lot.
NOTE #5 - CAPITALIZED LEASE PAYABLES
During 1991, the Company purchased two copiers and a computer using the
capital lease option method.
<TABLE>
<CAPTION> Lease Interest Total
Term Cost Factor Obligation
<S> <C> <C> <C> <C>
Computer 48 $ 10,450 $ 5,419 $ 15,869
Copiers 36 8,250 3,559 11,809
Total $ 18,700 $ 8,978 $ 26,678
</TABLE> F-12<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #5 - Capitalized Lease Payables -Continued-
Lease obligations on these leases were as follows:
<TABLE>
<S> <C>
1993 $ 6,994
1994 7,628
1995 2,119
Total $16,741
</TABLE>
In 1992, the Company defaulted on the leases but retains the equipment,
both lessors had demanded payment of the obligation, but have not pursued
these demands.
Lease periods on both leases have expired and neither leasor has made any
attempt to take possession of the equipment or filed any legal process.
The Company believes neither leasor will and has chosen to write off the
capitalized lease as other income.
NOTE #6 - Notes Payable
The Company has the following notes payable obligations.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes Payable to a Non U.S. Entity,
Stated in US Dollars:
No Collateral: Due December 31, 1997,
Interest at 16.67%
Original Note $273,158
- Remeasurement for Foreign
Currency Translation $ 267,131 $ 266,871
Notes Payable to an Auto Leasing Company,
Monthly Payments for 36 Months of $176.13 -0- 4,781
Note Payable on Press Master Machine,
Interest at 16.67%, Due December 31, 1997,
Original Note $171,029
Remeasurement for Foreign Currency Translation 170,519 -0-
Note Payable on Purchase of Rubber
Product Technology Due December 31, 1997,
No Interest, Purchased and
Payable in U.S. Dollars 347,547 -0-
Mortgage Payable on Florida Residential Property,
Due January 9, 1999, Interest at 13.5% -0- 165,000
---------- ----------
Total Notes Payable 785,197 436,652
Less Current Obligation 785,197 (268,835)
---------- ----------
Net Long Term $ -0- $ 167,817
========== =========
</TABLE>
F-13<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #6 - NOTES PAYABLE -CONTINUED-
The Company borrowed funds from a non US entity. It received in quarterly
installments Deutsche Marks of DM 411,381 these were translated to US $273,158
at the quarterly exchange rate. At December 31, 1995, the exchange rate was US
$1.5415 for DM 1.00. The Company valued the note at its current US $ equivalent
and realized in the statement of operations a translation gain of $6,287. The
Company has recorded deferred taxes of $943 applicable to the translation gain.
NOTE #7 - LEASE COMMITMENTS
On July 15, 1996, the Company leased an office in Tustin, California. The
lease requires a security deposit of $3,281, monthly payments of $4,101 and
expires on July 14, 1997.
NOTE #8 - DEPRECIATION
The Company capitalizes the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are depreciated
over the useful life of the assets using the straight-line method of
depreciation.
Scheduled below are the assets, costs, lives, and accumulated depreciations at
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
December 31, Depreciation Accumulated
1996 1995 Expense Depreciation
Assets Cost Cost Life 1996 1995 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Furniture
& Fixture $37,986 $37,103 5 $ 8,527 $ 7,421 $27,335 $26,410
Vehicles 8,994 8,994 3 2,248 2,998 8,994 6,746
Equipment 182,295 -0- 5 12,151 -0- 12,151 -0-
Leasehold
Improvements -0- 5 -0- 506 -0- -0-
Residential
Property -0- 102,688 30 -0- 3,423 -0- 16,102
Residential
Land -0- 150,000 --- -0- -0- -0- -0-
- -------------------------------------------------------------------------------
Totals $229,275 $298,785 $22,926 $14,348 $48,480 $49,258
================================================================
</TABLE>
NOTE #9 - NOTES RECEIVABLE
<TABLE>
<CAPTION> 1995 1994
---------- ----------
<S> <C> <C>
Notes Receivable from Sale of Equipment to A.
Geist of Hecklingen, Germany, $500,000 Deutsche
Marks Converted at $1.449, Payable $20,990 USD
Quarterly at 8% Interest Remeasured at December
31, 1995, at $1.4785 $ 338,181 $ -0-
========== ==========
Current Portion 83,960 -0-
Long Term Receivable 254,221 -0-
</TABLE> F-14<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #10 - COMPENSATION AGREEMENT
The Company has no agreements with its officers and directors to pay any
compensation, except for reimbursement for out of pocket expenditures for
activities on the Company's behalf.
The Company has no accrued vacation or other employee benefits that should be
recognized as part of these statements.
NOTE #11 - LICENSE AGREEMENT
Eurectec, Inc., (a subsidiary) holds a license granted by CISAP, SpA (an Italian
Corporation), which grants exclusive rights and license to technology and plant
operations for tire recycling and recovery facilities in North and Central
America. The Company's subsidiary Eurectec, Inc., has the right to sublicense
the technology. Eurectec, Inc., has a sublicense in Utah.
During 1995, the Company restructured its relationship with the Canadian
Licensee. Due to a change in ownership, the objectives of the Canadian Licensee
changed. Eurectec agreed to cancel the outstanding Accounts Receivable of
$625,000 for the Canadian license in return, for the return of the license
rights to Eurectec, except for the exclusive license rights to Alberta, Canada
which were retained by the Canadian Licensee. The Company also agreed to cancel
the accounts receivable of $230,000 for the equipment sale.
The Company received a 20% equity interest in the Canadian Company which had no
value and has not been recorded on the financial statement of the Company.
NOTE #12 - RELATED PARTY TRANSACTIONS
The Company has reimbursed two of its officers for travel and entertainment
funds for services related to the Company's business. Scheduled below are
payments for reimbursed expenses, consulting, accounting and financial services
by related parties
<TABLE>
<CAPTION>
Accrued Accounting &
Consulting Reimbursed Consulting Financial
Commissions & Expenses Expenses Fees Services
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Keith Fryer $ 65,415 $ $ $ 65,321 $
John Pope 45,500
Marcus J. Lenger 23,944
1995
Keith Fryer -0- -0- 8,501 77,950 -0-
John Pope -0- 15,450 -0- -0- 31,400
Gayle Hickok -0- -0- 2,600 -0- -0-
</TABLE>
F-15<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #12 - RELATED PARTY TRANSACTIONS -CONTINUED-
<TABLE>
<CAPTION> Accrued Accounting &
Prepaid Consulting Reimbursed Consulting Financial
Commissions & Expenses Expenses Fees Services
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Keith Fryer $ 75,000 $ 13,000 $ 17,325 $ 128,420 $ -0-
John Pope -0- 34,450 1,100 -0- 60,000
Gayle Hickok -0- -0- -0- 12,000 -0-
</TABLE>
An Officer of the Company has loaned the Company $151,152 at December 31, 1996,
and $58,701 at December 31, 1995 to fund its operations. The loan is non
interest bearing and is due on demand.
NOTE #13 - NET OPERATING LOSS CARRYFORWARD FOR INCOME TAX PURPOSES
The Company has incurred losses that can be carried forward to offset future
earnings if conditions of the Internal Revenue Codes are met. These losses are
as follows:
<TABLE>
<CAPTION>
Year of Expiration
Loss Amount Date
-------------------------------------
<S> <C> <C>
1992 $ 670,375 2007
1993 -0- 2008
1994 198,818 2009
1995 782,181 2010
1996 241,809 2011
</TABLE>
The Company has adopted FASB 109 to account for income taxes. The Company
currently has no issues that create timing differences that would mandate
deferred tax expense. Net operating losses would create possible tax assets in
future years. Due to the uncertainty as to the utilization of net operating
loss carryforwards an evaluation allowance has been made to the extent of any
tax benefit that net operating losses may generate.
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Current Tax Asset Value of Net Operating
Loss Carryforwards at Current Prevailing
Federal Tax Rate $ 576,085 $ 561,467 $ 295,525
Evaluation Allowance (576,085) (561,467) (295,525)
Net Tax Asset $ -0- $ -0- $ -0-
==================================
Current Income Tax Expense $ -0- $ -0- $ -0-
Deferred Income Tax Benefit 80 80 -0-
</TABLE>
In 1993, the Company made provisions for California Franchise Taxes because
California does not allow carryforward or carryback of tax losses. When tax
returns were finalized in 1995 the Company qualified for tax credits equal to
or greater than the accrued tax in California, because the facilities in
Wilmington, California were in an Enterprise Zone Economic Development Area.
Accordingly, in 1995 the Company reversed the 1993 tax accrual.
F-16<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #14 - MINORITY INTEREST
The Company's subsidiary Eurectec, Inc., has issued 4,812,000 shares of its
common stock to minority interest since its inception in 1992. All of these
shares have been sold to non U.S. persons pursuant to regulations in Germany.
<TABLE>
<CAPTION> Minority Interest
Total
Shares Percentage Par Paid in Retained Minority
Issued Owned Value Capital Earnings Interest
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 4,812,000 15.62 $ 4,812 $161,083 $(68,167) $ 97,728
1996 6,500,000 20.00 6,500 206,233 (127,994) 84,739
</TABLE>
The minority investment in the subsidiary is 6,500,000 shares purchased for
$414,578 in 1992, $619,487 in 1993, and $1,600 in 1996. Minority interest holds
20.00% of issued shares of the subsidiary and the minority interest incurred a
dilution of $868,170 upon investment, and $127,994 in accumulated losses for
1996.
NOTE #15 - ACCOUNTS RECEIVABLE WRITTEN OFF
In 1995 the Company has written off accounts receivable from sales in 1994.
<TABLE>
<CAPTION>
1994 Sales Total Current Long Term
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Canadian License Fee $ 652,498 $ 326,249 $ 326,249
Canadian Equipment Sale 230,000 230,000
Chinese Equipment Sale 71,136 71,136
---------------------------------
Total $ 953,634 $ 627,385 $ 326,249
=================================
</TABLE>
The Canadian license encountered operational difficulties because of their
refusal to comply with CISAP's instruction to operate the equipment. These
delays caused a cash flows problem which ultimately resulted in the need to
restructure the Canadian Company. As a result of the restructuring process the
Company agreed to write off its accounts receivable of $556,249 and its non
current accounts receivable of $326,249.
The $71,136 due from the Chinese sale was the retention on the sale. At
December 31, 1994, the Company held a letter of credit upon which it could have
collected the receivable if all conditions of the sale were met. In 1995,
problems developed with the operation of the system because the feed stock
(Chinese tires) had much higher fabric content than Western tires for which the
machinery was tested. Because of the delays caused to adjust the equipment to
handle Chinese tires and the fact that it took longer to process the high fabric
tires the Chinese refused to pay the accounts receivable, and the letter of
credit expired. In an attempt to maintain a good relationship with the Chinese
Company and the difficulty and expense of litigating a collection action in
China the Company wrote the accounts receivable off.
In 1996, the Company wrote off sales it made in 1995 to a German buyer of
$345,000. After a remeasurement allowance in 1995 of $6,819 the 1996 write off
was $338,181. The Company wrote off $38,750 loaned to Eurectec GmbH, and an
investment of $6,250. The Company owned 10% of Eurectec GmbH. Eurectec GmbH
has no operations and no plans for future operations. F-17<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #16 - LITIGATION MATTERS
The litigation referred to in prior reports as Herbert & Isabel Kugelmeier came
before the United Stated District Court for the District of Utah, Central
Division. On October 16, 1996 after the issues were tried the jury rendered its
verdict. "It is ordered and abjudged that the judgement be entered in favor of
the defendant and against the plaintiff on the plaintiff's complaint "no cause
of action" and that judgement be entered in favor of Plaintiffs against the
Defendant on the Defendants' counter claim, "no cause of action." As a result
of the ruling in the litigation the Company no longer has any connection to the
mining claims, and the Kugelmeiers have no license for the states of Colorado,
Arizona, and New Mexico.
An action was filed by Duthie Electric against "Eurectec Wilmington, Inc., dba,
Eurectec, Inc.," Eurectec Wilmington, Inc., is a California corporation and was
formed for the purpose of selling a CISAP 3000 System to an investor group in
California. The investors did not obtain funding to complete the purchase.
Eurectec, Inc., is a Nevada corporation and a subsidiary of the Company. A
judgement was obtained against Eurectec Wilmington, Inc., doing business under
the assumed name of Eurectec, Inc., and property of Eurectec Inc., was executed
on by the Sheriff in Orange County, California. Neither the Company or
Eurectec, Inc., was a party to the litigation. In 1997, the Company fully
resolved the dispute by making a payment in the amount of $24,908 to Duthie
Electric which was approximately one-half of the amount of the judgement entered
against Eurectec Wilmington, Inc.
NOTE #17 - EXPORT SALES
The Company's sales have occurred in foreign countries and the aggregate sales
to unaffiliated customers in foreign countries exceeds 10% of the total
revenues.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Country 1996 Sales 1995 Sales 1994 Sales
- -------------------------------------------------------------------------------
Canada $ 630,000
China 888,960
Mexico 50,000
Saudi Arabia $2,711,489 $2,024,290
Germany 161,190 310,500
----------------------------------
Total $2,872,679 $2,334,790 $1,568,960
==================================
</TABLE>
Sales in the amount of $2,334,790 were made and recorded upon shipment to
customers in the fourth quarter of 1995. In 1996, sales by quarter were as
follows; first quarter $966,071, second quarter $0, third quarter $1,662,149 and
4th quarter $244,459.
NOTE #18 - STOCK ISSUANCE BY SUBSIDIARY
In 1993, the Company's subsidiary Eurectec, Inc., issued 2,385,423 at $0.25 per
shares of its common stock to outsiders. This sale decreased the Company
ownership in the subsidiary from 91.50% to 84.38%. The subsidiary received in
U.S. dollars $619,487.
In 1996, Eurectec, Inc., issued 1,688,000 shares to its minority shareholders
to increase their ownership position in Eurectec, Inc., to 6,500,000 shares or
20.0%. Eurectec, Inc., contributed $1,600 as contributed capital to the parent
Corporation.
F-18
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #19 - SUBSEQUENT EVENTS
A. Settlement agreement on Duthie Electric Services, Corporation matter has
been reached, see explanation and details in Note #16.
B. Atlanta Rubber Recycling Inc., has confirmed in writing in 1997 their
intentions of completing their sales agreement to purchase equipment held by the
Company as inventory for $1,602.817 and to purchase a license for the state of
Florida for $700,000. No sale of equipment or license fees has been booked
pending payment of sales agreement and shipment of merchandise.
C. In January 1997, the Company concluded the sale of equipment to Mexico
Recycling Technology, it's Mexican licensee for $3,737,000. Eurectec, Inc.,
received a letter of credit for $238,599 and, CISAP received a letter of credit
for $2,101,000 and paid the Company its fees from the first installment payment
therefrom. The balance of the letter of credit $1,397,405 will be used for
Phase 2 of the contract. <PAGE>
PART III
Item 1. Index and Description of Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Title of Document Location
- ------- ------------------------------------- -----------------------
<S> <C> <C>
2.01 Articles of Incorporation, as amended Incorporated by reference*
2.02 Bylaws Incorporated by reference*
6.01 CISAP License Agreement Incorporated by reference*
6.02 Canadian License Agreement Incorporated by reference*
6.03 1990 Non-Qualified Stock Option Plan Incorporated by reference*
6.04 Amended CISAP License Agreement Incorporated by reference*
6.05 SMS Sondermaschinen Agreement Incorporated by reference*
99.0 Form 10-KSB as filed with the Attached hereto
Commission for fiscal year ended
December, 31, 1996
</TABLE>
*Incorporated by reference from the Registrant's registration statement on
form 10-SB, as amended, filed with the Commission, SEC file no. 0-23812.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
The Quantum Group, Inc.
Date: May 22, 1997 By: /s/ Ehrenfried Liebich
---------------------------------
Ehrenfried Liebich, President and
Director (Principal
Executive Officer)
Date: May 22, 1997 By: /s/ John F. Pope
----------------------------------
John F. Pope, Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: May 22, 1997 By: /s/ Ehrenfried Liebich
---------------------------------
Ehrenfried Liebich, Director
Date: May 22, 1997 By: /s/ Keith J. Fryer
---------------------------------
Keith J. Fryer, Director
24<PAGE>
EXHIBIT 99.0
Form 10-KSB as Filed with the Commission
for Fiscal Year Ended December 31, 1996
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-23812
---------
THE QUANTUM GROUP, INC.
(Name of small business issuer in its chapter)
Nevada 95-4255962
------------------ -----------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
Park Irvine Center 14771 Myford Road, Building B
Tustin, California 90744
- ----------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (714) 508-1470
-----------------
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.001 par value, common voting shares
-------------------------------------
(Title of class)
----------------
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such report(s),
and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is 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. [ ]
The issuer's revenue for its most recent fiscal year was: $2,907,679
----------
The aggregate market value of the issuer's voting stock held as of February
26, 1997, by non-affiliates of the issuer was $1,337,499.
As of December 31, 1996, issuer had 9,459,696 shares of its $.001 par value
common stock outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
Page 1 of 31 consecutively numbered pages <PAGE>
The Quantum Group, Inc.
Annual Report on Form 10-KSB for the Year ended December 31, 1996
-----------------------------------------------------------------
TABLE OF CONTENTS
-----------------------------------------------------------------
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 2 DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . . . . 15
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . 15
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . . . . 16
ITEM 7 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . 24
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . . . . . . . . 24
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . 28
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . 29
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
2<PAGE>
- --------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------
The Quantum Group, Inc., (the "Company"), is in the business of
investigating innovative products in the environmental and recycling
industries and obtaining licensing and marketing rights to such products. The
principal offices of the Company are located at the Park Irvine Center, 14771
Myford Road, Building B, Tustin, California. The Company was organized as a
corporation in 1968, under the laws of the state of California. In 1988 the
Company changed its domicile from California to the State of Nevada and has
operated as a Nevada corporation since that time.
Since the beginning of 1993, the primary business activities of the
Company have been conducted through its subsidiary, Eurectec, Inc., a Nevada
corporation, ("Eurectec") which is engaged in the world-wide marketing of
automobile and truck tire recycling equipment which produces recycled rubber
which is commonly known in the recycling industry as "crumb rubber." Eurectec
also markets presses and other equipment which utilize crumb rubber to make
various after-market products.
CISAP Agreement
In 1992, Eurectec, acquired an exclusive license to market and sell tire
recycling equipment in North America and non-exclusive rights to sell the
equipment outside of North America, manufactured by CISAP SpA ("CISAP"), an
Italian corporation. The agreement granting Eurectec license rights was
amended in April of 1996 and again in March of 1997. The agreement as
renegotiated extends the exclusive territory granted to Eurectec to include
South America and the term of the agreement is for an initial period of two
years commencing April 26, 1996. On April 26, 1998 the agreement will be
automatically renewed for a period of two years unless terminated by either
party pursuant to written notice delivered six months prior the end of the
initial term of the agreement. The agreement shall continue to renew every two
years in perpetuity unless terminated by either party pursuant to six months
notice prior to the end of any renewal period. The license agreement provides
that CISAP will manufacture, ship and install the CISAP equipment Eurectec
sells. CISAP will also provide training in equipment operation and maintenance
to the purchaser of any CISAP equipment.
Under its agreement with CISAP, in addition to selling tire recycling
equipment, Eurectec has the right to sub-license territorial rights to use
CISAP equipment on an exclusive basis in any portion of the exclusive territory
granted to Eurectec. Eurectec has the right to define a territory based on
geography, population or such other criteria as it deems appropriate.
3<PAGE>
To maintain the exclusive marketing rights, Eurectec must purchase a
minimum of eight CISAP granulator systems or equipment of similar value
manufactured by CISAP, during each year of the agreement. In addition to
manufacturing granulators CISAP manufactures other tire recycling equipment
including de-beaders, slitters, compact shredders, and grinders. Although such
equipment is available for sale by Eurectec, Eurectec is not obligated to
purchase such equipment from CISAP and Eurectec has supplied certain items of
such equipment from other manufacturers for use with CISAP granulators sold by
Eurectec. While the primary emphasis of Eurectec is marketing the CISAP
granulators, Eurectec also markets other CISAP tire recycling equipment with
the granulators, unless the system design of the individual client is better
served by equipment from other manufacturers. In the event Eurectec does not
maintain its exclusive rights in North America and South America, the agreement
with CISAP provides that CISAP will continue to honor the sub-licenses
negotiated by the Company.
The initial granulator system manufactured by CISAP was called the COMPACT
3000 System. This system was followed by a system with a larger input and
output capacity called the COMPACT 6000 System. The CISAP systems were
designed to be compact enclosed granulating systems. A truck tire was
processed by first having the steel belts removed by a de-beading machine. The
smaller steel belts in automobile tires were not removed before processing.
At that point, truck tires were put through a slitter which slices the tires
radially. Then the slit truck tires and whole automobile tires were fed
through a shredder, which cut the tires into pieces of not more than two to
three inches square. These chopped pieces were then fed into the CISAP system
which separated the rubber from the steel and fabric of the tire. The systems
also separated the steel from the fabric for separate resale or disposal. The
systems then granulated the rubber and segregated it into various sizes from
minus 5 to a minus 40 mesh, as measured by the American standard measurement
system (ASTM). The CISAP systems were designed to operate at ambient
temperatures.
Eurectec initially made a purchase of a COMPACT 3000 System for use as a
sales demonstration system in Wilmington, California. The system was operated
as a demonstration system until the first larger capacity COMPACT 6000 System
was sold by Eurectec and put into commercial operation in Canada by a Canadian
company. In March 1995, the Company closed the Wilmington facility and began
to use the Canadian facility to demonstrate the tire recycling equipment.
Eurectec is storing the CISAP 3000 System while it contemplates selling the
equipment or keeping it and establishing its own operating recycling facility.
During the past three years Eurectec has sold COMPACT 6000 Systems in
Canada, China, Saudi Arabia and Germany and has sold two COMPACT 9000 Systems,
as described below, which will be delivered to Mexico in 1997. Eurectec has
entered sales agreements for a sale of its Compact 3000 System to purchasers
in Florida, two Compact 6000 Systems as Phase 3 of the project in Saudi Arabia,
and two Compact 9000 Systems as Phase 2 of the project in Mexico. Pursuant to
its agreement with CISAP, Eurectec has sold some exclusive sub-licenses.
Eurectec has entered into exclusive sub-license agreements for the States of
Utah and Florida, Province of Alberta, Canada and Mexico.
4<PAGE>
Eurectec sold the first COMPACT 6000 System together with the exclusive
territorial rights to Canada, to market and use CISAP equipment, to Evergreen
Recycling, Ltd., ("Evergreen"). In 1995, Eurectec restructured its relationship
with Evergreen. Eurectec agreed to cancel the outstanding Account Receivable
of $556,249 owing from Evergreen on its Canadian sub-license agreement in
return for the cancellation of Evergreen's exclusive territorial right, except
in the Province of Alberta, where Evergreen continues to maintain an exclusive
sub-license to market and use CISAP equipment. The Company also agreed to
accept equity in the Canadian company in lieu of payment of the balance of
sales price of the equipment sold to the Canadian company. This was done in
part because of problems encountered in the in the delivery and set-up of the
CISAP equipment. This site was the first commercial installation of a Compact
6000 System made by CISAP.
The second sale of a COMPACT 6000 System made by Eurectec was in China. A
dispute arose between the purchaser and Eurectec and CISAP which resulted in
Eurectec receiving an amount less than the full agreed upon sales price of the
CISAP System. Although the CISAP 6000 System operated according to
specifications, the crumb rubber output was below the production estimates
represented by CISAP engineers and used by Eurectec in selling the COMPACT 6000
System. Upon investigation CISAP learned that the tires the Chinese were
recycling contained a much higher fabric content and lower rubber content than
the European tires used by CISAP to calculate production estimates.
From 1993 through 1996 Eurectec did not meet the minimum sale of
granulators required by the original license agreement with CISAP to maintain
the exclusive rights to market and sell the CISAP granulating systems in North
America. Part of the difficulty Eurectec encountered in meeting its minimum
purchase requirements was directly related to problems CISAP had in gearing up
its production capacity to make timely delivery of systems, training personnel
for on-site installation of equipment, and the development of effective
training programs to teach purchasers in the proper operation and maintenance
of the equipment. CISAP and Eurectec realized that their experience with the
COMPACT 3000 and COMPACT 6000 Systems indicated that certain design changes
should be made to enhance the market appeal of the systems. Therefore,
Eurectec has worked closely with CISAP during the past two years to make
significant improvements to the CISAP granulating equipment.
Recently, CISAP has completed a re-designed granulator, designated the
COMPACT 9000 System, which has greater production capacity and lower
maintenance cost than the earlier systems. The first COMPACT 9000 System will
be installed in Mexico in 1997 pursuant to a sale made by Eurectec. CISAP
accomplished increased output in the COMPACT 9000 System by re-designing the
way the tires are processed prior to granulation. CISAP's earlier granulator
systems shredded the tires and then sent the entire contents of the shredded
tire, steel, fabric and rubber through the granulation process This caused
considerable wear and tear to the cutting blades and the high speed mills in
the granulating equipment, which led to slower processing, greater maintenance
and down-time. In COMPACT 9000 Systems, almost all of the steel and fabric is
removed from the rubber by passing through a grinder prior to introduction into
the granulation process. With the new equipment, the material that enters the
granulation process is 90% free of steel. This design change is the principal
reason that normal wear and tear on the granulation equipment and the
associated down-time is reduced and output levels are increased. CISAP has
also designed a grinder retrofit a COMPACT 6000 System in order to allow those
Systems to benefit from the improved process design.
5<PAGE>
In recognition of the difficulties CISAP has encountered in introducing
new equipment to the market and difficulties Eurectec has encountered in
establishing a market for such equipment in an emerging sector of the recycling
industry, the parties renegotiated certain terms of the license agreement
originally entered in 1992. The parties have agreed to extend the rights of
exclusivity under their agreement through April 28, 1998 and have extended the
exclusive territory to include South America. Should Eurectec fail to meet its
minimum sales quota of granulating equipment by April 28, 1998, CISAP will have
the right to terminate the exclusive rights of Eurectec under the agreement.
All sales of CISAP equipment made by Eurectec are applied toward the minimum
sales requirement under the agreement with CISAP regardless whether the sales
are made to purchasers within the exclusive territory.
While Eurectec desires to maintain the exclusive marketing rights,
management believes that Eurectec could continue to operate without the
exclusive marketing license. It bases this belief on the success to date which
Eurectec has had in making sales in areas outside the exclusive territory, the
close working relationship that has been developed with CISAP, the specialized
nature of the industry, the industry recognition Eurectec has achieved through
participation in trade shows and industry gatherings during the past three
years and the completion of the design for the EGS System described below.
SMS AGREEMENT
In May of 1996, Eurectec entered an agreement with SMS Sondermaschinen
GmbH, a German corporation, ("SMS"). The agreement grants Eurectec the
exclusive right to sell and market SMS equipment and machinery on a worldwide
basis. SMS has expertise in the manufacturing of machinery and equipment used
in the recycling of tires and the manufacturing of products using crumb rubber.
SMS has developed proprietary binding and pigment agents that enable SMS
presses, blenders and rollers to manufacture, at low temperatures, a wide
variety of commercial products using crumb rubber. The agreement grants to
Eurectec the exclusive right to market and sell worldwide any machinery,
equipment, product, binder, process, application or license using any of the
know-how, trade secrets, patents, confidential information or other technology
of SMS (collectively "SMS products"), which is either currently owned by SMS or
developed or acquired by SMS in the future.
Management believes that the SMS products will enhance its ability to
compete in the tire recycling industry and increase its sales. Eurectec will
concentrate its efforts on marketing the SMS presses, binders and molds that
manufacture products from crumb rubber such as interlocking paving tiles,
playground tiles, heating tiles, door mats, livestock stable mats, industrial
fatigue mats, continuous roll material and carpet underlayment. The SMS
products allow Eurectec customers to utilize their crumb rubber production to
manufacture products with higher profitability than realized from sales of
commodity grades of crumb rubber.
6<PAGE>
The other benefit of the SMS agreement is that it diversifies Eurectec's
rubber recycling product line which in turn significantly decreases the
Company's dependence on CISAP equipment sales. At this time, Eurectec's
relationship with CISAP is positive, and it intends to continue selling the
CISAP granulating equipment as its primary line of tire recycling equipment.
The Company also intends to focus its sales efforts on SMS products,
particularly its mixers, presses and molds for producing after-market products.
The Company believes that the SMS equipment gives Eurectec a competitive
advantage by enabling Eurectec to offer a complete line of tire recycling
equipment to produce crumb rubber and a complete line of equipment to
manufacture several after-market products from the recycled rubber.
The SMS agreement provides that it will continue in perpetuity unless
terminated by SMS for a breach by the Company of one of the agreements
provisions. Eurectec may terminate the agreement at any time. If either party
wishes to terminate the agreement it must give the other party six months
notice of its intention to terminate.
In addition the SMS agreement grants Eurectec the option to acquire SMS in
the event that the principals of SMS elect to retire from operating SMS. The
option exercise price is $2,000,000 payable over a period of up to three years.
In the event Eurectec does not exercise the option, it holds a right of first
refusal to match the offer of any other prospective purchaser of SMS.
ROTHBURY AGREEMENT
In April of 1996, Eurectec entered an agreement with Rothbury Engineering
Limited, of Isle of Man, Great Britain to acquire the exclusive worldwide
manufacturing and marketing rights to a technique for manufacturing rubber
products such as floor coverings from crumb rubber without revulcanizing the
rubber and a process for giving a mixture of scrap rubber granulates, resins
and other additives heat conductive characteristics for use in products such as
heatable floor coverings and underlayments. The purchase price of the rights
was approximately $500,000. Eurectec has paid $150,000 of the purchase price
with the balance of approximately $350,000 due on or before December 31, 1997.
In the event Eurectec fails to make payment in full as agreed by the parties,
all payments made shall be retained by Rothbury and Eurectec's rights shall be
a continuing non-exclusive right to manufacture and market products utilizing
the process.
In heatable tile products production, Eurectec will utilize heating
filaments currently manufactured by others. The heating filament operates on
AC or DC electricity and is imbedded in a variety of interior and exterior tile
designs, underlayments and mats. The heating tile and underlayment products
can be operated more cost effectively than interior forced air and radiant
heating systems. In exterior applications, the heated rubber tiles provide
superior heat conducting properties to other available technology such as
heating coils in concrete. The heated fatigue mats and pet mats also provide
Eurectec with new products and new markets for crumb rubber.
7<PAGE>
Eurectec is currently exploring the possibility of filing for patent
protection on the technology subject to the license agreement. Eurectec
expects to develop procedures and techniques to utilizing the Rothbury
technology with SMS press equipment to produce commercially viable heatable
rubber floor tiles utilizing crumb rubber by the fourth quarter of 1997,
pending the filing of any patent applications by Eurectec.
EURECTEC GRANULATING SYSTEM (EGS)
Eurectec, working with outside engineering firms, has designed plans for a
complete tire recycling, granulating and after-market production system which
integrates individual pieces of tire recycling equipment made by other
manufacturers, SMS recycling equipment and SMS presses. The Company has spent
an estimated $45,000 and $135,000 in research and development for the design of
the EGS System during 1995 and 1996, respectively. The system as designed will
follow common processing steps accepted in the industry. The process will
begin by sending tires through a de-beader, slitter and shredder. In the next
step, the shredded material is then fed to a grizzly which extracts
approximately 90% of the steel from the shredded tires and further reduces the
size of the material to minus one inch. Then the material will be processed
through a magnetic separator which removes the steel shred and a pneumatic
aspiration system which removes the nylon fibers. The product is then
processed through a granulator which further reduces the shred to approximately
5 mesh and removes any remaining steel and fabric. Finally, the crumb rubber is
processed through a granulator which reduces the product to particle sizes down
to minus 40 mesh. The EGS System will also include the SMS mixers, presses and
molds to make a wide variety of products from the crumb rubber.
The EGS System will also offer as an option, a grinder which will reduce
the crumb rubber to minus 100 mesh and a proprietary process offered through
SMS to devulcanize the finely ground rubber. The devulcanized rubber restores
the crumb rubber to 50% to 85% of its original elasticity and allows the crumb
rubber to be mixed with virgin rubber and to be revulcanized.
The EGS System will not require Eurectec to engage in any equipment
manufacturing. Most of the items of equipment utilized in the system e.g.,
de-beaders, slitters, grizzlies, grinders and granulators are currently
manufactured by other companies. SMS will manufacture all of the equipment and
parts required to integrate the individual pieces of equipment into unified
recycling system.
It is estimated by the design engineers that the complete EGS System will
have an estimated input capacity of up to five tons per hour and will have a
retail price of approximately $4,000,000. The EGS system will be more
expensive and require a larger facility than the granulating compact systems
manufactured by CISAP and it will have a production capacity of approximately
four times of the COMPACT 6000 System. The Company expects to begin offering
the EGS system for sale before the end of 1997.
8<PAGE>
TIRE RECYCLING INDUSTRY AND COMPETITION
In the United States alone there are over 275,000,000 tires discarded each
year. There are currently between two and three billion tires stockpiled in
the United States. Although millions of tires are discarded every year, there
has been no consensus on the best way to dispose of the tires. Waste tires
continue to accumulate in huge tire dumps throughout the world. One of the
early governmental responses was to require the tires to be shred into small
pieces in order to reduce the size of the tire dumps, the potential for fires,
and the health hazards from the dumps which existed because of mosquitoes and
rodents which inhabit tire dumps. Some market developed for shredded tires as
fuel in cement kilns and electric power plants, however, most states have
prohibited or strictly limited tire burning because of its adverse
environmental impact. In addition, it has been recognized that tire burning is
an inadequate use of the valuable rubber resource contained in the tires.
In the effort to reclaim valuable resources from tires, attempts have been
made to recover oil from tires through a process call pyrolysis in which the
tires are heated to very high temperatures and petroleum is extracted. To
date pyrolysis systems have not reached commercial viability because of the
substantial capital investment required to construct such systems, the high
operating cost and low efficiency of such systems when compared to the price of
crude oil.
One of the challenges facing the tire recycling industry has been the lack
of reasonably priced equipment for the production of crumb rubber, given the
production capacity of such equipment and the prevailing market prices of crumb
rubber. Prices of crumb rubber varying according to the mesh (size) of the
rubber. Rubber with a mesh of minus 10 to 25 sells for $.17 - .20 per pound
and is the common size used in asphalt paving. The after-market products
manufactured from the SMS press equipment use rubber of approximately minus 30
mesh and sells for approximately $.20 - .22 per pound. Very finely ground
crumb rubber which is suitable for treatment with devulcanizing chemical
process is usually minus 80-100 mesh and sells for $.40 - .45 per pound.
A second obstacle to investing in available recycling equipment has been
the limited or uncertain demand for crumb rubber by manufacturers of rubber
products. Without an established market for crumb rubber and reasonably
predictable prices for crumb rubber there is no way to assure a recycler that
he could recover his capital investment or make a profit on a recycling
operation. In turn manufacturers have been reluctant to specify the use of
crumb rubber in products because of the lack of a broad and consistent supply
of high quality crumb rubber at predictable prices.
In an effort to induce recycling of tires, many states have enacted laws
which charge purchasers a recycling fee on all new tire sales. The fees are
deposited to state operated funds which are used for grants to fund tire
recycling technology research projects and to compensate tire recyclers for
recycling tires. In addition, the federal and state governments have created
markets for recycled rubber by enacting statutes which require that new road
construction include a certain percentage of recycled rubber in the roads. A
typical street one mile long and 30 feet wide using a 1.5 inch topping will use
approximately 39,000 pounds of crumb rubber. An interstate highway one mile
long and 72 feet wide using a 3 inch topping will require 186,000 pounds of
crumb rubber in the topping mix.
9<PAGE>
Recently, The Chicago Board of Trade (CBOT) Recyclables Exchange has begun
an internet based listing of recyclable materials including crumb rubber.
Access to the CBOT Recyclables Exchange is found on the Internet at:
http://cbot-recycle.com. The Recyclables Exchange allows participants to use
the on-line exchange to post listings to sell or enter materials wanted for
purchase. Whenever there is a match of a sell listing with a buyer's
parameters, the system will automatically e-mail a response to the buyer who
can then communicate with the seller to transact business. The CBOT system
allows for detailed product descriptions of material quality and other data
important to buyers and sellers. The Exchange users can select predetermined
commercial specifications or set customized product specifications. The
Recyclables Exchange will contribute significantly to the recognition and
growth of an established crumb rubber market. Eurectec, acting on behalf of
clients which have purchased equipment, has posted offers on the Recyclables
Exchange.
The Recyclables Exchange is currently operated as a cash market matching
buyers and sellers. It is the intent of the CBOT to monitor this cash market
to determine the viability of creating a futures contract in recyclable
products like crumb rubber. If a futures contract does develop for crumb
rubber it will further enhance the industry by allowing crumb rubber
manufacturers and crumb rubber consumers to begin hedging transactions which
will give price and supply stability to the market. This in turn will
contribute to wider use and acceptance of crumb rubber in a variety of
applications and industries.
All of these developments over the past few years have contributed to a
growing interest in the tire recycling industry. Although the tire recycling
industry is highly competitive, no single competitor holds a dominant market
position. Some of Eurectec's competitors have longer operating histories and
are financially stronger than the Company. There are several companies which
offer different pieces of equipment to recyclers such as shredders, slitters
and granulating equipment. However, few companies offer complete recycling
systems which include all equipment required to process whole tires to crumb
rubber. Those competitors which offer complete systems, sell systems which are
based on one of two design types. The older systems use efficient shredding
equipment but rely on hammermill technology for rubber granulation. These
systems tend to be very large, noisy and inefficient, in large part because the
hammermill technology was designed for other industrial applications and has
been adapted for use in tire recycling.
The second type of system offered by competitors is a cryogenic (freezing)
process which freezes the tires to very cold temperatures using liquid
nitrogen, at which point the brittle rubber can be broken free of the steel and
fabric content of the tire. Cryogenic systems are expensive, costing from 4
to 20 million dollars. To date, the Company is not aware of any facilities
using a cryogenic system that is not subsidized by government grants or private
grants from producers of liquid nitrogen. Although this process uses much more
sophisticated technology, the process tends to be cumbersome and expensive to
operate. If the equipment is shut down for maintenance or repairs the entire
system must be taken off line for a period of days. The second disadvantage of
such systems is that the crumb rubber made by the cryogenic process has reduced
elasticity, which limits the usefulness of the crumb rubber for after market
products.
10<PAGE>
The CISAP system was designed specifically to granulate rubber from
recycled tires efficiently at ambient temperatures. The COMPACT 6000 System was
designed to input up to 2,204 pounds of tires and the COMPACT 9000 System was
designed to input 3,306 pounds of tires per hour. As of December 1996, the
estimated cost of establishing a fully operational tire recycling facility
utilizing the COMPACT 9000 System was approximately $2,000,000, plus land and
buildings. The advantages of the CISAP system over systems offered by
competitors are (i) lower initial cost of a system; (ii) higher operating
efficiencies and lower operating expense; (iii) lower maintenance down time;
and (iv) recycling at ambient temperatures resulting in high quality crumb
rubber output. Similarly, the Eurectec EGS system is designed to operate at
ambient temperatures on a larger scale than the CISAP 9000 System.
MARKETING AND SALES
Eurectec has had most success marketing and selling outside of the United
States where there are attractive incentives offered to investors by way of
government grants, low interest loans and tax advantaged investment programs.
Eurectec has encountered challenges in making sales of the CISAP systems
in the United States. These obstacles arise from the substantial capital
expenditure required to commence a recycling facility and the ability of
interested parties to secure adequate supplies of tires for recycling. The
owners of large tire dumps have been reluctant to make the substantial capital
investment necessary to realize additional value from the discarded tires.
Tire dump operations have been profitable simply from the tipping charges
received at the time tires are delivered to such tire dumps. However, tire
dumps are now being recognized as nuisances and public safety hazards. The
emerging trend is, as the viability and profitability of tire recycling
continues to develop, to require storage operators to do more than store tires
in large dumps. As the tire recycling industry matures, owners of tire dumps
will be prohibited from operating mere dumps and will be required to begin
recycling activities. In addition, efficient and profitable recycling
facilities will open the way for other persons interested in tire recycling to
negotiate contracts for the acquisition of discarded tires necessary to supply
feed stock to such recycling facilities.
An additional challenge to Eurectec in marketing the recycling systems is
that there is a long sales cycle. Typically, it takes six to eighteen
months from the time Eurectec has its initial contact with a potential customer
until equipment is installed and Eurectec is paid in full. It may take up to
six months for CISAP to construct a system. Currently, CISAP does not
manufacture the equipment until Eurectec orders it and the purchaser has a
letter of credit in place for full payment of the system. After the equipment
is finished, depending upon the location, it takes from six to eight weeks to
ship and install a system. The extended period of time it takes for Eurectec
to complete a sales transaction is not unusual in the industry. These
challenges, however, have caused the Company to experience inconsistent cash
flow which has impacted the ability of the Company to grow. The sales cycle
of SMS press equipment ranges from approximately three to six months.
Management believes that marketing and sales emphasis on SMS presses, with a
shorter sales cycle, will allow the Company to normalize cash flows and to give
stability to Company operations.
11<PAGE>
The Company continues to rely principally on the efforts of its officers
and directors to generate sales. Eurectec's principal method of marketing is
done through direct sales by officers of the Company and approximately 12
independent commissioned sales representatives worldwide through participation
at trade shows and active membership in trade organizations. Eurectec
maintains a site on the Internet at http:\\www.eurectec.com. Since September
of 1996 when the web page was established there have been over 200,000 visitors
to the site. Eurectec is a member of the Rubber Pavements Association located
in Mesa, Arizona and is a founding member of the International Recycling
Federation located in Bonn, Germany.
Eurectec is a member of the International Tire and Retreading Association,
headquartered in Louisville, Kentucky (ITRA). ITRA will sponsor the 40th World
Tire Conference & Exhibition in April of 1997. Eurectec has had a booth in
this annual conference and exhibition in two of the past three years. Eurectec
will not have a booth in the 1997 conference but, Eurectec will have
representatives attend the conference and will have an insert brochure in the
conference edition of Scrap Tire News. Eurectec has generated leads at both
exhibitions at which it has had a booth and those at which it has only had
representatives attend. When Eurectec does not have its own booth,
representatives have generated sales leads networking with representatives at
booths of equipment manufacturers which have furnished equipment to Eurectec.
The Company will also attend the 30th Annual Waste Expo in Atlanta,
Georgia in May of 1997, the Autopromotec in Bologna, Italy in May of 1997, as a
joint exhibitor with CISAP, and the Rubber Expo 97 sponsored by the Rubber
Division of the American Chemical Society to be held in Akron, Ohio in October
of 1997.
ITRA will also exhibit at Reifen 98 - International Trade Fair for Tires
and Retreading in May, 1998 in Essen, Germany. There will be a special section
for U.S. Group Exhibits. The Company will attend this conference and intends
to apply for booth space at the exhibition. Eurectec also has plans to attend
the Pollutec International Trade Show for Environmental Technology and
Services, Lyon, France in 1998 and to have a booth at the TyreExpo Asia to be
held in 1998 in Singapore.
The Recycling Research Institute, located in Suffield, Connecticut (RRI)
holds an annual convention and Tire Recycling Industry Exposition. Eurectec
will attend this exhibition in 1998. In addition, Eurectec subscribes to the
RRI publication, ScrapTire News, a monthly newsletter and is listed in the
Scrap Tire Users Directory, an RRI annual publication which is a business
reference guide to the tire recycling industry.
12<PAGE>
Although the environmental problem of waste tires has existed for decades,
the tire recycling industry is still in its early stages of development
worldwide. No single response to the problem of waste tires has become
generally accepted. However, the momentum in the industry favors tire
recycling which reclaims the rubber resource. No single technology has
acheived market dominance. Under such market conditions, potential investors
are slow to make investment decisions. Manufacturers of recycling equipment do
not carry large inventories of equipment. The Company has limited capital and
limited full time personnel engaged in marketing and sales activities. These
are the major reasons that Eurectec has not established a consistent volume of
sales. At the same time the Company is aware that these challenges also form
significant barriers to entry by competitors which will face many of the same
challenges.
EMPLOYEES
Currently the Company has no employees. The Company contracts with an
employee service agency to provide office staff and secretarial services. The
Company relies heavily on the efforts of its President, Ehrenfried Liebich, it
also relies upon the services of various consulting agencies including agencies
owned and operated by Keith Fryer, a Company Vice President and Director and
John Pope, the Company Secretary, Treasurer, a Vice President and Director.
COMPANY SUBSIDIARIES
The majority of the Company's business is transacted through its 85% owned
subsidiary Eurectec. The remaining 15% interest in Eurectec is held by 67
shareholders, none of whom are officers, directors, control persons or
affiliates of the Company. Eurectec was formed by the Company, under the laws
of the State of Nevada in 1991. As discussed earlier, the Company negotiated
its licensing agreements with CISAP and SMS and Rothbury through Eurectec and
the Company uses Eurectec to market and sell the tire recycling equipment.
Eurectec also markets and sells sub-licenses for the Company. The Company
expects to enter into various other businesses most of which will be related
either directly or indirectly to the environmental technologies business.
Pursuant to that expectation, the Company has formed various subsidiaries of
Eurectec which will be used to transact the Company's business dealings in
these areas.
Eurectec International, Ltd., is a wholly owned subsidiary of Eurectec.
Eurectec International was established pursuant to the laws of the Province of
British Columbia and was incorporated in May 1991. The Company formed Eurectec
International to transact the international affairs of the Company in
individual recycling projects. The organization costs of establishing Eurectec
International were funded by Mr. Liebich. Eurectec International is currently
not engaged in any business transactions.
Eurectec Industries, Ltd., is a wholly owned subsidiary of Eurectec
International. Eurectec Industries was formed by the Company pursuant to the
laws of the Province of Alberta and was incorporated in February 1996 to take
advantage of government incentives offered to Canadian companies operating in
Canada. Eurectec Industries is currently unfunded and transacting no business.
13<PAGE>
Pacific Rubber Recycling Ltd, ("Pacific Rubber") is a wholly owned
subsidiary of Eurectec International. Pacific Rubber was organized pursuant to
the laws of the Province of British Columbia and was incorporated in May 1995.
When cash flow improves, the Company intends to open its own tire recycling
facility operated through this company. The Company currently is not pursuing
the establishment of a recycling facility. Pacific Rubber is unfunded and has
not transacted any business activities.
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ITEM 2. DESCRIPTION OF PROPERTY
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On June 25, 1996 the Company entered into a new one year lease agreement to
lease an industrial condominium in a multi-tenant building for use as its
principal executive office. The Company pays $3,281.00 per month for 4,495
square foot facility. The Company has an option to renew the lease for a two
year period. The Company intends to exercise the lease extension option in
July of 1997. The building is located at Park Irvine Business Center, 14771
Myford Road, Building B, Tustin, California 92780. Prior to entering the
lease, the Company had been leasing space in an executive office complex and
space in a storage facility on a month to month basis. The new space the
Company is leasing is sufficiently large to accommodate all of its
administrative and storage needs. In addition, the current location of the
Company houses an SMS press and accompanying equipment to demonstrate the
press and manufacture samples of products produced by the press.
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ITEM 3. LEGAL PROCEEDINGS
- ------------------------------------------------------------------------------
An action filed against the Company in March, 1995 by Herbert and Isabel
Kuglemeier was tried in October 1996, in the United States District Court for
the District of Utah, Central Division. The trial resulted in a verdict in
favor of the Company, its President and Eurectec as to all of the claims
asserted against them.
An action was filed by Duthie Electric against "Eurectec Wilmington, Inc.,
dba, Eurectec, Inc." Eurectec Wilmington, Inc. is a California corporation and
was formed for the purpose of selling a CISAP 3000 System to an investor group
in California. The investors did not obtain funding to complete the purchase.
Eurectec, Inc. is a Nevada corporation and a subsidiary of the Company. A
judgment was obtained against Eurectec Wilmington, Inc. doing business under
the assumed name of Eurectec, Inc. and property of Eurectec was executed on
by the sheriff in Orange County, California. Neither the Company or
Eurectec, Inc. was a party to the litigation. In 1997 the Company fully
resolved the dispute by making a payment in the amount of $24,908 to Duthie
Electric which was approximately one-half of the amount of the judgment
entered against Eurectec Wilmington, Inc.
15<PAGE>
The Company is not currently involved in any legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITIES HOLDERS
- ------------------------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ending December 31, 1996.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's common stock is listed on the NASD OTC Bulletin Board under the
symbol "QTMG." As of December 31, 1996 the Company had 268 shareholders holding
9,459,696 common shares. Of the issued and outstanding common stock, 2,432,266
are free trading, the balance are "restricted securities" shares as that term is
defined in Rule 144 promulgated by the Securities and Exchange Commission . The
Company has never declared a dividend on its common shares.
The published bid and ask quotations for the previous two fiscal years are
included in the chart below. These quotations represent prices between dealers
and do not include retail markup, markdown or commissions. In addition, these
quotations do not represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES ASK PRICES
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1995
First Quarter ended March 31 .25 .125 .875 .50
Second Quarter ended June 30 .1875 .0625 .8125 .625
Third Quarter ended Sept. 30 .1875 .0625 .8125 .5625
Fourth Quarter ended Dec. 31 .1875 .0625 .8125 .4375
1996
First Quarter ended March 31 .4375 .0625 .875 .625
Second Quarter ended June 30 .1875 .125 .75 .75
Third Quarter ended Sept. 30 .125 .0625 .75 .50
Fourth Quarter ended Dec. 31 .0625 .03125 .50 .25
</TABLE>
15<PAGE>
The foregoing figures were furnished to the Company by the National Quotation
Bureau, 1 Penn Plaza, 15th Floor, New York, New York 10001.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had on hand cash of $6,602.
The management of the Company made the decision at year end 1992 to
concentrate its resources and management efforts on the Company's tire recycling
operations. This has been the Company's business since the beginning of 1993.
Sales generally take six to eighteen months to complete. Some cash flow is
generated by customer deposits and miscellaneous charges when a contract is
signed, however, the bulk (generally 80%) of the cash flow is released to the
Company when the product is shipped. Contracts often provide for a final
payment, generally 10% of the contract amount, to be paid when installation
is completed.
Based on the periodic nature of these payments and the ongoing nature of
administrative expenses, the Company intends to increase, beginning in 1997, the
initial payment made when sales agreements are executed and obtain the full
balance when the equipment is delivered. In addition, the Company is currently
negotiating financing arrangements whereby the letters of credit, opened by
equipment purchasers to secure payment of equipment, will be used as collateral
for short term borrowing by the Company. The Company believes that these
negotiations will be successfully concluded in the second half of 1997 and that
the financing arrangements will eliminate many of the cash flow timing problems
the Company has experienced in the past.
The Company received an unsecured loan in the year ended December 31, 1995
of $273,158 from German lenders. The proceeds of the loan were used to finance
the research and development of the EGS system and for working capital to the
Company. The loan is due December 31, 1997 and accrues interest at the rate of
16.67% per annum. The SMS press equipment purchased in 1996 for $171,209 was
also financed by the German lenders under the interest rate and payment terms as
the 1995 loan.
In 1996 Eurectec purchased the rights to technology from Rothbury
Engineering Limited for $500,000. Eurectec made initial payments under the
agreement in the amount of $150,000. The payments were made from working
capital generated from period sales. Eurectec was unable to make payment of
the full amount of the purchase as required by the agreement on December 31,
1996. However, the parties agreed to an extension of the payment, with no
penalty to Eurectec, period to December 31, 1997.
16<PAGE>
The Company anticipates repaying the loans from the German lenders and the
amount due to Rothbury Engineering Limited from working capital generated from
future period sales. The Company is also investigating the possibility of
engaging an investment banker to make an offering of common shares to raise
adequate cpaital in the event anticipated sales revenues are not fully realized.
To date no agreements or commitments have been made to secure additional capital
for the Company.
In 1996, the Company arranged for a secured credit card to facilitate
travel. A deposit of $5,000 cash was used as security for the credit card. The
deposit earned $122 interest during the year. Because these funds must remain
on deposit to secure charges on the credit card, it has been categorized as Cash
Pledged, a non-current asset.
Eurectec signed a territorial license in May of 1996 with Atlanta Rubber
Recycling, Inc. located in Miami, Florida in connection with an equipment sales
agreement for a CISAP 3000 System owned as inventory by Eurectec and an SMS
press and ancillary equipment. The equipment sales agreement is for
$1,602,000. The license agreement provides Atlanta Rubber with exclusive
rights to practice or sub-license Eurectec's technology in order to use and
operate CISAP granulators and SMS presses and/or to sell equipment and
sub-sublicenses in the State of Florida. The license fee is for a total of
$700,000. Atlanta Rubber paid a deposit of $35,000 upon signing the
agreement of which $15,000 was paid in cash and $20,000 is in the form of a
demand note to Eurectec. The balance due Eurectec of $665,000 is to be paid
at the time of final payment under the equipment sales agreement. Atlanta
Rubber has requested an extension of time to perform under the equipment
sales agreement until June 5, 1997. The Company anticipates that Atlanta
Rubber will conclude this agreement by the extended deadline of June 5, 1997.
In October of 1996 Eurectec signed an equipment sales agreement in the
amount of $3,737,000 with Mexico Recycling Technology, located in Mexico City,
Mexico (Mexico Recycling). The equipment is to be delivered in two phases. In
January 1997 the purchaser opened letters of credit (totaling $2,101,000) to
purchase the equipment for Phase 1 of the project. Phase 1 equipment will be
delivered during 1997 with revenue to the Company of $2,101,000. Phase 2 of
the equipment purchase to the Mexico is also anticipated to be delivered in late
1997, or early 1998 with revenue to the Company of $1,636,000.
Eurectec sold a territorial license for Mexico to Mexico Recycling for
$500,000. The license was originally granted in 1994. At that time Eurectec
received an initial payment of $50,000 and received a promissory note for
$450,000. Subsequently, Mexico Recycling defaulted on the license agreement
and then renegotiated a reinstatement of the license at the time it executed
the equipment sales agreement in the fourth quarter of 1996. Eurectec is
scheduled to receive a license payment of $50,000 upon the delivery of Phase 1
equipment for which Mexico Recycling opened a letter of credit in January 1997.
The balance of $400,000 is to be paid in increments over a nine month period
after delivery of the Phase 1 equipment.
17<PAGE>
Currently in negotiation, the Company anticipates that a contract for Phase
3 of the Saudi project will be finalized during the second half of 1997. It is
estimated that Phase 3 equipment purchase will be for approximately $3,000,000.
Delivery of this equipment is anticipated in the first half of 1998.
Sales discussions and negotiations are underway with qualified
international prospects in Germany, Hungary, Lithuania, The United Kingdom,
Ireland, Morocco, Egypt and Syria and domestically with prospects in Nevada and
Kentucky. Although contracts with these prospects are not finalized, management
believes that one or more of these sales will be signed and sales deposits will
be received in 1997.
Management believes that proceeds from equipment sales and license fees due
from Mexico and equipment sales to Saudi Arabia, together with pending equipment
sales and license fees from Atlanta Rubber and the current sales activities of
SMS press equipment will provide sufficient capital and liquidity to meet the
Company's needs for 1997, including the Company's capital commitment for the
Rothbury license. The Company is also investigating the possibility of engaging
an investment banker to make an offering of common shares to raise adequate
capital in the event anticipated sales revenues are not fully realized. To date
no agreements or commitments have been made to secure additional capital for the
Company.
RESULTS OF OPERATIONS
The Company generated a $228,820 loss in the year ended December 31, 1996
compared to a loss of $624,695 the year ended December 31, 1995. The 1995 loss
includes an Accounts Receivable write off of $953,634, which resulted from the
Evergreen restructure of the Canadian license and equipment receivable
($882,498) (see Note #11 to the attached Financial statements), the Chinese
equipment receivable ($71,136). and loan receivable from Eurectec Deutchland
GmbH of ($38,750). The 1996 loss includes an Accounts Receivable write-off of
$338,181 for A. Geist and write-offs from Eurectec Deutchland GmbH of $38,750
for a loan receivable and $6,250 investment loss for a total of $376,931 1996
loss.
Net cash used by operations during the year ended December 31, 1996 was
$17,308 compared to $182,156 cash used in operations in the year ended December
31, 1995. This resulted primarily from profitable operations, the reduction of
customer deposits, application of inventory deposits, and expensing prepaid
commissions.
Accounts Receivable increased in the year ended December 31, 1996 by
$24,559. Accounts Receivable decreased $453,182 in 1995. The decrease in
Accounts Receivable in the year ended December 31, 1995, is the result of the
Evergreen license fee receivable write-off of $627,385 categorized as a current
receivable and the addition of $174,203 from 1995 sales transactions. (See Note
#11 to the attached financial statements). The 1995 Accounts Receivable balance
was the balance due on Phase 1 of the Saudi project which was collected in full
during 1996. The December 31, 1996 balance is comprised of $184,522 from
delivery of miscellaneous additional items resulting from change orders upon
completion of Phases 1 and 2 of the Saudi project and $20,000 balance from the
Florida license sale note.
18<PAGE>
Customer deposits increased $488,938 in the year ended December 31, 1994
because of the receipt of the deposit for the Saudi project Phase 2 order.
Customer deposits were reduced $244,464 (one half of the total deposit) in 1995
with the application of that amount to revenue due to the delivery of Phase 1
equipment of the project. The December 31, 1995 balance of $244,464 was applied
to revenue because Phase 2 of the Saudi project was completed during 1996.
During 1996, the Company recognized as revenue any Customer deposits made in
1996. At the end of 1996 there were no outstanding customer deposits.
Prepaid commissions were expensed in the year ended December 31, 1995,
also, because of the delivery of equipment under Phase 1 of the Saudi project.
Additional non-prepaid commissions were paid during 1996, however, the contracts
were delivered during the year and the Commissions were expensed prior to
December 31, 1996.
Minority interest was decreased by $12,989 during the year ended December
31, 1996 compared to a decrease of $122,705 during 1995. This is due to the
increase in the percentage (15.62% to 20.0%) of the minority interest during
1996. The increase in minority interest increases the holders percentage of the
accumulated loss (retained earnings) from prior periods. This dilution is
larger than participation in current earnings and results in a net reduction of
$12,989.
The Company leased two photocopiers in 1991. In early 1992 the Company
defaulted in its lease payment obligations. The leasing company never made
demand for payment or attempted repossession of the copiers or initiated
litigation against the Company. The Company has lost or misplaced its files
regarding the lease agreements. In 1992 one of the copiers was stolen from the
Company. The Company has never paid for the copiers and has taken the unpaid
amount of the leases into income. The default in the lease obligation will not
have a material impact on the Company's future financial condition or results of
operations because the amounts which might be claimed under the lease
agreements are not material in relation to the Company's overall revenue and
because claims for back lease payments may be legally unenforceable under
applicable statutes of limitations.
The Company purchased an SMS press during the year ended December 31, 1996
for $182,295. The Company paid $11,776 in cash and the balance of $171,029 was
financed by a loan from the German lenders who increased the loan originally
negotiated in 1995.
The Company also entered into a license agreement with Rothbury
Engineering, Limited, giving the Company certain worldwide exclusive rights to
technology allowing heat conduction through floor tiles. The Company agreed to
pay $500,000 for the license rights. Because of cash flow constraints, the
Company was unable to meet the payment schedule as originally negotiated. The
parties renegotiated the payment terms with no penalty to Eurectec. Under the
new payment terms, Eurectec paid $150,000 of the purchase price in cash during
1996 with the balance of $350,000 financed by the
seller and due from Eurectec on December 31, 1997.
19<PAGE>
The Company applied cash generated from the 1996 sales to the reduction of
Accounts Payable by $271,047 ($205,332 at December 31, 1996 vs. $476,379 at year
end 1995). Cash was also utilized to reduce accrued expenses to $158,822 at
December 31, 1996, which is a reduction of $68,064 from the December 31, 1995
balance of $226,886.
The Company concluded the sale of the residential property it owned in
Florida in February, 1996. The sale resulted in a gain of $38,327 in the year
ended 1996, no comparable transaction occurred previously.
Amounts due to Ehrenfried Liebich, an officer of the Company, increased to
$151,152 during the year ended December 31, 1996, from $58,701 at December 31,
1995. The increase of $92,451 is due to cash advances from the officer and non
reimbursement of expenses incurred on behalf of the Company. The loans from the
officer are non-interest bearing and are payable on demand.
The Company paid a security deposit on its new office space in the amount
of $3,281. Deposits increased from $661 to $3,281 due to this security deposit.
The previous security deposit was for utilities at the Miami facility and was
applied against charges and expensed in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996, AND THE YEAR ENDED DECEMBER 31,
1995.
Revenue for the year ended December 31, 1996 was $2,907,679. This is A
$227,889 increase over the revenues of $2,679,790 generated in the year ended
1995. The increase in 1996 results from an increase in equipment sales of
$192,889 and $35,000 from a territory sublicense sold to Atlanta Rubber.
The Company's sales are recorded only when equipment is shipped and title
passes to the buyer. Typical sales are by letter of credit, with the funds
being released by the bank when the equipment is placed for shipment with the
carrier. To date payment for the Company's equipment sales have been made on
the basis of 10% due at the time of sale, 80% due on shipment of equipment and
10% due at completion of installation. This has resulted in the Company
receiving its revenue in large lump sums at irregular intervals rather than in
smaller amounts paid at regular intervals. The Company intends that future
sales require 15%-20% of the amount due at the time of sale and the balance upon
delivery with the equipment manufacturer supplying the purchaser with a
performance and completion bond prior to delivery.
Cost of Sales consists of wholesale costs to the Company of the granulating
systems and support equipment plus freight and insurance, which are billed to
the client. The increase in equipment sales ($192,889) in the year ending
December 31, 1996, resulted in an increased cost of sales compared to 1995.
Cost of Sales was $1,895,468 for the year ended December 31, 1996, a $206,521
increase over the $1,688,947 cost of sales in 1995. Different support equipment
such as de-beaders, slitters and shredders are acquired from various
manufacturers and may carry differing profit margins but, they do not affect the
product mix of full tire recycling systems. Cost of Sales as a percentage of
total retail equipment sales was 66% in 1996 compared to 63% in 1995. This
improvement in margins is mainly due to payments received by the Company in 1996
upon completion of Phase 1 of the Saudi project and delivery of Phase 2
equipment to the Saudi project.
20<PAGE>
Commission expense for the year ended December 31, 1996 of $195,077 is less
than the 1995 expense of $329,960 by $134,883. This is due to the payment of
finders fees in 1995 which were not required on the 1996 orders.
Travel expenses in the year ended December 31, 1996 exceeded 1995 by
$22,118. ($67,586 in 1996 vs. $45,468 in 1995). This was due to supervising
the completion of the Saudi project and an increased international and domestic
sales efforts.
The Company moved to larger office facilities during June 1996. The new
facilities also have sufficient space for demonstration of the SMS press and
manufacture of tile samples. Because of the increased space, rental expense
increased to $83,103 in the year ended December 31, 1996 compared to $57,221 in
1995. The physical relocation was accomplished with Company personnel at
minimum incremental costs. Such costs were less than $500.
Office expense of $21,546 in the year ended December 31, 1996 is a
reduction of $2,300 from the 1995 expense of $23,846. This decrease is due to
moving from the prior offices where many services were purchased at higher than
current costs. Administrative Expenses increased by $17,982 from $69,301 in the
year ended December 31, 1995 to $87,283 in 1996 in support of the floor tile
program and generally increased marketing efforts.
The use of outside consultants was increased during 1996 and the
corresponding expense increased to $265,375 in 1996 from $164,178 in 1995. The
Company employed outside consultants for marketing and accounting in 1995 and
1996. Additional consulting expense was incurred in 1996 for the start up of
the technical and sales efforts associated with the SMS press equipment.
Interest expense was increased during 1996 by $18,544 ($88,161 vs. $69,617)
due to the increase of borrowing under the 1995 loan arrangement and a full year
interest in 1996 on the 1995 borrowing.
Professional expenses increased from $46,925 in the year ended December 31,
1995 to $68,147 in 1996. This increase is due to the legal fees incurred in
the successful defense of the Kuglemeier litigation, and the defense of the
title of Eurectec to a COMPACT 3000 System.
Foreign Currency translation gains of $6,344 in the year ended December 31,
1996 compared to a cost of $532 in the prior year. This gain is due to the fact
that the U.S. Dollar has strengthened in relation to the German Mark in both of
the years. The Company's non U.S. lender debt is repayable in German Marks.
This strengthening means that fewer Marks would be needed to repay the debt than
were needed at the previous year end. The Company has made arrangements with a
California bank to hedge foreign exchange risks. These arrangements are
intended to cover existing German lender debt (German Marks) and purchase orders
(Italian Lira and/or German Marks). To date this arrangement has not been
utilized because of the strength of the U.S. Dollar.
21<PAGE>
Although the federal tax laws provide for a loss carry forward, the State
of California where the Company is located, does not. The Company's current
year profit is not subject to federal taxes because of the prior period losses.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995, AND THE YEAR ENDED DECEMBER 31,
1994.
Revenue for the year ended December 31, 1995 was $2,679,796. This is an
increase over the revenues of $1,568,960 generated in the year ended 1994. This
change is the result of increased sales volume, consisting of payment for Phase
1 of the Saudi project and receipt of payment for an equipment sale to A. Geist
in Germany. Most of the Company's equipment sales were shipped and recorded
during the fourth quarter of 1995.
Cost of Sales consists of wholesale costs to the Company of the granulating
systems and support equipment plus freight and insurance, which are billed to
the client. Equipment sales in 1995 were $2,679,790 compared to $1,398,960 in
1994, representing an increase in 1995 of $1,280,830. The increase in retail
equipment sales in the year ending December 31, 1995 resulted in cost of sales
increase in the amount of $1,688,947 which is an increase of cost of sales of
$708,398 compared to cost of sales in the amount of $980,549 in 1994. Different
support equipment such as de-beaders, slitters and shredders were acquired from
various manufacturers and carried differing profit margins but did not affect
the product mix of full tire recycling systems.
Commission expense for the year ended December 31, 1995 of $329,960
exceeded the 1994 expense of $113,000 by $216,960. This is due to the increased
sales and higher commission rates to secure the sales.
Travel expenses in the year ended December 31, 1995 exceeded 1994 by
$35,980 ($45,468 in 1995 vs. $12,488 in 1994). This was due to the efforts of
completing the Saudi sale, customer service of prior years sales and an
increased domestic sales effort.
In 1995, Evergreen, a Canadian sub-licensee, opened its recycling plant in
Canada and made it available to the Company for demonstration purposes. Prior
to this time a facility was leased to Eurectec Wilmington, Inc., a California
corporation and the Company had a CISAP 3000 System owned by Eurectec, Inc. on
the leased premises as a demonstration unit. The decision was made in the first
quarter of 1995 to close the Wilmington facility and move the Company offices to
a small office in an office building. This move took place at the end of
March 1995. As a result of the move, leasehold improvements were abandoned and
abandonment expenses of $10,500 were recorded during the three months ended
March 31, 1995. The physical relocation was accomplished with Company personnel
at minimum incremental costs. Such costs were less than $2,000.
22
<PAGE>
Occupancy related expenses were reduced as a result of the redefined space
needs. Office expense of $23,846 in the year ended December 31, 1995 was a
reduction of $11,587 from the 1994 expense of $35,433. Rent and Utility
expenses were reduced from $98,170 in the year ended December 31, 1994 to
$57,221 in 1995. Administrative expense was reduced from the 1994 level of
$131,700 to $69,301 in the year ended December 31, 1995 primarily due to
reduction in administrative staff from three people in 1994 to the use of
contract services from an outside agency throughout the last three quarters of
1995.
The use of outside consultants was reduced during 1995 and the
corresponding expense reduced from $274,478 in 1994 to $164,178 in 1995.
Outside consultants were used for production, marketing and finance and
accounting during 1994 and for marketing and accounting in 1995.
Interest expense was increased during 1995 by $27,871 ($69,617 vs. $41,746)
due to the German lender loan arrangements and borrowing completed during 1995.
During the quarter ended June 30, 1995, the Company restructured its
relationship with Evergreen. Due to change in ownership, the objectives of
Evergreen changed. Eurectec agreed to cancel the outstanding Accounts
Receivable for the Canadian license in return for the return of the license
rights to Eurectec, except for the exclusive license rights to Alberta, Canada
which were retained by Evergreen. Eurectec also agreed to cancel the Accounts
Receivable of $230,000 for the equipment sale. The Company received a 20%
equity interest in Evergreen which had no value and has not been recorded on the
financial statements of the Company. Evergreen is a privately held start-up
business that is not yet fully operational and has no assets nor has Evergreen
generated any profit to date.
During the year ended December 31, 1994, the Eurectec sold and delivered a
minimum equipment package (Granulator, Shredder and conveyor only) to a
customer in mainland China. Ninety percent of the purchase price was released
under the terms of the letter of credit at the time of shipment. The final 10%
was to be released subsequent to installation. The equipment supplier provided
the equipment to specifications, however, the net yield of rubber was lower than
the parties expected because of the high fiber content of Chinese manufactured
tires. Due to this lower output, the client refused to release the remaining
balance and the letter of credit expired. The Company wrote off the balance of
$71,136 during the year ended December 31, 1995 as uncollectible.
During the three months ended June 30, 1995, the Company was able to sell
25,000 common shares owned by it in Texas Securities, Inc. for $12,500. The
Company had written off these shares in 1993, when Texas Securities, Inc. filed
for Chapter 7 liquidation under Federal bankruptcy law. A group of investors,
of which the Company was not a party, challenged the proceedings and wished to
consolidate the ownership of the Texas Securities, Inc. shares. The Company
retained 25,000 shares in the hope of benefiting from investor group activities.
Only the cash receipt for the portion sold was recognized, as the value of the
remaining portion is uncertain and the Company's stock is no longer trading.
23<PAGE>
- ------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following financial statements of the Company are filed as a part of
this report:
Report of Darrell Schvaneveldt, Certified Public Accountant;
Balance Sheets as of December 31, 1996 and December 31, 1995;
Statements of Stockholders' Equity for the years ended December31, 1996,
1995, and 1994;
Statements of Cash Flows for the years ended December 31, 1996, 1995,
and 1994;
Notes to Financial Statements.
There are no financial statement schedules included as part of this report.
The financial statements of the Company are set forth immediately following
the signature page to this Form 10-KSB.
- -------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
The Company has had no disagreements with its accountants as to any matter
regarding accounting or financial disclosure.
- -------------------------------------------------------------------------------
PART III
- -------------------------------------------------------------------------------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------------------------------------
The following table sets forth as of December 31, 1996 the name, age,
and position of each executive officer and director and the term of office of
each director of the Corporation.
<TABLE>
<CAPTION>
Name Age Position Director or Officer Since
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Ehrenfried Liebich 54 President March 1989
Director March 1989
Keith J. Fryer 47 Vice President March 1995
Director March 1995
John F. Pope 53 Vice President January 1991
Secretary January 1991
Treasurer January 1991
Director March 1989
Markus J. Lenger 32 Vice President October 1995
- ------------------------------------------------------------------------------
</TABLE>
24<PAGE>
All officers hold their positions at the will of the Board of Directors.
All directors hold their positions for one year or until their successors are
elected and qualified.
Set forth below is certain biographical information regarding each of
the Company's executive officers and directors:
EHRENFRIED LIEBICH is the President and a Director of the Company. Mr.
Liebich first became involved with the Company in March 1989. Mr. Liebich
was born and educated in Germany. After his formal secondary education in
Germany he joined the Merchant Marine, which he left as a ship's Officer with
the Court Line, London, U.K. Mr. Liebich immigrated to Canada in 1965 where
he started various businesses in the areas of real estate, investment,
chemical distribution and electronics. In March of 1989 he became the
President, a Director and controlling shareholder of the Company.
KEITH J. FRYER is a Vice President and a Director of the Company. Mr.
Fryer first became involved with the Company in August 1992. Mr. Fryer was
educated in England and graduated from the Cheshire College of Further
Education. He also studied at several UK colleges of management and became a
member of the Institute of Marketing London in 1974. Mr. Fryer became a
chartered member of the Institute in 1989. He has been a member of the
Marketing Society London since 1989. He is also a life member of the Wig &
Pen Club, The Strand, London. Mr. Fryer successfully operated Keith Fryer
Associates England, a business he formed in 1986, that provided marketing
consulting services in various business areas. In 1992, Mr. Fryer
established Keith Fryer Associates California, Inc., a marketing consulting
firm. Mr. Fryer became a Vice President and Director of the Company in March
1995.
JOHN F. POPE is the Secretary, Treasurer, a Vice President and a
Director of the Company. Mr. Pope first became involved with the Company in
March 1989. Mr. Pope received a B.S. degree in business administration from
Seton Hall University in 1963. He has also done post-graduate study at New
York University and University of Miami. Mr. Pope has been certified as a
Certified Management Accountant by the Institute of Management Accountants.
From November 1987 to the present, Mr. Pope has been self-
employed as an independent financial consultant to various public and private
companies. Mr. Pope became a Company Director in March 1989. He became
the Secretary, Treasurer and a Vice President of the Company in January 1991.
25<PAGE>
DR. MARKUS J. LENGER is a Vice President of the Company. Dr. Lenger
first became involved with the Company in October 1995. Dr. Lenger received
a B.S. in electronic engineering from The University in St. Gallen,
Switzerland. He also has a Doctorate degree in high energy physics from the
Max Plank Institute in Munich, Germany. Dr. Lenger has been self-employed as
a consultant through his company, BioSurf, Inc., a California corporation he
founded in 1994. Previously, Dr. Lenger was a Vice President of Research
and Development for Green Earth Technologies. He has also been associated
with BioVersal and OekoSens. Both companies are in the environmental
remediation business. Dr.Lenger has eight years experience in developing
bioremediation technologies. His technologies have been used in Europe to
successfully decontaminate more than 600,000 tons of highly contaminated
soil. Dr. Lenger also spent eight months in Valdez, Alaska during the Exxon
Valdez oil spill where he developed systems for waste water processing, soil
remediation and biological mixed surfactant systems.
There are no family relationships between any of the Company's officers
and directors. In addition, none of the officers and directors have been
involved in certain legal proceeding which require disclosure in this annual
report of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and executive officers are required to comply with section
16(a) of the Securities Exchange Act of 1934, which requires generally that
such persons file reports regarding ownership of and transactions in
securities of the Company on Forms 3, 4, and 5. A Form 3 is an initial
statement of ownership of securities, which is to be filed by the officers
and directors owning shares in the Company within 10 days after the effective
date of the Company's filing on Form 10-SB. Form 4 is to report changes in
beneficial ownership and is due on or before the tenth day of the month
following any month in which they engage in any transaction in the Company's
common stock. Form 5 covers annual statement of changes in beneficial
ownership which is due 90 days after the fiscal year end of the Company.
Messrs. Liebich, Pope and Fryer were inadvertently late in filing reports on
Form 3 and Form 5 for the year ended December 31, 1995. And Mr. Fryer
inadvertently was late in filing a report on Form 4 regarding the sale of
4,800 common shares of the Company in 1996.
- -------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------------------------------------------------------
The following table sets forth certain summary information concerning
the compensation paid or accrued over each of the Registrant's last three
completed fiscal years to the Company's, or its principal subsidiaries, chief
executive officers during such period (as determined at December 31, 1996 the
end of the Registrant's last completed fiscal year).
26<PAGE>
<TABLE>
<CAPTION> SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal Other Annual
Position Year Salary Bonus Compensation
------------------------ ------ -------- ------ --------------
<S> <C> <C> <C> <C>
Ehrenfried Liebech 1996 -0- -0- -0-
President/Director 1995 -0- -0- -0-
1994 -0- -0- -0-
Keith Fryer (1) 1996 65,321 -0- -0-
Vice President/Director 1995 77,950 -0- -0-
1994 60,000 -0- -0-
John F. Pope (2) 1996 45,500 -0- -0-
Vice President/Secretary 1995 46,850 -0- -0-
Treasurer/Director 1994 94,450 -0- -0-
Markus J. Lenger 1996 23,944 -0- -0-
Vice President 1995 -0- -0- -0-
1994 -0- -0- -0-
- -------------------------------------------------------------------------------
<CAPTION>
Long Term Compensation
Awards Payouts
Restricted
Stock Options/ LTIP All Other
Awards SARs Payout Compensation
---------- -------- ----------------------
<S> <C> <C> <C> <C>
Ehrenfried Liebech -0- -0- -0- -0-
President/Director -0- -0- -0- -0-
-0- -0- -0- -0-
Keith Fryer (1) -0- -0- -0- 65,415
Vice President/Director -0- -0- -0- -0-
-0- -0- -0- 80,000
John F. Pope (2) -0- -0- -0- -0-
Vice President/Secretary -0- -0- -0- -0-
Treasurer/Director -0- -0- -0- -0-
-0- -0- -0- -0-
Markus J. Lenger -0- -0- -0- -0-
Vice President -0- -0- -0- -0-
-0- -0- -0- -0-
- -------------------------------------------------------------------------------
</TABLE>
(1) Keith Fryer provided consulting services to the Company through Keith Fryer
Associates California, Inc., his private consulting business. The salary
figures represent amounts paid by the Company to Keith Fryer Associates
California, Inc. These services were provided on terms at least as favorable
as could have been negotiated with an independent third party. The "other
compensation" paid to Keith Fryer was in the form of commissions for license
and equipment sales.
(2) John Pope provided consulting services to the Company through his private
consulting business, John F. Pope, Inc. The salary figures represent amounts
paid by the Company to John F. Pope, Inc. For Mr. Pope's services to the
Company as an officer and director overseeing the financial affairs of the
Company. These services were provided on terms at least as favorable as
could have been negotiated with an independent third party.
27<PAGE>
BONUSES AND DEFERRED COMPENSATION
The Company does not have any bonus, deferred compensation, employee benefit, or
retirement plan. Such plans may be adopted by the Company at such time as deemed
reasonable by the board of directors. The Company does not have a compensation
committee, all decisions regarding compensation are determined by the board of
directors.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS
The Company does not have in effect any stock option plan or stock appreciation
rights plan. The Company did not grant any options or stock appreciation rights
in 1996. The Company did have a Non-qualified Incentive Stock Option Plan
which was adopted in 1990. None of the options granted under that plan
were exercised and all of the options expired in March of 1996.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person named in cash
compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment with the company or its subsidiaries, or any change
in control of the Company, or a change in the person's responsibilities
following a changing in control of the Company.
- ------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------------
The following table sets forth as of December 31, 1996 the name and the number
of shares of the Registrant's Common Stock, par value $0.001 per share, held of
record or beneficially by each person who held of record, or was known by the
Registrant to own beneficially, more than 5% of the 9,459,696 issued and
outstanding shares of the Registrant's Common Stock, and the name and
shareholdings of each director and of all officers and directors as a group.
<TABLE>
<CAPTION>
Title of Amount and Nature of Percentage of
Class Name of Beneficial Owner Beneficial Ownership Class
- ------ ------------------------ -------------------- --------------
<S> <C> <C> <C>
Common Ehrenfried Liebich 3,962,778 41.89%
14771 Myford Road
Building B
Tustin, California 90744
Common Keith J. Fryer 5,200 (1) .0005%
14771 Myford Road
Building B
Tustin, California 90744
Common John F. Pope 131,000 (2) .013%
14771 Myford Road
Building B
Tustin, California 90744
Common Dr. Markus J. Lenger 0 0%
14771 Myford Road
Building B
Tustin, California 90744
- ------------------------------------------------------------------------------
Common All Officers, Directors
as a Group: 4,098,978 43.33%
4 persons)
- ------------------------------------------------------------------------------
</TABLE> 28<PAGE>
(1) These shares are owned by Keith Fryer Associates California, Inc. Mr.
Fryer is the owner operator of that business and is deemed to be the
beneficial owner of these shares because he holds the sole voting and
investment power regarding such shares.
(2) Mr. Pope's total shares includes 106,000 shares held of record by Parallex
Capital Corporation which he may be deemed to be a beneficial owner of the
shares because he has shared investment power of the shares.
- --------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
As of December 31, 1996 the Company had borrowed directly from Mr.
Ehrenfried Liebich the total amount of $151,152. The loans are non-interest
bearing and are payable on demand. Mr. Liebich is the President, a Director and
a beneficial owner of more than 10% of the Company's outstanding Common Stock.
All of these funds were utilized to provide the Company with needed working
capital. This loan was made on terms at least as favorable as terms the Company
could have negotiated with an independent third party.
- ------------------------------------------------------------------------------
PART IV
- ------------------------------------------------------------------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
(a) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the fourth quarter of the fiscal year.
(b) Exhibits. The following exhibits are included as part of this report:
29<PAGE>
<TABLE>
<CAPTION>
SEC Exhibit
Exhibit Reference
Number Number Title of Document Location
- ------- ------ ---------------------------- ---------------
<S> <C> <C> <C>
3.01 3 Articles of Amendment to the Incorporated
Articles of Incorporation by reference*
3.02 3 Articles of Incorporation Incorporated
by reference*
3.03 3 Bylaws Incorporated
by reference*
10.01 10 CISAP License Agreement Incorporated
by reference*
10.02 10 Canadian License Agreement Incorporated
by reference*
10.03 10 Mexico License Agreement Incorporated
by reference*
10.04 10 Amendment to CISAP License Incorporated
Agreement, dated April 26, 1996 by reference*
10.05 10 SMS Sondermaschinen License Incorporated
Agreement, dated May 15, 1996 by reference*
10.06 10 Amendment to CISAP License Attached
Agreement, dated March 14, 1997
10.07 10 Florida License Agreement Attached
10.08 10 Rothbury License Agreement Attached
23.01 23 Consent of Accountant Attached
27.01 27 Financial Data Schedule Attached
</TABLE>
*Incorporated by reference from the Registrant's registration statement on Form
10-SB, as amended, filed with the Commission, SEC file no. 0-23812.
30<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf of the undersigned, thereunto duly
authorized.
Dated: The Quantum Group, Inc.
a Nevada corporation
By: /s/ Ehrenfried Liebich
---------------------------
Ehrenfried Liebich, President
DATE NAME AND TITLE SIGNATURE
- --------- --------------- -------------------------------
4-11-97 Ehrenfried Liebich By: /s/ Ehrenfried Liebich
President/Director ---------------------------
Ehrenfried Liebich, President
4-11-97 Keith J. Fryer By: /s/ Keith J. Fryer
Vice President/Director -------------------------------
Keith J. Fryer
4-11-97 John F. Pope By: /s/ John F. Pope
Vice President/Secretary -------------------------------
Treasurer/Director John F. Pope
31<PAGE>
THE QUANTUM GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1996
&
DECEMBER 31, 1995
<PAGE>
/Letterhead/ Darrell T. Schvaneveldt
Certified Public Accountant
275 East South Temple, Suite 300
Salt Lake City, Utah 84111
Darrell T. Schvaneveldt C.P.A. Telephone (801) 521-2392
INDEPENDENT AUDITORS REPORT
---------------------------
Board of Directors
The Quantum Group, Inc., and Subsidiaries
I have audited the accompanying balance sheets of The Quantum Group,
Inc., and Subsidiaries, as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1996, 1995, and 1994. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. 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 the
significant estimates made by management, as well as evaluating the overall
financial statements presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of The Quantum Group, Inc., and
Subsidiaries, as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994, in conformity with generally accepted accounting principles.
/s/Darrell T. Schvaneveldt
- ---------------------------
Salt Lake City, Utah
March 28, 1997
<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
------------ ------------
<S> <C> <C>
ASSETS
-------
CURRENT ASSETS
Cash $ 6,602 $ 26,140
Accounts Receivable 204,522 179,963
Inventory 490,579 490,579
Deposit on Inventory -0- 424,820
Notes Receivable -0- 83,960
------------ ------------
Total Current Assets 701,703 1,205,462
PROPERTY & EQUIPMENT
Furniture & Fixtures 10,651 10,693
Residential Property -0- 236,586
Vehicles -0- 2,248
Equipment 170,144 -0-
------------ ------------
Total Property &
Equipment 180,795 249,527
OTHER ASSETS
Accounts Receivable -0- 254,221
Loan Receivable -0- 38,750
Investments -0- 6,250
Cash Pledged 5,122 -0-
License Rights 464,377 -0-
Deposit 3,281 661
Tax Benefit Deferred 80 80
------------ ------------
Other Assets 472,860 229,962
------------ ------------
TOTAL ASSETS $1,355,358 $1,754,951
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets -Continued-
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
------------ ------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
---------------------------------
CURRENT LIABILITIES
Accrued Expenses $ 158,822 $ 226,886
Accounts Payable 205,332 476,379
Due Officers 151,152 58,701
Customer Deposits -0- 244,474
Capitalized Lease Payable -0- 16,741
Current Maturities 785,197 268,835
------------ ------------
Total Current Liabilities 1,300,503 1,292,016
LONG TERM LIABILITIES
Note Payable - Machinery 170,519 -0-
Note Payable - Technology 347,547 -0-
Note Payable 267,131 266,871
Vehicle Note Payable -0- 4,781
Mortgage Payables -0- 165,000
Less Current Maturities (785,197) (268,835)
------------ ------------
Total Long Term Liabilities -0- 167,817
Minority Interest in Subsidiary 84,739 97,782
STOCKHOLDERS' EQUITY
Common Stock 50,000,000 Shares
Authorized; Par Value of $0.001
Per Share
9,456,696 Shares Issued 9,457 9,457
Paid In Capital 1,678,363 1,676,763
Accumulated Deficit (1,717,704) (1,488,884)
------------ ------------
Total Stockholders' Equity (29,884) 197,336
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $1,355,358 $1,754,951
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
December December December
31, 1996 31, 1995 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
- --------
Equipment Sales $ 2,872,679 $ 2,679,790 $ 1,398,960
License Sales 35,000 -0- 120,000
Other Income -0- -0- 50,000
------------- ------------- -------------
Total Revenues 2,907,679 2,679,790 1,568,960
Cost of Sales 1,895,468 1,688,947 980,549
------------- ------------- -------------
Gross Profit 1,012,211 990,843 588,411
Expenses
- --------
Commission 195,077 329,960 113,000
Depreciation 22,926 14,342 16,535
Amortization 33,169 -0- 113
Travel 67,586 45,468 12,488
Professional Fees 68,147 46,925 63,566
Office 21,546 23,846 35,433
Rent & Utilities 83,103 57,221 98,170
Administrative Expenses 87,283 69,301 131,700
Consultant Fees 265,375 164,178 274,478
Interest 88,161 69,617 41,746
Accounts Receivable Written
Off 376,931 953,634 -0-
Foreign Currency Translation (6,344) 532 -0-
Total Expenses 1,302,960 1,775,024 787,229
------------- ------------- -------------
Net Profit or (Loss)
From Operations (290,749) (784,181) (198,818)
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations -Continued-
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
December December December
31, 1996 31, 1995 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Other Income & (Expenses)
- -------------------------
Interest Income $ 122 $ -0- $ -0-
Gain on Sale of Residence 38,327 -0- -0-
Loss on Investment (6,250) -0- -0-
Sale of Securities
Previously Written Off -0- 12,500 -0-
Asset Abandonment -0- (10,500) -0-
Income - Capital Lease 16,741 -0- -0-
------------- ------------- -------------
Total Other Income &
(Expense) 48,940 2,000 -0-
------------- ------------- -------------
Net Profit or (Loss) (241,809) (782,181) (198,818)
Taxes & Minority Interest
Minority Interest 12,989 122,621 28,399
Provisions for Taxes
- Current -0- 34,785 -0-
Provisions for Taxes
- Deferred -0- 80 -0-
------------- ------------- -------------
Total Taxes &
Minority Interest 12,989 157,486 28,399
------------- ------------- -------------
Net Profit or (Loss) $ (228,820) $ (624,695) $ (170,419)
============= ============= =============
Net Profit or (Loss)
Per Share (.02) (.07) (.02)
Weighted Average Shares
Outstanding 9,456,696 9,456,696 9,456,696
Diluted Net Profit
Per Share N/A N/A N/A
Weighted Average Shares
and Options Outstanding N/A N/A N/A
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Stockholders' Equity
From January 1, 1994 to December 31, 1996
<TABLE>
<CAPTION> Common Stock Paid In Accumulated
Stock Amount Capital Deficit
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1993 9,444,696 $ 9,445 $ 1,664,775 $ (693,770)
Shares Issued for
Commission in
Lieu of Cash 12,000 12 11,988
Loss for Year Ended
December 31, 1994 (170,419)
--------------------------------------------------------
Balance,
December 31, 1994 9,456,696 9,457 1,676,763 (864,189)
Loss for Year Ended
December 31, 1995 (624,695)
--------------------------------------------------------
Balance ,
December 31, 1995 9,456,696 9,457 1,676,763 (1,488,884)
Contributed Capital 1,600
Profit for Year Ended
December 31, 1996 (228,820)
---------------------------------------------------------
Balance,
December 31, 1996 9,456,696 $ 9,457 $ 1,678,363 $(1,717,704)
========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net Profit or (Loss) $ (228,820) $ (624,695) $ (170,419)
Adjustments to Reconcile Net Profit
or (Loss) to Net Cash:
Write Off Investment 6,250 -0- -0-
Write Off Loan Receivable 38,750 -0- -0-
Write Off Long Term Receivable 338,181 -0- -0-
Amortization & Depreciation 56,095 14,342 16,648
Foreign Currency Remeasurement (6,344) -0- -0-
Non Cash Income (16,741) -0- -0-
Non Cash Expenses -0- -0- 12,000
Gain on Sale TSI Stock -0- (12,500) -0-
Loss on Abandonment of Asset -0- 10,500 -0-
Reserve for Discontinued
Operations -0- -0- (25,000)
Minority Interest (12,989) (122,621) (28,403)
Changes in Operating Assets &
Liabilities:
(Increase) Decrease in Accounts
Receivable (24,559) 453,182 (306,896)
(Increase) Decrease in Inventory -0- 12,900 1,535
(Increase) Decrease in Deposit on
Inventory 424,820 -0- (150,000)
Decrease (Increase) in Long-Term
Accounts Receivable -0- (11,932) -0-
Decrease (Increase) in Long-Term
Loan Receivable -0- 7,816 (7,816)
(Increase) Decrease in Prepaid
Insurance -0- 984 974
Decrease (Increase) in Prepaid
Commissions -0- 273,500 (273,500)
(Increase) Decrease in Deposits (3,281) 8,335 (600)
Increase (Decrease) in Accrued
Expenses (68,034) 136,579 (1,984)
Increase (Decrease) in Accounts
Payable (271,047) (49,217) 385,674
(Decrease) Increase in Tax Payable
- Current -0- (34,785) -0-
(Decrease) Increase in Customer
Deposits (244,464) (244,464) 488,938
Increase in Taxes Payable
Deferred -0- (80) -0-
Increase in Cash Pledged (5,122) -0- -0-
Rounding (3) -0- -0-
------------- ------------- -------------
Net Cash (Used) by Operating
Activities (17,308) (182,156) (58,849)
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows -Continued-
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION> 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Investing Activities
- ------------------------------------
Gross Proceeds from Sale TSI Stock -0- 12,500 -0-
Purchase of Equipment (182,295) -0- -0-
Purchase of License Rights (497,547) -0- -0-
Sale of Residential Property 252,532 -0- -0-
Purchase of Furniture (11,086) -0- (3,684)
------------- ------------- -------------
Net Cash Provided (Used) by
Investing Activities (438,396) 12,500 (3,684)
Cash Flows from Financing Activities
- ------------------------------------
Payment on Long Term Debt (169,781) (1,997) (1,751)
Increase (Decrease) in Notes Payable 511,896 266,871 -0-
Increase (Decrease) in Amounts Due
Officers 92,451 (69,900) 58,545
Contributed Capital 1,600 -0- -0-
------------- ------------- -------------
Net Cash Provided by
Financing Activities 436,166 194,974 56,794
------------- ------------- -------------
Increase (Decrease) in Cash (19,538) 25,318 (5,739)
Cash at Beginning of Period 26,140 822 6,561
------------- ------------- -------------
Cash at End of Period $ 6,602 $ 26,140 $ 822
============= ============= =============
Disclosures from Operating
Activities:
Interest $ 88,161 $ 69,617 $ 41,746
Taxes 8,675 -0- -0-
Significant Non Cash Transactions:
12,000 Shares Common Stock
Issued to Pay Commissions $ -0- $ -0- $ 12,000
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements
NOTE #1 - CORPORATE HISTORY
The Company was organized on December 2, 1968, under the laws of the
state of California, as Acqualytic Systems, Inc. The Company was
suspended on June 1, 1971 for failure to comply with statutory laws of
California. On June 15, 1989, the Company was reinstated after paying
the applicable taxes and fees to the state of California. During the
period of its suspension the Company transacted no business with the
exception of its President, Mr. Frank Scoville, transferring stock
previously issued to him to a number of other individuals. The Company
acted as its own transfer agent.
Pursuant to an agreement of merger filed on June 27, 1989, in the state
of Nevada, Acqualytic Systems, Inc., a California Corporation, merged
with Country Maid, Inc., a Nevada Corporation. The Nevada Corporation
was incorporated in the state of Nevada on June 13, 1988 and on June 30,
1989 Country Maid, Inc., filed applicable documents with the state of
Nevada and received a Certificate of Reinstatement. Country Maid, Inc.,
was the survivor Corporation pursuant to the merger agreement. The
surviving Corporation changed its name to Transcontinental Video
Robotics, Inc., on June 27, 1989. On September 18, 1992, the name of the
Company was changed to The Quantum Group, Inc.
During 1991, and 1992, the Company marketed electronic acupuncture
devices and a complete line of nutritional supplements through franchised
distribution centers. In December 1992, all operations of the subsidiary
involved with the acupuncture devices and nutritional supplements were
suspended. Losses incurred in these operations have been treated as
operating losses in 1991 and 1992.
In 1992, the Company acquired rights to import and market equipment used
in the tire recycling industry. The tire recycling operation is the
thrust of the Company's operations at December 31, 1996. (See Note #11)
NOTE #2 - SIGNIFICANT ACCOUNTING POLICIES
(A) The Company uses the accrual method of accounting.
(B) Revenues and directly related expenses are recognized in the period
when the goods are shipped to the customer.
(C) The Company considers all short term, highly liquid investments that
are readily convertible, within three months, to known amounts as cash
equivalents. The Company currently has no cash equivalents.
(D) Primary Earnings Per Share amounts are based on the weighted average
number of shares outstanding at the dates of the financial statements.
Fully Diluted Earnings Per Shares shall be shown on stock options and
other convertible issues that may be exercised within ten years of the
financial statement dates.
(E) Inventories: Inventories are stated at the lower of cost,
determined by the FIFO method or market.
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #2 - SIGNIFICANT ACCOUNTING POLICIES -Continued-
(F) Consolidation Policies: The accompanying consolidated financial
statements include the accounts of the company and its majority -
owned subsidiary. Intercompany transactions and balances have been
eliminated in consolidation.
(G) Foreign Currency Translation / Remeasurement Policy: The company
has no on site operations in foreign countries. All pur chases and
sales in foreign countries are concluded in American dollars. If at
future dates assets and liabilities occur in fo reign countries they
will be recorded at historical cost and translated at exchange rates in
effect at the end of the year. Income Statement accounts are translated at
the average exchange rates for the year. Translation gains and losses
shall be recorded as a separate line item in the equity section of the
financial statements.
(H) Depreciation: The cost of property and equipment is depreciated
over the estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated (amortized) over the lesser of
the length of the related assets or the estimated lives of the assets.
Depreciation is computed on the straight line method for reporting
purposes and for tax purposes.
(I) Issuance of Subsidiary's Stock: The Company has elected to accounts
for shares issued by its subsidiary as an equity transactions.
(J) Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates
NOTE #3 - INVENTORY AND DEPOSITS
In November 1992, Eurectec, Inc., a subsidiary purchased a granulator
compact 3000 machine from an Italian manufacturer for $605,000 (DM), or
$379,577 (USD). In 1993, Eurectec, Inc., purchased equipment, paid
import fees thereon, freight, and set up fees for an additional $125,437
(USD) bringing the inventory to $505,014 (USD) at December 31, 1993. In
1994, the Company received credit from the manufacturer adjusting the
total inventory to $503,479 (USD). In 1995, the Company used a Model 66
Electric De-Beader machine with a cost of $12,900 (USD) to settle claims
for consulting fees by a former employee.
In 1993, the Company deposited with CISAP (the Italian manufacturing
firm) $274,820 (USD) for future purchases of equipment. This deposit was
increased to $424,820 (USD) in 1994, and was used in 1996.
The inventory is subject to a Sheriff's lien placed in 1996, see Note #16
Litigation Matters. The inventory has also been committed to Atlanta
Rubber Recyclers, Inc., See Note #19 Subsequent Events.
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #4 - NONCASH INVESTING AND FINANCING ACTIVITIES
Texas Securities, Inc.:
On December 6, 1990, the Company issued to Texas Securities, Inc., (TSI),
100,000 shares of its common stock, restricted as to Rule 144, for
1,000,000 shares of stock of TSI. At the date of the exchange TSI, was
trading at $.25 to $.30 per share. Inasmuch as shares exchanged were
restricted and the Company acquired approximately 9% of the shares
outstanding. The shares received were valued at $75,000, which was
approximately 9% of the book value of the stockholders' equity of TSI, as
per their audited financial reports at year end July 31, 1990.
In 1991, the Company made adjustments reducing its investments in TSI,
based upon the audited financial statements of TSI. In 1992, the
Company's position in TSI, did not decline and no revaluation was made.
In 1994, TSI filed bankruptcy in North District Bankruptcy Court of
Texas. Because of the uncertainty created by the bankruptcy filing as a
subsequent event, the Company has written off its entire investment in
TSI.
In 1995, an unrelated party and a stockholder of TSI offered to buy the
Company's shares in TSI to enhance his position for a lawsuit he sought
to bring against TSI. The Company sold him 500,000 shares of the TSI
stock for $12,500.
Residential, Real Estate
Dade County, Florida:
Pursuant to an agreement dated March 25, 1991, the Company issued 250,000
shares of its common stock restricted, as to Rule 144 to an unrelated
seller in consideration for a residence and a boat house in Miami,
Florida. At the time of the exchange, shares of the Company were trading
for $1.50 to $2.50 per share. The residence constructed in 1936 is
assessed by Dade County, as having a value of $250,000. Other real
estate valuation techniques were applied and found that similar
properties were selling at approximately the same price or higher.
On February 16, 1996, the Company concluded provisions of the escrow
agreement entered into in 1995, and sale of the residential property in
Florida was concluded. As a term of the sale the Company purchased the
adjoining lot from its current owner for $65,000 and sold it to the
purchaser. The purchaser paid $382,500 for the company's property and the
adjoining lot.
NOTE #5 - CAPITALIZED LEASE PAYABLES
During 1991, the Company purchased two copiers and a computer using the
capital lease option method.
<TABLE>
<CAPTION> Lease Interest Total
Term Cost Factor Obligation
------------------------------------------------------
<S> <C> <C> <C> <C>
Computer 48 $ 10,450 $ 5,419 $ 15,869
Copiers 36 8,250 3,559 11,809
------------------------------------------------------
Total $ 18,700 $ 8,978 $ 26,678
=================================
</TABLE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #5 - CAPITALIZED LEASE PAYMENTS -Continued-
Lease obligations on these leases were as follows:
<TABLE> <S> <C>
1993 $ 6,994
1994 7,628
1995 2,119
-----------
Total $ 16,741
===========
</TABLE>
In 1992, the Company defaulted on the leases but retains the equipment,
both lessors had demanded payment of the obligation, but have not pursued
these demands.
Lease periods on both leases have expired and neither leasor has made any
attempt to take possession of the equipment or filed any legal process.
The Company believes neither leasor will and has chosen to write off the
capitalized lease as other income.
NOTE #6 - NOTES PAYABLE
The Company has the following notes payable obligations.
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Notes Payable to a Non U.S. Entity, Stated in US
Dollars: No Collateral: Due December 31, 1997,
Interest at 16.67% Original Note $273,158 -
Remeasurement for Foreign Currency Translation $ 267,131 $ 266,871
Notes Payable to an Auto Leasing Company,
Monthly Payments for 36 Months of $176.13 -0- 4,781
Note Payable on Press Master Machine,
Interest at 16.67%, Due December 31, 1997,
Original Note $171,029 Remeasurement for
Foreign Currency Translation 170,519 -0-
Note Payable on Purchase of Rubber Product
Technology Due December 31, 1997, No Interest,
Purchased and Payable in U.S. Dollars 347,547 -0-
Mortgage Payable on Florida Residential Property,
Due January 9, 1999, Interest at 13.5% -0- 165,000
----------- ------------
Total Notes Payable 785,197 436,652
Less Current Obligation 785,197 (268,835)
----------- ------------
Net Long Term $ -0- $ 167,817
=========== ============
</TABLE>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #6 - NOTES PAYABLE -Continued-
The Company borrowed funds from a non US entity. It received in
quarterly installments Deutsche Marks of DM 411,381 these were translated
to US $273,158 at the quarterly exchange rate. At December 31, 1995, the
exchange rate was US $1.5415 for DM 1.00. The Company valued the note at
its current US $ equivalent and realized in the statement of operations a
translation gain of $6,287. The Company has recorded deferred taxes of
$943 applicable to the translation gain.
NOTE #7 - LEASE COMMITMENTS
On July 15, 1996, the Company leased an office in Tustin,
California. The lease requires a security deposit of $3,281, monthly
payments of $4,101 and expires on July 14, 1997.
NOTE #8 - DEPRECIATION
The Company capitalizes the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are
depreciated over the useful life of the assets using the straight-line
method of depreciation.
Scheduled below are the assets, costs, lives, and accumulated
depreciations at December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
December Depreciation Accumulated
1996 1995 Expense Depreciation
Assets Cost Cost Life 1996 1995 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Furniture
& Fixture $37,986 $37,103 5 $8,527 $7,421 $27,335 $26,410
Vehicles 8,994 8,994 3 2,248 2,998 8,994 6,746
Equipment 182,295 -0- 5 12,151 -0- 12,151 -0-
Leasehold
Improvements -0- 5 -0- 506 -0- -0-
Residential
Property -0- 102,688 30 -0- 3,423 -0- 16,102
Residential
Land -0- 150,000 -- -0- -0- -0- -0-
---------------------------------------------------------------
Totals $229,275 $298,785 $22,926 $14,348 $ 48,480 $49,258
===============================================================
</TABLE>
NOTE #9 - Notes Receivable
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Notes Receivable from Sale of Equipment to
A. Geist of Hecklingen, Germany, $500,000
Deutsche Marks Converted at $1.449,
Payable $20,990 USD Quarterly at 8% Interest
Remeasured at December 31, 1995, at $1.4785 $ 338,181 $ -0-
========== =========
Current Portion 83,960 -0-
Long Term Receivable 254,221 -0-
</TABLE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #10 - COMPENSATION AGREEMENT
The Company has no agreements with its officers and directors to pay any
compensation, except for reimbursement for out of pocket expenditures for
activities on the Company's behalf.
The Company has no accrued vacation or other employee benefits that
should be recognized as part of these statements.
NOTE #11 - LICENSE AGREEMENT
Eurectec, Inc., (a subsidiary) holds a license granted by CISAP, SpA (an
Italian Corporation), which grants exclusive rights and license to
technology and plant operations for tire recycling and recovery
facilities in North and Central America. The Company's subsidiary
Eurectec, Inc., has the right to sublicense the technology. Eurectec,
Inc., has a sublicense in Utah.
During 1995, the Company restructured its relationship with the Canadian
Licensee. Due to a change in ownership, the objectives of the Canadian
Licensee changed. Eurectec agreed to cancel the outstanding Accounts
Receivable of $625,000 for the Canadian license in return, for the return
of the license rights to Eurectec, except for the exclusive license
rights to Alberta, Canada which were retained by the Canadian Licensee.
The Company also agreed to cancel the accounts receivable of $230,000 for
the equipment sale.
The Company received a 20% equity interest in the Canadian Company which
had no value and has not been recorded on the financial statement of the
Company.
NOTE #12 - RELATED PARTY TRANSACTIONS
The Company has reimbursed two of its officers for travel and
entertainment funds for services related to the Company's business.
Scheduled below are payments for reimbursed expenses, consulting,
accounting and financial services by related parties
<TABLE>
<CAPTION>
Accrued Accounting &
Prepaid Consulting Reimbursed Consulting Financial
Commissions & Expenses Expenses Fees Services
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Keith Fryer $ 65,415 $ $ $ 65,321 $
John Pope 45,500
Marcus J. Lenger 23,944
1995
Keith Fryer -0- -0- 8,501 77,950 -0-
John Pope -0- 15,450 -0- -0- 31,400
Gayle Hickok -0- -0- 2,600 -0- -0-
1994
Keith Fryer 75,000 13,000 17,325 128,420 -0-
John Pope -0- 34,450 1,100 -0- 60,000
Gayle Hickok -0- -0- -0- 12,000 -0-
</TABLE>
An Officer of the Company has loaned the Company $151,152 at December 31,
1996, and $58,701 at December 31, 1995 to fund its operations. The loan
is non interest bearing and is due on demand.
NOTE #13 - NET OPERATING LOSS CARRYFORWARD FOR INCOME TAX PURPOSES
The Company has incurred losses that can be carried forward to offset
future earnings if conditions of the Internal Revenue Codes are met.
These losses are as follows:
<TABLE>
<CAPTION>
Year of Expiration
Loss Amount Date
------------------------------------------------
<S> <C> <C>
1992 $ 670,375 2007
1993 -0- 2008
1994 198,818 2009
1995 782,181 2010
1996 241,809 2011
</TABLE>
The Company has adopted FASB 109 to account for income taxes. The
Company currently has no issues that create timing differences that would
mandate deferred tax expense. Net operating losses would create possible
tax assets in future years. Due to the uncertainty as to the utilization
of net operating loss carryforwards an evaluation allowance has been made
to the extent of any tax benefit that net operating losses may generate.
<TABLE>
<CAPTION> 1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Current Tax Asset Value of Net Operating
Loss Carryforwards at Current Prevailing
Federal Tax Rate $576,085 $561,467 $295,525
Evaluation Allowance (576,085) (561,467) (295,525)
-------------------------------
Net Tax Asset $ -0- $ -0- $ -0-
===============================
Current Income Tax Expense $ -0- $ -0- $ -0-
Deferred Income Tax Benefit 80 80 -0-
</TABLE>
In 1993, the Company made provisions for California Franchise Taxes
because California does not allow carryforward or carryback of tax
losses. When tax returns were finalized in 1995 the Company qualified
for tax credits equal to or greater than the accrued tax in California,
because the facilities in Wilmington, California were in an Enterprise
Zone Economic Development Area. Accordingly, in 1995 the Company
reversed the 1993 tax accrual.
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #14 - MINORITY INTEREST
The Company's subsidiary Eurectec, Inc., has issued 4,812,000 shares of
its common stock to minority interest since its inception in 1992. All
of these shares have been sold to non U.S. persons pursuant to
regulations in Germany.
<TABLE>
<CAPTION>
Minority Interest
- ------------------------------------------------------------------------------
Total
Shares % Par Paid in Retained Minority
Issued Owned Value Capital Earnings Interest
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 4,812,000 15.6 $4,812 $161,083 $(68,167) $97,728
1996 6,500,000 20.0 0 6,500 206,233 (127,994) 84,739
</TABLE>
The minority investment in the subsidiary is 6,500,000 shares purchased
for $414,578 in 1992, $619,487 in 1993, and $1,600 in 1996. Minority
interest holds 20.00% of issued shares of the subsidiary and the minority
interest incurred a dilution of $868,170 upon investment, and $127,994 in
accumulated losses for 1996.
NOTE #15 - ACCOUNTS RECEIVABLE WRITTEN OFF
In 1995 the Company has written off accounts receivable from sales in 1994.
<TABLE>
<CAPTION>
1994 SALES
TOTAL CURRENT LONG TERM
-------------------------------------------
<S> <C> <C> <C>
Canadian License Fee $ 652,498 $ 326,249 $ 326,249
Canadian Equipment Sale 230,000 230,000
Chinese Equipment Sale 71,136 71,136
--------------------------------------------
Total $ 953,634 $ 627,385 $ 326,249
============================================
</TABLE>
The Canadian license encountered operational difficulties because of
their refusal to comply with CISAP's instruction to operate the
equipment. These delays caused a cash flows problem which ultimately
resulted in the need to restructure the Canadian Company. As a result of
the restructuring process the Company agreed to write off its accounts
receivable of $556,249 and its non current accounts receivable of
$326,249.
The $71,136 due from the Chinese sale was the retention on the sale. At
December 31, 1994, the Company held a letter of credit upon which it
could have collected the receivable if all conditions of the sale were
met. In 1995, problems developed with the operation of the system
because the feed stock (Chinese tires) had much higher fabric content
than Western tires for which the machinery was tested. Because of the
delays caused to adjust the equipment to handle Chinese tires and the
fact that it took longer to process the high fabric tires the Chinese
refused to pay the accounts receivable, and the letter of credit expired.
In an attempt to maintain a good relationship with the Chinese Company and the
difficulty and expense of litigating a collection action in China the Company
wrote the accounts receivable off.
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #15 - ACCOUNTS RECEIVABLE WRITTEN OFF -Continued-
In 1996, the Company wrote off sales it made in 1995 to a German buyer of
$345,000. After a remeasurement allowance in 1995 of $6,819 the 1996
write off was $338,181. The Company wrote off $38,750 loaned to Eurectec
GmbH, and an investment of $6,250. The Company owned 10% of Eurectec
GmbH. Eurectec GmbH has no operations and no plans for future operations.
NOTE #16 - Litigation Matters
The litigation referred to in prior reports as Herbert & Isabel
Kugelmeier came before the United Stated District Court for the District
of Utah, Central Division. On October 16, 1996 after the issues were
tried the jury rendered its verdict. "It is ordered and abjudged that
the judgement be entered in favor of the defendant and against the
plaintiff on the plaintiff's complaint "no cause of action" and that
judgement be entered in favor of Plaintiffs against the Defendant on the
Defendants' counter claim, "no cause of action." As a result of the
ruling in the litigation the Company no longer has any connection to the
mining claims, and the Kugelmeiers have no license for the states of
Colorado, Arizona, and New Mexico.
An action was filed by Duthie Electric against "Eurectec Wilmington,
Inc., dba, Eurectec, Inc.," Eurectec Wilmington, Inc., is a California
corporation and was formed for the purpose of selling a CISAP 3000 System
to an investor group in California. The investors did not obtain funding
to complete the purchase. Eurectec, Inc., is a Nevada corporation and a
subsidiary of the Company. A judgement was obtained against Eurectec
Wilmington, Inc., doing business under the assumed name of Eurectec,
Inc., and property of Eurectec Inc., was executed on by the Sheriff in
Orange County, California. Neither the Company or Eurectec, Inc., was a
party to the litigation. In 1997, the Company fully resolved the dispute
by making a payment in the amount of $24,908 to Duthie Electric which was
approximately one-half of the amount of the judgement entered against
Eurectec Wilmington, Inc.
NOTE #17 - EXPORT SALES
The Company's sales have occurred in foreign countries and the aggregate
sales to unaffiliated customers in foreign countries exceeds 10% of the
total revenues.
<TABLE>
<CAPTION>
1996 1995 1994
Country Sales Sales Sales
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Canada $ 630,000
China 888,960
Mexico 50,000
Saudi Arabia $ 2,711,489 $ 2,024,290
Germany 161,190 310,500
---------------------------------------
Total $ 2,872,679 $ 2,334,790 $ 1,568,960
=======================================
</TABLE>
Sales in the amount of $2,334,790 were made and recorded upon shipment
to customers in the fourth quarter of 1995. In 1996, sales by quarter
were as follows; first quarter $966,071, second quarter $0, third quarter
$1,662,149 and 4th quarter $244,459.
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #18 - STOCK ISSUANCE BY SUBSIDIARY
In 1993, the Company's subsidiary Eurectec, Inc., issued 2,385,423 at
$0.25 per shares of its common stock to outsiders. This sale decreased
the Company ownership in the subsidiary from 91.50% to 84.38%. The
subsidiary received in U.S. dollars $619,487.
In 1996, Eurectec, Inc., issued 1,688,000 shares to its minority
shareholders to increase their ownership position in Eurectec, Inc., to
6,500,000 shares or 20.0%. Eurectec, Inc., contributed $1,600 as
contributed capital to the parent Corporation.
NOTE #19 - SUBSEQUENT EVENTS
A. Settlement agreement on Duthie Electric Services, Corporation matter
has been reached, see explanation and details in Note #16.
B. Atlanta Rubber Recycling Inc., has confirmed in writing in 1997
their intentions of completing their sales agreement to purchase
equipment held by the Company as inventory for $1,602.817 and to purchase
a license for the state of Florida for $700,000. No sale of equipment or
license fees has been booked pending payment of sales agreement and
shipment of merchandise.
C. In January 1997, the Company concluded the sale of equipment to
Mexico Recycling Technology, it's Mexican licensee for $3,737,000.
Eurectec, Inc., received a letter of credit for $238,599 and, CISAP
received a letter of credit for $2,101,000 and paid the Company its fees
from the first installment payment therefrom . The balance of the letter
of credit $1,397,405 will be used for Phase 2 of the contract.
EXHIBIT 10.06
THIS DOCUMENT
REPRESENTS AN
AGREEMENT AMENDMENT
AGREED BETWEEN
CISAP ECOLOGY S.R.L.
AS LICENSOR
AND EURECTEC, INC.
A SUBSIDIARY OF
THE QUANTUM GROUP, INC.
AS LICENSEE
DATE: MARCH 14, 1997
E-1<PAGE>
1.
By this Agreement Amendment, which modify the Agreement signed April 26th, 1996,
Cisap Ecology S.r.l. accepts this contract in the place of Cisap S.p.A.
Today March 14th, 1997 we agree the following modifications to the a.m.
contract:
Whereas Cisap Ecology S.r.l. is willing to grant, and Eurectec, Inc. desires to
receive, the right to continue to sell Cisap Ecology S.r.l. technologies and
equipment above mentioned in all countries of the world, excluding Italy, and
EXCLUSIVELY in North America, Canada, Mexico and South America, with the terms
and conditions hereinafter set forth.
PAGE 4:
1.8
Payment shall mean a commercial Letter of Credit irrevocable and confirmed with
order, with where possible an advance payment of at least 15 per cent of the net
equipment price. Eurectec may assign or create a back to back L/C in favour of
Cisap Ecology S.r.l. when necessary.
PAGE 5:
2.1
Territory: shall mean: EXCLUSIVE North America, Canada, Mexico and South
America; Italy excluded; in all other Countries of the world Eurectec will
have the right to sell without exclusive. Eurectec to supply Cisap Ecology
S.r.l. a regular list of outstanding inquiries, at least every 3 months for
these and exclusive countries and Cisap Ecology agree not to quote directly
with Eurectec's declared clients in non-exclusive Countries.
2.1
Use of patents: Cisap Ecology S.r.l. hereby grants to Eurectec an exclusive
right and license during the terms of this agreement to practice the
technology in order to use and operate plants/or sell equipment in the above
mentioned exclusive and non exclusive territory with clients confirmed to and
acknowledged by Cisap Ecology S.r.l.
PAGE 6-7-8-9-10
as before
PAGE 11
as before except:
price list remains the same, except for the debeader price which increases from
ITL. 40.800.000 = to ITL. 55.000.000 =, still within the agreement taken in
Item 9.17.
Other points as before. Pistoia, March 14th, 1997
By: /s/ Diana Fantacci By: /s/ Ehrenfried Liebich
_____________________ _________________________
for Cisap Ecology S.r.l. For Eurectec, Inc.
(Diana Fantacci) (Ehrenfried Liebich)
E-2
EXHIBIT 10.07
THIS DOCUMENT
REPRESENTS A
LICENSE AGREEMENT
BETWEEN
EURECTEC, INC.
A WHOLLY OWNED SUBSIDIARY OF
THE QUANTUM GROUP, INC.
LICENSOR
AND
ATLANTA RUBBER RECYCLING, INC.
LICENSEE
FOR THE TERRITORY OF
FLORIDA
DATE : MAY 20, 1996
E-3
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 Business Day. . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Confidential Information. . . . . . . . . . . . . . . . . . . . 5
1.3 Dollars (CAN) or "$CAN" . . . . . . . . . . . . . . . . . . . . 5
1.4 Dollars (US) or "$US" . . . . . . . . . . . . . . . . . . . . . 5
1.5 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . 5
1.6 Licensed Technology . . . . . . . . . . . . . . . . . . . . . . 6
1.7 Net Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.8 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.9 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.10 Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.11 Technical Information . . . . . . . . . . . . . . . . . . . . . 6
1.12 Territory . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.13 Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II. GRANT OF RIGHTS AND LICENCES. . . . . . . . . . . . . . . . . . 6
2.1 Use of Patents. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Construction of Plants. . . . . . . . . . . . . . . . . . . . . 7
2.3 Use of Technical Information. . . . . . . . . . . . . . . . . . 7
2.4 Right to Use Trademarks . . . . . . . . . . . . . . . . . . . . 7
2.5 Quality Control . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Right to Sublicense . . . . . . . . . . . . . . . . . . . . . . 8
2.7 No Rights by Implication. . . . . . . . . . . . . . . . . . . . 8
2.8 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . 8
III. OBLIGATIONS OF EURECTEC . . . . . . . . . . . . . . . . . . . . 8
3.1 Training and Technical Assistance . . . . . . . . . . . . . . . 9
3.2 Additional Services . . . . . . . . . . . . . . . . . . . . . . 9
IV COMPENSATION PAYABLE TO EURECTEC. . . . . . . . . . . . . . . .10
4.1 Licensing Fee and Royalty . . . . . . . . . . . . . . . . . . .10
4.2 Contents of Licensee's Reports. . . . . . . . . . . . . . . . .11
4.3 Payments Accompany Licensee's Reports . . . . . . . . . . . . .11
4.4 Minimum Royalty . . . . . . . . . . . . . . . . . . . . . . . .11
4.5 Payments of Royalties and Other Amounts . . . . . . . . . . . .11
4.6 Licensee's Books and Records. . . . . . . . . . . . . . . . . .12
4.7 Eurectec's Right to Audit . . . . . . . . . . . . . . . . . . .12
4.8 Audit Information Confidential. . . . . . . . . . . . . . . . .12
4.9 Licensee's Reports Conclusively Correct . . . . . . . . . . . .12
V INVENTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 Disclosure Inventions . . . . . . . . . . . . . . . . . . . . .12
E-4<PAGE>
5.2 Right to Use Inventions . . . . . . . . . . . . . . . . . . . .12
5.3 Registering Patents on Inventions . . . . . . . . . . . . . . .12
5.4 Registering Patents in the Territory. . . . . . . . . . . . . .13
VI CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . . . . .13
6.1 Confidentiality Maintained. . . . . . . . . . . . . . . . . . .13
6.2 Information in Connection with Sale . . . . . . . . . . . . . .13
6.3 Liability for Disclosure. . . . . . . . . . . . . . . . . . . .13
VII WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . .14
7.1 Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . .14
VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . .14
8.1 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . .14
8.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . .14
8.3 After Termination . . . . . . . . . . . . . . . . . . . . . . .15
8.4 Payment Obligations Continue. . . . . . . . . . . . . . . . . .15
8.5 No Damages for Termination. . . . . . . . . . . . . . . . . . .15
8.6 Sub-Licenses not to be Terminated . . . . . . . . . . . . . . .15
8.7 Sub-Licensees Rights if Licensee Terminated . . . . . . . . . .15
IX REPRESENTATIONS, WARRANTIES & COVENANTS OF EURECTEC . . . . . .15
9.1 Ownership of Licensed Technology. . . . . . . . . . . . . . . .15
9.2 No Conflicting Agreements . . . . . . . . . . . . . . . . . . .16
X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .16
10.1 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . .16
10.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .16
10.3 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . .16
10.4 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
10.5 Non Circumvention . . . . . . . . . . . . . . . . . . . . . . .17
10.6 No Other Relationship . . . . . . . . . . . . . . . . . . . . .17
10.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
10.8 Entire Understanding. . . . . . . . . . . . . . . . . . . . . .17
10.9 Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . . .18
10.10 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . .18
10.11 Fees Payable. . . . . . . . . . . . . . . . . . . . . . . . .18
10.12 Responsibility for Taxes. . . . . . . . . . . . . . . . . . .18
10.13 Survival of Contents. . . . . . . . . . . . . . . . . . . . .18
10.14 Table of Contents and Headings. . . . . . . . . . . . . . . .19
10.15 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .19
10.16 Feasibility . . . . . . . . . . . . . . . . . . . . . . . . .19
</TABLE>
E-5<PAGE>
LICENSE AGREEMENT
This License Agreement is made and entered into on this day : May 20, 1996
by and between Eurectec, Inc., of 3901 McArthur Boulevard, Suite # 200,
Newport Beach, California 92660 and Atlanta Rubber Recycling, Inc.
________________________________________________________________
WHEREAS, Eurectec possesses certain intellectual and industrial property
rights with respect to tire recycling and recovery processes from Cisap
S.p.A. and other recycling technologies ; and
WHEREAS, Eurectec under the terms of its agreement with Cisap S.p.A. Italy,
is willing to grant, and LICENSEE/sub licensee desires to receive, the
right to use such rights in : Florida
in accordance with the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual promises, terms
and conditions hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties do hereby agree as follows :
I. DEFINITIONS
As used herein, the following terms shall have the following definitions.
1.1 Business Day. "Business Day" shall mean a day on which banks are open
for business in Los Angeles, California, U.S.A.
1.2 Confidential Information. "Confidential Information" shall mean that
part of the Technical Information which is not publicly known.
1.3 Dollars (Can). "Dollars (Can)" shall mean the lawful money of Canada in
immediately available funds.
1.4 Dollars (US) or "$US". "Dollars (US)" or "$US" shall mean the lawful
money of the United States of America in immediately available funds.
1.5 Effective Date. "Effective Date" shall mean the later of (a) the date
on which EURECTEC executes this Agreement, (b) the date on which LICENSEE
executes this Agreement and pays the Licensing Fee [4.1 (a)(i)].
1.6 Licensed Technology. "Licensed Technology" shall mean the Patents,
Trademarks and Technical Information now in existence.
1.7 Gross Income. "Gross Income" shall mean (a) any and all amounts
received by
E-6<PAGE>
LICENSEE or its sub licensees in connection with the services rendered
and/or products sold from or by Plants which operate in the Territory.
1.8 Patents. "Patents" shall mean all patents and patent applications
listed in Exhibit A to this Agreement.
1.9 Payment. "Payment" shall mean a Commercial Letter of Credit or other
mutually acceptable and agreed upon payment method.
1.10 Plant. "Plant" shall mean a tire recycling and recovery facility
operated pursuant to the rights granted to LICENSEE/sub licensee hereunder.
1.11 Technical Information. "Technical Information" shall mean all
currently existing trade secrets , know-how, computer programs (including
copyrights in said programs), knowledge, technology, means, methods,
processes, practices, formulas, techniques, procedures, technical,
assistance, designs, drawings, apparatus, written and oral rectification's
of data, specifications, assembly procedures, schematics and other valuable
information of whatever nature, whether confidential or not, and whether
proprietary or not, which are necessary to allow someone reasonably skilled
in the industry to construct, use, service and test a Plant.
1.12 Territory."Territory" shall mean : Florida
1.13 Trademarks. "Trademarks" shall mean any and all trademarks, trade
names, service marks and other commercial symbols either listed in Exhibit
C to this Agreement or else which EURECTEC may from time to time designate
to be included within this definition by written notice to LICENSEE/sub
licensee. Once included in this definition, such trademarks, trade names,
service marks and other commercial symbols shall not be removed from this
definition without the mutual agreement of the parties hereto.
II. GRANT OF RIGHTS AND LICENSES
Subject to all of the terms and conditions set forth in this Agreement:
2.1 Use of Patents. EURECTEC hereby grants to LICENSEE an exclusive right
and license during the term of this Agreement to practice the Technology in
order to use and operate Plants and/or sell equipment in the Territory.
LICENSEE shall not use or operate Plants or sell equipment outside the
Territory. LICENSEE shall not use or operate Plants or sell equipment
outside the Territory. EURECTEC or CISAP shall not use/ or operate Plants
or sell equipment inside the Territory.
2.2 Construction of Plant(s)
E-7<PAGE>
Pursuant to the presentation to EURECTEC for approval of otherwise
completed sub-license agreements and/or otherwise completed contracts for
the construction and operation of plants by LICENSEE/sub licensee, EURECTEC
will test successfully and disassemble and package safely for shipment,
complete equipment and machinery as described in the said agreements or
contracts. (EXHIBIT B) All other costs of shipping, duties, taxes and
licences shall be borne by the sub-licensee or by LICENSEE according to the
agreement between LICENSEE and the sub-licensee.
2.3 Use of Technical Information.
(a) EURECTEC grants to LICENSEE an exclusive right and license during
the term of this Agreement to use the Technical Information in the
Territory in connection with EURECTEC's exercise of its rights and licenses
granted in Paragraph 2.1 above.
(b) As soon as practicable after the Effective Date, but in no event
later than (60) days after the Effective Date, EURECTEC shall provide to
LICENSEE/sub licensee, at no additional costs to LICENSEE/sub licensee, all
of the Technical Information.
2.4 Right to Use Trademarks. LICENSEE/sub licensee shall use each of the
Trademarks on an exclusive basis in connection with the use, operation and
promotion of Plants hereunder, provided, however, that LICENSEE/sub
licensee shall give EURECTEC thirty (30) days prior written notice before
using any Trademark for the first time in a particular location in the
Territory. LICENSEE/sub licensee may also use other trademarks, trade
names, service marks and commercial symbols of its own choosing in
connection with the use, operation and promotion of Plants hereunder.
2.5 Quality Control.
(a) In order to comply with EURECTEC's quality control standards,
LICENSEE/SUB LICENSEE shall :
(i) maintain the quality of each plant by adhering to those specific
quality control standards that EURECTEC may from time to time promulgate
and communicate to LICENSEE with respect to such Plant ;
(ii) use the Trademarks prominently on the Plant(s) and documentation
relating to the Plant(s), and in compliance with all relevant laws and
regulations;
(iii) accord EURECTEC the right to inspect each Plant during normal
business hours, without prior advance notice, to confirm that LICENSEE's
use of such Trademarks is in compliance with this provision.
2.6 Right to Sub license. LICENSEE shall have the right to sub license any
of the
E-8<PAGE>
rights and licenses granted hereunder without the prior consent of
EURECTEC, so long as : (a) each sub licensee agrees in writing to be bound
by all of the terms and conditions contained in this Agreement; and (b)
EURECTEC is provided with a copy of each such agreement within ten (10)
days after it is executed. LICENSEE hereby guarantees that each of its sub
licensees shall comply with the terms contained in this Agreement.
2.7 No Rights by Implication. No rights or licenses with respect to
Licensed Technology are granted or deemed granted hereunder or in
connection herewith, other than those rights or licenses expressly granted
in this Agreement.
2.8 Non-Competition. During the term of this Agreement , LICENSEE/sub
licensee shall not engage in any negotiations with third parties with a
view towards or engage in the manufacture of any device which may be
employed to recycle or otherwise recover tires if such device could
reasonably be considered to be in competition with the EURECTEC processes
described in this Agreement; neither shall EURECTEC or CISAP shall
negotiate or conclude any agreement with any other party to construct or
operate a Plant or Plants within the Territory while this Agreement is in
effect.
III. OBLIGATIONS OF EURECTEC
3.1 Training & Technical Assistance.
(a) To assist LICENSEE/sub licensee in exercising its rights
hereunder, EURECTEC agrees to provide sufficient man-days of training and
technical assistance each calendar year (beginning in the year of the
Effective date) to LICENSEE/sub licensee and its employees anywhere in the
Territory, so that LICENSEE/sub licensee will be able to use the Licensed
Technology to its full potential. Such training and assistance shall be
rendered by EURECTEC at no additional charge to LICENSEE/sub licensee,
except for expenses to be reimbursed to EURECTEC as provided in Paragraph
3.1(c) below.
(b) To the extent LICENSEE/sub licensee requests such training and
technical assistance in excess of the man-days provided in Paragraph 3.1
(a) above, EURECTEC shall be paid a per diem amount to be negotiated
between the parties before such assistance and training is provided and
which shall be paid before such assistance and training is rendered;
provided that EURECTEC's representatives are then able to provide such
training and technical assistance.
(c) Travel costs, lodging, meals and all related expenses incurred by
EURECTEC in connection with sending representatives into the Territory
pursuant to this Paragraph 3.2 (a) or (b) shall be paid for in full by the
LICENSEE/sub licensee.
3.2 Additional Services.
(a) EURECTEC shall use its reasonable efforts to provide LICENSEE/sub
licensee with any and all additional assistance reasonably requested by
LICENSEE/sub
E-9<PAGE>
licensee, including without limitation; producing technical, sales,
advertising and other reports and information for LICENSEE/sub licensee
which LICENSEE/sub licensee believes might be useful in promoting the
Plants; assisting LICENSEE/sub licensee in attempting to obtain from third
parties technical information, drawings, plans, specifications and other
data which are not proprietary to EURECTEC and which EURECTEC does not
otherwise have the right to use, in order to enable LICENSEE/sub licensee
to respond to requests of any potential customer, assisting LICENSEE/sub
licensee in responding to technical inquiries from potential customers of
the Plants; and assisting LICENSEE/sub licensee in the testing of Plants
and in the further development of test equipment
(b) EURECTEC shall bill LICENSEE/sub licensee for any such additional
services at prices to be agreed in advance by the parties hereto. EURECTEC
shall not commence performance of any part of any services hereunder until
such prices are established in writing by the parties hereto.
(c) Such services shall be invoiced in Dollars (US) monthly by
EURECTEC. Payment shall be due within thirty (30) days after EURECTEC's
receipt of each of EURECTEC's invoices therefor, and shall otherwise be
paid in accordance with Paragraph 4.5 hereof.
IV. COMPENSATION PAYABLE TO EURECTEC
4.0 Minimum Equipment Purchase - LICENSEE agrees to purchase the equipment
package under Exhibit B, or equipment of similar value, within ( 90 ) days
of signing this Agreement and five (5) additional C6000 granulator during
the following five (5) years or sooner.
4.1 Licensing Fee & Royalty
(a) LICENSEE agrees to pay EURECTEC, for the rights granted to
LICENSEE under paragraphs 2.1, 2.2, 2.3(a) and 2.4 above and for the
services to be rendered by EURECTEC under paragraphs 2.3 (b) and 3.1 (a)
above; and in addition, upon completion of each sub-licensing agreement
secured and negotiated by LICENSEE:
(i) A Fee equal to the total amount of items supplied as per;
Exhibit A - Price List of all Fees, Disbursements and
Miscellaneous Costs; and
Exhibit B - Price List of all machinery, equipment, supplies and
material. The items supplied to be mutually agreed upon by
EURECTEC and the LICENSEE except for those items in Exhibits A &
B which are indicated as non-negotiable and which must, in any
case, be included. Payment of the Fee indicated in Exhibit A as
"Licensing Fee" shall, subject to the signing of this Agreement by
both parties, initiate this Agreement. Signed copies of Exhibits A
& B shall constitute part of this Agreement, however, the signing
of these Exhibits may, by mutual agreement, be made subsequent to
the signing of this main part and shall not delay the Effective
date of this Agreement as per para. 1.5.
(ii) a continuing royalty equal to Five per cent (5%) of the Gross
Income from all Plants operated by the LICENSEE (re 1.7)
E-10<PAGE>
(iii) a continuing royalty equal to Five per cent (5%) of the Gross
Income from all Plants by sub-Licensees of the LICENSEE (re 1.7)
4.2 Contents of LICENSEE's Reports. LICENSEE shall deliver to EURECTEC
within ninety (90) days after the end of each Payment Period, starting on
the Effective Date and every 90 days thereafter, a written report
describing, for the applicable Payment Period; (a) the number of Plants
operated by LICENSEE and its sub licensees during such Payment Period; (b)
the Gross Income for each Plant during the Payment Period ; and (c) the
total royalty due on such Gross Income under Paragraph 4.1(a)(iii) hereof.
4.3 Payments Accompany LICENSEE's Reports. Each report for a payment Period
required in Paragraph 4.2 hereof shall be accompanied by a full payment to
EURECTEC of the royalties payable under Paragraph 4.1(a)(iii) hereof from
the Gross Income described in Paragraph 4.2 above.
4.4 Minimum Royalty.
(a) No minimum royalty shall apply, however, the LICENSEE/sub licensee
is required to operate and maintain the Plant or Plants in the Territory at
a level of production that shall reasonably be held comparable to other
plants operating under similar operating and market conditions.
4.5 Payments of Royalties and Other Amounts.
(a) All payments under Paragraphs 3.2, 4.3 hereof shall be made in
Dollars (US) by wire transfer or other mutually agreed upon method, to such
bank or account as EURECTEC may from time to time designate in writing.
(b) Whenever any payment hereunder shall be stated to be due on a day
which is not a Business Day, such payment shall be made on the immediately
succeeding Business day.
(c) Payments hereunder shall be considered to be made as of the day on
which they are received in EURECTEC's designated bank or account.
(d) For this agreement to become effective, the Licensee is required
to make the initial equipment purchase according to the terms and
conditions described in Exhibit "B", concurrently with the signing of this
agreement.
4.6 LICENSEE's Books and Records. LICENSEE/sub licensee agrees to make and
keep full and accurate books and records in sufficient detail to enable
royalties payable hereunder to be determined.
4.7 EURECTEC Right to Audit. On seven (7) day's prior written notice to
LICENSEE/sub licensee, EURECTEC and its certified public accountants and
other auditors shall have full access to the books and records of LICENSEE
and/or any or
E-11<PAGE>
all of its sub licensees pertaining to activities under this Agreement
and shall have the right to make copies therefrom at EURECTEC's expense.
EURECTEC, its certified public accountants and other auditors shall have
such access at all reasonable times and from time to time during normal
business hours. Prompt adjustment shall be made by the proper party to
compensate for any errors or omissions disclosed by such audit.
4.8 Audit Information Confidential. EURECTEC agrees to hold confidential
all information learned in the course of any examination of books and
records pursuant to Paragraph 4.8 above, except when it is necessary for
EURECTEC to reveal such information in order to enforce its rights under
this Agreement in court, or similar dispute resolution or enforcement
proceeding or action, or except when compelled by law.
4.9 LICENSEE's Reports Conclusively Correct. All quarterly reports and
payments not disputed as to correctness by EURECTEC within three (3) years
after receipt thereof shall thereafter conclusively be deemed correct for
all purposes.
V. INVENTIONS.
5.1 Disclosure Inventions. LICENSEE/sub licensee shall disclose to EURECTEC
each Invention of LICENSEE/sub licensee affecting the operation of the
Plant(s) or equipment after such Invention is formulated, made or
conceived.
5.2 Right to Use Inventions. LICENSEE/sub licensee may use such inventions
only if approved in writing by EURECTEC.
5.3 Registering Patents on Inventions. If LICENSEE/sub licensee formulates,
makes or conceives a patentable Invention, LICENSEE/sub licensee may apply,
at its own expense, for appropriate patent and other registrations of such
Invention in any and all jurisdictions in the Territory.
5.4 Registering Patents in the Territory. LICENSEE/sub licensee may
register any such patents for use in the Territory at his own expense
subject to 5.2.
VI. CONFIDENTIAL INFORMATION
6.1 Confidentiality Maintained. Each party agrees that the other party
hereto has a proprietary interest in its Confidential Information. All
disclosures to the receiving party, its agency and employees shall be held
in strict confidence by such receiving party, its agents and employees, and
such receiving party shall disclose the Confidential information only to
those of its agents and employees to whom it is necessary in order to carry
out their duties as limited by the terms and conditions hereof. The
receiving party shall not use the other party's Confidential Information
except for the purposes of exercising its rights and carrying out its
duties hereunder.
The provisions of this paragraph 6.1 shall also apply to any consultants or
subcontractors that the receiving party may engage in connection with its
obligations under this Agreement.
E-12<PAGE>
6.2 Information in Connection with Sale. EURECTEC hereby grants the
LICENSEE the right during the term of this Agreement to distribute to the
LICENSEE's sub licensees in connection with the operation of Plants that
part of the Technical Information necessary for such sub licensees to use
and operate such Plant, even if such information includes some of
EURECTEC's Confidential Information, to the extent that Eurectec and the
LICENSEE agree that such technical Information is helpful to such sub
licensees in order to operate the Plant.
6.3 Liability for Disclosure. Notwithstanding anything contained in this
Agreement to the contrary, neither party shall be liable for a disclosure
of the other party's Confidential Information if the information is so
disclosed;
(a) was in the public domain at the time it was disclosed by the
disclosing party to the receiving party; or
(b) was independently developed by the receiving party and is so
demonstrated promptly upon receipt of the documentation and technology by
the receiving party; or
(c) becomes known to receiving party from a source other than the
disclosing party without breach of this Agreement by the receiving party
and can be so demonstrated.
VII. WARRANTIES.
7.1 Warranties.
(a) THE ORIGINAL MANUFACTURER'S WARRANTIES SHALL BE PASSED ON TO THE
LICENSEE OR SUB-LICENSEE BY EURECTEC.
(b) IN NO EVENT SHALL EURECTEC BE LIABLE TO LICENSEE FOR SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF
PROFITS OR LOSS OF USE DAMAGES) ARISING OUT OF THE USE OR OPERATION OF ANY
PLANT, EVEN IF EURECTEC HAS BEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES
OR LOSSES.
VIII. TERMINATION.
8.1 Term of Agreement. Unless it is terminated earlier pursuant to the
terms of this Article 8, this Agreement shall continue in full force and
effect in perpetuity.
8.2 Termination. Upon the occurrence of any of the following events, this
Agreement may be terminated by the non breaching party by giving written
notice of termination to the breaching party, such termination to be
immediately effective upon the giving of such notice of termination. Unless
for reasons of force majeure, outside the control of Licensor, Licensee or
sub-Licensee.
(a) the occurrence of a material breach or default as to any
obligation hereunder by either party and the failure of such breaching
party to promptly
E-13<PAGE>
pursue (within thirty (30) days after receiving written notice thereof from
the non breaching party) a reasonable remedy designed to cure (in the
reasonable judgment of the non-breaching party) such material breach or
default; or
(b) the filing of a petition in bankruptcy, insolvency or
reorganization against or by either party, or either party becoming subject
to a composition for creditors, whether by law or agreement, or either
party going into receivership or otherwise becoming insolvent (for the
purposes of this Paragraph 8.2., such party shall be considered to be a
breaching party). or
(c) failure of the LICENSEE to order, accompanied by transferable
irrevocable Letter of Credit, the equipment for the first plant to be
constructed within the Territory, within ninety (90) days of completion of
this Agreement.
8.3 After Termination. If the LICENSEE is the breaching party, all rights
to the Territory provided in the Agreement shall revert immediately to
EURECTEC.
8.4 Payment Obligations Continue. Upon termination of this Agreement for
any reason, nothing shall be construed to release LICENSEE from its
obligations to pay EURECTEC any and all royalties or other amounts accrued
but unpaid hereunder prior to the date of such termination.
8.5 No Damages for Termination. The parties hereto agree that if either
party terminates the other party pursuant to this Article 8, then the
termination party shall not be liable form damages or injuries suffered by
the other party as a result of that termination.
8.6 Sub-Licensees not to be Terminated. Should this Agreement between
LICENSEE and EURECTEC be terminated for any reason, the Agreements with
sub-licensees, which have been approved previously by EURECTEC and
negotiated and completed by LICENSEE, shall continue in effect and without
penalties or requirement of remedies unless such Agreements with
sub-licensees are also in default, in which case each sub-licensee
agreement shall be treated and considered separately and distinctly by
EURECTEC.
8.7 Sub-Licensees Rights of LICENSEE Terminated. Provided the Sub-Licensees
are not in breach of this Agreement, they shall retain all rights to
operate according to the provisions of this Agreement.
IX. REPRESENTATIONS. WARRANTIES AND COVENANTS OF EURECTEC.
9.1 Ownership of Licensed Technology. EURECTEC hereby represents and
warrants to LICENSEE that, to the best of its information and belief,
EURECTEC is the lawful owner of the Licensed Technology, free and clear of
all security interests, encumbrances, liens, mortgages, licenses or rights
of third parties which would impair the licenses and rights granted to
LICENSEE hereunder.
9.2 No Conflicting Agreements. EURECTEC hereby represents, warrants and
covenants that it has not and will not enter into any agreement with or
become subject to any obligation in favor of any third party which might
conflict with its obligations hereunder.
E-14<PAGE>
X MISCELLANEOUS
10.1 Assignments. Except as provided in Paragraph 2.6 hereof, this
Agreement and any and all of the rights and obligations of either party
hereunder shall not be assigned, delegated, sold, transferred or otherwise
disposed of, by operation of law or otherwise, without the prior written
consent of the other party.
This Agreement shall be binding upon, and inure to the benefit of, EURECTEC
and LICENSEE and their respective successors and assigns, to the extent
such assignments are in accordance with this paragraph 10.1.
10.2 Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of Nevada, United States
of America, as such laws are implied to agreements entered into and to be
performed entirely within its borders between its residents. In the
unlikely event of either party bringing a law suit against the other, each
party has the right to litigate against the other under the Laws of the
United States .
10.3 Arbitration. Any dispute, controversy or claim arising out of or
relating to this Agreement or to a breach thereof, including its
interpretation, performance or termination, shall be submitted to and
finally resolved by arbitration. The arbitration shall be conducted in
accordance with the commercial rules of the United Nations Conference on
International Trade Law ("UNCITRAL") which shall be administered in London,
England (including the rendering of the award) by the London Court of
International Arbitration. The arbitration, shall be the exclusive forum
for resolving such dispute, controversy or claim. For the purposes of this
arbitration, the provisions of this Agreement and all rights and
obligations thereunder shall be governed and construed in accordance with
the laws of the State of Nevada, United States of America, as such laws are
applied to agreements entered into and to be performed entirely within its
borders between its residents. The decision of the arbitrators shall be
executory, final and binding upon the parties hereto, and the expense of
the arbitration (including without limitation the award of attorney's fees
to the prevailing party) shall be paid as the arbitrators determine.
10.4 Waiver. A waiver of any breach of any provision of this Agreement
shall not be construed as a continuing waiver of other breaches of the same
or other provisions of this Agreement.
10.5 Non-Circumvention. In the event that LICENSEE or any of its designated
agents shall introduce any other person or persons, company or corporation
to the EURECTEC Patents, systems or plant, and should such introduction,
discussion, negotiation, conversation or written communication result in
said person, persons, company or corporation entering into an Agreement
with EURECTEC for the licensing of said patents, processes or the
construction of a plant, whether within or without the Territory covered by
this Agreement, said person, persons, company or corporation shall be
deemed to be a sub-licensee of LICENSEE under this Agreement and shall be
governed by all the conditions contained in this Agreement, unless such
plant is to be built in another Licensee's assigned territory in which case
a "finder's fee" shall be negotiated with the other Licensee.
E-15<PAGE>
10.6 No Other Relationship. Nothing herein contained shall be deemed to
create a joint venture, agency or partnership relationship between the
parties hereto. Neither party shall have any power to enter into any
contracts or commitments in the name of, or on behalf of, the other party,
or bind the other party in any respect whatsoever.
10.7 Notices. Each notice required or permitted to be sent under this
Agreement shall be given by Fax transmission or by registered or recorded
delivery letter to EURECTEC and to LICENSEE at the addresses and FAX
numbers supplied. Either party may change its address and/or fax number for
purposes of this Agreement by giving the other party written notice of its
new address and/or Fax number. Any such notice if given or made by
registered or recorded delivery letter shall be deemed to have been
received on the earlier of the date actually received and the date ten (10)
Business Days after the same was posted (and in proving such it shall be
sufficient to prove that the envelope containing the same was properly
addressed and posted as aforesaid) and if given or made by telecopy
transmission shall be deemed to have been received at the time of despatch,
unless such date of deemed receipt is not a Business Day, in which case the
date of deemed receipt shall be the next succeeding Business Day.
10.8 Entire Understanding. This Agreement embodies the entire understanding
between the parties relating to the subject matter hereof, whether written
or oral, and there are no prior representations, warranties or agreements
between the parties not contained in this Agreement.
10.9 Invalidity. If any provision of this Agreement is declared invalid or
unenforceable by a court having competent jurisdiction, it is mutually
agreed that this Agreement shall endure except for the part declared
invalid or unenforceable by order of such court. The parties shall consult
and use their best efforts to agree upon a valid and enforceable provision
which shall be a reasonable substitute for such invalid or unenforceable
provision in light of the intent of this Agreement.
10.10 Amendments. Any amendment or modification of any provision of this
Agreement must be in writing, dated and signed by both parties hereto.
10.11 Fees Payable. "Licensing Fee" is payable upon signing this Agreement
by the LICENSEE, other fees are payable as described in Exhibits A & B and
in para 4.3 of this Agreement.
10.12 Responsibility for Taxes.
(a) Taxes in the territory now or hereafter imposed with respect to
the transactions contemplated hereunder (with the exception of income taxes
or other taxes imposed upon EURECTEC and measured by the gross or net
income of EURECTEC) shall be the responsibility of LICENSEE, and if paid or
required to be paid by EURECTEC, the amount thereof shall be added to and
become a part of the amounts payable by LICENSEE hereunder.
E-16<PAGE>
(b) Taxes outside the Territory now or hereafter imposed with respect
to the transactions contemplated hereunder (with the exception of income
taxes or other taxes imposed upon LICENSEE and measured by the gross or net
income of LICENSEE) shall be the responsibility of EURECTEC, and if paid or
required to be paid by LICENSEE, the amount thereof shall be deducted from
the amounts payable by LICENSEE hereunder.
(c) All taxes that become due and payable in the territory, from
royalty payments earned by Eurectec, Inc., from the Licensee and payable to
Eurectec, Inc., by the Licensee, under the terms of this Agreement, shall
be paid by the Licensee on behalf of Eurectec, Inc., and the net proceeds
will be passed to Eurectec, Inc., under the terms of this Agreement
accordingly.
10.13 Survival of Contents. Notwithstanding anything else in this Agreement
to the contrary, the parties agree that Paragraphs 2.7, 3.1(b) and (c),
3.2(b) and (c), 5.2, 8.4, 8.5, 10.1, 10.2, 10.3, 10.5, 10.6, 10.7, 10.8,
10.9, 10.10, 10.12, and 10.13 and Articles IV, VI & VII shall survive the
termination or expiration of this Agreement, as the case may be, to the
extent required thereby for the full observation and performance by any or
all the parties hereto.
10.14 Table of Contents and Headings. Any table of contents accompanying
this Agreement and any headings contained herein are for directory purposes
only, do not constitute a part of this Agreement, and shall not be employed
in interpreting this Agreement.
10.15 Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall be deemed to be an original.
10.16 Feasibility. The Licensee acknowledges that EURECTEC makes no
promises, claims or projections concerning the feasibility, number or
viability of tire recycling plant(s) in the Territory, nor of the
availability of raw materials or markets, and that it is the responsibility
of the Licensee to establish to his own satisfaction that such a plant or
plants are feasible.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement.
Signed this date : May 20, 1996
E-17<PAGE>
by
EURECTEC, INC. ATLANTA RUBBER RECYCLING, INC.
Licensor. As Licensee.
Signed: By /s/ Ehrenfried Liebich Signed: By /s/ Giuliano Gasparotto
_____________________ _______________________
Name: Ehrenfried Liebich Name: Giuliano Gasparotto
Title: President Title: Company Secretary
Witness: Caralen Lutanio Witness: Caralen Lutanio
(Print Name ) (Print Name)
Signed: By /s/ Caralen Lutanio Signed: By /s/ Caralen Lutanio
E-18<PAGE>
EURECTEC, Inc.
EXHIBIT "A"
Appendix to the License Agreement between Eurectec, Inc.
and
Atlanta Rubber Recycling, Inc.
for the Territory of
Florida
Price List of Fees, Disbursements and Miscellaneous Costs
The following Costs and other considerations constitute part of the above
described License Agreement and shall be binding upon the parties to the
Agreement.
Item One: Licensing Fee: In consideration of which, Eurectec grants
the exclusive right to build, construct,
operate
and/or sub-license the construction, building
or operation of such Tire Recycling Plants as
are the subject of this Agreement, within the
boundaries of the Territory stated in the
Agreement.
$ 700,000 U.S. dollars
less 5% cash deposit $ 035,000 U.S. dollars
Balance Due: $ 665,000 U.S. dollars*
NOTE : Fee payable upon the signing of this Agreement. The foregoing fee
is a one time only fee payable for the rights to the described Territory.
No such fee is payable to Eurectec by or for sub-Licensees of the
Licensee. California Sales Tax is not applicable to this amount.
* To be pledged to Eurectec, Inc., via a Corporate Promissory Note - to be
signed by all the ARR shareholders.
Signed : By /s/ Ehrenfried Liebich (Eurectec).
Signed : By /s/ Giuliano Gasparotto (Licensee).
Date of Agreement : May 20, 1996
E-19<PAGE>
EURECTEC, Inc.
EXHIBIT "B"
Appendix to License Agreement between
Eurectec, Inc., and Atlanta Rubber Recycling, Inc.
Equipment Price List
<TABLE>
<CAPTION>
Part One - C3000 granulator plus additional processing equipment :
<S> <C> <C>
1.0 C3000 granulator $ 478,000.00
1.1 Hopper plus conveyor assembly 050,000.00
2.0 Bead puller 020,000.00
3.0 Slitter ES2 026,250.00
4.0 Slitter ES3 (cross-cut) 026,250.00
5.0 Baling machine (C3000 reclaimed steel) 007,500.00
6.0 Smasher 70 shredder 063,000.00
7.0 Shipping and installation 050,000.00
Shredding & granulating equipment $ 721,000.00
Part Two - Product manufacturing equipment :
1.0 PressMaster Duo ( 200 ) $ 354,545.00
2.0 MixMaster ( 2 ) 345,454.00
6.0 Spare molds a) shallow 009,091.00
b) deep 036,364.00
7.0 Installation charges 090,909.00
8.0 Shipping charges 045,454.00
Product manufacturing equipment $ 881,817.00
TOTAL EQUIPMENT COSTS $ 1,602,817.00
1.0 Exclusive License Fee-State of Florida: $ 700,000.00
TOTAL PROJECT COST $ 2,302,817.00
(a) Excludes Florida Sales Tax or other Taxes, where applicable.
(a) Terms : To be funded via an acceptable Letter of Credit, confirmed via
a US or Canadian Bank with agreed draw down terms to a) pay for the C3000
equipment held in inventory, b) the product manufacturing equipment, c) the
start-up expenses.
(a) This License to be read in conjunction with the Sales Agreement to be
signed by both parties.
E-20<PAGE>
Initial : EL Initial : GG
E-21 <PAGE>
EURECTEC, Inc.
EXHIBIT "C"
Appendix to the License Agreement between Eurectec, Inc.
and
Atlanta Rubber Recycling, Inc.
for the Territory of :
Florida
LIST & SAMPLES OF TRADEMARKS & LOGOS
The following items constitute part of the above described License
Agreement and shall be
binding upon the parties to the Agreement.
SEE ATTACHED EXAMPLES
Signed : ________________________ (Eurectec)
Signed : ________________________ (Licensee)
Date of Agreement : May 20, 1996
<PAGE>
EURECTEC, Inc.
EXHIBIT "D"
Appendix to the License Agreement between Eurectec
and
Atlanta Rubber Recycling, Inc.
for the Territory of
Florida
LIST OF WARRANTIES attached.
The following Warranties constitute part of the above described License
Agreement and shall be binding upon the parties to the Agreement.
a) All CISAP products are guaranteed for twelve (12) months commencing at
commissioning date. The guarantee includes the replacement of all parts
that are defective or mismanufactured, and covers defects in the machinery
operation resulting from such defective parts and/or manufacturing defects.
The guarantee does not include consumable items such as blades, seals, or
bearings.
Technical support in the form of personnel from CISAP will be supplied as
per paras 3.1 a, b & C., of the Agreement.
b) CISAP guarantees the nominal production capacity of granulators within
+/- 10 %. Data is based on the crumbling and granulating of radial, steel
belted, truck casings resulting in granules measuring between 0.5 mm and
4.0 mm.
Signed : By /s/ Ehrenfried Liebich (Eurectec)
Signed : By /s/ Giuliano Gasparotto (Licensee)
Date of Agreement : May 20, 1996
E-23
</TABLE>
EXHIBIT 10.08
Memorandum of Agreement
made this 2nd day of April 1996
Between: Rothbury Engineering Limited
National House, Santon,
Isle of Man, Great Britain
(Licensor hereinafter called ROTHBURY)
of the first part
and Eurectec, Inc.
3901 McArthur Boulevard, Suite #200,
Newport Beach, CA 92660
(Licensee hereinafter called EURECTEC)
of the second part
E-24<PAGE>
Whereas Licensor has developed
a) a technique for manufacturing different technical rubber products such as
floor coverings from scrap rubber without revulcanizing (hereinafter referred to
as "Process One") and:
b) a process for giving a mixture of scrap rubber granulates and resins and
other additives electric conductive characteristics such as heatable floor
coverings (hereafter referred to as "Process Two");
and Whereas EURECTEC wishes to purchase the exclusive WORLDWIDE manufacturing
and distribution rights to Process One and Process Two;
Now therefore this agreement witnesseth that in consideration of the sum US
$100.00 now paid by EURECTEC to ROTHBURY (receipt which is hereby acknowledged)
the parties agree as follows:
1) ROTHBURY hereby gives and grants unto EURECTEC the right and option to
license the exclusive Worldwide manufacturing and distribution rights to Process
One and Process Two from this date on the following terms:
2) The purchase price shall be in an amount of US $497,547.00 payable by
EURECTEC to ROTHBURY as follows:
a) US $ 150,000 advance payment payable upon signing this document
Balance US $ 347,547 to be paid as follows:
b) US $ 050,000 on or before July 31, 1996
c) US $ 050,000 on or before September 30, 1996
d) US $ 050,000 on or before November 30, 1996
e) US $ 197,547 balance on or before December 31, 1996
3) It is clearly understood in the event of default by EURECTEC in making
payments as specified in clause 2 above that:
i) all payments made by EURECTEC to the date of default shall remain the
property of ROTHBURY and shall not be refundable;
ii) EURECTEC shall no longer have exclusive rights as defined in clause 1)
above but simply a "non-exclusive" right on a continuing basis;
iii) any and all License agreements entered into by EURECTEC, Inc., a US company
to which ROTHBURY intends to assign its licensing rights hereunder shall
remain effective and binding and;
iv) ROTHBURY shall have no other recourse against Eurectec with respect to such
default.
4) ROTHBURY - upon payment in full by EURECTEC of the advance payment - shall
convey to EURECTEC or its nominees all technical information and know-how
E-25<PAGE>
pertaining to the technology and processes referred to in the first recital to
this agreement. At no additional cost ROTHBURY shall on an ongoing basis
provide EURECTEC with all relevant technical information and know-how
subsequently developed by ROTHBURY with respect to Process One and Process Two.
5) EURECTEC shall have the right to sub-license this technology and any
subsequent technology that may be introduced by ROTHBURY to EURECTEC without any
royalty payment(s) being made by EURECTEC to ROTHBURY.
6) EURECTEC and its licensees shall be entitled to use the trade name or names
registered by ROTHBURY with respect to either the ordinary tile or heating tiles
and shall cause all licensees in any country to market the tiles in any event
under the same trade name(s).
7) EURECTEC shall have the right to file a patent application in North America
and Canada in its own name and extend this patent application to other parts of
the world as its sees fit in order to protect its markets.
8) EURECTEC shall cause all manufacturer's of either tile wherever situated in
the world to imprint on the back of each tile its name and address and any other
marks its deems necessary to protect its patents on these products.
9) EURECTEC shall insert a clause in each agreement it enters into for the
licensing of tile rights for any territory, countries or jurisdiction providing
that the licensee shall not market the tiles outside the area to which the
rights are specifically granted. The clause shall be sufficiently broad in
scope to cover marketing and/or distribution directly or indirectly outside
such area and shall fix the licensee with the obligation of similarly
restricting purchasers of said tiles from marketing the same directly or
indirectly outside the prescribed area. EURECTEC shall reserve the right to
cancel the manufacturing and distribution rights to the said tiles of any
licensed manufacturer in the event its tiles are sold outside the prescribed
area.
All EURECTEC licensees shall be bound by these same terms and conditions.
In the event of an outside manufacturer selling or distributing any of said
tiles within North America and Canada and EURECTEC electing to take legal action
against such manufacturer or any distributor or sales agent thereof then
ROTHBURY may be added as a Plaintiff & shall join with EURECTEC in the
prosecution of said action at the expense of ROTHBURY. EURECTEC shall have
no recourse against ROTHBURY for any such breach of contract said manufacturer.
11) EURECTEC shall be obliged to include a clause in each licensee agreement
providing that before the license agreement is effective the licensee must enter
into a confidentiality agreement with ROTHBURY and EURECTEC to protect
divulgement of the secret proprietary information relating to formula and
know-how.
12) This agreement shall be interpreted and construed under the laws of
California, United States of America.
E-26<PAGE>
13) Time shall be of the essence of this agreement.
14) This agreement shall inure to the benefit of and bind the parties hereto
and their respective successors and assigns.
Signed: By /s/ Ehrenfried Liebich Signed: By /s/
___________________________ ________________________
Authorized Officer Eurectec, Inc. Authorized Officer Rothbury Eng. Limited.
E-27
EXHIBIT 23.01
Darrell T, Schvaneveldt
Certified Public Accountant
275 East South Temple, Suite 300
Salt Lake City, Utah 84111
Darrell T. Schvaneveldt C.P.A. Telephone (801) 521-2392
Consent of Darrell T. Schvaneveldt
Independent Auditor
I consent to the use, in this Form 10-SB, of our report dated December 31,
1996, on the financial statements of The Quantum Group, Inc., dated letter date,
included herein.
/s/ Darrell T. Schvaneveldt
Salt Lake City, Utah
June 2, 1997
E-28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,602
<SECURITIES> 0
<RECEIVABLES> 204,522
<ALLOWANCES> 0
<INVENTORY> 490,579
<CURRENT-ASSETS> 701,703
<PP&E> 229,275
<DEPRECIATION> 48,480
<TOTAL-ASSETS> 1,355,358
<CURRENT-LIABILITIES> 1,300,503
<BONDS> 0
<COMMON> 9,457
0
0
<OTHER-SE> (39,341)
<TOTAL-LIABILITY-AND-EQUITY> 1,355,358
<SALES> 2,872,679
<TOTAL-REVENUES> 2,907,679
<CGS> 1,895,468
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,302,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (228,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (228,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (228,820)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
