<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
For the fiscal year ended December 31, 1999
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Business 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: $17,821.
The aggregate market value of the issuer's voting stock held as of April
13, 2000, by non-affiliates of the issuer was $16,888,418.
As of April 13, 2000, issuer had 10,384,672 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 51 consecutively numbered pages
</Page>
<PAGE>
The Quantum Group, Inc.
Annual Report on Form 10-KSB for the Year ended December 31, 1998
- --------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------
PART I
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . .3
ITEM 2 DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . 13
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 13
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 . . . . . . . . . . . . . . . . . . . . . 20
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 20
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . 23
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 25
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 25
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 26
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</Page>
<PAGE>
<PAGE>
- --------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------
FORWARD LOOKING INFORMATION
- --------------------------------------------------------------------------
This Form 10-KSB contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. For
this purpose any statements contained in this Form 10-KSB 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 uncertainty, and
actual results may differ materially depending on a variety of factors,
many of which are not within the Company's control. These factors include
but are not limited to economic conditions generally and in the industries
in which the Company and its customers participate; competition within the
Company's industry, including competition from much larger competitors;
technological advances which could render the Company's products less
competitive or obsolete; failure by the Company to successfully develop new
products or to anticipate current or prospective customers' product needs;
price increase or supply limitations for components purchased by the
Company for use in its products; and delays, reductions, or cancellations
of orders previously placed with the Company.
- --------------------------------------------------------------------------
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------
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 products
plants. The principal offices of the Company are located at the Park
Irvine Business Center, 14771 Myford Road, Building B, Tustin, California
92780. 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. The Company is registered and qualified to do business in
the State of California.
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 which
makes aftermarket products from crumb rubber. Second, the Company and its
subsidiaries also own and operate tire recycling facilities, through joint
venture agreements, which manufacture crumb rubber and aftermarket
products. Third, the Company and its subsidiaries operate in the
construction industry, primarily in the area of crumb rubber modified
asphalt paving, commonly known as "CRM" asphalt.
3
</Page>
<PAGE>
The Company conducts most of its operations through several wholly
owned subsidiary companies. The corporate organization is as follows:
-----------------------
| THE |
| QUANTUM |
| GROUP, INC. |
-----------------------
|
|
|
----------------------------------------------------------------------
| | | | |
------------ ---------- -------- --------- ------------
| POSEIDON | | QCAL, | | QEST | | QMAX | | EURECTEC |
| PRODUCTS,| | Inc. | | Inc.| | Inc. | | INC. |
| GmbH | | | | | | | | |
------------ ---------- -------- --------- ------------
| |
-------- ---------
| QIND | | MAT, |
| INC. | | INC. |
-------- ---------
Company Subsidiaries
- --------------------
Equipment Marketing and Sales
-----------------------------
Quantum Environmental Solutions & Technology, Inc. ("QEST")
-----------------------------------------------------------
is a wholly owned subsidiary of the The Quantum Group, Inc. QEST was
established pursuant to the laws of the State of Nevada on April 21, 1997.
QEST was put into active operations during the fourth quarter 1999. The
primary responsibility of QEST is the marketing and sales of tire
recycling and aftermarket product equipment systems.
Quantum Environmental Solutions & Technology Industries, Inc. ("QIND")
----------------------------------------------------------------------
is a wholly owned subsidiary of QEST. QIND was established pursuant
to the laws of the State of Nevada on April 21, 1997. QIND was formed to
market and sale tire recycling systems and aftermarket product equipment
systems in Canada.
4
</Page>
<PAGE>
Joint Venture Facilities
------------------------
QCAL, Inc. ("QCAL")
--------------------
Is a wholly owned subsidiary of The Quantum Group, Inc. QCAL was
established pursuant to the laws of the State of California on October 22,
1999 for the purpose of entering into joint venture agreements in the State
of California to own and operate tire recycling and aftermarket product
manufacturing facilities.
Through QCAL, the Company entered into a joint venture agreement with
the State of California Department of Corrections ("CDC") for construction
and operation of a tire crumbing facility at the Richard J. Donovan
Correctional Facility at Rock Mountain in San Diego County, California
("Donovan Correctional Facility"). This plant will manufacture crumb
rubber at the prison facility using an inmate workforce. The Donovan
Correctional Facility plant is currently 60% operational and the Company
anticipates it will be fully operational by the third quarter of 2000.
The Donovan occupies a 10,000 square foot facility. As part of the
joint venture agreement, CDC has agreed to allow the Company to use this
plant as a showcase for its marketing efforts. The Company intends to take
prospective buyers to the plant to demonstrate a small scale tire crumbing
facility.
The Company currently has 10 trained inmate-employees at this
facility, and expects to expand its workforce as needed. Thomas Driscoll,
the Company's Vice President of Operations, is currently working on
location overseeing construction, installation, training and operations of
this plant.
Depending upon the success of the initial phase of this project, and
finances permitting, the Company may seek to expand operations at the
Donovan Correctional Facility plant to include some aftermarket product
manufacturing or equipment fabrication.
Poseidon Products GmbH.
-----------------------
In a joint venture agreement with SteG, a German Government sponsored
company, the Company established Poseidon Products GmbH ("Poseidon") which
will construct and operate a tire recycling facility in Penkun, in the
state of Mecklenburg-Vorpommern to produce crumb rubber and to manufacture
a wide range of value added aftermarket products. The plant is designed to
shred and granulate tires into crumb rubber. Some of the crumb rubber will
be devulcanized with the Company's Revulc 300 machine. The devulcanized
rubber will be used in a variety of products. The balance of the crumb
rubber will be used for in house manufacturing of value added products
using press systems and other technologies.
Ground breaking for the Poseidon joint venture occurred September 17,
1998 in Penkun, Germany. Site improvements were begun and foundations for
the plant were commenced. Due to difficulties Poseidon has encountered in
obtaining debt financing, construction of the Poseidon facility has been
delayed. Initially, the Company negotiated with Deutsche Bank to provide
funding. German state government officials have agreed to proceed with the
project and guarantees have been pledged by the State of Mecklenburg. This
should enable the conclusion of funding with either Deutsche Bank, Deutsche
Kredit Bank and other banks with whom the Company is presently negotiating.
Due to the size and nature of this project, concluding the necessary
funding with grant and loan agreements has caused further delays.
Management believes all necessary funding agreements will be completed
during the second quarter of 2000.
5
</Page>
<PAGE>
Pending completion of funding, environmental compliance, and building
construction assuming contractors are able to maintain the current
construction schedule, the Company anticipates the Poseidon facility to be
complete and operational during the fourth quarter of 2000. Poseidon has
opened offices in Penkun and has commenced a marketing study and plan to
introduce and sell its manufactured products in Germany and Europe.
As the Poseidon facility will incorporate all of the equipment and
technology the Company has to offer, the Company anticipates the Poseidon
facility to be a showcase for future full scale tire recycling plant sales.
The plant, equipment and technology is the culmination of research and
development by the Company.
Construction Industry
---------------------
Quantum Modified Asphalt Xcetera, Inc., ("QMAX")
------------------------------------------------
Is a wholly owned subsidiary of the The Quantum Group, Inc. QMAX was
established pursuant to the laws of the State of Nevada on May 11, 1997.
QMAX was put into active operations during the fourth quarter 1999. The
Company believes a potentially large market for crumb rubber exists in the
asphalt paving industry, where there appears to be significant interest in
producing CRM asphalt paving. QMAX will oversee the Company's efforts in
the CRM asphalt industry. This will include the use of specialized mobile
equipment for the mixing of crumb rubber and asphalt at hot mix plants,
overseeing technology transfer programs to international clients, on-site
project management and seminars to educate both public and private sector
engineers to the Company's products and services.
Modified Asphalt Technologies, Inc. ("MAT")
-------------------------------------------
During the first quarter of 2000 the Company purchased Modified
Asphalt Technologies, Inc., ("MAT") to be a subsidiary of QMAX, and entered
into an employment agreement with its president Jeffery R. Smith. MAT and
Mr. Smith are recognized leaders in the production and use of CRM asphalt.
MAT and Mr. Smith have expertise in the areas of technology transfer,
equipment manufacturing, material specifications and supply, quality
assurance, personnel training, asphalt rubber binder production and
application and implementation of asphalt rubber usage. The Company
believes this acquisition will compliment the products and services QMAX
currently offers and enable it to expand its operations in the CRM asphalt
paving industry.
Eurectec, Inc. ("Eurectec")
----------------------------
Is a wholly owned subsidiary of The Quantum Group, Inc. It was
established for the primary purpose of negotiating license agreements with
CISAP and SMS to market and sell their tire recycling and aftermarket
product equipment. Unfortunately, neither manufacturer could provide
equipment that operated at manufacturer's specifications. The Company's
most recent sales of CISAP and SMS equipment were to buyers in Mexico and
Saudi Arabia. Both facilities experienced significant problems, some of
which are still unresolved. Because the CISAP and SMS equipment has not
worked as represented, the Company is no longer selling, nor does it intend
to sell CISAP or SMS equipment in the future. The Company is currently
involved in litigation with CISAP. The Company is not currently involved
in, nor does it anticipate being involved in litigation with SMS.
With the conclusion of the Company's relationships with CISAP and SMS,
Eurectec's primary business purposes no longer exist. The Company
anticipates little, if any business will be transacted through Eurectec in
the future.
6
</Page>
<PAGE>
The Company has developed a website which 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 which 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 web site has also been established and may be viewed at
http://www.poseidon-products.com. The web site, which is in German and
English, provides a platform for showcasing the Poseidon joint venture and
promoting an awareness of the Company. The Company is currently updating
its websites.
Market For The Company's Products
- ---------------------------------
In the United States there are over 275,000,000 tires discarded each
year. There are currently between two and three billion tires stockpiled
in the United States and an estimated 1,000,000,000 tires discarded
annually worldwide. 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 to this problem was to require the
tires be shred into small pieces to reduce the size of the tire dumps, the
potential for fires, and the health hazards which existed because of
mosquitoes and rodents which inhabit these tire dumps. The European Union
has issued a directive banning landfilling of all tires, whether whole or
shredded, by the year 2007.
In an effort to induce recycling of tires in the United States, many
states have enacted laws charging recycling fees on all new tire sales.
The fees are deposited into 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 a market 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.
Several different methods for disposing of or recycling tires have
been attempted. At one point, a 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 an effort to reclaim valuable resources from tires, attempts have
been made to recover oil from tires through pyrolysis. Pyrolysis is a
process of heating tires to very high temperatures and extracting the
petroleum content from the rubber. 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.
7
</Page>
<PAGE>
Another system being offered by some of the Company's competitors is a
cryogenic 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 facility 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. Moreover, if the
equipment is shut down for maintenance or repairs the entire system must be
taken off line for a period of days. Another 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.
Other systems uses efficient shredding equipment, but rely on
hammermill technology for granulating the shredded rubber. These systems
tend to be very large, noisy and inefficient, largely because hammermill
technology was designed for other industrial applications and has not been
readily adaptable for use in tire recycling.
In addition to the fact that there is no agreed upon best method for
recycling scrap tires, another of the challenges facing the tire recycling
industry has been the lack of reasonably priced equipment for the
production of crumb rubber, particularly given the production capacity of
such equipment and the prevailing market prices of crumb rubber. Prices of
crumb rubber vary according to the mesh (size) of the rubber. The March
2000 issue of Scrap Tire and Rubber Users Directory, 2000, published by
Recycling Research Institute, provided information regarding historical
market prices of tire-derived materials, including crumb rubber. In 1999-
2000, the average price of crumb rubber with a mesh of minus 10 was $.05 -
.18 per pound. This is the size most commonly used in asphalt paving.
Aftermarket products manufactured from press equipment use rubber of
approximately minus 30 mesh, which for 1999-2000 was priced at $.08 - .32
per pound. Very finely ground crumb rubber which is suitable for
devulcanization is usually minus 80-100 mesh. In 1999-2000 crumb this size
ranged in price from $.17 - .75 per pound.
Another obstacle to market development has been the limited and
uncertain demand for crumb rubber. 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.
Moreover, the tire recycling industry is highly competitive, no single
competitor holds a dominant market position. Some of the Company'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. Few companies, however, offer complete recycling systems which
include all equipment required to process whole tires to crumb rubber and
in turn use crumb rubber to produce aftermarket products.
The Company believes the system it offers has several advantages over
the systems offered by competitors, including (i) lower initial cost of a
system; (ii) higher operating efficiencies and lower operating expense;
(iii) less maintenance down time; and (iv) recycling at ambient
temperatures resulting in high quality crumb rubber output.
8
</Page>
<PAGE>
Products
- --------
Crumbing Equipment
------------------
Eco Granulating System ("EGS")
------------------------------
The Company, working with outside engineering firms, has designed a
complete tire recycling and granulating production system which integrates
individual pieces of tire recycling equipment made by other manufacturers.
The EGS System reduces scrap automobile and truck tires to useful and
valuable crumb rubber, reusable steel scrap and nylon fluff. The system as
designed follows common processing steps accepted in the industry. The
process begins by sending truck tires through a de-beader, slitter and
shredder. Automobile tires go directly to a shredder. In the next step,
the shredded material is 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 is processed through a
magnetic separator which removes the steel shred and a pneumatic aspiration
system which removes the nylon fibers. The product is 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
ranging from 0 to .5 mm, .5 mm to 2 mm, 2 mm to 4 mm. The EGS System will
also offer as an option, a grinder which will reduce the crumb rubber to
minus 60 mesh.
The EGS System the Company markets does not require the Company to
manufacture any equipment. Most of the equipment used in the system e.g.,
de-beaders, slitters, grizzlies, grinders and granulators are currently
manufactured by other companies. If necessary, third party contractors can
manufacture all of the equipment and parts required to integrate the
individual pieces of equipment into a unified recycling system.
SuperCollider - Impact 500 Technology
-------------------------------------
During 1997, the Company worked on the in-house development of a
compact SuperCollider machine designed to take large mesh size crumb rubber
produced by the EGS System and buffings from tire retreading and pulverize
it into fine powder in order to open up several new markets. These markets
include extrusion products, press products and products combining super-
fine crumb and plastic. The Company finalized the engineering for the
SuperCollider and concluded the development, prototype work and initial
performance testing during 1998 and early 1999. After testing the initial
prototype, the Company decided not to sell the SuperCollider into the
market until a number of improvements could be made. During 1999, the
Company made those improvements and began additional testing. Testing of
the improved SuperCollider is now about 95% complete as of December 31,
1999. The first SuperCollider is currently being installed at the Donovan
Correctional Facility.
REVULCON(R) - Revulc 300 Technology
-----------------------------------
The Company entered an exclusive worldwide license agreement with Faru
GmbH., Dresden, Germany ("Faru"). Faru is the patent holder of the
REVULCON technology. This technology enables the production of high
density, smooth finish rubber moldings and extrusions, including new tires,
by adding REVULCON compound. This is done by a process of devulcanizing
the rubber, returning it to a state where it can be utilized in new
products and re-vulcanized. The reactivated rubber waste can be processed
without further additives to rubber products like mats, plates, solid
rubber tires, components for fall protection, elements for sound and
9
</Page>
<PAGE>
<PAGE>
vibration deadening, blocking and insulating layers against heat and
moisture. Profiles and other goods can be made by extrusion or injection
molding when the revulcanized rubber is mixed with fresh rubber or
plastics. While there are other companies developing and marketing
competing technology, the REVULCON(R) technology is the only one that does
not introduce or use of chemicals in its process.
The Company has negotiated an agreement with Ermafa GmbH, Dresden,
Germany, ("Ermafa") to manufacture equipment using the Revulcon
technology. This equipment is being sold under the brand name Revulc 300.
The first Revulc 300 has been manufactured and is currently operational in
the Coswig plant. Three additional machines are in various stage of
construction. The first of these machines will be installed at the Donovan
Correctional Facility; the second one will be installed at the Poseidon
Facility. The Company anticipates selling the third machine to an outside
purchaser.
Aftermarket Product Equipment
-----------------------------
Eco-Press
---------
The Company also sells press equipment which can be used to process
crumb rubber into value added aftermarket products including door mats,
anti-fatigue mats, cattle and heated per mats, roofing products, irrigation
hoses, trailer liners, carpet underlay and "Ecoplas" (a combination of
recycled rubber and plastic from which many wood replacement products are
made). Industrial products such as speed bumps, traffic cones, curbside
recycling bins, road marker posts and sound barriers, and sports surfaces
such as tennis and other ball game courts, gymnastic and running track
surfaces, and playground safety surfaces are other end products which can
be manufactured using crumb rubber.
Rothbury Technology
-------------------
The Company, has the exclusive worldwide manufacturing and marketing
rights to a process for giving a mixture of crumb rubber granulates, resins
and other additives heat conductive characteristics for use in products
such as heatable floor coverings, cattle and pet mats and underlayments
developed by Rothbury Engineering Limited, Great Britain.
The Rothbury technology relies on a heating filament, which operates
on either AC or DC electricity, imbedded in a rubber underlayment. These
products can be operated more cost effectively than interior forced air and
radiant heating systems. In exterior applications, the heated rubber
products provide superior heat conducting properties to other available
technology such as heating coils in concrete. These heated products give
manufacturers new products and a new market for crumb rubber.
The Company has applied for UL listing in Europe. The Company has
also filed for patent protection on this technology subject to the license
agreement. If the patent is granted, it will be held by The Quantum Group,
Inc.
Research and Development
- ------------------------
As discussed above, the Company had a prototype of its Impact 500
SuperCollider by the end of 1998, it decided to make various improvements
to the Impact 500 before selling it to the public. Because the Impact 500
was initially completed in 1998, all of the research and development
associated with that technology was charged off in 1998. Thus, in
accordance with certain accounting principles, despite the fact that the
Company continued to improve and develop the Impact 500, the Company's
accounting records show that it spent no money on research and development
during 1999.
10
</Page>
<PAGE>
Marketing and Sales
- -------------------
The Company has been most successful marketing and selling outside of
the United States where attractive incentives are offered to investors by
way of government grants, low interest loans and tax advantaged investment
programs.
The Company has encountered challenges selling its tire recycling
systems in the United States. These obstacles arise from the substantial
capital expenditure required to commence a recycling facility and the
inability 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. Tire dumps, however, are now being recognized as nuisances and
public safety hazards. The emerging trend is 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 recycle the tires or sell them to a recycler.
An additional challenge to the Company in marketing the recycling
systems is the long sales cycle. Typically, it takes twelve to twenty four
months from the time the Company has its initial contact with a potential
customer until equipment is installed and the Company is paid in full.
The Company continues to rely principally on the efforts of its
officers and directors to generate sales. Historically, the Company's
principal method of marketing has been through direct sales by officers of
the Company and its 12 independent commissioned sales representatives
worldwide. The Company believes its active participation in trade shows,
trade organizations is providing strong industry connections and marketing
opportunities. The Company is also advertising in technical and trade
journals and articles and on the Company's website. Finally, the Company
believes its joint venture projects at the Donovan Correctional Facility
and Poseidon will provide excellent marketing platforms for the sale of the
Company's products.
The Company is a member of a number of associations related to the
tire, rubber and recycling industries including the Rubber Pavements
Association located in Mesa, Arizona, the International Tire and Retreading
Association, headquartered in Louisville, Kentucky (ITRA), ETRA (the
"European Tire Recycling Association") headquarter in Brussels, Belgium and
is a founding member of the International Recycling Federation located in
Bonn, Germany. In addition, the Company is listed in the Scrap Tire Users
Directory, an RRI annual publication which is a business reference guide to
the tire recycling industry.
The Company's management attended and made a successful presentation
at the first European International Symposium on Crumb Rubber in Asphalt
Paving held in Meclkenburg-Vorpommern Germany. In the upcoming months, the
Company's management plans to attend the ETRA European Tire Recycling
Congress and Annual General Meeting to be held in Brussels in March and the
ITRA Annual meeting in May. The Company is considering attending several
other international shows during the third and fourth quarters of 2000.
Despite significant effort, to date the Company has been unable to
establish consistent sales volume. The Company credits this to a number of
factors. First, although the 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. While momentum in the industry seems to
11
</Page>
<PAGE>
<PAGE>
favor tire recycling, which reclaims the rubber resource, no single
technology or method has achieved market dominance. Under these
conditions, potential purchasers are slow to buy. Second, because of
limited sales, manufacturers of recycling equipment do not carry large
inventories of equipment, which significant lengthens the sales cycle.
Third, due to inconsistent sales volume, the Company has had limited
capital and has maintained only a limited marketing and sales staff.
While these factors have made it difficult for the Company to create
consistent cash flow and compete successfully in the industry, they also
form significant barriers to entry by competitors who will face many of the
same challenges.
In December 1999, QEST entered into a memorandum of understanding with
Shandong Hongli Co,. Ltd., of Shandong, China. The memorandum of
understanding provides that Shangdong Hongli will: purchase shredding and
granulating equipment capable of processing 10,000 tons of radial
automobile tires per year; purchase an Impact 500 SuperCollider; and
receive a license to manufacture and sale the EGS System in China, subject
to the parties entering into a definitive agreement.
Employees
- ---------
Currently the Company has 16 employees other than its officers and
directors, its twelve independent outside sales persons and an outside
consultant. 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, Secretary, and Director and John Pope, the Company
Treasurer, a Vice President and Director. The Company currently employs
six persons at its corporate headquarters including two administrative
staff, two management staff, one sales person and one technical staff
member. The Company employees ten persons in addition to Thomas Driscoll,
a Vice President, at its San Diego facility.
- -------------------------------------------------------------------------
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------------------------------------------------
On March 1, 2000, the Company renewed its lease agreement to lease an
industrial condominium in a multi-tenant building for use as its principal
executive office. The Company pays $3,821.00 per month for 4,495 square
foot facility. The lease expires on February 28, 2002 and has a renewal
option for an additional year. The building is located at Park Irvine
Business Center, 14771 Myford Road, Building B, Tustin, California 92780.
The space the Company is leasing is sufficiently large to accommodate all
of its administrative and storage needs.
- -------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------------------------------------------------
On or about April 23, 1999, Eurectec was named as a defendant in a
complaint filed in the Court in Pistoia, Italy by Tyre's Ecology S.r.l.,
("Tyre") formerly known as CISAP Ecology S.r.l. ("CISAP Ecology"). Tyre
succeeded to the interest of CISAP Spa ("CISAP") as a party to the
marketing agreement between Eurectec and CISAP. Under the marketing
agreement Eurectec was granted the exclusive rights to market certain tire
granulating equipment manufactured by CISAP. The agreement required a
minimum number of granulating systems to be sold by Eurectec to maintain
the exclusive rights. Due to the poor performance of CISAP and its
equipment Eurectec has not met its minimum sales quota. As part of the
lawsuit, Tyre is seeking to terminate the marketing agreement.
12
</Page>
<PAGE>
The Company is not concerned with the threatened loss of the marketing
rights held by Eurectec because it believes those marketing rights hold
limited value given the manufacturers' consistent failure to deliver
commercially viable equipment to purchasers. Moreover, the Company is now
doing business with other manufacturers of shredding and granulating
equipment that the Company believes is superior to the CISAP equipment.
Tyre is also seeking to recover damages in the approximate amount of
$520,000 arising from alleged misstatements by Eurectec as to the
manufacturers' represented through-put capacity of equipment and alleged
defamation by Eurectec and Marco Morbidelli, a former Tyre engineer who has
performed work for Eurectec and purchasers of CISAP and Tyre equipment in
Saudi Arabia and Mexico.
The Company intends to vigorously defend itself on the basis that none
of the CISAP or Tyre equipment sold to any of the purchasers introduced by
Eurectec has been capable of operating as represented. Moreover, CISAP and
Tyre have failed to deliver purchased equipment, failed to properly install
equipment as required by contract and failed to provide warranty service to
the purchasers of the equipment.
The Company has incurred substantial costs attempting to obtain
performance for its clients and has suffered substantial damages to its
business as a result of the plaintiff's unwillingness and inability to
perform under its sales agreements.
Because of these excessive costs the Company filed a counterclaim
against Tyre in the Court in Pistoia, on January 11, 2000. The Company
seeks to recover damages in the amount of U.S.$4,366,154.
Marco Morbidelli, and the purchasers of the equipment in Saudi Arabia
and Mexico have told the Company that they will support and cooperate with
the Company in its defense against Tyre's claims and its efforts to
establish CISAP's and Tyre's breaches of various equipment purchase
agreements.
- -------------------------------------------------------------------------
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, 1999.
- -------------------------------------------------------------------------
PART II
- -------------------------------------------------------------------------
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 March 3, 2000 the Company had 456
shareholders holding 10,384,672 common shares. Of the issued and
outstanding common stock, 2,772,293 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.
13
</Page>
<PAGE>
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>
1998
- ----
First Quarter ended March 31 3.00 .50 3.3125 1.1875
Second Quarter ended June 30 4.1875 2.875 4.3125 3.00
Third Quarter ended Sept. 30 3.625 2.00 3.75 2.375
Fourth Quarter ended Dec. 31 4.375 2.875 4.4375 3.125
1999
- ----
First Quarter ended March 31 4.25 3.0625 4.50 3.375
Second Quarter ended June 30 3.125 2.50 3.50 2.875
Third Quarter ended Sept. 30 3.25 2.65625 3.375 3.00
Fourth Quarter ended Dec. 31 3.00 1.4375 3.15625 1.5625
</TABLE>
The foregoing figures were furnished to the Company by the National
Quotation Bureau, 11 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
- -------------------------------
As of December 31, 1999, the Company had cash on hand of $ 242,934.
The Company raised $1,107,484 during 1999 in a Regulation S offering. The
Company acquired debt of $282,438 during 1999. $272,240 of this debt was
incurred by Poseidon Products, GmbH, the Company's joint venture in
Germany. The remaining $10,198 is for an installment purchase for the
Company's QCAL operation in San Diego.
Results of Operations
- ---------------------
Comparison of the year ended December 31, 1999, and the year ended December
31, 1998
- --------------------------------------------------------------------------
The Company generated a loss of $ 2,642,390 in the year ended December
31, 1999 compared to a loss of $100,691 for the year ended December 31,
1998. The primary reason for the differences is that the Company had no
revenue from sales of equipment in 1999 to unrelated third parties. The
1998 revenue from equipment sales was $2,882,007 with a gross profit of
$1,191,125. During 1999 the Company concentrated on the purchase and
manufacture of equipment for its QCAL subsidiary operation and delayed
sales efforts to other customers until equipment package specification were
modified and updated and until the QCAL facility was operational. The1999
loss includes an Accounts Receivable write off of $347,220, the 1998 loss
included an accounts receivable write off of !00,000. No revenue from
license fees was generated in either the year ended December 31, 1999 or
1998.
14 </Page>
<PAGE>
The majority of the Company's sales are recorded when equipment is
shipped and title passes to the buyer. Typical sales are by letter of
credit, with the funds 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 the equipment and 10% due on the completion of installation.
This has resulted in the Company receiving its revenue in large lump sums
at irregular intervals rather than smaller amounts at frequent intervals.
The Company intends that future equipment 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 performance and
completion bonds prior to delivery. Additionally, the sales of product
from QCAL will be of smaller amounts with more frequent sales. Equipment
purchased for the use of a subsidiary or joint venture is recorded as a
purchase of assets with no revenue or inter-company profit generated upon
the transfer to the operating entity
Net cash used in operations was $ 836,692 during the year ended
December 31, 1999 compared to $1,334,685 in the year ended December 31,
1998. During 1999, Accounts receivable decreased by $2,747,576, Furniture
and fixtures increased by $35,443, Equipment increased by $1,414,664.
Inventory increased $120,044, Customer deposits decreased $1,897,779 and
Deposits decreased by $775,717. Cash used in operations in 1998 was from an
increase in Accounts Receivable of $2,354,061, Deposits increased by
$1,804,508, offset by an increase in Customer Deposits of $2,190,462.
$179,309 was used for the purchase of land. Accrued Expensed decreased by
$102,315 while Accounts Payable increased by $585,185.
Accounts Receivable decreased in the year ended December 31, 1999 by
$2,747,576. This decrease was from the payments received from customers of
$1,724,810, the return, cancellation, and crediting of a sale of $675,546
and the write off of $347,220. The write off is of all remaining balances
on the Mexico project. The Company believes that as a result of
difficulties with the Cisap equipment, combined with other factors, the
financial viability of the Mexico project is so low that collection of the
outstanding balances is unlikely. The return involved a piece of equipment
sold to but not yet installed in Germany. The customer returned the
equipment to the Company who in turn installed it in the QCAL San Diego
plant.
Furniture and fixtures increased by $35,443, due to furniture
purchased for the QCAL facility and for the Quantum Group corporate
offices.
Equipment increased due to the purchase of Equipment for the QCAL
facility and from the manufacturing costs of completing the Impact 500, and
transferring the 1998 balance of $63,203 for the prototype to equipment
upon its installation in San Diego.
Customer deposits decreased upon applying the deposits to invoices
upon the completion of installation and testing at customer sights.
Deposits with vendors decreased as the deposits were applied to the
Company's liability upon installation and upon receipt of equipment for the
QCAL San Diego facility
Inventory consists of purchased crumb rubber on site at the Company's
QCAL San Diego facility. This crumb was purchased from Mexico to provide
safety stock raw materials and to facilitate crumb rubber re-sales prior
the San Diego facility reaching full capacity production.
15
</Page>
<PAGE>
Franchise Taxes payable balance at December 31 1999 and 1998 of
$103,548 consists of $70,691 Federal taxes and $32,857 in California state
taxes. Although the Company has a Net Operating Loss Carry Forward for
Federal Income Tax purposes, the law provides that the utilization of the
NOL is a preference item triggering the Alternative Minimum Tax. The State
of California does not have a NOL Carry Forward . The Company has delayed
April 14, 2000payment of this balance pending clarification of certain
collections and timing differences, but anticipates that payment will be
made during the second half of 2000.
Accrued expenses decreased in the year ended December 31, 1999 by
$366,041, compared to a decrease of $102,315 in the year ended December 31,
1998. Accounts payable declined $71,684 in the year ended December 31, 1999
compared to an increase of $585, 185. The 1998 increase relates to the open
invoices for a two large sales shipped just prior to yearend. Aside from
those two open items, the general reduction of accrued expenses and
accounts payable is a result of more timely disbursements.
Minority interest was $9,463 at the end of December, 1998. That
interest represents the remaining balance of the German investment in the
Poseidon joint venture project after giving effect to their 20% portion of
the 1998 operating loss. The loss for the year ended December 31, 1999
exceeds the minority interest equity, which was accordingly reduced to
zero.
The carrying value of the land owned by the Poseidon joint venture was
reduced to $157,753 at December 31, 1999 from $179,309 at December 31,
1998. this reduction is as a result of the decline in valuation of the
German Mark against the US Dollar. As this re valuation is of an existing
asset, no loss is reported for operating statement purposes
Depreciation Expense of $144,222 for the year ended December 31, 1999
exceeds the 1998 expense of $47,691 by $96,531. This is due to the
equipment purchased and manufactured for the QCAL operation.
Travel expenses of $167,274 for the year ended December 31, 1999
increased by 8% or $11,832 compared to the year ended December 31, 1998.
This increase is due to increased marketing activities in support of the
QCAL operation.
Professional fees increased from $56,978 for the twelve months ended
December 31, 1998 to $210,483 for 1999. This increase is due to the legal
activities involving the CISAP litigation and in resolving the concerns of
the various projects utilizing the cisap equipment.
Office expenses of $97,356 for the twelve months ended December 31,
1999 are a slight reduction from the 1998 expenses of $98,139.
Administrative expenses of $814,361 for the year ended December 31,
1999 are significantly higher than the $249,909 for the comparable 1998
period. This included the start up cost of the QCAL operation and increased
personnel in marketing and office support of the QCAL product sales effort.
Consulting expenses of $715, 663 for the year ended December 31, 1999
increased from the year ended December 31 1998 by $266,155. This increase
is primarily due to added use of consultants on the reconfiguration of the
Company's equipment packages and fee increases from the Company's president
and executive vice president.
Options expense of $39,067 was recognized in 1999 as a result of the
Board of Directors approval of the 1999 employee incentive stock option
program. No comparable expense was incurred in 1998.
16
</Page>
<PAGE>
Comparison of the year ended December 31, 1998, and the year ended December
31,1997.
- ---------------------------------------------------------------------------
The Company generated a $100,691 loss in the year ended December 31,
1998 compared to a profit of $101,893 for the year ended December 31, 1997.
The 1998 loss includes an Accounts Receivable write off of $100,000, and
an investment loss of $20,000. The 1997 profit includes sale of Licence
Rights of $350,000 and $150,000. The $350,00 license fee is partially
offset by a reserve of $175,000.
Net cash used in operations during the year ended December 31, 1998
was $1,334,685 compared to $197,974 cash generated by operations in the
year ended December 31, 1997. During 1998, Accounts Receivable increased
by $2,354,061, Deposits increased by $1,804,508, offset by an increase in
customer deposits of $2,190,462. $179, 309 was used to purchase land.
Accrued Expenses decreased by $102,315 while Accounts Payable increased by
$585,185. The cash generated from operations in 1997 resulted primarily
from profitable operations, an increase in Accrued Expenses of $393,577, an
increase in Taxes Payable of $103,548, the Accounts Receivable write off of
$195,000 and Depreciation and Amortization of $84,745, partially offset by
the increase in Accounts Receivable of $681,457, and a decrease in Accounts
Payable of $65,316
Accounts Receivable increased in the year ended December 31, 1998 by
$2,354,061 to $3,065,040. The 1998 Accounts Receivable balance consists of
the sale of a press and contract additions on the Mexico project of
$175,000 and $335,000 respectively, the Licence Fee receivable of $350,000
(less the reserve of $275,000) and $1,316,607 and $1,105,400 for two
projects in Germany and $58,033 in Crumb Rubber sales. The December 31,
1997 Accounts Receivable balance primarily included The Mexico project
which is included above. The company has not sought collection of these
items as an accommodation to the client due to installation delays and
their problems with Cisap. Although the Company believes that these
amounts will ultimately be collected, the 1997 reserve of $175,000 was
increased by $100,000 in 1998.
Inventory at December 31, 1998 is $19,425 compared to $29,760 at
December 31, 1997. The 1996 balance was equipment held for sale that was
sold back to the vendor. The 1998 and 1997 balance consists only of raw
materials ( crumb rubber) for the manufacture of mats.
The deposit account at December 31, 1998 is $1,807,789 in Other Assets
for equipment for the two German projects and $303,021 in Current assets
for a inventory of crumb rubber heated tiles to be sold at retail. The
1997 balance was $421,451 of which $417,951 was a deposit with Cisap which
represented the proceeds on the sale to them of the C3000 machine
previously held in inventory. The 1997 deposit was utilized in 1998.
Securities Accounts balance of $73,125 at December 31, 1997 is the
result of receiving 20,000 shares of Keystone Energy common stock for a
$100,000 license fee. The securities had a market value $100,000 at the
time of the transaction, but were subsequently written down to reflect the
December 31, 1997 market price. These securities were sold in 1998. The
Company realized an additional loss of $20,000 in 1998 prior to the sale.
Accrued Expenses decreased by $102,315 to $450,084 during the year
ended December 31, 1998 compared to $552,399 at December 31, 1997. The
major components of this decrease was the payment of the accrued interest
on Company debt.
17
</Page>
<PAGE>
Franchise Taxes Payable balance at December 31, 1998 and 1997 of
$103,548 consists of $70,691 Federal Taxes and $32,857 in California State
taxes. Although the Company has a Net Operating Loss Carry Forward of
$1,663,146 for Federal Income Tax purposes, the law provides that the
utilization of the NOL is an preference item triggering the Alternative
Minimum Tax. The State of California does not have a NOL carry forward and
as such the year's operation are subject to California Income tax. The
Company has delayed payment of this balance pending clarification of
certain collections, but anticipates payment will be made during the second
half of 1999.
Current Maturities were at December 31, 1997 $721,318. The Current
Maturities are that portion of the Company's long term debt due within the
upcoming fiscal year. As all of the long term debt was due during 1998, it
is all categorized as Current Maturities. The notes and the accrued
interest on them were paid off during the first quarter of 1998.
Minority Interest was $109,256 at December 31, 1997 due to the 20%
percent minority interest in the Company's primary subsidiary, Eurectec,
Inc. This Minority Interest was exchanged for stock in the Company during
1998. The $9,463 at December 31, 1998 is as a result of the establishment
of Poseidon Product GmbH, the joint venture project with the Germany
government.
Revenue for the year ended December 31, 1998 was $2,952,900. This is a
$471,909 decrease from the revenues of $3,424,809 generated in the year
ended December 31, 1997. The decrease in 1998 is from a decrease in
equipment sales of $41,809, a decrease of $500,000 in License Sales, as the
Company did not conclude any new licences in 1998. Other Income increased
by $69,900 consisting primarily of the sale of crumb rubber and mats.
The majority of the Company's sales are recorded 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 at frequent
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 manufacture supplying the purchaser with performance and
completion bonds prior to delivery.
Cost of Sales consists of wholesale costs to the Company of
granulating systems and support equipment plus freight and insurance, which
are billed to the client. Cost of Sales for the year ended December 31,
1998 was $1,761,775, a $499,902 decrease from the $2,261,667 for the year
ended December 31, 1997. Cost of Sales as a percentage of equipment sales
was 60% in 1998 compared to 77% in 1997 and 66% in 1996. 1997 was adversely
affected by concessions to the buyer in relation to the granting of the
territorial license for Mexico. The Company believes that the gross margin
experienced in 1998 an appropriate margin on equipment transactions but is
not indicative of a trend but rather is the function of different equipment
specifications for different projects.
Commission expense for the year ended December 31, 1998 was $0
compared to the 1997 expense of $37,008. This is due to the a continuation
of the strategy of having contracts negotiated by Company personal with
out the use of outside sales personal or agents.
18
</Page>
<PAGE>
Depreciation expense was essentially unchanged in 1998 to $47,691
compared to $47,737 in 1997. The majority of the depreciation expense in
both years was for the SMS press. This unit was sold in late 1998.
The Company amortizes the license agreement with Rothbury Engineering
over the anticipated 10 year economic life of the technology. The year
ended December 31, 1998 and 1997 include a full years amortization.. During
1998 the Company acquired a License from Faru GmbH. This license is also
being amortized over 10 years from the date of acquisition, resulting in an
increase in amortization expense of $7,500 for the year ended December 31,
1998 compared to 1997.
Travel expenses increased in the twelve months ended December 31, 1998
by $99,386 compared to 1997 ( $155,442 vs $ 56,056 ), due primarily to the
extensive travel necessary due to the projects in Germany, the German joint
venture, the installations in Mexico and the strategy of seeking to
establish business relationships which will lead to further joint venture
agreements.
Professional Fees decreased to $56,978 in the year ended December 31,
1998 , compared to $78,596 in the year ended December 31, 1997. The 1997
year included legal work involved with the reverse split of the Company's
stock and the agreements to exchange the shares held by the minority
holders of shares in the Company's subsidiary (Eurectec, Inc) for Quantum
shares. The 1998 year includes expenses relating to ongoing operations of a
more general nature.
Office Expenses increased by $61,431 from the year ended December 31,
1997. This is due to the addition of support personal, and the repair,
maintenance and cleaning of the company's offices, for the full year.
Administrative Expenses increased to $249,909 in the year ended December
31, 1998 from $95,377 in the year ended December 31, 1997. This is due to
the establishment of both financial and general public relation programs,
the fees for application for full NASDAQ listing and the establishment of
marketing and sales programs for both crumb rubber and after market
products such as mats. Rent and Utilities expense declined in the year
ended December 31, 1998 to $63,259 compared to $65,634 in 1997.
Consulting Fees increased to $449,508 in the twelve months ended
December 31, 1998 compared to $232,571 for the year ended December 31,
1997. The Company employed outside consultants for marketing and accounting
in 1998 and 1997. Additional consulting expense was incurred in 1997 for
the start up of the crumb rubber and after market sales efforts. In 1998
the Company began paying its president as a consultant..
Interest Expense declined 1998 compared to 1997 from $95,656 to $804
due to paying off the Company debt in early 1998.
In 1997 the Company reserved $175, 000 (50%) of the Mexico License Fee
Receivable under the theory of conservativism. Although the signed
agreement calls for the payment of $350,000, Management believes that the
client may attempt to renegotiate the contract or seek concessions in some
manner. In 1998 the Company added $100,000 to this reserve.
The Foreign Currency translation gains of $63,880 in the year ended
December 31, 1997 are $36,116 more than the gain of $27,764 in the twelve
months ended December 31, 1998. This gain in both years is due to the fact
that the U.S. Dollar has strengthened considerable in relation to the
German Mark. 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 debt was repaid
during early 1998 thereby reducing effect of the gain to only the period
prior to repayment.
19 </Page>
<PAGE>
<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, 1999 and December 31, 1998;
Statements of Stockholders' Equity for the years ended December 31,
1999, 1998, and 1997;
Statements of Cash Flows for the years ended December 31, 1999, 1998,
and 1997;
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, 1999 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 57 President March 1989
Director March 1989
Keith J. Fryer 50 Vice President March 1995
Director March 1995
Secretary July 1997
John F. Pope 57 Vice President January 1991
Treasurer January 1991
Director March 1989
Thomas A. Driscoll 45 Vice President May 1999
</TABLE>
- -------------------------------------------------------------------------
20 </Page>
<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
------------------
Mr. 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
--------------
Keith J. Fryer is a Vice President, Secretary 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 with a City and Guild of London Institute Diploma in
Construction and Site Surveying. He also studied at Cranfield and
Dunchurch UK Management Colleges 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 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 and Secretary of the
Company in July 1997.
John F. Pope
------------
Mr. Pope is the Treasurer, a Vice President and a Director of the
Company. Mr. Pope began his professional career in 1963 as an auditor in
public accounting and subsequently on the corporate staff of Olivetti
Underwood in New York. He joined Burger King Corporation in Miami,
Florida, in 1968 and progressed to the position of Controller, Company
Stores Division. He joined Orange Julius International, Inc., Santa
Monica, California, in 1974 as Vice President, Finance and a Director for
the parent company and its national and international subsidiaries.
In 1980, Mr. Pope became President of Inflation Management, Inc., Los
Angeles, California. From February 1982 until February 1984 he was Vice
President, Finance of Aerobic Dancing, Inc. In 1984 he became Senior Vice
President of Animated Playhouses Incorporated and Subsidiaries, before
moving to become Executive Vice President Finac International, Inc., an
investment and venture capital firm in Torrance, California.
From 1986 through November 1987, Mr. Pope acted as Vice President
Finance and Administration for ASI Sign Systems of Marina Del Ray, Inc.
After leaving ASI Sign Systems in late 1987, Mr. Pope became a independent
financial consultant assisting a number of domestic and international
public and private companies in franchising, financial structure, and
internal and SEC reporting. He continues to serve on the Board of
Directors of several companies he helped to become public companies.
21 </Page>
<PAGE>
In 1989, Mr. Pope became a founding member of the Board of Directors
of the Quantum Group, Inc. Mr. Pope is a Certified Management Accountant
(CMA) and serves on the National Board of Directors of The Institute of
Management Accountants, where he also chairs the National Committee of
Finance. He has also been Certified in Financial Management (CFM) by the
same institute. He is a Certified Public Accountant (CPA) and a member of
the American Institute of Certified Public Accountants (AICPA). He has
been a member of a number of other professional and civic organizations,
including the Curriculum Steering Committee, School of Accountancy,
University of Southern California.
Thomas A. Driscoll
------------------
Mr. Driscoll first became involved with the Company in May 1999. Mr.
Driscoll received and A.A. degree in Electronic Engineering Technology from
Columbus State University in Columbus, Ohio in 1983. From 1983-1993, he
worked in the field and in supervisory positions for several companies.
From 1993 to 1997 he was the Director of Operations for Aurelios Pizza &
Joe's Sports Bar. Under his leadership, annual sales increased from $1.25
million to 3.5 million. From 1997 to April 1999, he served as President
and Director of Sales/Marketing for Triple Play Pizza, Inc., where he
developed the Company's Operations Manual, management training programs,
and implemented regional sales and marketing programs. He also negotiated
manufacturing and distributions contracts. Since May 1999, Mr. Driscoll
has served as the Vice President of Operations. His primary responsibility
is to oversee operations, sales, marketing and distribution for the
Company's Joint Venture Project at the Donovan Prison in San Diego,
California.
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 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.
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5
and amendments thereto furnished to the Company with respect to the most
recent fiscal year, it appears the following forms were inadvertantly filed
late: Thomas Driscoll's Form 3; Ehrenfried Liebich, Keith Fyrer, John
Pope and Thomas Driscoll's respective Form 5s for 1999; and John Pope's
Form 4s regarding 12 different sales of shares of the Company's common
stock equaling a total of 14,168 common shares sold. All of the common
shares sold were shares owned by John F. Pope, Inc, which Mr. Pope is an
officer and director of.
22
</Page>
<PAGE>
- -------------------------------------------------------------------------
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,
1999 the end of the Registrant's last completed fiscal year).
<TABLE>
<CAPTION>
Summary Compensation Table
----------------------------
Annual Compensation Long Term Compensation
--------------------- -------------------------
Awards
------
Name Other Restr Payouts
and Annual icted ------- All
Principal Compen Stock Options Other
Position Year Salary Bonus sation Awards /SARs# LTIP Payout
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ehrenfried Liebich 1999 $ -0- 169,573 -0- 45,531 -0- -0- -0-
President/Director 1998 -0- 72,806 -0- -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0- -0- -0-
Keith Fryer (1) 1999 -0- -0- 95,000 -0- 31,222 -0- -0-
Vice President/
Director/ 1998 -0- -0- 105,000 -0- -0- -0- -0-
Secretary 1997 -0- -0- 68,559 20,000 333,334 -0- 36,008
John F. Pope (2) 1999 -0- -0- 27,500 -0- 13,009 -0- -0-
Vice President/ 1998 -0- -0- 30,000 -0- -0- -0- -0-
Treasurer/Director 1997 -0- -0- 28,850 -0- -0- -0- -0-
Thomas A. Driscoll 1999 72,000 -0- -0- -0- 14,050 -0- -0-
Vice President 1998 -0- -0- -0- -0- -0- -0- -0-
1997 -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 options were granted to Mr. Fryer pursuant to the Company's 1997 Stock
Option Plan.
(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.
23
</Page>
<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
- ------------------------------------------------
Effective June 27, 1997, the Company implemented the Quantum Group,
Inc., 1997 Stock Option Plan and allocated 1,000,000 shares of common stock
of the Company to be available for grant under the plan. In October, 1997,
the Company granted an option, pursuant to the 1997 Stock Option Plan, to
Keith Fryer, an officer and director of the Company for 333,334 shares,
exercisable at $0.0625 per share. The options are exercisable at a rate of
66,666 shares per year for a period of five years commencing immediately
upon the date of grant. To date, 66,666 options have been exercised.
Effective November 18, 1999, the Company implemented the Quantum
Group, Inc., 1999 Stock Option Plan and allocated 200,000 shares of common
stock of the Company to be available for grant under the plan. In November
18, 1999, the Company granted 146,320 options, pursuant to the 1999 Stock
Option Plan, to its officers, directors, employees and consultants. All
shares issued pursuant to the Plan are exercisable at $2.887 per share.
The options are exercisable for a period of five years commencing
immediately upon the date of grant. To date, none of the options have been
exercised. The officers and directors received options as follows:
Ehrenfried Liebich received an option to purchase 45,531 shares; Keith
Fryer received an option to purchase 31,222
Option / SAR Grants in Last Fiscal Year
- ---------------------------------------
Individual Grants
-----------------
<TABLE>
<CAPTION>
Name Number of % of Total Exercise Expiration Grant
Securities Options/SARs or Base Date Date
Options/SARs Granted to Price Present
Granted Employees ($/share) Value ($)
Fiscal Year
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ehrenfried Liebich 45,531 31.17% $2.887 2004 $119,518.88
Keith Fryer 31,222 21.34 2.887 2004 90,137.91
John Pope 13,009 8.89 2.887 2004 34,148.63
Thomas Driscoll 14,050 9.60 2.887 2004 40,562.35
- -------------------------------------------------------------------------------------
</TABLE>
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.
24
</Page>
<PAGE>
- -------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
The following table sets forth as of December 31, 1999 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
10,384,672, 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 Name of Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class
- ---------- --------------------- -------------------- ------------
<S> <C> <C> <C>
Common Ehrenfried Liebich 2,887,593 27.81%
14771 Myford Road
Building B
Tustin, California 90744
Common Keith J. Fryer (1) 366,666 3.53%
14771 Myford Road
Building B
Tustin, California 90744
Common John F. Pope (2) 19,500 0.19%
14771 Myford Road
Building B
Tustin, California 90744
Common Thomas A. Driscoll 0 0%
14771 Myford Road
Building B
Tustin, California 90744
- ------------------------------------------------------------------------------------
Common All Officers, Directors
as a Group: (4 persons) 3,273,759 31.52%
- ------------------------------------------------------------------------------------
</TABLE>
(1) This includes 15,000 shares held of record by his three children and
51,666 held of record by Keith Fryer Associates, California, Inc., all of
which he may be deemed to be a beneficial owner of.
(2) All of Mr. Popes shares are held of record by John F. Pope, Inc.,
which he may be deemed to be a beneficial owner of the shares because he
has shared investment power of the shares.
25
</Page>
<PAGE>
- --------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
- --------------------------------------------------------------------------
In August 1998, the Company loaned $30,000 to John Pope, a director
and officer of the Company. In January 1999, the Company loaned Mr. Pope
an additional $10,000. Both notes are at an interest rate of 9% per annum.
The August 1998 note was due and payable on December 28, 1998 unless
extended by the Company. That promissory note has been extended by the
Company and is now due December 31, 2000. The January 1999 note is also
due and payable on December 31, 2000. John Pope is also the owner of John
F. Pope, Inc., a consultant to the Company. Compensation paid to John F.
Pope, Inc. is identified under the compensation table.
In August 1999, the Company loaned $25,000 to Keith Fryer, a director
and officer of the Company. The note is at an interest rate of 9% per
annum and is due and payable on December 31, 2000 unless extended by the
Company. Keith Fryer, an officer and director of the Company, is the owner
of Keith Fryer Associates California, Inc., ("KFA") a consultant to the
Company. Compensation paid to KFA is identified under the compensation
table.
There were no other related party transactions during 1999.
26
</Page>
<PAGE>
- --------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Reports on Form 8-K.
None.
(b) Exhibits. The following exhibits are included as part of this report:
<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 by
Articles of Incorporation reference*
3.02 3 Articles of Incorporation Incorporated by
reference*
3.03 3 Bylaws Incorporated by
reference*
10.01 10 The Quantum Group, Inc., 1999 Attached
Stock Option Plan
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.
- --------------------------------------------------------------------------
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: March 30, 2000 The Quantum Group, Inc.
a Nevada corporation
By: /s/ Ehrenfried Liebich
---------------------------
Ehrenfried Liebich, President
DATE NAME AND TITLE SIGNATURE
- -------------- --------------------- ---------------------------
March 30, 2000 Ehrenfried Liebich By: /s/ Ehrenfried Liebich
President/Director ---------------------------
Ehrenfried Liebich, President
March 30, 2000 Keith J. Fryer By: /s/ Keith J. Fryer
Vice President/Director/ ---------------------------
Secretary Keith J. Fryer
March 30, 2000 John F. Pope By: /s/ John F. Pope
Vice President, ----------------------------
Treasurer/Director John F. Pope
</Page>
<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: March 30, 2000 The Quantum Group, Inc.
a Nevada corporation
By:
---------------------------
Ehrenfried Liebich, President
DATE NAME AND TITLE SIGNATURE
- -------------- --------------------- ---------------------------
March 30, 2000 Ehrenfried Liebich By:
President/Director ---------------------------
Ehrenfried Liebich, President
March 30, 2000 Keith J. Fryer By:
Vice President/Director/ ---------------------------
Secretary Keith J. Fryer
March 30, 2000 John F. Pope By:
Vice President, ----------------------------
Treasurer/Director John F. Pope
<PAGE>
THE QUANTUM GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1999
&
DECEMBER 31, 1998
</Page>
<PAGE>
/Letterhead/
Schvaneveldt & Company
Certified Public Accoutant
275 East 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, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1999, 1998, and 1997. 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, 1999 and 1998, and the results of its
operations and its cash flows for the years ended December 31, 1999, 1998,
and 1997, in conformity with generally accepted accounting principles.
/S/ Schvaneveldt & Company
Salt Lake City, Utah
April 12, 2000
</Page>
<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December December
31, 1999 31, 1998
----------- -----------
<S> <C> <C>
Assets
Current Assets
- --------------
Cash $ 242,934 $1,781,944
Accounts Receivable 317,464 3,065,040
Inventory 139,469 19,425
Deposit 317,003 303,021
Note & Interest Receivable - Officer 69,253 30,932
Prepaid Expenses 26,944 440
----------- -----------
Total Current Assets 1,113,067 5,200,802
Property & Equipment
- --------------------
Furniture & Fixtures 55,547 -0-
Equipment 1,292,764 29,963
Vehicles 70,397 41,382
Land 157,753 179,309
Websites 9,650 -0-
----------- -----------
Total Property & Equipment 1,586,111 250,654
Other Assets
- ------------
Cash Pledged -0- 5,329
License Rights 442,611 507,367
Deposit 687,487 1,807,789
Prototype Impact 500 -0- 63,203
----------- -----------
Other Assets 1,130,098 2,383,688
----------- -----------
Total Assets $3,829,276 $7,835,144
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
</Page>
<PAGE>
The Quantum Group Inc., and Subsidiaries
Balance Sheets -Continued-
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December December
31, 1999 31, 1998
----------- -----------
<S> <C> <C>
Liabilities & Stockholders' Equity
Current Liabilities
- -------------------
Accrued Expenses $ 84,043 $ 450,084
Accounts Payable 653,517 725,201
Notes Payable 272,240 -0-
Customer Deposits 295,183 2,192,962
Franchise Taxes Payable 103,548 103,548
Current Maturities 16,925 -0-
----------- -----------
Total Current Liabilities 1,425,456 3,471,795
Long Term Liabilities
- ---------------------
Capital Lease 67,631 25,503
Note Payable 10,198 -0-
Less Current Maturities ( 16,925) -0-
----------- -----------
Total Long Term Liabilities 60,904 25,503
Minority Interest in Subsidiary -0- 9,463
- -------------------------------
Stockholders' Equity
- --------------------
Common Stock 50,000,000 Shares Authorized;
Par Value of $0.001 Per Share; 9,033,123 &
8,400,075 Shares Issued and Outstanding 9,033 8,400
Paid In Capital 6,692,776 6,018,287
Accumulated Deficit (4,358,893) (1,698,304)
----------- -----------
Total Stockholders' Equity 2,342,916 4,328,383
----------- -----------
Total Liabilities &
Stockholders' Equity $3,829,276 $7,835,144
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
</Page>
<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
December December December
31, 1999 31, 1998 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
- --------
Equipment Sales $ -0- $ 2,882,007 $ 2,923,816
License Sales -0- -0- 500,000
Other Income 17,821 70,893 993
------------- ------------- -------------
Total Revenues 17,821 2,952,900 3,424,809
Cost of Sales 348 1,761,775 2,261,677
------------- ------------- -------------
Gross Profit 17,473 1,191,125 1,163,132
Expenses
- --------
Commission -0- -0- 37,008
Depreciation 144,222 47,691 47,737
Amortization 64,756 57,256 49,756
Travel 167,274 155,442 56,056
Professional Fees 210,483 56,978 78,596
Office 97,356 98,139 36,708
Rent & Utilities 71,242 63,259 65,634
Administrative Expenses 814,361 249,909 95,377
Consultant Fees 715,663 449,508 232,571
Interest 19,504 804 95,656
Accounts Receivable Written Off 347,220 100,000 195,000
Foreign Currency Translation -0- ( 27,764) ( 63,880)
Research & Development -0- 13,544 -0-
Options Issued Expense 39,067 -0- -0-
------------- ------------- -------------
Total Expenses 2,691,148 1,264,766 926,219
------------- ------------- -------------
Net Income (Loss) From Operations ( 2,673,675) ( 73,641) 236,913
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
</Page>
<PAGE>
The Quantum Group Inc., and Subsidiaries
Statements of Operations -Continued-
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
December December December
31, 1999 31, 1998 31, 1997
------------ ------------ ------------
<S> <C> <C> <C>
Other Income (Expenses)
- -----------------------
Interest Income $ 21,822 $ 13,583 $ -0-
Loss on Investment -0- ( 20,000) -0-
Investment Evaluation Loss -0- -0- ( 6,875)
------------- ------------- -------------
Total Other Income (Expense) 21,822 ( 6,417) ( 6,875)
Net Income (Loss) ( 2,651,853) ( 80,058) 230,038
Taxes & Minority Interest
Minority Interest ( 9,463) ( 2,492) 24,517
Provisions for Taxes - Current -0- 23,125 103,628
------------- ------------- -------------
Total Taxes & Minority Interest ( 9,463) 20,633 128,145
------------- ------------- -------------
Net Income (Loss) ($ 2,642,390) ($ 100,691) $ 101,893
============= ============= =============
Net (Loss) Per Share Before
Extraordinary Items ($ 0.30) ($ 0.01) $ 0.02
Net (Loss) Per Share After
Extraordinary Items ( 0.30) ( 0.01) 0.02
Weighted Average Shares Outstanding 8,670,366 6,846,696 4,728,348
</TABLE>
The accompanying notes are an integral part of these financial statments
F-6
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Stockholders' Equity
From January 1, 1998 to December 31, 1999
<TABLE>
<CAPTION>
Common Stock Paid In Accumulated
Stock Amount Capital Deficit
---------------------------------------------------
<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 at $1.50 Per Share 1,200,000 1,200 1,798,800
Shares Issued Regulation S
for Cash at $2.00 Per Share 300,000 300 599,700
Shares Issued Regulation S
for Cash at $2.25 Per Share 1,000,000 1,000 2,249,000
Cost of Shares Sold Pursuant
to Regulation S Offering ( 694,964)
Shares Issued or
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
Net Loss for 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
Net Loss for Year Ended
December 31, 1999 (2,642,390)
---------------------------------------------------
Balance, December 31, 1999 9,033,123 $ 9,033 ($6,692,776) ($4,358,893)
===================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net Profit or (Loss) ($2,642,390)($ 100,691) $ 101,892
Adjustments to Reconcile Net Profit
or (Loss) to Net Cash:
Write Off Accounts Receivable 347,220 100,000 195,000
Options Issued 39,067 -0- -0-
Amortization & Depreciation 208,978 104,947 84,745
Non Cash Expense 163,500 -0- -0-
Minority Interest 9,463 12,210 24,517
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable 2,747,576 (2,354,061) ( 681,457)
(Increase) Decrease in Inventory ( 120,044) 10,335 38,991
(Increase) Decrease in Deposit on Inventory ( 13,982) 118,430 -0-
(Increase) Decrease in Prototype Impact 500 63,203 ( 63,203) -0-
(Increase) Decrease in Notes
Receivable - Officer ( 38,321) ( 30,932) -0-
(Increase) Decrease in Prepaid Expense ( 26,504) ( 440) -0-
(Increase) Decrease in Deposits 755,717 (1,804,508) -0-
Increase (Decrease) in Accrued Expenses ( 366,041) ( 102,315) 393,577
Increase (Decrease) in Accounts Payable ( 71,684) 585,185 ( 65,316)
Increase (Decrease) in Tax Payable - Current -0- -0- 103,548
Increase (Decrease) in Customer Deposits (1,897,779) 2,190,462 2,500
Increase (Decrease) in Taxes Payable Deferred -0- -0- 80
(Increase) Decrease in Cash Pledged 5,329 ( 104) ( 103)
----------- ------------ ------------
Net Cash (Used) by Operating
Activities ( 836,692) (1,334,685) 197,974
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Land -0- ( 179,309) -0-
Refund of Import Duty -0- -0- 718
Purchase of Vehicle ( 39,401) -0- -0-
Purchase of Equipment (1,414,664) ( 82,389) ( 25,492)
Purchase of License Rights -0- ( 150,000) -0-
Purchase of Furniture ( 35,443) 40,000 -0-
Purchase of Securities -0- 73,125 ( 80,000)
Sale of Press -0- 216,635 -0-
Purchase of Website ( 9,650) -0- -0-
------------ ----------- ------------
Net Cash Provided (Used) by
Investing Activities (1,499,158) ( 81,938) ( 104,774)
</TABLE>
The accompanying notes are an integral part of the financial statements
F-8
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Statements of Cash Flows -Continued-
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
- ------------------------------------
Sale of Common Stock 472,274 3,759,611 150,000
Payment on Long Term Debt -0- ( 721,318) ( 63,879)
Increase (Decrease) in Notes Payable 324,566 25,503 -0-
Increase (Decrease) in Amounts Due Officers -0- ( 7,919) ( 43,233)
----------- ------------ ------------
Net Cash Provided by Financing Activities 796,840 3,055,877 42,888
Increase (Decrease) in Cash (1,539,010) 1,639,254 136,088
Cash at Beginning of Period 1,781,944 142,690 6,602
----------- ------------ ------------
Cash at End of Period $ 242,934 $ 1,781,944 $ 142,690
=========== ============ ============
Disclosures from Operating Activities
- -------------------------------------
Interest $ 19,504 $804 $95,656
Taxes -0- -0- 103,628
Significant Non Cash Transactions
- ---------------------------------
1,600,000 Shares Common Stock Issued to
Officer Debt Satisfaction $ -0- $ -0- $ 100,000
650,000 Shares of Common Stock Issued to
Acquire Minority Interest in Subsidiary -0- 109,256 -0-
363,178 Shares of Common Stock Issued for
Services Rendered $ 635,843 $ -0- $ -0-
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9
</Page>
<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 Acquatic Systems, Inc. On June 27, 1989, the Company
merged with Country Maid, Inc., a Nevada Corporation, the Corporate
domicile was changed to the state of Nevada. On September 18, 1992, the
name of the Company was changed to The Quantum Group, Inc.
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, 1999.
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 The inventory is stated at the lower of cost or market. The inventory
is a single recycling system that the Company intends to sell as a
system. The Company is currently pursuing several prospects to sell
the system.
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: Assets and
liabilities that occur in foreign countries are 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.
</Page>
F-10
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #2 - Significant Accounting Policies -Continued-
- -----------------------------------------------------
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principals requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
K New Technical Pronouncements:
In 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure" was issued effective for periods ending after December 15,
1997. The Company has adopted the disclosure provisions of SFAS No.
129 effective with the fiscal year ended December 31, 1998.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued effective for fiscal years beginning after December 31, 1997,
with earlier application permitted. The Company has elected to adopt
SFAS No. 130 effective with the fiscal year ended December 31, 1998.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued for fiscal year
beginning after December 31, 1997, with earlier application permitted.
The Company has elected to adopt SFAS No. 131, effective with the
fiscal years ended December 31, 1998.
In February 1998, SFAS No. 132, "Employer's Disclosure about Pensions
and Other Post-Retirement Benefits" was issued for fiscal years
beginning after December 15, 1998. Adoption of SFAS 132 did not have
a material impact on the Company financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued for fiscal years beginning after June
15, 1999. It is anticipated that SFAS No. 133, will have no effect
upon the Company's financial statements.
NOTE #3 - Inventory and Deposits
- --------------------------------
In 1998, the Company deposited $303,021 with the purchaser of three Revulc
300 Systems and press equipment for tiles to be produced in the last
quarter of 1999.
In 1999, the Company deposited an additional $384,466 with the purchase of
the three Revulc 300 Systems and press equipment for tiles to be utilized
in 2000.
F-11
</Page>
<PAGE>
<PAGE> The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #4 - Noncash Investing and Financing Activities
- ----------------------------------------------------
In 1998, the Company issued 650,000 shares of its common stock to acquire
the minority interest of its subsidiary, Eurectec, Inc. The minority
interest had a net book value of $109,256.
In 1999, the Company issued 269,749 shares of its common stock for services
rendered in connection with the Reg S placement of its common shares valued
at $472,062.
NOTE #5 - Notes Payable
- -----------------------
<TABLE>
<CAPTION>
The Company has the following notes payable obligations. Short Term Long Term
----------- -----------
<S> <C> <C>
Note Payable to a Venture Capital Group (Germany)
6% Interest Rate Due on Demand $ 272,240 $ -0-
Capital Leases, Payable 60 Payments of $1,082 -0- 67,631
Note Payable, Trailer Manufacturer 36 Months, 8% Interest -0- 10,198
----------- -----------
Total $ 272,240 $ 77,829
Less Current Maturities -0- 16,925
----------- -----------
Total $ 272,240 $ 60,904
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Debt Service Requirements at Year Amount
------- ----------
2000 $ 289,165
2001 16,925
2002 16,925
2004 13,526
2005 13,528
----------
Total $ 350,069
==========
</TABLE>
NOTE #6 - Lease Commitments
- ---------------------------
On March 1, 2000, the Company renewed its lease agreement to lease an
industrial condominium in a multi-tenant building for use as its principal
executive office. The Company pays $3,821 per month for a 4,495 square
foot facility. The lease expires on February 28, 2002 and has a renewal
option for an additional year. The building is located at Park Irvine
Business Center, 14771 Myford Road, Building B, Tustin, California 92780.
The space the Company is leasing is sufficiently large enough to
accommodate all of its administrative and storage needs. Prior to March 1,
2000, the Company rented the same facility on a month to month arrangement.
<TABLE>
<CAPTION>
<S> <C> <C>
Total Lease Commitments Year Amount
---------- -----------
2000 $ 38,210
2001 45,852
2002 7,642
-----------
Total $ 91,704
===========
</TABLE>
F-12 </Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #7 - 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 and accumulated depreciations at
December 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
December 31, Depreciation Accumulated
1999 1998 Expenses Depreciation
Assets Cost Cost 1999 1998 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Furniture & Fixtures $66,780 $ 31,337 $ 9,860 $ 4,429 $ 11,234 $ 1,374
Equipment 1,414,664 -0- 121,900 42,561 121,900 -0-
Vehicle 81,458 42,084 10,387 701 11,088 701
Website 9,650 -0- -0- -0- -0- -0-
-------------------------------------------------------------
Balance $1,572,552 $ 73,421 $142,147 $ 47,691 $144,222 $ 2,075
=============================================================
</TABLE>
NOTE #8 - Compensation Agreement
- --------------------------------
The Company has no contracts with its officers and directors to pay any
compensation, except for an oral agreement to 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 #9 - License Agreement
- ---------------------------
The Company through its subsidiary, Eurectec, Inc., 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 has the right to sub-
license the technology.
CISAP, SpA underwent a bankruptcy and reorganization as of July 2, 1997.
As a result of the reorganization, CISAP Ecology, SRL, was established to
continue the business of CISAP SpA, tire granulation equipment,
specifically the CISAP 3000, 6000 and 9000 machines as supplied to Mexico
and CISAP Projects was established to focus on the sale of tire re-treading
equipment. Subsequently CISAP Ecology, SRL has undergone a name change to
Tyre's Ecology, SRL. The Company is now dealing with Tyre's Ecology, SRL,
in its attempts to resolve the Mexico and Saudi project issues. CISAP and
it's successor are hereinafter referred to as CISAP.
F-13
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #9 - License Agreement -Continued-
- ---------------------------------------
As a result of the difficulties experienced by CISAP and its successor in
delivering equipment which functions as specified and to make delivery in a
timely manner, the Company has determined that the exclusive right to
market CISAP equipment has been diminished. Therefore, the Company will
not pursue additional sales of CISAP equipment at performance levels
required by the agreement with CISAP to maintain such exclusivity.
The problems encountered by the Company with the CISAP equipment failure
and CISAP's unacceptable responses in both Mexico and Saudi Arabia have
seriously impacted the Company's expected revenue stream from the second
phase of the Mexico project and the third phase of the Saudi project, both
of which have been suspended.
NOTE #10 - 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>
Consulting
Salaries Commissions Fees
------------ ------------ -----------
<S> <C> <C> <C>
1999
Keith Fryer $ -0- $ -0- $ 95,000
John Pope -0- -0- 27,500
Ehrenfried Liebich -0- -0- 169,573
Thomas Driscoll 72,000 -0- -0-
1998
Keith Fryer $ -0- $ -0- $ 105,000
John Pope -0- -0- 30,000
Ehrenfried Liebich -0- -0- 72,807
Marcus J. Lenger -0- -0- 25,084
1997
Keith Fryer $ -0- $ 36,008 $ 68,599
John Pope -0- -0- 28,850
Marcus J. Lenger -0- -0- 9,859
</TABLE>
In August 1998, the Company loaned to an officer $30,000 at 9% per annum.
The due date of the note has been extended to December 28, 1999. In 1999,
the Company loaned two officers a total of $35,000 at 9% per annum, due
December 31, 2000. At December 31, 1999, the Company had accrued $4,253 in
interest receivable.
F-14
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #11 - 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 $ 440,338 2007
1993 -0- 2008
1994 198,818 2009
1995 782,181 2010
1996 241,809 2011
1997 -0- 2017
1998 80,058 2018
1999 2,642,390 2019
</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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current Tax Asset Value of Net Operating
Loss Carryforwards at Current Prevailing
Federal Tax Rate $1,120,505 $ 525,092 $ 497,872
Evaluation Allowance (1,202,505) (525,092) (497,872)
----------- ----------- -----------
Net Tax Asset $ -0- $ -0- $ -0-
=========== =========== ===========
Current Income Tax Expense $ -0- $ -0- $ 103,628
Deferred Income Tax Benefit -0- -0- -0-
</TABLE>
NOTE #12 - 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.
In 1998, the Company issued 650,000 shares of its common stock to the
minority interest of Eurectec, Inc., to acquire the shares held by the
German shareholders.
F-15
</Page>
<PAGE>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #13 - Accounts Receivable Written Off
- ------------------------------------------
In 1998, the Company increased its reserve for bad debts against accounts
receivable from the Mexico contract by $100,000.
NOTE #14 - 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>
Country 1999 Sales 1998 Sales 1997 Sales
- ------------ ----------- ----------- -----------
<S> <C> <C> <C>
Mexico $ -0- $ 460,000 $3,202,891
Saudi Arabia -0- -0- -0-
Germany -0- 2,422,007 -0-
Phillippines -0- -0- 79,000
----------- ----------- -----------
Total $ -0- $2,882,007 $3,281,891
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Sales by quarter of 1999, 1998 and 1997 are scheduled below.
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
First Quarter $ -0- $ 460,000 $ 186,561
Second Quarter -0- -0- 154,889
Third Quarter -0- -0- 2,336,232
Fourth Quarter -0- 2,422,007 747,127
----------- ----------- -----------
Totals $ -0- $2,882,007 $3,424,809
=========== =========== ===========
</TABLE>
NOTE #15 - Stockholders' Equity
- -------------------------------
The Company completed the 1998 Regulation S offering by issuing 2,599,999
shares sold at prices from $1.50 per share to $2.25 per share.
In 1999, the Company issued 269,870 shares pursuant to Reg S for gross
proceeds of $472,274. Additionally, 363,178 shares were issued for
services rendered of which 269,750 shares were considered to be the cost of
the Reg S shares which were sold.
In 1999, the Company issued 146,320 options to purchase 146,320 shares of
its common stock for two years from the date of the grant on November 17,
1999. The options were considered to be valued at the present value of
the market price discounted at 5.5% for a two year period. Each option was
valued at $0.267, and an expense of $39,067 was accrued and recognized in
the paid in capital.
F-16
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #16 - Prototype Impact 500
- -------------------------------
The Company working with outside engineering firms, has designed plans for
a complete tire recycling, granulating and after-market production system,
known as the Eco Granulating Systems, (EGS), which integrates individual
pieces of tire recycling equipment made by other manufacturers. The EGS
System reduces scrap automobile and truck tires to useful and valuable
crumb rubber, reusable steel scrap and nylon fluff. The system as designed
will follow common processing steps accepted in the industry.
In 1998, the Company internally developed a machine known as the "Impact
500", which is designed to take large mesh size crumb rubber produced by
the EGS System and pulverize it into fine powder. The Company expended
$13,544 to build a prototype machine and conduct sufficient tests to assure
that technological feasibility had been attained. The Company built one
Impact 500 machine at a cost of $63,203. This machine is portable and
completely self contained so that it can be shipped to trade shows or for
on site demonstration and quickly made operational.
In 1999, the Prototype Impact 500 was fully operational and was moved as
operating equipment to the Richard J. Donovan Correctional Facility at Rock
Mountain in San Diego County, California.
NOTE #17 - License Right
- ------------------------
In April of 1996, the Company entered into an agreement with Rothbury
Engineering Limited, 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 granulates, resins
and other additives heat conductive characteristics for use in products
such as heatable floor coverings and underlayments.
The Company entered into an exclusive worldwide license agreement with Faru
GmbH, Dresden, Germany ("Faru"). Faru is the patent holder of the REVULCON
(R) technology. For each REVULCON (R) plant sold by the Company, Faru will
receive a royalty payment of $10,000 for up to fifteen (15) plants and
$20,000 royalty payment for each plant sold following the initial fifteen.
The Company anticipates the sale of up to three REVULCON (R) systems, under
the brand name Revulc 300, during 2000. The manufacture of the REVULCON
(R) plants will be subcontracted out to third party manufacturers.
The REVULCON (R) technology enables the production of high density, smooth
finish rubber moldings and extrusions, including new tires, from recycled
crumb rubber. This is done by a process of devulcanizing the rubber,
returning it to a state where it can be utilized in new products and be
revulcanized. The reactivated rubber waste can be processed without
further additives to rubber products like mats, plates, solid rubber tires,
components for fall protection, elements for sound and vibration deadening,
blocking and insulating layers against heat and moisture, etc., in mixtures
with fresh rubber or plastics, profiles and other goods can be made by
extrusion or injection moldings.
F-17
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #17 - License Right -Continued-
- ------------------------------------
<TABLE>
<CAPTION>
License Amortization Accumulated
Licensor Cost Expense 1999 Amortization
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Rothbury $ 497,547 $ 49,756 $ 182,433
Faru GmbH 150,000 15,000 22,500
-----------------------------------------
Total $ 647,547 $ 64,756 $ 204,933
=========================================
</TABLE>
NOTE #18 - Joint Venture
- ------------------------
SteG Germany - Poseidon Products GmbH.
The Company has finalized a joint venture agreement with a German
Government sponsored company, Strukturentwicklungsgesellschaft
Ueckermunde GmbH, located near Berlin. The Company has an 80%
interest in the joint venture and a buy-back agreement to purchase the
remaining 20%. As a result of the joint venture agreement, Poseidon
Products GmbH, was established and will construct and operate a tire
recycling facility in the state of Mecklenburg-Vorpommern to produce
crumb rubber and to manufacture a wide range of value added products.
The plant is designed to be a tire recycling facility whereby tires
will be shredded and granulated producing the commodity crumb rubber.
Some of the crumb rubber is subsequently partially devulcanized
utilizing the Company's exclusive REVULCON (R) process to enable
material to be used in a variety of products and processes including
incorporation into new tire manufacture. The balance of the crumb
rubber will be used for in-house manufacturing. The plant will employ
a number of presses to manufacture additional value added after market
products such as flooring, soaker hoses for irrigation applications,
interlocking tiles and heated tiles as well as other products.
The Poseidon joint venture funding is expected to be completed by the
end of the second quarter, 2000. Funding consists of 50% of the total
project costs (approximately $13,800,000) from a grant from the
European Union Structure Fund for European regional development and
40% bank financing and 10% equity raised through a private offering in
Germany, partly funded from proceeds of a Regulation S offering. The
equity funding is currently 90% complete. The Company is under
contract to supply the technology transfer and equipment package for
the Poseidon project valued at $7,370,000, with anticipated equipment
delivery commencing in 2000. Engineering for the project is being
coordinated by FDC Engineering of Switzerland.
Ground breaking for the Poseidon joint venture occurred September 17,
1998 in Penkun, Germany and the construction program is scheduled for
2000. Pending completion of all building construction and
environmental compliance permitting funding and maintaining the
current construction schedule, the Company anticipates
the Poseidon facility to be complete and operational during the fourth
quarter, 2000. Poseidon has opened offices in Penkun and has
commenced a German wide marketing study and plan to introduce and sell
its manufactured products.
F-18
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #18 - Joint Venture -Continued-
- ------------------------------------
The Company has consolidated the joint venture into its financial
statements and reflects a minority interest position of the initial
investment made by outsiders of $12,210 less 20% of the joint venture
losses of $12,210 for a net minority position of $0.
NOTE #19 - Legal Proceedings
- -----------------------------
On or about April 23, 1999, the Company's subsidiary, Eurectec, Inc., was
name as a defendant in a complaint filed in Pistoia, Italy by Tyre's
Ecology S.r.l., ("Tyre") formerly known as CISAP Ecology S.r.l. ("CISAP
Ecology"). Tyre succeeded to the interest of CISAP Spa ("CISAP") as a
party to a marketing agreement between Eurectec, Inc., and CISAP. Under
the marketing agreement Eurectec was granted the exclusive rights to market
certain tire granulating equipment manufacturing by CISAP and Tyre. The
agreement required a minimum number of granulating systems to be sold by
Eurectec to maintain the exclusive rights. Eurectec has not met its
minimum sales quota due to the non-performance of the CISAP equipment. The
Complaint seeks, among other things, to terminate the marketing agreement
and to recover damages in the approximate amount of $520,000 arising from
alleged misstatements by Eurectec as to the manufacturers' represented
through-put capacity of equipment and alleged defamation by Eurectec and
Marco Morbidelli, a former Tyre engineer who has performed for Eurectec and
purchasers of CISAP and Tyre equipment in Saudi Arabia and Mexico.
The Company intends to vigorously defend the claim for damages on the basis
that none of the CISAP or Tyre equipment sold to any of the purchasers
introduced by Eurectec has been capable of operating as represented.
Moreover, the manufacturers have failed to deliver equipment purchased,
failed to properly install equipment as required by contract, and failed to
provide warrant service to the purchasers of the equipment.
The Company has incurred substantial costs attempting to obtain performance
for its clients and has suffered substantial damages to its business as a
result of the plaintiff's unwillingness and inability to perform under its
sales agreement. Moreover, the Company is not concerned with the loss of
the marketing rights held by Eurectec because it does not believe those
marketing rights hold any value given the manufacturers' consistent failure
to deliver commercially viable equipment to purchasers.
Because the excessive costs the Company sustained as a result of CISAP's
failure to deliver commercially viable equipment, the Company, through
Eurectec, filed a counterclaim against Tyre in the Court in Pistoia, on
January 11, 2000. The Company seeks to recover damages in the amount of
$4,366,154.
NOTE #20 - Segments
- -------------------
During 1999, the Company completed an internal reorganization and created
new subsidiaries to accomplish its production goals. For 1999,
substantially all of the operations were handled by The Quantum Group,
Inc., Poseidon Products GmbH and Qcal. These three entities are segment
one and are involved with the production of crumb rubber and the
manufacturing of equipment to produce Crumb Rubber. Qest, Inc., and its
subsidiary Qind, Inc., are to become the marketing segment of the Company's
consolidated financial statements, but had de minimus operating costs is
1999, Qmax, Inc., and Mat, Inc., (acquired in 2000) will become the
construction industries functions of the Company. This segement had not
operations in 1999.
F-19
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #21 - Principals of Consolidation
- --------------------------------------
The consolidated financial statements of The Quantum Group, Inc., and its
subsidiaries include the amount of all majority owned subsidiaries.
Intercompany loans, deposits and other transations have been eliminated in
the consolidated process.
The Company's subsidiaries are as described as follows;
Quantum Environmental Solutions & Technology, Inc. ("QEST")
-----------------------------------------------------------
Quantum Environmental Solutions & Technology, Inc. ("QEST") is a
wholly owned subsidiary of the The Quantum Group, Inc. QEST was
established pursuant to the laws of the State of Nevada on April 21, 1997.
QEST was put into active operations during the fourth quarter 1999. The
primary responsibility of QEST is the marketing and sales of tire
recycling and aftermarket product equipment systems.
Quantum Environmental Solutions & Technology Industries, Inc. ("QIND")
----------------------------------------------------------------------
Quantum Environmental Solutions & Technology Industries, Inc. ("QIND")
is a wholly owned subsidiary of QEST. QIND was established pursuant to the
laws of the State of Nevada on April 21, 1997. QIND was formed to market
and sale tire recycling systems and aftermarket product equipment systems
in Canada.
Crumb Rubber Products
QCAL, Inc. ("QCAL")
--------------------
QCAL, Inc. ("QCAL"), is a wholly owned subsidiary of The Quantum
Group, Inc. QCAL was established pursuant to the laws of the State of
California on October 22, 1999 for the purpose of entering into joint
venture agreements in the State of California to own and operate tire
recycling and aftermarket product manufacturing facilities.
Through QCAL, the Company entered into a joint venture agreement with
the State of California Department of Corrections ("CDC") for construction
and operation of a tire crumbing facility at the Richard J. Donovan
Correctional Facility at Rock Mountain in San Diego County, California
("Donovan Correctional Facility"). This plant will manufacture crumb
rubber at the prison facility using an inmate workforce. The Donovan
Correctional Facility plant is currently 60% operational and the Company
anticipates it will be fully operational by the third quarter of 2000.
Poseidon Products GmbH.
-----------------------
In a joint venture agreement with SteG, a German Government sponsored
company, the Company established Poseidon Products GmbH ("Poseidon") which
will construct and operate a tire recycling facility in Penkun, in the
state of Mecklenburg-Vorpommern to produce crumb rubber and to manufacture
a wide range of value added aftermarket products. The plant is designed to
shred and granulate tires into crumb rubber. Some of the crumb rubber will
be devulcanized with the Company's Revulc 300 machine. The devulcanized
rubber will be used in a variety of products. The balance of the crumb
rubber will be used for in house manufacturing of value added products
using press systems and other technologies.
F-20
</Page>
<PAGE> The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #21 - Principals of Consolidation -Continued-
- --------------------------------------------------
Construction Industry
Quantum Modified Asphalt Xcetera, Inc., ("QMAX")
------------------------------------------------
Quantum Modified Asphalt Xcetera, Inc., ("QMAX") is a wholly owned
subsidiary of the The Quantum Group, Inc. QMAX was established pursuant to
the laws of the State of Nevada on May 11, 1997. QMAX was put into active
operations during the fourth quarter 1999. The Company believes a
potentially large market for crumb rubber exists in the asphalt paving
industry, where there appears to be significant interest in producing CRM
asphalt paving. QMAX will oversee the Company's efforts in the CRM asphalt
industry. This will include the use of specialized mobile equipment for
the mixing of crumb rubber and asphalt at hot mix plants, overseeing
technology transfer programs to international clients, on-site project
management and seminars to educate both public and private sector engineers
to the Company's products and services.
Modified Asphalt Technologies, Inc. ("MAT")
-------------------------------------------
During the first quarter of 2000 the Company purchased Modified
Asphalt Technologies, Inc., ("MAT") to be a subsidiary of QMAX, and entered
into an employment agreement with its president Jeffery R. Smith. MAT and
Mr. Smith are recognized leaders in the production and use of CRM asphalt.
MAT and Mr. Smith have expertise in the areas of technology transfer,
equipment manufacturing, material specifications and supply, quality
assurance, personnel training, asphalt rubber binder production and
application and implementation of asphalt rubber usage. The Company
believes this acquisition will compliment the products and services QMAX
currently offers and enable it to expand its operations in the CRM asphalt
paving industry.
Eurectec, Inc. ("Eurectec")
----------------------------
Eurectec, Inc. ("Eurectec"), is a wholly owned subsidiary of The
Quantum Group, Inc. It was established for the primary purpose of
negotiating license agreements with CISAP and SMS to market and sell their
tire recycling and aftermarket product equipment. Unfortunately, neither
manufacturer could provide equipment that operated at manufacturer's
specifications. The Company's most recent sales of CISAP and SMS equipment
were to buyers in Mexico and Saudi Arabia. Both facilities experienced
significant problems, some of which are still unresolved. Because the
CISAP and SMS equipment has not worked as represented, the Company is no
longer selling, nor does it intend to sell CISAP or SMS equipment in the
future. The Company is currently involved in litigation with CISAP. The
Company is not currently involved in, nor does it anticipate being involved
in litigation with SMS.
With the conclusion of the Company's relationships with CISAP and SMS,
Eurectec's primary business purposes no longer exist. The Company
anticipates little, if any business will be transacted through Eurectec in
the future.
F-21
</Page>
<PAGE>
The Quantum Group, Inc., and Subsidiaries
Notes to Financial Statements -Continued-
NOTE #22 - Subsequent Events
- ----------------------------
During the first quarter of 2000, the Company purchased Modified Asphalt
Technologies, Inc., ("MAT") to be a subsidiary of QMAX, and entered into an
employment agreement with its president Jeffery R. Smith. MAT and Mr.
Smith are recognized leaders in the production and use of CRM asphalt. MAT
and Mr. Smith have expertise in the areas of technology transfer, equipment
manufacturing, material specifications and supply, quality assurance,
personnel training, asphalt rubber binder production and application and
implementation of asphalt rubber usage.
On April 5, 2000, the Company approved the 2000 Qualified Stock Option
Program. The Stock Option Program allocates 200,000 options to be issued
for 200,000 shares. On April 5, 2000 options for 153,168 shares were
issued.
F-22
</Page>
<PAGE>
THE QUANTUM GROUP, INC.
1999 Stock Option Plan
Section 1. Purpose; Definitions.
- ------------------------------------
1.1 Purpose. The purpose of The Quantum Group, Inc. (the "Company")
1999 Stock Option Plan (the "Plan") is to enable the Company to offer to
its key employees, officers, directors, consultants, advisors and sales
representatives whose past, present and/or potential contributions to the
Company and its Subsidiaries have been, are or will be important to the
success of the Company, an opportunity to acquire a proprietary interest in
the Company. The various types of long-term incentive awards which may be
provided under the Plan will enable the Company to respond to changes in
compensation practices, tax laws, accounting regulations and the size and
diversity of its business.
1.2 Definitions. For purposes of the Plan, the following terms shall
be defined as set forth below:
(a) "Agreement" means the agreement between the Company and the
Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto and the regulations
promulgated thereunder.
(d) "Committee" means the Stock Option Committee of the Board or
any other committee of the Board, which the Board may designate to
administer the Plan or any portion thereof. If no Committee is so
designated, then all references in this Plan to "Committee" shall mean the
Board.
(e) "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(f) "Company" means The Quantum Group, Inc., a corporation
organized under the laws of the State of Nevada.
(g) "Deferred Stock" means Stock to be received, under an award
made pursuant to Section 9, below, at the end of a specified deferral
period.
(h) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section 13.1,
below.
(j) "Employee" means any employee, director, general partner,
trustee (where the registrant is a business trust), officer or consultant
or advisor.
1
</Page>
<PAGE>
(k) "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder,
means, as of any given date: (i) if the Common Stock is listed on a
national securities exchange or quoted on the Nasdaq National Market or
Nasdaq SmallCap Market, the last sale price of the Common Stock in the
principal trading market for the Common Stock on the last trading day
preceding the date of grant of an award hereunder, as reported by the
exchange or Nasdaq, as the case may be; (ii) if the Common Stock is not
listed on a national securities exchange or quoted on the Nasdaq National
Market or Nasdaq SmallCap Market, but is traded in the over-the-counter
market, the closing bid price for the Common Stock on the last trading day
preceding the date of grant of an award hereunder for which such quotations
are reported by the OTC Bulletin Board or the National Quotation Bureau,
Incorporated or similar publisher of such quotations; and (iii) if the fair
market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good
faith.
(l) "Holder" means a person who has received an award under the
Plan.
(m) "Incentive Stock Option" means any Stock Option intended to
be and designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(n) "Nonqualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(o) "Normal Retirement" means retirement from active employment
with the Company or any Subsidiary on or after age 65.
(p) "Other Stock-Based Award" means an award under Section 10,
below, that is valued in whole or in part by reference to, or is otherwise
based upon, Stock.
(q) "Parent" means any present or future parent corporation of
the Company, as such term is defined in Section 424(e) of the Code.
(r) "Plan" means The Quantum Group, Inc., 1999 Stock Option
Plan, as hereinafter amended from time to time.
(s) "Restricted Stock"means Stock, received under an award made
pursuant to Section 8, below, that is subject to restrictions under said
Section 8.
(t) "SAR Value" means the excess of the Fair Market Value (on
the exercise date) of the number of shares for which the Stock Appreciation
Right is exercised over the exercise price that the participant would have
otherwise had to pay to exercise the related Stock Option and purchase the
relevant shares.
(u) "Stock" means the Common Stock of the Company, par value
$.001 per share.
(v) "Stock Appreciation Right" means the right to receive from
the Company, on surrender of all or part of the related Stock Option,
without a cash payment to the Company, a number of shares of Common Stock
equal to the SAR Value divided by the exercise price of the Stock Option.
(w) "Stock Option" or "Option" means any option to purchase
shares of Stock which is granted pursuant to the Plan.
2
</Page>
<PAGE>
(x) "Stock Reload Option" means any option granted under Section
6.3, below, as a result of the payment of the exercise price of a Stock
Option and/or the withholding tax related thereto in the form of Stock
owned by the Holder or the withholding of Stock by the Company.
(y) "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of
the Code.
Section 2. Administration.
- ------------------------------
2.1 Committee Membership. The Plan shall be administered by the
Board or a Committee. Committee members shall serve for such terms as the
Board may in each case determine, and shall be subject to removal at any
time by the Board.
2.2 Powers of Committee. The Committee shall have full authority,
subject to Section 4, below, to award, pursuant to the terms of the Plan:
(i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock,
(iv) Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based
Awards. For purposes of illustration and not of limitation, the Committee
shall have the authority (subject to the express provisions of this Plan):
(a) to select the officers, key employees, directors,
consultants, advisors and sales representatives of the Company or any
Subsidiary to whom Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Reload Stock Options and/or Other Stock-Based Awards
may from time to time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, number of shares, share price, any restrictions or limitations,
and any vesting, exchange, surrender, cancellation, acceleration,
termination, exercise or forfeiture provisions, as the Committee shall
determine);
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards
granted hereunder are to operate on a tandem basis and/or in conjunction
with or apart from other equity awarded under this Plan and cash awards
made by the Company or any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the
Plan under such rules and procedures as the Committee may establish,
including the crediting of interest on deferred amounts denominated in cash
and of dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which Stock
and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder;
and
(g) to substitute (i) new Stock Options for previously granted
Stock Options, which previously granted Stock Options have higher option
exercise prices and/or contain other less favorable terms, and (ii) new
awards of any other type for previously granted awards of the same type,
which previously granted awards are upon less favorable terms.
3
</Page>
<PAGE>
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 4 and 12, below,
the Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, to interpret the terms and
provisions of the Plan and any award issued under the Plan (and to
determine the form and substance of all Agreements relating thereto), to
otherwise supervise the administration of the Plan. Subject to Section 12,
below, all decisions made by the Committee pursuant to the provisions of
the Plan shall be made in the Committee's sole discretion and shall be
final and binding upon all persons, including the Company, its Subsidiaries
and Holders.
(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to
Incentive Stock Options (including but limited to Stock Reload Options or
Stock Appreciation rights granted in conjunction with an Incentive Stock
Option) or any Agreement providing for Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the Holder(s) affected,
to disqualify any Incentive Stock Option under such Section 422.
Section 3. Stock Subject to Plan.
- -------------------------------------
3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be 200,000
shares. Shares of Stock under the Plan may consist, in whole or in part,
of authorized and unissued shares or treasury shares. If any shares of
Stock that have been granted pursuant to a Stock Option cease to be subject
to a Stock Option, or if any shares of Stock that are subject to any Stock
Appreciation Right, Restricted Stock, Deferred Stock award, Reload Stock
Option or Other Stock-Based Award granted hereunder are forfeited or any
such award otherwise terminates without a payment being made to the Holder
in the form of Stock, such shares shall again be available for distribution
in connection with future grants and awards under the Plan. Only net
shares issued upon a stock-for-stock exercise (including stock used for
withholding taxes) shall be counted against the number of shares available
under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of
any merger, reorganization, consolidation, recapitalization, dividend
(other than a cash dividend), stock split, reverse stock split, or other
change in corporate structure affecting the Stock, such substitution or
adjustment shall be made in the aggregate number of shares reserved for
issuance under the Plan, in the number and exercise price of shares subject
to outstanding Options, in the number of shares and Stock Appreciation
Right price relating to Stock Appreciation Rights, and in the number of
shares and Stock Appreciation Right price relating to Stock Appreciation
Rights, and in the number of shares subject to, and in the related terms
of, other outstanding awards (including but not limited to awards of
Restricted Stock, Deferred Stock, Reload Stock Options and Other Stock-
Based Awards) granted under the Plan as may be determined to be appropriate
by the Committee in order to prevent dilution or enlargement of rights,
provided that the number of shares subject to any award shall always be a
whole number.
4
</Page>
<PAGE>
Section 4. Eligibility.
- ---------------------------
Awards may be made or granted to key employees, officers, directors,
consultants, advisors and sales representatives who are deemed to have
rendered or to be able to render significant services to the Company or its
Subsidiaries and who are deemed to have contributed or to have the
potential to contribute to the success of the Company. No Incentive Stock
Option shall be granted to any person who is not an employee of the Company
or a Subsidiary at the time of grant.
Section 5. Required Six-Month Holding Period.
- -------------------------------------------------
Any equity security issued under this Plan may not be sold prior to
six months from the date of the grant of the related award without the
approval of the Company.
Section 6. Stock Options.
- -----------------------------
6.1 Grant and Exercise. Stock Options granted under the Plan may be
of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock
Options. Any Stock Option granted under the Plan shall contain such terms,
not inconsistent with this Plan, or with respect to Incentive Stock
Options, not inconsistent with the Code, as the Committee may from time to
time approve. The Committee shall have the authority to grant Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options
and which may be granted alone or in addition to other awards granted under
the Plan. To the extent that any Stock Option intended to qualify as an
Incentive Stock Option does not so qualify, it shall constitute a separate
Nonqualified Stock Option. An Incentive Stock Option may be granted only
within the ten-year period commencing from the Effective Date and may only
be exercised within ten years of the date of grant or five years in the
case of an Incentive Stock Option granted to an optionee ("10%
Stockholder") who, at the time of grant, owns Stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall
be subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under an Incentive Stock Option shall be determined by the
Committee at the time of grant and may not be less than 100% of the Fair
Market Value of the Stock as defined above; provided, however, that the
exercise price of an Incentive Stock Option granted to a 10% Stockholder
shall not be less than 110% of the Fair Market Value of the Stock. The
exercise price per share of Stock purchasable under any options granted
that are not Incentive Stock Option, shall be determined by the Committee
at the time of grant.
(b) Option Term. Subject to the limitations in Section 6.1,
above, the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee and as set forth in Section 11, below. If the
Committee provides, in its discretion, that any Stock Option is exercisable
only in installments, i.e., that it vests over time, the Committee may
waive such installment exercise provisions at any time at or after the time
of grant in whole or in part, based upon such factors as the Committee
shall determine.
5
</Page>
<PAGE>
(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the
term of the Option, by giving written notice of exercise to the Company
specifying the number of shares of Stock to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, which shall
be in cash or, unless otherwise provided in the Agreement, in shares of
Stock (including Restricted Stock and other contingent awards under this
Plan) or, partly in cash and partly in such Stock, or such other means
which the Committee determines are consistent with the Plan's purpose and
applicable law. Cash payments shall be made by wire transfer, certified or
bank check or personal check, in each case payable to the order of the
Company; provided, however, that the Company shall not be required to
deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of
Stock shall be valued at the Fair Market Value of a share of Stock on the
day prior to the date of exercise. Such payments shall be made by delivery
of stock certificates in negotiable form which are effective to transfer
good and valid title thereto to the Company, free of any liens or
encumbrances. Subject to the terms of the Agreement, the Committee may, in
its sole discretion, at the request of the Holder, deliver upon the
exercise of a Nonqualified Stock Option a combination of shares of Deferred
Stock and Common Stock; provided that, notwithstanding the provision of
Section 9 of the Plan, such Deferred Stock shall be fully vested and not
subject to forfeiture. A Holder shall have none of the rights of a
stockholder with respect to the shares subject to the Option until such
shares shall be transferred to the Holder upon the exercise of the Option.
(e) Transferability. Unless otherwise determined by the
Committee, no Stock Option shall be transferable by the Holder other than
by will or by the laws of descent and distribution, and all Stock Options
shall be exercisable, during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holders' employment by
the Company or a Subsidiary terminates by reason of death, any Stock Option
held by such Holder, unless otherwise determined by the Committee at the
time of grant and set forth in the Agreement, shall be fully vested and may
thereafter be exercised by the legal representative of the estate or by
the legatee of the Holder under the will of the Holder, for a period of one
year (or such other greater or lesser period as the Committee may specify
at grant) from the date of such death or until the expiration of the stated
term of such Stock Option, which ever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of
Disability, any Stock Option held by such Holder, unless otherwise
determined by the Committee at the time of grant and set forth in the
Agreement, shall be fully vested and may thereafter be exercised by the
Holder for a period of one year (or such other greater or lesser period as
the Committee may specify at the time of grant) from the date of such
termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is the shorter.
6
</Page>
<PAGE>
(h) Other Termination. Subject to the provisions of Section
14.3, below, and unless otherwise determined by the Committee at the time
of grant and set forth in the Agreement, if a Holder is an employee of the
Company or a Subsidiary at the time of grant and if such Holder's
employment by the Company or any Subsidiary terminates for any reason other
than death or Disability, the Stock Option shall thereupon automatically
terminate, except that if the Holder's employment is terminated by the
Company or a Subsidiary without cause or due to Normal Retirement, then the
portion of such Stock Option which has vested on the date of termination of
employment may be exercised for the lesser of three months after
termination of employment or the balance of such Stock Option's term.
(i) Additional Incentive Stock Option Limitation. In the case
of an Incentive Stock Option, the aggregate Fair Market Value of Stock
(determined at the time of grant of the Option) with respect to which
Incentive Stock Options become exercisable by a Holder during any calendar
year (under all such plans of the Company and its Parent and Subsidiary)
shall not exceed $100,000.
(j) Buyout and Settlement Provisions. The Committee may at any
time, in its sole discretion, offer to buy out a Stock Option previously
granted, based upon such terms and conditions as the Committee shall
establish and communicate to the Holder at the time that such offer is
made.
(k) Stock Option Agreement. Each grant of a Stock Option shall
be confirmed by and shall be subject to the terms of, the Agreement
executed by the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after
the time of grant in the case of a Nonqualified Stock Option) a Stock
Reload Option up to the amount of shares of Stock held by the Holder for at
least six months and used to pay all or part of the exercise price of an
Option and, if any, withheld by the Company as payment for withholding
taxes. Such Stock Reload Option shall have an exercise price equal to the
Fair Market Value as of the date of the Stock Reload Option grant. Unless
the Committee determines otherwise, a Stock Reload Option may be exercised
commencing one year after it is granted and shall expire on the date of
expiration of the Option to which the Reload Option is related.
Section 7. Stock Appreciation Rights.
- -----------------------------------------
7.1 Grant and Exercise. The Committee may grant Stock Appreciation
Rights to participants who have been, or are being granted, Options under
the Plan as a means of allowing such participants to exercise their Options
without the need to pay the exercise price in cash. In the case of a
Nonqualified Stock Option, a Stock Appreciation Right may be granted either
at or after the time of the grant of such Nonqualified Stock Option. In
the case of an Incentive Stock Option, a Stock Appreciation Right may be
granted only at the time of the grant of such Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject
to the following terms and conditions:
(a) Exercisability. Stock Appreciation Rights shall be
exercisable as determined by the Committee and set forth in the Agreement,
subject to the limitations, if any, imposed by the Code, with respect to
related Incentive Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate and
shall no longer be exercisable upon the termination or exercise of the
related Stock Option.
7 </Page>
<PAGE>
(c) Method of Exercise. Stock Appreciation Rights shall be
exercisable upon such terms and conditions as shall be determined by the
Committee and set forth in the Agreement and by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Holder shall be entitled to receive a number of Option Shares equal to the
SAR Value divided by the exercise price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock
Appreciation Rights shall not affect the number of shares of Stock
available under for awards under the Plan. The number of shares available
for awards under the Plan will, however, be reduced by the number of shares
of Stock acquirable upon exercise of the Stock Option to which such Stock
Appreciation right relates.
Section 8. Restricted Stock.
- --------------------------------
8.1 Grant. Shares of Restricted Stock may be awarded either alone or
in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom, and the time or times at which,
grants of Restricted Stock will be awarded, the number of shares to be
awarded, the price (if any) to be paid by the Holder, the time or times
within which such awards may be subject to forfeiture (the "Restriction
Period"), the vesting schedule and rights to acceleration thereof, and all
other terms and conditions of the awards.
8.2 Terms and Conditions. Each Restricted Stock award shall be
subject to the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name
of the Holder to whom such Restricted Stock shall have been awarded.
During the Restriction Period, certificates representing the Restricted
Stock and any securities constituting Retained Distributions (as defined
below) shall bear a legend to the effect that ownership of the Restricted
Stock (and such Retained Distributions), and the enjoyment of all rights
appurtenant thereto, are subject to the restrictions, terms and conditions
provided in the Plan and the Agreement. Such certificates shall be
deposited by the Holder with the Company, together with stock powers or
other instruments of assignment, each endorsed in blank, which will permit
transfer to the Company of all or any portion of the Restricted Stock and
any securities constituting Retained Distributions that shall be forfeited
or that shall not become vested in accordance with the Plan and the
Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes. The
Holder will have the right to vote such Restricted Stock, to receive and
retain all regular cash dividends and other cash equivalent distributions
as the Board may in its sole discretion designate, pay or distribute on
such Restricted Stock and to exercise all other rights, powers and
privileges of a holder of Common Stock with respect to such Restricted
Stock, with the exceptions that (i) the Holder will not be entitled to
delivery of the stock certificate or certificates representing such
Restricted Stock until the Restriction Period shall have expired and unless
all other vest requirements with respect thereto shall have been fulfilled;
(ii) the Company will retain custody of the stock certificate or
certificates representing the Restricted Stock during the Restriction
Period; (iii) other than regular cash dividends and other cash equivalent
distributions as the Board may in its sole discretion designate, pay or
distribute, the Company will retain custody of all distributions ("Retained
8
</Page>
<PAGE>
Distributions") made or declared with respect to the Restricted Stock (and
such Retained Distributions will be subject to the same restrictions, terms
and conditions as are applicable to the restricted Stock) until such time,
if ever, as the Restricted Stock with respect to which such Retained
Distributions shall have been made, paid or declared shall have become
vested and with respect to which the Restriction Period shall have expired;
(iv) a breach of any of the restrictions, terms or conditions contained in
this Plan or the Agreement or otherwise established by the Committee with
respect to any Restricted Stock or Retained Distributions will cause a
forfeiture of such Restricted Stock and any Retained Distributions with
respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the Restriction
Period with respect to each award of Restricted Stock and the satisfaction
of any other applicable restrictions, terms and conditions (i) all or part
of such Restricted Stock shall become vested in accordance with the terms
of the Agreement, subject to Section 11, below, and (ii) any Retained
Distributions with respect to such Restricted Stock shall become vested to
the extent that the Restricted Stock related thereto shall have become
vested, subject to Section 11, below. Any such Restricted Stock and
Retained Distributions that do not vest shall be forfeited to the Company
and the Holder shall not thereafter have any rights with respect to such
Restricted Stock and Retained Distributions that shall have been so
forfeited.
Section 9. Deferred Stock.
- ------------------------------
9.1 Grant. Shares of Deferred Stock may be awarded either alone or
in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom and the time or times at which
grants of Deferred Stock shall be awarded, the number of shares of Deferred
Stock to be awarded to any person, the duration of the period (the
"Deferral Period") during which, and the conditions under which, receipt of
the shares will be deferred, and all the other terms and conditions of the
awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be subject
to the following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or
the Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), shares certificates shall be issued and delivered to the
Holder, or his legal representative, representing the number equal to the
shares covered by the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred
Stock shall not have any rights of a stockholder by virtue of such award
until the expiration of the applicable Deferral Period and the issuance and
delivery of the certificates representing such Stock. The shares of Stock
issuable upon expiration of the Deferral Period shall not be deemed
outstanding by the Company until the expiration of such Deferral Period and
the issuance and delivery of such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the Deferral
Period with respect to each award of Deferred Stock and the satisfaction of
any other applicable restrictions, terms and conditions all or part of such
Deferred Stock shall become vested in accordance with the terms of the
Agreement, subject to Section 11, below. Any such Deferred Stock that does
not vest shall be forfeited to the Company and the Holder shall not
thereafter have any rights with respect to such Deferred Stock.
9
</Page>
<PAGE>
(d) Additional Deferral Period. A Holder may request to, and
the Committee may at any time, defer the receipt of an award (or an
installment of an award) for an additional specified period or until a
specified event (the "Additional Deferral Period"). Subject to any
exceptions adopted by the Committee, such request must generally be made at
least one year prior to expiration of the Deferral Period for such Deferred
Stock awards (or such installment).
Section 10. Other Stock-Based Awards.
- ----------------------------------------
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or
payable, in value in whole or in part by reference to, or otherwise based
on, or related to, shares of Common Stock, as deemed by the Committee to be
consistent with the purposes of the Plan, including, without limitation,
purchase rights, shares of Common Stock awarded which are not subject to
any restrictions or conditions, convertible or exchangeable debentures, or
other rights convertible into shares of Common Stock and awards valued by
reference to the value of securities of or the performance of specified
subsidiaries. Other Stock-Based Awards may be awarded either alone or in
addition to or in tandem with any other awards under this Plan or any other
plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which
grants of such other stock-based awards shall be made, the number of shares
of Common Stock to be awarded pursuant to such awards, and all other terms
and conditions of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee
and to Section 11, below.
Section 11. Accelerated Vesting and Exercisability.
- ------------------------------------------------------
If (i) any person or entity other than the Company and/or any
stockholders of the Company as of the Effective Date acquire securities of
the Company (in one or more transactions) having 25% or more of the total
voting power of all the Company's securities then outstanding and (ii) the
Board of Directors of the Company does not authorize or otherwise approve
such acquisition, then, the vesting periods of any and all Options and
other awards granted and outstanding under the Plan shall be accelerated
and all such Options and awards will immediately and entirely vest, and the
respective holders thereof will have the immediate right to purchase and/or
receive any and all Stock subject to such Options and awards on the terms
set forth in this Plan and the respective agreements respecting such
Options and awards.
Section 12. Amendment and Termination.
- -----------------------------------------
Subject to Section 4 hereof, the Board may at any time, and from time
to time, amend, alter, suspend or discontinue any of the provisions of the
Plan, but no amendment, alteration, suspension or discontinuance shall be
made which would impair the rights of a Holder under any Agreement
theretofore entered into hereunder, without the Holder's consent.
Section 13. Term of Plan.
- ----------------------------
13.1 Effective Date. The Plan shall be effective as of November 18,
1999. ("Effective Date").
10
</Page>
<PAGE>
13.2 Termination Date. Unless terminated by the Board, this Plan
shall continue to remain effective until such time no further awards may be
granted and all awards granted under the Plan are no longer outstanding.
Notwithstanding the foregoing, grants of Incentive Stock Options may only
be made during the ten-year period following the Effective Date.
Section 14. General Provisions.
- ----------------------------------
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed
by the Company and the Holder. The Committee may terminate any award made
under the Plan if the Agreement relating thereto is not executed and
returned to the Company within 10 days after the Agreement has been
delivered to the Holder for his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to
any payments not yet made to a Holder by the Company, nothing contained
herein shall give any such Holder any rights that are greater than those of
a general creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a
Holder's employment with the Company or a Subsidiary is terminated for any
reason whatsoever, and within one year after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in
competition with, the Company, the Committee, in its sole discretion, may
require such Holder to return to the Company the economic value of any
award which was realized or obtained by such Holder at any time during the
period beginning on that date which is six months prior to the date of such
Holder's termination of employment with the Company.
(b) Termination for Cause. The Committee may, in the event a
Holder's employment with the company or a Subsidiary is terminated for
cause, annul any award granted under this Plan to return to the Company
the economic value of any award which was realized or obtained by such
Holder at any time during the period beginning on that date which is six
months prior to the date of such Holder's termination of employment with
the Company.
(c) No Right of Employment. Nothing contained in the Plan or in
any award hereunder shall be deemed to confer upon any Holder who is an
employee of the Company or any Subsidiary any right to continued employment
with the Company or any Subsidiary, nor shall it interfere in any way with
the right of the Company or any Subsidiary to terminate the employment of
any Holder who is an employee at any time.
14.4 Investment Representations. The Committee may require each
person acquiring shares of Stock pursuant to a Stock Option or other award
under the Plan to represent to and agree with the Company in writing that
the Holder is acquiring the shares for investment without a view to
distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
11
</Page>
<PAGE>
14.6 Withholding Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income
tax purposes with respect to any option or other award under the Plan, the
Holder shall pay to the Company, or made arrangements satisfactory to the
Committee regarding the payment of, any Federal, state and local taxes of
any kind required by law to be withheld or paid with respect to such
amount. If permitted by the Committee, tax withholding or payment
obligations may be settled with Common Stock, including Common Stock that
is part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditioned upon such
payment or arrangements and the Company or the Holder's employer (if not
the Company) shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Holder from the Company or any Subsidiary.
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Nevada (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not
be deemed compensation for purposes of computing benefits under any
retirement plan of the Company or any Subsidiary and shall not affect any
benefits under any other benefit plan now or subsequently in effect under
which the availability or amount of benefits is related to the level of
compensation (unless required by specific reference in any such other plan
to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in
the Plan, no right or benefit under the Plan may be alienated, sold,
assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with
respect to all Stock Options and awards under the Plan shall be subject to
(i) all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation,
the Securities Act of 1933, as amended, and (ii) the rules and regulations
of any securities exchange on which the Stock may be listed.
14.11 Conflicts. If any of the terms or provisions of the Plan or
an Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions
shall be deemed inoperative to the extent they so conflict with the
requirements of said Section 422 of the Code. Additionally, if this Plan
or any Agreement does not contain any provision required to be included
herein under Section 422 of the Code, such provision shall be deemed to be
incorporated herein and therein with the same force and effect as if such
provision had been set out at length herein and therein. If any of the
terms or provision of any Agreement conflict with any terms or provision of
the Plan, then such terms or provision shall be deemed inoperative to the
extent they so conflict with the requirements of the Plan. Additionally,
if any Agreement does not contain any provision required to be included
therein under the Plan, such provision shall be deemed to be incorporated
therein with the same force and effect as if such provision had been set
out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed
under this Plan have not been, as of the Effective Date, registered under
the Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register
the Stock or to assist the Holder in obtaining an exemption from the
various registration requirements, or to list the Stock on a national
securities exchange. 12 </Page>
<PAGE>
Exhibit 23.01
Consent of Accountant
</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.
Consent of Darrell T. Schvaneveldt
Independent Auditor
I consent to the use, of our report dated April 12, 2000, on the
financial statements of The Quantum Group, Inc., and Subsdiaries, dated
December 31, 1999, included herein and to the reference made to me.
S/ Schvaneveldt & Company
Salt Lake City, Utah
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000921450
<NAME> THE QUANTUM GROUP, INC., AND SUBSIDIARIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 242,934
<SECURITIES> 0
<RECEIVABLES> 317,464
<ALLOWANCES> 0
<INVENTORY> 139,469
<CURRENT-ASSETS> 1,113,067
<PP&E> 1,572,552
<DEPRECIATION> 144,222
<TOTAL-ASSETS> 3,829,276
<CURRENT-LIABILITIES> 1,425,456
<BONDS> 0
0
0
<COMMON> 9,033
<OTHER-SE> 2,333,883
<TOTAL-LIABILITY-AND-EQUITY> 3,829,276
<SALES> 0
<TOTAL-REVENUES> 17,821
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,691,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,504
<INCOME-PRETAX> (2,642,390)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,642,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,642,390)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
