<PAGE>
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
--------------------- ----------------------
June 30, 2000 0-23812
THE QUANTUM GROUP, INC.
------------------------
(Exact name of registrant as specified in its charter)
NEVADA
-------
(State or other jurisdiction of incorporation or organization
95-4255962
-----------
(I.R.S. Employer Identification No.)
Park Irvine Business Center, 14771 Myford Road, Building B
-----------------------------------------------------------
Tustin, CA 92780
----------------
(Address of principal executive offices)
(714) 508-1470
---------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
---- ----
State the number of shares outstanding of each of the registrants classes
of common equity, as of the latest practicable date.
Common stock, par value $.001; 11,366,187 shares outstanding
as of August 7, 2000
</Page>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
The Quantum Group, Inc., and Subsidiaries
Financial Statements
June 30, 2000 (Unaudited)
</Page>
<PAGE>
/Letterhead/
Schvaneveldt & Company
Certified Public Accountant
275 East South Temple, Suite #300
Salt Lake City, Utah 84111
(801) 521-2392
Darrell T. Schvaneveldt, C.P.A.
Board of Directors
The Quantum Group, Inc., and Subsidiaries
(A Development Stage Company)
I have reviewed the accompanying balance sheets, of The Quantum Group,
Inc., and subsidiaries, as of June 30, 2000, and for the three month and
six month or nine month periods then ended. These financial statements are
the responsibility of the Company's management.
I conducted my review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, I do not express such an
opinion.
Based on my review, I am not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/S/ Schvaneveldt & Company
Salt Lake City, Utah 84111
August 10, 2000
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-3)
Balance Sheets
June 30, 2000 & 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June June December
30, 2000 30, 1999 31, 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current Assets
--------------
Cash $ 14,237 $ 716,045 $ 242,934
Accounts Receivable 413,981 3,065,040 317,464
Inventory 133,649 64,210 139,469
Deposit 317,003 696,220 317,003
Note & Interest Receivable - Officer 69,247 47,619 69,253
Prepaid Expenses 26,944 220 26,944
----------- ----------- -----------
Total Current Assets 975,061 4,589,354 1,113,067
Property and Equipment
----------------------
Furniture and Fixtures 49,645 - 55,547
Equipment 1,193,750 548,116 1,292,764
Vehicles 62,249 37,274 70,397
Land 157,753 179,309 157,753
Web Sites 8,686 - 9,650
----------- ----------- -----------
Total Property and Equipment 1,472,083 764,699 1,586,111
Other Assets
------------
Cash Pledged - 5,329 -
License Rights 2,125,233 474,990 442,611
Deposit 687,487 1,807,789 687,487
Goodwill 81,200 - -
----------- ----------- -----------
Total Other Assets 2,893,920 2,288,108 1,130,098
----------- ----------- -----------
TOTAL ASSETS $5,341,064 $7,642,161 $3,829,276
=========== =========== ===========
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-4)
Balance Sheets
June 30, 2000 & 1999
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June June December
30, 2000 30, 1999 31, 1999
----------- ----------- ------------
<S> <C> <C> <C>
Current Liabilities
-------------------
Accrued Expenses $ 66,506 $ 450,467 $ 84,043
Accounts Payable 722,286 675,385 653,517
Notes Payable 358,310 - 272,240
Customer Deposits 485,897 2,723,017 295,183
Franchise Tax Payable 103,548 103,548 103,548
Payroll Taxes Payable 40,540 - -
Sales Tax Payable 3,208 - -
Current Maturities 16,925 - 16,925
----------- ----------- -----------
Total Current Liabilities 1,797,220 3,952,417 1,425,456
Long Term Liabilities
---------------------
Capital Lease 81,089 22,737 67,631
Notes Payable 12,720 - 10,198
Less Current Maturities ( 16,925) - ( 16,925)
----------- ----------- -----------
Total Long Term Liabilities 76,884 22,737 60,904
Minority Interest in Subsidiary 498,475 9,463 -
Stockholders' Equity
--------------------
Common Stock, 50,000,000 Shares
Authorized; Par Value of $0.001
Per Share,10,064,672 and 8,400,755
Shares Issued Retoractively
Restated Respectively 10,065 8,400 9,033
Paid In Capital 8,496,744 6,018,287 6,692,776
Currency Translation Differencial - 18,199 -
Accumulated Deficit (5,538,324) (2,387,342) (4,358,893)
----------- ----------- -----------
Total Stockholders' Equity 2,968,485 3,657,544 2,342,916
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,341,064 $7,642,161 $3,829,276
=========== =========== ===========
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-5)
Statement of Operations
For the Six Months Ended June 30, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Three Six Six Twelve
Months Months Months Months Months
June June June June December
30, 2000 30, 1999 30, 2000 30, 1999 31, 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
--------
Product Sales $ 115,674 $ - $ 217,006 $ - $ -
Other Income 5,601 4,099 12,483 74,798 17,821
---------- ---------- ---------- ---------- ----------
Total Revenues 121,275 4,099 229,489 74,798 17,821
Cost of Sales 67,091 - 126,182 - 348
---------- ---------- ---------- ---------- ----------
Gross Profit 54,184 4,099 103,307 74,798 17,473
Expenses
--------
Depreciation 68,944 32,843 137,774 35,346 144,222
Amortization 16,189 16,189 32,378 32,378 64,756
Travel 18,808 45,248 54,183 129,318 167,274
Professional Fees 23,867 44,083 55,727 77,754 210,483
Office 44,064 45,528 91,666 75,047 97,356
Rent & Utilities 30,328 14,446 61,255 28,339 71,242
Administrative Expenses 260,126 47,201 534,099 154,147 814,361
Consultant Fees 108,879 125,432 280,656 213,308 715,663
Interest - - - - 19,504
Accounts Receivable
Written Off - - - - 347,220
Options Issued Expense - - 35,000 - 39,067
---------- ---------- ---------- ---------- ----------
Total Expenses 571,205 370,970 1,282,738 745,637 2,691,148
Net Income (Loss)
From Operations (517,021) (366,871)(1,179,431) (670,839) (2,673,675)
</TABLE>
See accountant's report and accompaniny notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-6)
Statement of Operations -Continued-
For the Six Months Ended June 30, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Three Six Six Twelve
Months Months Months Months Months
June June June June December
30, 2000 30, 1999 30, 2000 30, 1999 31, 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Other Income (Expenses)
-----------------------
Interest Income - - - - 21,822
---------- ---------- ---------- ---------- ----------
Total Other Income
(Expenses) - - - - 21,822
Taxes & Minority Income
-----------------------
Minority Interest - - - - ( 9,463)
Provisions for Taxes
- Current - - - - -
---------- ---------- ---------- ---------- ----------
Total Taxes &
Minority Interest - - - - ( 9,463)
Net Income (Loss) ( 517,021)( 366,871)(1,179,431)( 670,839) (2,642,390)
Net Income (Loss)
Per Share ($ 0.05)($ 0.04)($ 0.12)($ 0.08) $ 0.30
Weighted Average
Shares Outstanding 9,574,672 8,400,075 9,574,672 8,400,075 8,670,366
Diluted Net Profit
Per Share N/A N/A N/A N/A N/A
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-7)
Statement of Shareholders' Equity
From January 1, 1998 to June 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Paid In Accumulated
Stock Amount Capital Deficit
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 4,853,409 $ 4,853 $1,932,968 ($1,615,812)
Shares Issued Regulation S
for Cash 1,200,000 1,200 1,798,800
Shares Issued Regulation S
for Cash 300,000 300 599,700
Shares Issued Regulation S
for Cash 1,000,000 1,000 2,249,000
Cost of Shares Sold Pursuant
to Regulation S Offering ( 694,964)
Shares Issued on
Exercise of Options 396,666 397 24,177
Shares Issued to Minority
Interest Shareholders to Acquire
100% of Subsidiary Stock 650,000 650 108,606
Loss for the Year Ended
December 31, 1998 ( 100,691)
--------------------------------------------------
Balance,
December 31, 1998 8,400,075 8,400 6,018,287 (1,716,503)
Shares Issued for Services
at $1.75 Per Share 363,178 363 635,480
Shares Issued for Cash
at $1.75 Per Share 269,870 270 472,004
Cost of Shares Issued (472,062)
Options Issued 39,067
Loss for the Year Ended
December 31, 1999 (2,642,390)
--------------------------------------------------
Balance, December 31, 1999 9,033,123 9,033 6,692,776 (4,358,893)
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-8)
Statement of Shareholders' Equity -Continued-
From January 1, 1998 to June 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Paid In Accumulated
Stock Amount Capital Deficit
--------------------------------------------------
<S> <C> <C> <C> <C>
Options Issued 35,000
Shares issued to acquire
Modified Asphalt Technology, Inc. 51,549 52 89,948
Shares issued to acquire
Advanced Recycling Sciences, Inc. 980,000 980 1,714,020
Loss for the Six Months Ended
June 30, 2000 (1,179,431)
--------------------------------------------------
Balance, June 30, 2000 10,064,672 $ 10,065 $ 8,496,744 ($5,538,324)
==================================================
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-9)
Statement of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Six Twelve
Months Months Months
Ended Ended Ended
June June December
30, 2000 30, 1999 31, 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operations
--------------------------
Net Profit (Loss) ($1,179,431) ($670,839) ($2,642,390)
Adjustments to Reconcile Net Profit
or (Loss) to Net Cash
Write Off Accounts Receivable - - 347,220
Options Issued - - 39,067
Amortization and Depreciation 170,152 67,724 208,978
Non Cash Expenses - - 163,500
Minority Interest - - 9,463
Changes in Operating Assets & Liabilities
(Increase) Decrease in Accounts Receivable (96,517) - 2,747,576
(Increase) Decrease in Inventory 5,820 (44,785) (120,044)
(Increase) Decrease in Deposit on Inventory - (393,199) (13,982)
(Increase) Decrease in Prototype Impact 500 - - 63,203
(Increase) Decrease in Notes Receivable
- Officer 6 (16,687) (38,321)
(Increase) Decrease in Prepaid Expenses - 220 (26,504)
(Increase) Decrease in Deposits - - 755,717
Increase (Decrease) in Accrued Expenses (17,537) 383 (366,041)
Increase (Decrease) in Accounts Payable 68,769 (49,816) (71,684)
(Decrease) Increase in Customer Deposits 190,714 530,055 (1,897,779)
Increase Decrease in Cash Pledged - - 5,329
Increase (Decrease) in Payroll Taxes Payable 40,540 - -
(Increase) Decrease in Sales Tax Payable 3,208 - -
----------- ----------- -----------
Net Cash Provided (Used) by
Operating Activities (814,276) (576,944) (836,692)
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries (F-10)
Statement of Cash Flows -Continued-
For the Six Months Ended June 30, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Six Twelve
Months Months Months
Ended Ended Ended
June June December
30, 2000 30, 1999 31, 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Investing Activities
------------------------------------
Purchase of Vehicles - - (39,401)
Purchase of Equipment (23,746) (486,189) (1,414,664)
Purchase of Furniture - - (35,443)
Purchase of Websites - - (9,650)
(Increase) Decrease in Goodwill (81,200) - -
----------- ----------- -----------
Net Cash Provided (Used) by
Investing Activities (104,946) (486,189) (1,499,158)
Cash Flows from Financing Activities
------------------------------------
Sale of Common Stock 90,000 - 472,274
Sale of Subsidiary Common Stock 498,475 - -
Increase (Decrease) in Notes Payable 102,050 (2,766) 324,566
----------- ----------- -----------
Net Cash Provided (Used) by
Financing Activities 690,525 (2,766) 796,840
----------- ----------- -----------
Increase (Decrease) in Cash (228,697) (1,065,899) (1,539,010)
Cash at Beginning of Period 242,934 1,781,944 1,781,944
----------- ----------- -----------
Cash at End of Period $ 14,237 $ 716,045 $ 242,934
=========== =========== ===========
Disclosure from Operating Activities
------------------------------------
Interest $ - $ - $ 19,504
Taxes - - -
Significant Non Cash Transactions
---------------------------------
363,178 Shares of Common Stock Issued
for Services Rendered - - 685,843
51,549 Shares Issued for the acquisition of
Modified Asphalt Technology, Inc. - 90,000 -
980,000 Shares Issued for the acquisition of
Advanced Recycling Sciences, Inc. 1,715,000 - -
</TABLE>
See accountant's letter and accompanying notes
</Page>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
---------------------------------------------------------------------
This Form 10-QSB contains certain forward-looking statements. For this
purpose any statements contained in this Form 10-QSB that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate" or "continue" or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors.
General
-------
The Quantum Group, Inc., (the "Company"), is in the business of
developing innovative products and technologies in the environmental and
recycling industries for tire rubber recycling and aftermarket product
producing plants.
The business of the Company and its subsidiaries is focused in three
primary areas. First, the Company manufactures and sells its own equipment
and equipment manufactured by others which produces recycled rubber from
automobile and truck tires, commonly known as "crumb rubber." The Company
also manufactures and sells its own equipment and equipment of others to
manufacture aftermarket products from crumb rubber. Second, the Company
owns and operates tire recycling facilities, through joint venture
agreements, which manufacture crumb rubber and aftermarket products.
Third, the Company operates in the construction industry, primarily in the
area of crumb rubber modified asphalt paving, commonly known as "CRM"
asphalt.
The Company has developed a website that can be viewed at
http://www.tqginc.com. The website allows visitors to access an overview
of the Company's activities, obtain market information for the Company's
trading stock and view the Company's EDGAR filings. The Company has a main
portal website, http://www.tirerecycling.com that provides links to all of
the Company's subsidiaries' websites: QEST http://www.qest-quantum.com;
QCAL http://www.qcal-quantum.com; and QMAX http://www.qmax-quantum.com.
A Poseidon website has also been established and may be viewed at
http://www.poseidon-products.com. The website, which is in German and
English, provides a platform for showcasing the Poseidon joint venture and
promoting an awareness of the Company.
2
</Page>
<PAGE>
Liquidity and Capital Resources
-------------------------------
At June 30, 1999, the Company had cash of $14,237 on hand. The Company
is in the final stages of negotiations for a loan from a European Bank. The
Company is also negotiating for additional equity financing from its
primary European underwriter and has commenced discussion with a U.S.
underwriter for private placement funding. Although management believes
that some or all of these negotiations may be successful, no firm
commitment currently exists. Should the Company not be successful with any
of the above negotiations, the ability of the Company to meet its financial
obligations in a timely manner or to remain in business is doubtful.
Results of Operations
---------------------
Comparison of the three months ended June 30, 2000, and the three
months ended June 30, 1999.
------------------------------------------------------------------
During the first half of 2000, the Company's net cash used in operations
was $814,276, compared to cash used in operations of $576,944 during the
first half of 1999. The 1999 cash utilization is a result of an operating
loss of $1,179,431 reduced by depreciation and amortization of $170,152, an
increase of deposits from customers of $190,714 and increases of $68,769
and $40,540 in accounts payable and payroll taxes payable, respectively.
The Company had short term borrowings of $102,050 during the first six
months of 2000 and sold shares in a subsidiary for $498.475. Cash used in
operations for the comparable 1999 period was effected by cash expenditures
of $393,199 for the Impact 500 and from purchasing $486,189 of equipment
for use in the California prison. No such expenditures were made in the
current year.
The Company generated $115,674 of product sales revenue during the
quarter ended June 30, 2000. These products were manufactured in the
Company's subsidiary's operation in the San Diego prison facility or by
subcontractors. All of these sales were through QCAL. The economics of
manufacturing versus purchasing for resale of the QCAL products has been a
matter of significant analysis and review. The difficulties and delays of
operating in the prison environment have been higher than planned, while
the anticipated cost savings have not materialized. Management believes
that the needs of QCAL's customers can be better served if QCAL
subcontracts the manufacture of aftermarket products to other
manufacturers, from whom QCAL can buy the products at a discount and resell
them to its customers. Given that QCAL can contract out the manufacture of
aftermarket products and purchase those goods for resell at the same or
less than it costs QCAL to manufacture the products at the prison facility,
combined with the above mentioned unexpected difficulties and expenses
associated with operating in the prison environment, the Company has ceased
operations at the QCAL prison facility. On August 2, 2000, the Company
notified the California Department of Corrections that it would like to
negotiate a rescission of its lease agreement and an exit strategy from the
San Diego facility.
No equipment sales were made during this quarter in 2000 or in the same
quarter in 1999.
3
</Page>
<PAGE>
Travel expense in the three months ended June 30, 2000 were $18,808, a
reduction from the prior period expense of $45,248 by $26,440.
Administrative expense increased from $47,201 to $260,126 from the second
quarter of 1999 to the same quarter of 2000. This increase is also due to
the operation of the San Diego prison facility, the QCAL executive staff
and the increased sales efforts for QCAL products.
Consultant fees decreased by $16,553 to $108,887 in the three months
ended June 30, 2000 compared to the $125,432 incurred in the comparable
three-month period in 1999. In the 1999 period, the Company incurred
$20,000 of expenses for the engineering of the Poseidon project. This
expense did not reoccur. Professional fees were $23,867 for the 2000
quarter compared to $44,083 for the quarter ended June 30, 1999. This
reduction is the result of timing differences in the utilization of such
outside services and should not be viewed as a trend.
Depreciation expense of $68,944 for the three months ended June 30, 2000
is an increase of $36,101, over the three months ended June 30, 1999. This
increase is due to the equipment placed in service for the San Diego prison
operation.
Amortization expense is the same for both reporting periods. At the end
of June, 2000 the Company acquired licenses rights via the purchase of
Advanced Recycling Sciences, Inc., to a new tire recycling technology. The
Company will begin amortizing this license right over a ten-year period
next quarter.
Comparison of the six months ended June 30, 2000, and the six months
ended June 30, 1999.
--------------------------------------------------------------------
The Company had $217,006 in product sales for the six months ended June
30, 2000, no such sales were recorded during the comparable 1999 half year.
The Company earned $12,483 in other income consisting primarily of interest
in the first half of 2000. $1,920 in other revenue was generated from the
sale of crumb rubber, $1,000 was generated from the sale of research
materials, and $6,175 in interest was also earned during the first half of
1999.
The Company had a loss of $1,179,431 in the six months ended June 30,
2000 compared to a loss of $670,839 in 1999. This is due to the increased
level of activities resulting from operating the San Diego prison project
and the related marketing, sales and support activities.
Travel expenses of $54,183 in the six months ended June 30, 2000 are less
than the comparable 1999 period expense of $129,318 by $75,135 due to less
overseas travel. Administrative expenses increased during the first half
of 2000 to $534,099 compared to $154,147, due to the inclusion of operating
expenses for QCAL and increased office support.
Consulting fees have increased from $213,308 in the six months ended June
30, 1999 to $280,656 in 2000. Due to increased use of consultants to
assist in the evaluation and analysis of the San Diego operations.
Professional fees for the six months ended June 30, 2000 of $55,727 are
less than the 1999 period of $77,754 do to the timing of the utilization of
legal firms, but is expected to rise in the second half of the year.
Office expenses increased from $75,047 in the first half of 1999 to $91,666
in 2000 because of operating the San Diego facility and increased support
activities.
4
</Page>
<PAGE>
Comparison of the three months ended June 30, 1999, and the three
months ended June 30, 1998.
-----------------------------------------------------------------
During the first half of 1999, the Company's net cash used in operations
was $756,944, compared to cash used in operations of $766,112 during the
first half of 1998. The 1999 cash utilization is a result of an operating
loss of $670,839 and the payment of $393,199 of equipment deposits, and an
increase of deposits from customers of $530,055. The Company purchased
$486,189 of equipment to be used in the California prison
The Company generated $4,099 of other revenue during the quarter ended
June 30, 1999. All if this is interest income. No equipment sales were
made during this quarter in 1999 or in the same 1998 quarter. The second
quarter of 1998 had $9,088 of other revenue, $1,900 of this revenue was
generated by the sale crumb rubber inventory and $1,000 was generated from
the sale of research reports. $6,175 in interest was earned during the
quarter. The crumb rubber was sold at cost and $31,000 of additional
expenses were incurred for added equipment on the Mexico project resulting
in a cost of sales of $38,175.
Travel expense in the three months ended June 30, 1999 of $45,248
exceeded the prior period expense of $41,461 by $3,787. Administrative
expense decreased from $61,451 to $47,201 from the second quarter of 1998
to the same quarter of 1999. This decrease is also due to the substitution
of Company employees for contract labor and temporary employees. Because
of the change the salaries and wages account has 22,531 of expense, which
would have been an administrative expense. Additionally, $24,327 of
salaries were paid to new employees brought on to assist the California
prison project. No salaries and wages account existed in 1998.
Consultant fees increased by $31,752 to $125,432 in the three months
ended June 30, 1999 compared to the $96,680 incurred in the comparable
three-month period in 1998. $20,000 of this increase is as a result of
expenses incurred in relation to the engineering of the Poseidon. The
balance is due to increased activity in preparing for the sale of mat
products anticipated to be produced in the prison project. During the
three months ended June 30, 1998, the Company sold its investment in
Keystone Energy at a loss of $13,875 from the previously reduced carrying
value. No comparable transaction was applicable to the same quarter of the
this year.
Comparison of the six months ended June 30, 1999, and the six months
ended June 30, 1998.
--------------------------------------------------------------------
The Company had $9,088 of other revenue during the six months ended June
30, 1999. No equipment sales have been delivered during this period. The
Company generated $460,000 of equipment sales revenue and $400,000 of costs
as a result of contract additions on the Mexico project during the six
months ended June 30, 1998. $40,000 of additional revenue was also
generated by the sale of a small parcel of land that the Company owned in
conjunction with the previously owned residential property in Florida.
$1,920 in other revenue was generated from the sale of crumb rubber and
$1,000 was generated from the sale of research materials. $6,175 in
interest was also earned during the first half of 1998.
5
</Page>
<PAGE>
The Company had a loss of $670,839 in the six months ended June 30, 1999
compared to a loss of $452,361 in 1998. This is because of the increased
level of activities resulting from preparation for the California prison
project and the Poseidon project.
Travel expenses of $129,318 in the six months ended June 30, 1999 exceed
the comparable 1998 period expense of $76,272 by $53,046, with the majority
of this difference incurred in the first quarter of 1999. Administrative
expenses increased during the first quarter but were reduced during the
second quarter of 1999 as explained above. Consulting fees have increased
from $190,707 in the six months ended June 30, 1998 to $213,308 in 1999,
with all of this increase occurring in the second quarter as explained
above. Professional fees increased to $77,754 in the six months ended June
30, 1999 from $18,462 in the comparable 1998 period. This increase is due
to the increased legal activity related to the upcoming projects. Office
expenses increased from $24,941 in the first half of 1998 to $75,047 in
1999 because of the purchase of new computing equipment ($10,000) and the
addition of staff.
PART II - OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
--------------------------
There were no significant changes in the Company's litigation with Tyre's
Ecology S.r.l., during the quarter ended June 30, 2000.
On or about July 14, 2000, QEST Industries, Inc., ("QIND") a Company
subsidiary and The Quantum Group, Inc., as plaintiffs, filed a lawsuit
against Veplas Manufacturing LTD., ("Veplas") for breach of contract. This
action was filed in the Supreme Court of British Columbia, in Vancouver.
During late 1998 and early 1999, the Company met and entered into
negotiations with Veplas for the manufacture of certain equipment by
Veplas. This equipment was to be used for manufacturing aftermarket
products from crumb rubber. This equipment was being purchased by Company
for use in its San Diego prison facility. During negotiations, the Company
informed Veplas that it would only purchase the Veplas equipment if it met
the Company's strict specifications and production rates. Veplas was told
that non-conforming equipment would be unacceptable. Veplas represented
that they had the engineering and technical expertise to assure that its
equipment would meet the Company's requirements. The Company also
represented to Veplas that it had a number of customers waiting to purchase
equipment. Veplas represented that it was capable of meeting the demands
of the Company's clients, including consistently producing high quality
equipment that would produce high quality aftermarket products.
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<PAGE>
On or about February 15, 1999, the Company, through a subsidiary, entered
into a Sales Agreement ("Agreement") with Veplas whereby Veplas was to
manufacture certain equipment for use by the Company in making aftermaket
products from crumb rubber. The Company entered the Agreement based largely
on Veplas' representations of their engineering and technical expertise and
their ability to manufacture high quality equipment meeting the Company's
strict specifications. Pursuant to the Agreement, plaintiff's paid Veplas
$344,052(U.S.).
Despite Veplas' representations, the equipment it manufactured and
delivered to the San Diego prison facility did not meet the Company's
specifications. The equipment was of poor quality. The equipment did not
meet the necessary specification and production rates to allow the Company
to profitably produce aftermarket products. The equipment routinely
suffered mechanical breakdowns. Following breakdowns, the equipment often
required expensive retrofitting to make it function at any level.
Moreover, the Veplas equipment was poorly or incorrectly designed and could
not stand up to the specifications set forth by the Company.
The Company is seeking a full refund of the $344,052 (U.S.) it paid
Veplas for Veplas' failure to deliver equipment that was fit for the
purpose for which it was purchased. The Company is also seeking to recover
$735,000 (U.S.) for damages and losses it suffered as a result of the
faulty Veplas equipment. Finally, the Company will seek special damages as
may be proved at trial, and attorneys fees.
Veplas has filed an appearance with the Court. Veplas has until Friday,
August 11, 2000 to file an Answer to the Complaint.
Item 2. Changes in Securities
------------------------------
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified.
The following securities, which are not registered under the Securities
Act of 1933, were issued since the Company's last quarterly report for the
quarter ended March 31, 2000.
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Recent Sales of Unregistered Securities
---------------------------------------
(a) Securities sold.
--------------------
Date Title Price Per Share Amount
------------------- ------- --------------- -------
Second Quarter 2000 Common Share Exchange* 980,000
* For purposes of the exchange, the Company's shares were valued at $1.75
per share which was the closing price of the Company's common stock on the
Over-The-Counter Bulletin Board on May 24, 2000, the date the Agreement and
Plan of Reorganization was signed by the parties.
(b) Underwriters and other purchasers.
--------------------------------------
On or about June 28, 2000, 980,000 common shares were issued to
acquire 1,000,000 common shares of Advanced Recycling Sciences, Inc.
("ARS"), a Florida corporation. The 1,000,000 shares represented all of
the issued and outstanding shares of ARS.
(c) Consideration.
------------------
In exchange for all of the issued and outstanding common stock of ARS,
the Company issued 980,000 shares of Company common stock. For purposes of
this exchange, the Company's common stock was valued at $1.75, which was
the closing price of the Company's common stock on the date the Agreement
and Plan of Reorganization was signed.. No cash was received by the
Company.
(d) Exemption from registration claimed.
----------------------------------------
The 980,000 Company common shares exchanged for all of the issued and
outstanding common shares of ARS were issued pursuant to an exemption from
registration under section 4(2) of the Securities Act of 1933. No cash was
received by the Company.
(e) Terms of conversion or exercise.
------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities.
-----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
None
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Item 5. Other Information.
---------------------------
Acquisition of Advanced Recycling Services, Inc.
------------------------------------------------
On May 24, 2000, the Company entered into an Agreement and Plan of
Reorganization whereby it acquired Advanced Recycling Sciences, Inc.,
("ARS") a Florida corporation in a share exchange. The Company issued
980,000 shares of its stock in exchange for 1,000,000 shares of ARS, which
was all of the issued and outstanding stock of ARS.
ARS holds a worldwide exclusive license to develop and market a
patented rubber recycling technology using chemical processes under
supercritical conditions. This developmental technology facilitates the
production of commodity chemicals from recycled automobile tire,
particularly synthetic crude oil. The Company believes this technology
compliments the products and services the Company currently offers.
The Company has launched an initial web site for ARS
http://www.tires2oil.com/. The Company has also prepared a preliminary
economic study and budget for building a full scale production facility.
As soon as funds are available, the Company intends to hire an independent
consultant to prepare a detailed study of the feasibility of building and
operating a full scale pilot plant.
Agreement in Principle
----------------------
HIM Hessiche Industriemull GmbH
--------------------------------
The Company has reached an agreement in principle with HIM Hessiche
Industriemull GmbH ("HIM"), Wiesbaden, Germany. HIM is a service
enterprise with national and international experience in project management
of waste disposal and recycling facilities. The agreement in principle
provides that HIM will oversee the construction and commissioning of
equipment at the Company's Poseidon plant in Penkun, Germany. Following
completion of the plant, HIM will assume responsibility and oversee all
necessary services associated with running the plant. In addition to the
day-to-day operations of the plant, HIM will also develop strategies for
securing an adequate supply of used tires, and will work to develop a
greater market for crumb rubber and aftermarket products, including the use
of crumb rubber granulates in road construction. In exchange for these
service, HIM will be paid service fees. The terms and amounts of those
service fees are currently being negotiated.
The Company anticipates a Definitive Agreement will be negotiated and
entered into and the transaction will be closed as soon as the Company has
the necessary funding to finish construction and begin operations of the
Poseidon plant.
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Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(A) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed during the
quarter ended June 30, 2000.
(B) Exhibits. The following exhibits are included as part of this
report:
Exhibit SEC Exhibit
Number Ref. Number Title of Document Location
------- ----------- ------------------------ --------
2.01 2 Agreement and Plan Attached
of Reorganization
27.01 27 Financial Data Schedule Attached
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this to be signed on its behalf by the
undersigned thereunto duly authorized.
The Quantum Group, Inc.
August 10, 2000 /s/Ehrenfried Liebich
----------------------
Ehrenfried Liebich
Chairman of the Board, President
and Chief Executive Officer
August 10, 2000 /s/John F. Pope
----------------
John F. Pope
Vice President, Finance
Chief Accounting Officer
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