Part II
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 2 of 2
(Unaudited)
For the Nine Months Ended
September 30,
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1998 1997
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Supplemental Disclosures
Conversion of accrued officer salary to common stock $ -- $ 8,750
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Stock issued for accrued services rendered $ -- $100,000
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See notes to financial statements.
QUEST PRODUCTS CORPORATION
Statements of Cash Flows
(Unaudited)
For the Quarter Ended
September 30,
--------------------------------
1998 1997
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Cash Flows from Operating Activities
Net (loss) $(104,385) $ (32,819)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,449 1,405
Accrued interest 4,162 5,016
(Increase) decrease in:
Accounts receivable 10,634 (10,458)
Inventories (38,302) 25,673
Advances to Automotive Marketing, Inc. -- (67,709)
Deferred preoperating and developmental costs -- 2,341
Increase (decrease) in:
Accounts payable 28,535 (68,695)
Accrued officers' and directors' compensation 81,000 42,500
Taxes payable -- (18)
Accrued expenses 10,095 1,293
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(6,812) (101,471)
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Cash Flows from Financing Activities
Proceeds from sale of common stock -- 60,000
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-- 60,000
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Net Decrease in Cash (6,812) (41,471)
Cash - beginning 7,455 67,921
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Cash - end $ 643 $ 26,450
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See notes to financial statements.
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
1. BACKGROUND AND BASIS OF PRESENTATION
Quest Products Corporation (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company's purpose is to market and distribute its
patented phase-out system smoking cessation device (the "product").
The Company had primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials. This domestic marketing was curtailed due to the ongoing
negotiations with the Federal Trade Commission ("FTC"), which have been
concluded. In March 1998, the Company reentered the domestic retail market.
The Company also distributes the product overseas.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations ($325,955 in 1998 and $218,544 in 1997), and has had limited
liquidity causing difficulty in meeting its current operating expense
obligations and debt service requirements. The Company is actively
marketing the product to help improve revenues and may seek additional
financing through private placement of debt and securities. The financial
statements do not include any adjustments that might result should the
continued existence of the Company be threatened by any continued losses or
the failure of the above factors to influence the financial viability of
the Company.
The interim statements were prepared pursuant to the requirements for
reporting on Form 10- QSB. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes included in the Company's latest Annual Report on Form 10-KSB for the
year ended December 31, 1997. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for interim periods. The
current period results of operations are not necessarily indicative of the
results for the entire year ending December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies - There were no changes in
significant accounting policies during the current period.
3. RELATED PARTY TRANSACTIONS
Loans from Director and Officer - A former officer/shareholder, who is
still a director of the Company, is owed $33,952 by the Company. The amount
is payable on demand with a stated interest rate of 11%. Effective June 30,
1997, the former officer/shareholder agreed to no longer charge interest.
QUEST PRODUCTS CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals which acquired an 18% ownership interest for
$500,000 was awarded two seats on the Board of Directors and one officer's
position. The two individuals had consulting agreements for which the
Company accrued fees of $5,000 per month for each individual from July 1996
through November 1997. In December 1997, the Company entered into
employment contracts with each of these two individuals for $150,000 per
year for five years from December 1997 through November 2002 and issued
options to purchase 7,500,000 shares each at an exercise price of $.03 per
share. As of September 30, 1998, the two individuals were owed $160,000
each in accrued consulting fees and salaries.
A director, who was previously the Company's chief executive officer,
entered into a consulting agreement with the Company for $2,000 per month
from October 1997 through September 1998. As of September 30, 1998, he is
owed $66,030 in accrued salary, consulting fees and expenses.
4. SHAREHOLDER'S LOAN
During 1996, the Company received $200,000 from a shareholder as a loan in
connection with the Company's media campaign. Repayments of $35,000 were
made in cash and $7,500 in stock. The repayment of the $157,500 of
remaining principal at September 30, 1998 and $30,438 of interest which
accrues at 10% will be negotiated.
5. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS.
Dependence on Major Customers and Suppliers - Domestic retail sales
represent approximately 90% of sales with only one retail customer
representing more than 10% of total sales.
The Company is currently purchasing 100% of its products from one vendor.
Regulatory Matters - There have been no changes in the status of regulatory
inquiries by the Food and Drug Administration (FDA) and the Federal Trade
Commission (FTC).
Litigation - In July 1997, the Company's former attorney, who is a relative
of a Director, brought an action against the Company in New York State
Supreme Court, New York County for unpaid attorney fees and disbursements
of approximately $18,000. Legal counsel has not rendered an opinion as to
the ultimate outcome of this matter.
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
Results of Operations
Nine Months Ended September 30, 1998 Compared
to Nine Months Ended September 30, 1997
The Company incurred a net loss of $325,955 for the nine months ended
September 30, 1998 as compared to the loss of $218,544 for the nine months ended
September 30, 1997. Nine-month sales increased $173,194. The increase in sales
resulted from a retail sales program which began in March 1998.
Selling expenses increased from $59,899 to $259,352 as a result of the
additional costs associated with the distribution of the product into retail
chain drug stores.
General and administrative expenses increased from $364,695 to $419,419 as
a result of an increase in officer salaries ($195,117) and rent ($15,976) less a
decrease in office salaries and consulting fees ($143,512), professional fees
($9,616) and telephone ($6,039).
The gross profit margin increased from 60% to 80%, due to the high volume
of domestic retail sales.
The Company maintains a $1,000,000 liability insurance policy.
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
Liquidity and Capital Resources
Cash of $173,145 was used for operations for the 9 months ended September 30,
1998 as compared to $275,987 used in the same period of last year. Cash
decreased during the 9 months ended September 30, 1998 by $26,945.
The Company's working capital has deteriorated due to the use of current assets
for operations. Working capital and current ratios were:
September 30, December 31, September 30,
1998 1997 1997
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Working capital
(deficiency) ($1,055,841) ($880,433) ($517,966)
Current ratios 0.15:1 0.10:1 0.31:1
In order to meet short-term marketing goals, in July 1997 certain officers and
directors agreed to acquire an aggregate of 10,000,000 shares of the Company's
common stock (representing 8% of total shares outstanding) for an aggregate
purchase price of $100,000. The Company is also seeking an additional $240,000
of financing under the same terms and conditions as offered to the officers and
directors. As of September 30, 1998, the Company has received $318,700. There is
no assurance that the Company will be able to obtain additional financing.
Distribution and Marketing
Marketing (Domestic)
In March 1998, the Company entered the U.S. retail market under the
category of smoke cessation products.
Marketing (International)
On August 21, 1995, the Company entered into an agreement with a South
Korean trading company for the distribution and manufacture of a modified
(design) PhaseOut product in South Korea. Because of the improved design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers and Japan has 35 million smokers.
Distribution in South Korea is expected to begin in the 2nd quarter of 1999.
QUEST PRODUCTS CORPORATION
Management's Discussion and Analysis
Regulatory Matters
There have been no material changes in the status of matters pending before
the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC).
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