U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
(State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES |X| NO |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not 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.
|X|
The registrant's operating revenues for its most recent fiscal year were $8,834.
The number of shares outstanding on December 31, 2002 was 233,038,334 shares of
Common Stock, .00003 par value.
Continued...
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.01) of
the Company's Common Stock, as of December 31, 2002, is approximately $1,927,902
based upon the 192,790,235 shares of Registrant's Common Stock held by
non-affiliates.
(1) "Affiliates" solely for purposes of this item refers to those persons who,
during the three months preceding the filing of this Form 10-KSB were officers
or directors of the Company and/or beneficial owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: (check one) Yes |_| No |X|
QUEST PRODUCTS CORPORATION
Form 10-KSB
Fiscal Year Ended December 31, 2002
Table of Contents
PART I PAGE
----
Item 1. Business 4 - 8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters 9 - 11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 14
Item 7. Financial Statements F1 - F18
Item 8. Changes in or Disagreement with Accountants on Accounting
and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 15 - 16
Item 10. Executive Compensation 17 - 18
Item 11. Security Ownership of Certain Beneficial Owners and
Management 18 - 19
Item 12. Certain Relationships and Related Transactions 19
PART IV
Item 13. Exhibits and Reports on Form 8-K 20
Item 14. Control and Procedures 21
Signatures 22
Supplemental Information 23
PART 1
Item 1. Business
The Private Securities Litigation Reform Act or 1995 provides a safe
harbor for forward-looking statements. All statements other than statements of
historical fact in this report are forward-looking statements. Such
forward-looking statements are based on the current beliefs of management and
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of Quest Products Corporation to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: Quest's history of losses; the need to obtain
additional financing and the ability to obtain such financing; and uncertainties
relating to business and economic conditions in markets in which Quest operates.
The words, believe, expect, anticipate, intend and plan and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made.
The Company
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 has one wholly owned subsidiary, The ProductIncubator.com,
Inc., and a majority-owned subsidiary, Wynn Technologies, Inc., through which it
intends to identify and bring to the marketplace unique proprietary consumer
products. The Company also continues to distribute its patented "Phase-Out"
system smoking cessation device (the "PhaseOut device") both domestically and
internationally.
During 1999, the Company entered into a License Agreement with the holders
of a patent for the exclusive worldwide license to make, use and sell inventions
related to an adjustable lens product such as sunglasses, ski goggles or diving
masks. In June 2000 the Company entered into a comprehensive agreement with
Opsales and its President and Vice President, Sidney and Dean Friedman, to
manufacture and distribute the Company's rotatable variable polarized lenses to
be used in the Company's new sunglass product, Rainbow Shades(TM). In January
2001, the Company made its final selection of frame designs for its Rainbow
Shades(TM) sunglasses. The initial line of Rainbow Shades(TM) sunglasses
consists of three separate frames created and designed in Italy. The Rainbow
Shades(TM) sunglasses feature Quest's patented and revolutionary new lens system
which allows the wearer to select up to three different lens colors by simply
moving a slider on the frame. The slider causes the lens to rotate which, in
turn, changes the lens color. With the Rainbow Shades(TM) sunglasses, there is
no need to remove or replace the lens.
During 2000, the Company acquired the rights to and developed a
multi-account card system which will allow a subscribing card holder to access
all of their Credit card, Debit card, frequent flyer, telephone calling card and
other membership accounts by using one plastic "smart" credit card which will be
commercialized and marketed under the name "BIG1CARD"(TM). On March 1, 2001, the
Company signed a five-year Consulting Agreement with Alex W. Hart to serve as a
Special Consultant to the Company on the development and commercialization of
the Company's patented Big1Card(TM) technology. Quest, through its subsidiary,
Wynn Technologies, Inc., owns all rights to the Big1Card(TM) patent, U. S.
Patent No. 5,859,419. Mr. Hart's duties will be to use his best efforts to
locate and approach appropriate organizations to participate in the Company's
Big1Card(TM) SmartCard project. This will include introducing the Company and
assisting in completing agreements with all such organizations.
4
The PhaseOut Device
The PHASEOUT device is a simple, easy to use, mechanical, light-weight
instrument that allows the smoker to continue to smoke their preferred brand of
cigarettes and at the same time, gradually and sequentially reduce their
nicotine intake by over 80%. This weaning process is the same type of
detoxification methodology that has proven successful with many other addictive
substances. Once the smoker has been weaned, their chances to quit for good are
greatly enhanced.
PHASEOUT's weaning methodology has an important additional psychological
benefit for all smokers. It allows the smoker to continue to smoke their
preferred brand until they are ready to quit. Of course, to achieve these
results under normal smoking conditions, smokers must avoid compensatory
practices, such as smoking more cigarettes and blocking the ventilation holes
created by the PHASEOUT device.
The PHASEOUT system works without the use of any drugs, chemicals or
attachments. The average retail price to consumers is approximately $20 plus
shipping and handling.
The Company is currently having the product manufactured by one vendor in
South Korea. This source of supply should be able to produce all future PhaseOut
units required for sale.
How PhaseOut Works
A smoker inserts their entire unopened pack of cigarettes (filtered or
unfiltered - soft pack or box) into the PHASEOUT device. With a simple press and
release that takes just seconds, PHASEOUT processes all of the cigarettes within
the pack.
The device strategically creates from one to four microfine perforations
in the lip end of each cigarette. These perforations filter and ventilate the
smoke drawn through the cigarette, thereby reducing the amount of nicotine and
other toxins inhaled by the smoker.
One miniature filter (perforation) is created in Phase one, filtering out
up to 26% of the nicotine, and similar amounts of other toxins such as carbon
monoxide and tar. Additional perforations are created as the smoker proceeds
through each of the four Phases. With each additional perforation there is a
progressive reduction of nicotine and other harmful substances based upon
controlled laboratory studies. By Phase IV, 80.7% of the nicotine, 91.6% of the
tar, 89.2% of carbon monoxide and 90% of all other tobacco constituents (Total
Particulate Matter) have been eliminated. As discussed above, these reductions
under normal smoking conditions depend upon proper use of the product and the
treated cigarettes by smokers. The suggested period on each phase is two weeks
(eight week total), however, smokers can tailor the program to their own
individual liking and proceed at their own pace, under their own timetable. The
smoker is in control. There is no pressure, no fear of failure. Importantly, any
change in the taste, flavor or draw of the cigarette is lessened as the smoker
proceeds through the program due to the gradual transition from phase to phase.
In the United States, there are currently reported to be in excess of 46
million smokers and worldwide the number of smokers is estimated to exceed 1
billion.
5
Patents
The United States Patent Office has issued two patents for the PhaseOut
System (Patent Number 4,231,378 issued November 4, 1980 and Patent number
5,218,976 issued June 15, 1993). The Company has received patents in China,
Taiwan and Japan.
Marketing
We are currently developing a multifaceted strategy to reinvigorate the
sales of PhaseOut. We sell PhaseOut on our website, and we intend to develop
brand recognition through a targeted international/domestic advertising program.
New Products:
Sunglasses
In October 1999, the Company successfully completed development of
adjustable polarized sunglasses, which allow the wearer to change the color of
the sunglass lenses to a variety of colors without changing the lenses or
altering the frame. The Company will strive to begin worldwide distribution
during 2004; however, that will depend upon its ability to raise the cash
necessary to complete the molds and purchase materials.
In addition, on October 31, 1999 the Company entered into a license
agreement with the owner of a patented technology as it pertains to eyewear.
Under the agreement, the licensor grants under the provisions of his patent the
exclusive license to make, use, and sell the patented inventions through all
channels of distribution and to otherwise practice the patent on an exclusive
basis to the exclusion of the entire world, including the inventor. The patent
licensed hereunder relates to an adjustable glasses product including but not
limited to sunglasses, ski goggles and diving masks. The territory covered by
the patent is the World.
In consideration for this license granted to the Company, the licensor
will receive royalty payments based on the number of glasses sold. A $10,000
advance royalty was paid up on signing of the contract. Also, in consideration
for this license being granted to the Company, the licensor received warrants to
purchase 1,000,000 shares of the Company's Common Stock.
The Company will continue to add new technology to the patent in relating
to design and function.
In connection with the abovementioned License Agreement, in June 2000 the
Company entered into a comprehensive agreement with Opsales and its President
and Vice President, Sidney and Dean Friedman, to manufacture and distribute the
Company's rotatable, variable polarized lenses to be used in the Company's new
sunglass product, Rainbow Shades(TM).
In January 2001, the Company made its final selection of frame designs for
its sunglasses. The initial line of sunglasses consists of three separate frames
created and designed in Italy. The sunglasses feature Quest's patented and
revolutionary new lens system which allows the wearer to select up to three
different lens colors by simply moving a slider on the frame. The slider causes
the lens to rotate which, in turn, changes the lens color. With these
sunglasses, there is no need to remove or replace the lens. Opsales has also
agreed to introduce us to all suppliers that would be necessary for the
completion of all sunglass products.
6
Research and Development expenses for the sunglass product were
approximately $63,000 and $89,000 in 2002 and 2001, respectively.
Big1Card(TM)
During 2000, the Company acquired the rights to and developed a
multi-account card system which will allow a subscribing card holder to access
all of their Credit card, Debit card, frequent flyer, telephone calling card and
other membership accounts by using one plastic "smart" credit card which will be
commercialized and marketed under the name "BIG1CARD"(TM). The multiple account
card system is protected by United States Patent No. 5,859,419, which was
obtained by the system's inventor, Sol H. Wynn. As part of the BIG1CARD(TM), the
Company formed a new corporation in March 2000 named Wynn Technologies Inc.
("Wynn Tech"), which has now acquired all right, title and interest to the Wynn
patent. Therefore, Wynn Technologies Inc. now has the exclusive rights in the
United States to make, use, offer and sell this new multi-account card system.
Wynn Tech is owned 65% by Quest Products Corporation and 35% by Mr. Wynn. The
Company's 65% interest is subject to the resolution of certain contingencies.
Accordingly, the Company is not currently consolidating this subsidiary.
On March 1, 2001, the Company signed a five-year Consulting Agreement with
Alex W. Hart to serve as a Special Consultant to the Company on the development
and commercialization of Wynn Technologies, Inc.'s patented Big1Card(TM)
technology. The five-year Consulting Agreement called for Mr. Hart to receive
options to purchase 5 million shares of the Company's stock, which can be
exercised at any time during the five-year Agreement, either on a cash or
cashless basis. Two million options have been issued at $.10; 1 million options
issued at $.15; 1 million options at $.20; and 1 million options at $.30. The
fair value of these options is being amortized over the life of the consulting
agreement. Quest, through its unconsolidated subsidiary, Wynn Technologies,
Inc., owns all rights to the Big1Card(TM) patent, U. S. Patent No. 5,859,419.
Mr. Hart's duties will be to use his best efforts to locate and approach
appropriate organizations to participate in the Company's Big1Card(TM) project.
This will include introducing the Company and assisting in completing agreements
with all such organizations.
During 2001 and 2002, Quest received official notices from the United
States Patent and Trademark Office that the Company's applications to add 28
additional claims to its multi-account credit card system patent will be
allowed. In light of this favorable action of the Patent Office on the Company's
applications, the original 7 patent claims will be enlarged to a total of 35
claims.
Research and Development expenses for the Big1Card(TM) were approximately
$90,000 and $109,000 in 2002 and 2001 respectively.
7
Competition
The Company competes with numerous products and techniques designed to aid
smokers to stop smoking. Many of the companies promoting these products have
been in existence for longer periods of time, are better established than the
Company, have financial resources substantially greater than the Company and
have more extensive facilities than those which now or in the foreseeable future
will become available to the Company. In addition, other firms may enter into
competition with the Company in the near future.
One type of significant competitive product is the nicotine patch, which
requires a prescription by licensed physicians for treatment of nicotine
withdrawal. This appears to be the quit smoking method that is now most commonly
prescribed.
Employees
At the present time, the Company has four employees, including the
Company's two officers and directors and two administrative and secretarial
personnel.
Item 2. Properties
The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11791.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
8
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) Market information - The principal U.S. market in which the Company's Common
Shares ($.00003 par value) were tradable is in the over-the-counter market.
The OTC Bulletin Board symbol for the Company's Common Stock is "QPRC".
The following table sets forth the range of high and low bid quotes of the
Company's Common Stock per quarter as provided by the National Quotation Bureau
(which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions).
Bid Price
---------
Period High Low
------ ---- ---
Quarter Ended March 31, 2001 .153 .040
Quarter Ended June 30, 2001 .115 .030
Quarter Ended September 30, 2001 .050 .030
Quarter Ended December 31, 2001 .050 .030
Quarter Ended March 31, 2002 .080 .020
Quarter Ended June 30, 2002 .060 .020
Quarter Ended September 30, 2002 .020 .010
Quarter Ended December 31, 2002 .010 .010
(b) Holders -- As of December 31, 2002, the approximate number of the
Company's shareholders was 7,200.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial
status and its contemplated financial requirements, does not contemplate
or anticipate paying any dividends upon its Common Stock in the
foreseeable future.
9
Recent Sales of Unregistered Securities
During the year ended December 31, 2002, we made the following sales of
unregistered securities:
Consideration Received and If Option, Warrant
Description of Underwriting or Convertible
or Other Discounts to Exemption from Security, Terms of
Date of Type of Number Market Price Afforded to Registration Exercise or
Sale Security Sold Purchasers Claimed Conversion
---- -------- ---- ---------- ------- ----------
3/14/02 2 3,500,000 Warrants issued to Directors in 4(2) Exercisable through
connection with Board services. No February 28, 2005 at
cash consideration received until an exercise price of
exercise. $.143 per share.
3/14/02 2 3,500,000 Warrants issued to Directors in 4(2) Exercisable through
connection with Board services. No February 28, 2006 at
cash consideration received until an exercise price of
exercise. $.09 per share.
3/14/02 2 3,500,000 Warrants issued to Directors in 4(2)
connection with Board services. Exercisable through
No cash consideration received February 28, 2007 at
until exercise. an exercise price of
$.03 per share.
3/15/02 2 2,000,000 Warrants issued in connection 4(2)
with private placement. No cash Exercisable through
consideration received until March 15, 2005 at an
exercise. exercise price of
$.02 per share.
4/2/02 1 133,333 Common Stock issued pursuant to 4(2) Not Applicable
conversion of Warrants issued
February 15, 1999. The Common
Stock was issued at $0.01 per
share. We received proceeds of
$1,333.
10
8/12/02 1 700,000 Common Stock issued pursuant to 4(2) Not Applicable
July 31, 2002 Consulting
Agreement. The common stock was
issued at $0.02 per share. We
received consulting services
valued at $14,000.
11/11/02 2 15,000,000 Warrants issued to Directors in 4(2) Exercisable through
connection with Board Services. December 1, 2005 at
No cash consideration received an exercise price of
until exercise. $.03 per share.
(1) Common Stock
(2) Warrants
11
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company incurred a net loss of $846,171 and $898,013 for the years
ended December 31, 2002 and 2001 respectively.
Sales decreased by $13,289 from $22,123 in 2001 to $8,834 in 2002 as a
result of a decrease in international sales. The Company's sales continue to be
primarily generated via e-commerce.
The Company sold 358 units in 2002 at an average price of approximately
$20 per unit plus shipping and handling and 2,016 PhaseOut units in 2001 at an
average price of approximately $10 per unit plus shipping and handling. The
average cost per unit sold in 2002 and 2001 remained $1.61.
Research and development expenses incurred by the Company decreased by
$45,871 from $198,607 in 2001 to $152,736 in 2002. This decrease is primarily
attributable to an approximately $27,000 decrease in product development costs
as it relates to the Company's sunglass product, and an approximately $19,000
decrease in expenses related to the Company's SmartCard product.
Selling expenses incurred by the Company decreased by $6,671 from $39,551
in 2001 to $32,880 in 2002. This decrease is primarily due to a decrease in
travel-related expenses.
General and administrative expenses incurred by the Company decreased by
$62,119 from $608,944 in 2001 to $546,825 in 2002. This decrease is attributable
to a decrease in salaries, consulting fees and rent, net of sublease income.
Interest expense increased by $6,620 from $9,472 in 2001 to $16,092 in
2002 due to interest on loans from shareholders received during 2002.
During 2002, the Company wrote down excess inventory of $23,570 and
considered the PhaseOut patent to be impaired by $12,349. In addition, the
Company considered the assets related to the sunglass project to be impaired by
$35,097.
12
Liquidity and Capital Resources
Cash of $115,830 was used for operations for 2002 as compared to $340,248
used in 2001. Cash decreased during the year by $34,497.
The Company's working capital deficiency increased primarily due to
accrued officers compensation and loans from shareholders. Working capital and
current ratios were:
December 31, December 31,
2002 2001
---- ----
Working capital
(deficiency) $(1,745,420) $(1,163,004)
Current ratios 0.002:1 0.05:1
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. Through December 31, 2002, the Company
received $1,151,700 of financing under the same terms offered to the Directors
and Officers. There is no assurance that the Company will be able to obtain
additional financing.
In October 1999, the Company successfully completed development of
adjustable polarized sunglasses which allow the wearer to change the color of
the sunglass lenses to a variety of colors without changing the lenses or
altering the frame. Cash paid for further research and development expenditures
related to the sunglass project is not expected to exceed $50,000 during 2003.
During 2000, the Company acquired the rights to and developed a
multi-account card system which will allow a subscribing card holder to access
all of their Credit card, Debit card, frequent flyer, telephone calling card and
other membership accounts by using one plastic "smart" credit card which will be
commercialized and marketed under the name "BIG1CARD"(TM). On March 1, 2001, the
Company signed a five-year Consulting Agreement with Alex W. Hart to serve as a
Special Consultant to the Company on the development and commercialization of
the Company's patented Big1Card(TM) technology. Quest, through its
unconsolidated subsidiary, Wynn Technologies, Inc., subject to the resolution of
certain contingencies, owns all rights to the Big 1Card(TM) patent, U. S. Patent
No. 5,859,419. Mr. Hart's duties will be to use his best efforts to locate and
approach appropriate organizations to participate in the Company's Big1Card(TM)
SmartCard project. This will include introducing the Company and assisting in
completing agreements with all such organizations.
The Company believes the issuance of the enhanced patent on the Big1Card
will give it the ability to raise additional funds through revenue, debt or
equity financing, which, in turn will enable it to expand and refine its
marketing efforts to improve the efficiency of these efforts and to increase
revenues for its other products.
13
In January and June 2001, the Company filed a reissue application to
significantly broaden its patent rights for its multi-account credit card
system. During 2001 and 2002, the Company received official notices from the
United States Patent and Trademark Office that the Company's applications to add
28 additional claims to its multi-account credit card system patent will be
allowed. In light of these favorable actions of the Patent Office on the
Company's applications, the original 7 patent claims will be enlarged to a total
of 35 claims. The Company's management believes the Patent Office action
allowing these additional 28 claims significantly broadens and strengthens the
Company's patent and materially increases its value in the marketplace. The new
claims allowed by the Patent Office, when combined with the original claims,
make it extremely unlikely that a competitor will be able to design around or
otherwise circumvent the Company's patent in launching a smart card
multi-account credit card system and best insures that no one else in the United
States will be able to commercialize a multi-account credit card system without
obtaining license rights from the Company. The Company's patent which has a 1995
priority date is, to their knowledge, the only U.S. patent which covers a
multi-account credit card system employing a processing chip and on-board
memory. In addition, Quest Products Corporation is in the process of contacting
corporations in order to apply the Company's patented multi-account credit card
system to the myriad of security issues facing Government and industry. Cash
paid for further research and development expenditures related to the
Big1Card(TM) smart card project in 2003 is not expected to exceed $25,000.
Item 7. Financial Statements
14
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report F-1
Consolidated Financial Statements
Consolidated Balance Sheet F-2 - F-3
December 31, 2002
Consolidated Statements of Operations
For the Years Ended December 31, 2002 and 2001 F-4 - F-5
Consolidated Statements of Changes in Shareholders' (Deficit)
For the Years Ended December 31, 2002 and 2001 F-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-18
Independent Auditors' Report
To the Board of Directors and Shareholders
Quest Products Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Quest Products
Corporation and Subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, shareholders' (deficit), and cash flows
for the years ended December 31, 2002 and 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quest Products
Corporation and Subsidiaries as of December 31, 2002 and the results of its
operations and its cash flows for the years ended December 31, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has had recurring net operating losses since
its inception, has relied upon debt and equity financing to provide funds for
operations and, as of December 31, 2002 current liabilities exceed current
assets by $1,745,420. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
April 11, 2003
- F1 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2002
Assets
Current Assets
Cash $ 1,147
Inventory 1,624
Prepaid expenses 474
-------
3,245
-------
Investment in Unconsolidated Subsidiary 1,595
Furniture and Equipment - at cost - net of accumulated
depreciation of $63,665 8,308
License - net of accumulated amortization of
$7,903 1,000
Patents - net of accumulated amortization of
$27,086 10,000
Security Deposits 405
-------
21,308
-------
$24,553
=======
See notes to consolidated financial statements.
- F2 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2002
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $10,900 $ 20,900
Accounts payable 270,167
Due to Officers and Directors 1,176,580
Loans from shareholders-including accrued interest
of $23,564 203,564
Accrued expenses and other current liabilities 77,454
-----------
1,748,665
-----------
Deferred Rent Payable 5,345
Commitments and Contingencies
Shareholders' (Deficit)
Convertible Preferred Stock - par value $.00003 -
authorized 10,000,000 shares - no shares issued and
outstanding --
Common Stock - par value $.00003 - authorized
390,000,000 shares - 233,038,334 shares issued and
outstanding 6,991
Capital in excess of par 6,000,083
Accumulated (deficit) (7,736,531)
-----------
(1,729,457)
-----------
$ 24,553
===========
See notes to consolidated financial statements.
- F3 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations Page 1 of 2
For the Years Ended
December 31,
2002 2001
--------- ---------
Sales - net $ 8,834 $ 22,123
Cost of Sales 1,292 4,398
--------- ---------
7,542 17,725
--------- ---------
Research and Development Expenses 152,736 198,607
Selling Expenses 32,880 39,551
General and Administrative Expenses 546,825 608,944
--------- ---------
732,441 847,102
--------- ---------
(Loss) Before Other Income (Expenses) (724,899) (829,377)
--------- ---------
Other Income (Expenses)
Write-down of excess inventory (23,570) --
Impairment of patent cost (12,349) --
Impairment of other assets (35,097) --
Write-off of deferred registration costs -- (25,000)
Write-off of discount on debt (34,000) (34,000)
Interest (expense) (16,092) (9,472)
Loss on investment in unconsolidated subsidiary (164) (164)
--------- ---------
(121,272) (68,636)
--------- ---------
Net (Loss) $(846,171) $(898,013)
========= =========
See notes to consolidated financial statements.
- F4 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations Page 2 of 2
Net (Loss) per Share:
Basic and Diluted:
-0- -0-
=========== ===========
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 232,000,000 228,000,000
=========== ===========
See notes to consolidated financial statements.
- F5 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit)
For the Years Ended December 31, 2002 and 2001
Number of
Common Stock Amount Capital in
Shares $.00003 Excess of Accumulated
(Post-Split) Par Value Par Value (Deficit) Total
----------------------------------------------------------------------------
Balance - December 31, 2000 223,005,001 6,690 5,397,026 (5,992,347) (588,631)
Proceeds from exercise of warrants 8,200,000 246 236,754 -- 237,000
Warrants issued in settlement of debt -- -- 34,000 -- 34,000
Compensation due to warrants -- -- 131,725 -- 131,725
Net (loss) -- -- -- (898,013) (898,013)
----------- ------- ---------- ----------- -----------
Balance - December 31, 2001 231,205,001 $ 6,936 $5,799,505 $(6,890,360) $(1,083,919)
Proceeds from exercise of warrants 133,333 4 1,329 1,333
Warrants issued for services -- -- 146,300 146,300
Warrants issued in settlement of debt -- 34,000 34,000
Stock issued for services 700,000 21 13,979 14,000
Warrants converted to common stock 1,000,000 30 4,970 5,000
Net (loss) -- -- -- (846,171) (846,171)
Balance - December 31, 2002 233,038,334 $ 6,991 $6,000,083 $(7,736,531) $ 1,729,457)
=========== ======= ========== =========== ===========
See notes to consolidated financial statements.
- F6 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 1 of 2
For the Years Ended
-------------------
December 31,
2002 2001
-------------------------
Cash Flows from Operating Activities
Net (loss) $(846,171) $(898,013)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 7,576 10,592
Amortization 7,591 5,720
Warrants issued for compensation 146,300 131,725
Common stock issued for compensation 14,000 --
Write-down of excess inventory 23,570 --
Impairment of patent costs 12,349 --
Impairment of other assets 35,097 --
Write-off of deferred registration costs -- 25,000
Write-off of discount on debt 34,000 34,000
Accrued interest 16,092 9,472
Equity in net loss of subsidiary 164 164
(Increase) decrease in:
Inventories 576 3,246
Prepaid expenses 2,792 12,069
Deferred rent payable 5,345
Increase (decrease) in:
Accounts payable 36,936 9,663
Accrued officer compensation 337,022 291,114
Accrued expenses 50,931 25,000
--------- ---------
(115,830) (340,248)
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 1,333 --
Proceeds from exercise of warrants -- 237,000
Proceeds on loans from shareholders 80,000 100,000
--------- ---------
81,333 337,000
--------- ---------
See notes to consolidated financial statements.
- F7 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 2 of 2
For the Years Ended
-------------------
December 31
-----------
2002 2001
-----------------------
Net Decrease in Cash $(34,497) $ (3,248)
Cash - beginning 35,644 38,892
-------- --------
Cash - end $ 1,147 $ 35,644
======== ========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Warrants issued to acquire assets $ 5,000 $ --
-------- --------
See notes to consolidated financial statements.
- F8 -
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002
1 - The Company
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 has one wholly owned subsidiary, The
ProductIncubator.com, Inc and a majority-owned subsidiary, Wynn
Technologies, Inc., through which it intends to identify and bring to the
marketplace unique proprietary products. Rainbow Shades, Inc., also a
wholly - owned subsidiary, was dissolved during 2002. The Company
continues to distribute its patented "Phase-Out" system smoking cessation
device (the "PhaseOut device") both domestically and internationally.
During 1999, the Company entered into a License Agreement with the holders
of a patent for the exclusive worldwide license to make, use and sell
inventions related to an adjustable lens product such as sunglasses, ski
goggles or diving masks. See Note 5.
During 2000, the Company acquired the rights to and developed a
multi-account card system which will allow a subscribing card holder to
access all of their Credit card, Debit card, frequent flyer, telephone
calling card and other membership accounts by using one plastic "smart"
credit card which will be commercialized and marketed under the name
"BIG1CARD"(TM). See Note 6.
2 - Summary of Significant Accounting Policies
a. Principles of Consolidation - The consolidated financial statements
include the accounts of Quest Products Corporation and its wholly
owned subsidiaries after elimination of all inter-company accounts
and transactions.
b. Cash and Cash Equivalents - The Company considers all short-term,
highly liquid investments with maturities of three months or less at
the date of their acquisition to be cash equivalents. These balances
are maintained at a high quality financial institution. At times,
these balances are in excess of FDIC insurance limits.
c. Inventory - Inventory is valued at cost (on a first-in, first-out
basis) which is not in excess of market value. Inventory is
comprised entirely of finished goods.
d. Furniture and Equipment - Furniture and equipment are carried at
cost. Depreciation is computed using the straight-line and
accelerated methods over the estimated useful lives (three to seven
years) of the assets.
- F9 -
e. Long-lived Assets Including Goodwill and Other Acquired Intangible
Assets - The Company's policy is to review furniture and equipment
and certain identifiable intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. A review for impairment includes
comparing the carrying value of an asset to an estimate of the
undiscounted net future cash inflows over the life of the asset. An
asset is considered impaired when the carrying value exceeds the
calculation of the undiscounted net future cash inflows or fair
market value. An impairment loss is defined as the amount of the
excess of the carrying value over the fair market value of the
asset.
The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, in the first quarter of 2002. SFAS No. 142 requires that
goodwill and intangible assets with indefinite lives no longer be
amortized, but instead be tested for impairment at least annually or
sooner whenever events or changes in circumstances indicate that
they may be impaired. SFAS No. 142 also requires that intangible
assets with definite lives be amortized over their estimated useful
lives and reviewed for impairment. The review for impairment is done
in accordance with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
On November 11, 2002 the Board of Directors decided that, until the
Company begins to generate revenue from other sources, not to put
additional marketing effort into both the PhaseOut and the sunglass
projects. As such, the Company has determined that the value of the
PhaseOut patent, the deferred royalties and the License related to
the sunglass project were impaired and were written down to their
fair values based on the future cash flows expected from the
PhaseOut device and the estimated fair value of the License.
The estimated amortization expense for the PhaseOut patent is $5,000
per year for 2003 and 2004.
f. Stock-Based Compensation:
Employees - When stock based compensation is issued to
employees and directors, in connection with their services as
directors, Statement of Financial Accounting Standards
("SFAS") No. 123 Accounting for Stock-Based Compensation,
encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans
at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees. APB No. 25
requires no recognition of compensation expense for the
stock-based compensation arrangements provided by the Company
where the exercise price is equal to or greater than the
market price at the date of the grants.
Non-Employees - When stock based compensation is issued to
non-employees, the Company records these transactions at the
fair market value of the equity instruments issued or the
goods or services received, whichever is more reliably
measurable.
- F10 -
g. Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted
average numbers of shares of common stock outstanding during the
period. Diluted earnings (loss) per share is computed giving effect
to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the
incremental common shares issuable upon the exercise of warrants.
For 2002 and 2001, potentially dilutive securities that related to
shares issuable upon the exercise of stock options granted by the
Company totaling 3,550,000 and 11,461,458 respectively were
excluded, as their effect was antidilutive. See Note 8.
h. Advertising - The Company expenses the cost of advertising as
incurred. Advertising expense was approximately $2,000 in both 2002
and 2001.
i. Revenue Recognition - The Company's customers include end users,
retailers and distributors. Revenue, less reserves for returns, is
recognized upon shipment to the customer.
j. Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
of America 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 dates of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
k. Shipping and Handling Fees and Costs - The Company includes shipping
and handling fees billed to customers in net sales. Shipping and
handling costs associated with both inbound and outbound freight are
included in cost of sales.
l. Reclassification - Certain amounts from prior years have been
restated to conform to the current year's presentation. These
reclassifications have no effect on the previously reported loss.
3 - Status of the Company
The financial statements have been prepared on a going-concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business over a reasonable length of
time.
The Company has had recurring net operating losses since its inception and
has made use of privately-placed debt and equity financing to provide
funds for operations. As of December 31, 2002, current liabilities
exceeded current assets by $1,745,420. Those factors create an uncertainty
about the Company's ability to continue as a going concern.
The Company believes the issuance of the enhanced patent on the Big1Card
will give it the ability to raise additional funds through revenue, debt
or equity financing, which, in turn will enable it to expand and refine
its marketing efforts to improve the efficiency of these efforts and to
increase revenues for its other products.
The financial statements do not include any adjustments that might be
necessary should the above or other factors affect the Company's ability
to continue as a going concern.
- F11 -
4 - Sunglass Product Agreements
License Agreement -- During 1999, the Company entered into a License
Agreement with the holders of a patent for the exclusive worldwide license
to make, use and sell inventions related to an adjustable lens product
such as sunglasses, ski goggles or diving masks. Under this Agreement, in
July 2000 the Company issued warrants to purchase 1,000,000 shares of
stock at $.0275 per share. The Company estimated the fair value of these
warrants to be $29,000 and has recorded this License Acquisition Cost as a
long-term asset on its balance sheet. In March 2001, the Company amended
this License Agreement to extend its terms. As compensation, the Company
agreed to allow the holders of the patent to exercise their warrants at no
cost. The value of this amendment, added to the License Acquisition Cost,
was the excess of the fair value of the stock issued over the fair value
(using the Black-Scholes option pricing method) of the warrants cancelled.
These acquisition costs are being amortized using the straight-line method
over the remaining life of the Agreement. The life of the Agreement is
based on the remaining life of the Patent which, at acquisition date, had
13 years remaining.
Pursuant to the License Agreement, the Company is subject to annual
minimum royalty payments of $25,000, commencing from the date of the first
commercial sale of any product covered by the License Agreement. The
Company paid $10,000, which will be used to offset future royalty payments
due.
As stated in Note 1e above, the Company has determined that the value of
the deferred royalties and the License related to the sunglass project
were impaired and were written down to their fair values based on the
estimated fair value of the License.
Consulting and Representation Agreement -- In June 2000 the Company
entered into a comprehensive agreement with Opsales and its President and
Vice President, Sidney and Dean Friedman, to manufacture and distribute
the Company's rotatable, variable polarized lenses to be used in the
Company's new sunglass product. Under this Agreement, Opsales and its
President and Vice President will provide consultation and expertise in
the developing, manufacturing and distributing of its sunglass product in
the United States and abroad.
In exchange, the Company paid a one-time fee of $2,500 each to Sidney and
Dean Friedman in June 2000 and paid $1,000 per month each through January
2002. The Company also issued options to purchase 1,000,000 shares each of
the Company's stock at $.09 per share expiring June 30, 2003. The Company
is recognizing compensation for the fair value of these options over the
term of the agreement.
5 - BIG1CARD(TM) Agreements
Wynn Technologies Inc. During 2000, the Company developed a multi-account
card system which will allow a subscribing card holder to access all of
their Credit card, Debit card, frequent flyer, telephone calling card and
other membership accounts by using one plastic "smart" credit card which
will be commercialized and marketed under the name "BIG1CARD"(TM). The
multiple account card system is protected by United States Patent No.
5,859,419, which was obtained by the system's inventor, Sol H. Wynn
("Wynn"). As part of the BIG1CARD(TM), a new corporation formed by the
Company, named Wynn Technologies Inc. ("Wynn Tech"), has now acquired all
right, title and interest to the Wynn patent. Therefore, Wynn Tech has the
exclusive rights in the United States to
- F12 -
make, use, offer and sell this new multi-account card system. Wynn Tech is
owned 65% by Quest Products Corporation and 35% by Wynn. The Company's 65%
interest is subject to the resolution of certain contingencies.
Accordingly, the Company is not currently consolidating this subsidiary.
The Company also applied for additional patents to further enhance
BIG1CARD(TM) technology.
Under an agreement, Wynn shall be entitled to receive 2% of the gross
revenues of Wynn Tech and other compensation as certain milestones are
achieved. Upon Wynn Tech achieving cumulative gross revenues of
$10,000,000, Wynn shall receive options to purchase 5,000,000 shares of
the Company's stock at $.07 per share. Upon Wynn Tech achieving cumulative
gross revenues of $30,000,000, Wynn shall receive options to purchase
10,000,000 shares of the Company's stock at $.10 per share. Upon Wynn Tech
achieving cumulative gross revenues of $100,000,000, Wynn shall be
entitled to one seat on the Company's Board. Upon Wynn Tech achieving
cumulative gross revenues of $200,000,000, Wynn shall be entitled to lead
a design-engineering center in California, which shall be financed by Wynn
Tech.
The Company issued options to purchase 5,000,000 shares of Quest stock at
$.05 per share to Wynn in exchange for a 65% interest in Wynn Tech which
owns the patent covering the Big1Card(TM) technology. Since Wynn is
considered a "promoter," the patent contributed to Wynn Tech was valued at
his historical cost of $3,000.
The Company has not included Wynn Tech in its consolidated financial
statement since there are significant contingencies related to the control
of Wynn Tech. The Company accounts for its investment in Wynn Tech under
the equity method whereby the investment account is increased for
contributions by the Company plus its 65% share of the income and reduced
for distributions and its 65% share of any losses incurred by Wynn Tech
without restriction and regardless of whether the investment balance goes
below zero.
Following are condensed unaudited financial data of Wynn Technologies,
Inc.:
As of December 31, 2001
Patent, net of accumulated amortization of $252 $ 2,748
-------
Shareholders' Equity $ 2,748
-------
For the Year ended December 31, 2001
Net Loss $ (164)
-------
As of December 31, 2002
Patent, net of accumulated amortization of $416 $ 2,584
-------
Shareholders' Equity $ 2,584
-------
For the Year ended December 31, 2002
Net Loss $ (164)
-------
- F13 -
Consulting Agreement. On March 1, 2001, the Company signed a five-year
Consulting Agreement with Alex W. Hart to serve as a Special Consultant to
the Company on the development and commercialization of the Company's
patented Big1Card(TM) technology. Mr. Hart's duties will be to use his
best efforts to locate and approach appropriate organizations to
participate in the Company's Big1Card(TM) SmartCard project. This will
include introducing the Company and assisting in completing agreements
with all such organizations.
The five-year Consulting Agreement calls for Mr. Hart to receive options
to purchase 5 million shares of the Company's stock, which can be
exercised at any time during the five-year Agreement, either on a cash or
cashless basis. Two million options will be issued at $.10; 1 million
options will be issued at $.15; 1 million options at $.20; and 1 million
options at $.30.
6 - Domain Investments Inc. Equity Financing Agreement
In connection with the November 2, 2000 investment agreement with Domain
Investments, Inc., the Company decided, on July 31, 2002, not to file an
SB2 registration, which accordingly, terminated this agreement.
7 - Tribe Communications, Inc. Consulting Agreement
On July 31, 2002, the Company entered into a six-month consulting
agreement with Tribe Communications, Inc., an investment banking firm
specializing in web casting, exposure, corporate consulting and finance.
Tribe was to provide guidance and assistance in raising awareness,
educating potential investors, retail support and capital formation. The
Company issued 700,000 shares to Tribe upon the execution of this
agreement. Additional compensation is dependent upon Tribe's assistance in
raising capital for the Company. Such compensation could aggregate
$125,000 in stock or cash, plus 5% of the total investment received by the
Company. The consulting agreement expired on January 31, 2003.
8 - Warrants and Convertible Debentures
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented as if the Company had accounted for
its warrants under the fair value method. The fair value of each warrant
is estimated on the date of the warrant grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
2002 2001
------- -------
Assumptions:
Expected life of warrants 4 years 5 years
Risk free interest rate 5.0% 6.0%
Volatility of stock 186% 188%
Expected dividend yield -- --
- F14 -
The weighted average grant date fair value of the warrants granted to
employees and board members during 2002 and 2001 was $884,733 and $0,
respectively. Had the fair value of the warrants been amortized to expense
over the related service period, the pro forma impact on earnings of the
stock-based compensation for the warrants under the provision would have
been as follows:
2002 2001
----------- ---------
Net (Loss):
As reported $ (846,171) $(898,013)
Pro forma $(1,146,127) $(925,013)
Earnings Per Share:
As reported $ -0- $ -0-
Pro forma $ (.01) $ (.01)
In accordance with SFAS 123, the weighted average fair value of warrants
is required to be based on a theoretical statistical model using the
preceding assumptions. In actuality, the Company's warrants do not trade
on a secondary exchange and, therefore, the employees and directors cannot
derive any benefit from holding the warrants under these plans without an
increase in the market price of Company stock. Such an increase in stock
price would benefit all shareholders commensurately.
a. Warrants -Presented below is a summary of warrant activity for the
years shown: All warrants are immediately exercisable upon grant.
Weighted Average
Warrants Exercise Price
------------------------------
Balance - December 31, 2000 78,727,284 0.04
Granted 5,500,000 0.16
Exercised (8,200,000) 0.03
Expired (1,500,000) 0.06
-----------
Balance - December 31, 2001 74,527,284 0.05
Granted 28,500,000 0.05
Exercised (1,633,333) 0.04
Expired (15,500,000) 0.03
-----------
Balance - December 31, 2002 85,893,951 0.06
===========
- F15 -
The following table summarizes information for warrants currently outstanding
and exercisable at December 31, 2002:
Warrants Outstanding
------------------------------------------------------------------
Range of Weighted Average Weighted Average
Prices Number Remaining Life Exercise Price
----------- ------------------------------------------------------------------
$ 0.01 -.0.03 8,916,667 1 year 0.02
0.03 -.0.04 19,500,000 3 years 0.03
0.05 - 0.09 48,977,284 2 years 0.05
0.10 - above 8,500,000 3 years 0.16
-----------
$ 0.01 - 0.09 85,893,951 2 years 0.06
===========
b. 1992 Convertible Debentures - In 1992, the Company initiated a
series of private placement offerings of two and three-year
Subordinated Convertible Debentures with an annual interest rate of
10% and with variable conversion rates (ranging from $.05 to $.10
per share). These offerings raised a total of $117,500. The Company
is in default on interest payments and is in violation of covenants.
Of the original $117,500 raised, $107,500 has been paid back or
converted into stock. As of December 31, 2002, $10,000 of principal
and $10,900 of interest remain unpaid or unconverted on these
debentures.
c. Authorized Shares - During 2000, the Company increased the number of
its authorized shares of capital stock to 390,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock.
9 - Related Party Transactions
a. Loans from Related Parties - During 2001, the Company received loans
from Shareholders in the amount of $100,000. The loans are payable
on demand plus accrued interest at 10% per annum. In connection with
these loans, the shareholders were issued warrants and options to
purchase 500,000 shares at $.05 per share. The portion of the
proceeds allocable to the warrants was accounted for as paid-in
capital. The corresponding discount was written off as these loans
are payable on demand.
During 2002, the Company received loans from Shareholders in the
amount of $80,000. The loans are payable on demand plus accrued
interest at 10% per annum. In connection with these loans, the
shareholders were issued warrants to purchase 2,000,000 shares at
$.02 per share. The portion of the proceeds allocable to the
warrants was accounted for as paid-in capital. The corresponding
discount was written off as these loans are payable on demand.
- F16 -
Officer's and Director's Compensation - During 1996, an investor
group brought in by Herbert M. Reichlin and Burton A. Goldstein
("the two individuals") acquired an 18% ownership interest for
$500,000. The two individuals were awarded seats on the Board of
Directors and officers positions. In addition, the two individuals
each received 9,778,975 warrant shares. 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 warrants to purchase 7,500,000
shares each at an exercise price of $.03 per share. During 2000,
these two individuals each agreed to receive 10,000,000 shares of
stock in lieu of $400,000 in accrued salaries. As of December 31,
2002, the two individuals were owed $593,154 and $563,852
respectively in accrued salaries and expenses. After their
employment contracts expired, the individuals are continuing to be
compensated on the same terms.
b. Director's Loans - As of December 31, 2002, a group of Directors has
made loans to the Company totaling $17,200, payable on demand
without interest.
c. Legal Fees - The Company utilizes the services of a law firm where
Director is a partner. Fees incurred for 2002 and 2001 were $3,777
and $32,193 respectively. At December 31, 2002, $120,113 remains in
accounts payable.
10 - Income Taxes
The Company has available net operating loss carryforwards of
approximately $8,598,000, which expire in 2003 until 2015. Deferred income
taxes reflect the net tax effects of net operating loss carryforwards and
result in deferred tax assets of approximately $2,923,000 and $2,637,000
at December 31, 2002 and 2001, respectively, which were fully offset by
valuation allowances due to uncertainties surrounding the ultimate
realization of these assets.
- F17 -
11 - Lease Commitments
The Company is obligated under a lease for office space through November
2006. Rental expense was $74,018 and $64,483 for 2002 and 2001,
respectively. The remaining future minimum lease payments required under
this lease are as follows:
2003 70,887
2004 73,455
2005 76,125
2006 72,108
As required by FAS 13, the rent expense under this lease is recognized on
a straight line basis and therefore has given rise to a deferred rent
liability of $5,345 as of December 31, 2002.
The Company is subletting a portion of their office from March 2002
through June 2003.For the period of March 2002 through September 2002 the
Company received $3,000 per month or $12,000. For the period October 2002
through June 2003 the Company is receiving $4,500 per month or $40,500.
- F18 -
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
NONE
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position(s) with the Company
---- --- ----------------------------
Burton A. Goldstein 67 Chairman of the Board of Directors
Secretary, Chief Executive Officer
Herbert M. Reichlin 61 President, Treasurer,
Chief Operating Officer, Director
Richard Bruno 57 Director
Alfred Fabricant 49 Director
Thomas Kirch 58 Director
Angelo J. Vassallo 57 Director
Milton J. Walters 58 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified. Each director is entitled to receive
warrants for 500,000 shares at market price each February.
A summary of the business experience of each officer and director of the
Company is as follows:
BURTON A. GOLDSTEIN has been Chairman of the Board of Directors of the
Company since March 10, 1997 and became its Secretary in December 1997. Mr.
Goldstein is a chartered Life Underwriter and active in estate preservation for
business owners and wealthy individuals.
HERBERT M. REICHLIN has been a Director and Treasurer of the Company since
July 30, 1996 and became its President in December 1997. Mr. Reichlin is a
practicing Certified Public Accountant.
15
RICHARD BRUNO has been a Director of the Company since June 1998. Prior to
retirement, Mr. Bruno was employed as Managing Director of NASDAQ trading at
Paine Webber Inc. from 1964 thru June 1998.
THOMAS KIRCH is the managing partner of KV Partners, fixed income
consultants and asset managers. Mr. Kirch is formerly a Managing Director of The
First Boston Corporation, one of the nation's largest investment banking firms,
as well as a First Vice President of Loeb Rhoades, Hornblower, and a Vice
President at Morgan Stanley & Co., Inc.
ALFRED FABRICANT has been a Director since October 7, 1997. Mr. Fabricant
is the founding partner of the New York law firm of Fabricant & Yeskoo LLP and
is currently the Managing Partner of the law firm of Ostrolenk, Faber, Gerb &
Sofken. Mr. Fabricant was educated at the University of Miami (1975) and at the
John Marshall Law School (1978).
ANGELO J. VASSALLO has been a Director since October 22, 1999. Mr.
Vassallo has 30 years of marketing and sales experience at Seagrams, and he is
presently the Vice President for Sales at Pernod-Ricard-USA.
MILTON J. WALTERS has been a Director since December 28, 1999. Mr. Walters
is President of Tri-River Capital Group, a company that serves the specialized
investment banking needs of the financial service industry.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of
the Securities Exchange Act of 1934, and, accordingly, compliance with Section
16(a) thereof is not required or applicable.
16
Item 10. Executive Compensation
The following table sets forth the annual long-term compensation for the
Company's Chief Executive Officer, and the only other executive officer during
the Company's last three fiscal years:
Summary Compensation Table
Annual Long-Term All Other
Compensation Compensation Compensation
Securities
Underlying
Name and Principal Positions Year Salary Warrants (#)
-------------------------------------------------------------------------------------------------------------------
Burton A. Goldstein 2002 $ 150,000 -- $ 11,396
(Chief Executive Officer) 2001 $ 150,000 -- 17,204
2000 $ 150,000 -- 44,546
Herbert M. Reichlin 2002 $ 150,000 -- $ 20,626
(President and Chief 2001 $ 150,000 -- 20,056
Operating Officer) 2000 $ 150,000 -- 52,593
Warrant Grants in Last Fiscal Year
The following table sets forth certain information concerning warrants
granted during 2001 to the named executives:
Individual Grants
Number of % of Total Exercise
Securities Warrants Granted or Base
Underlying to Employees in Price Expiration
Name Warrants Granted Fiscal Year ($/share) Date
-------------------------------------------------------------------------------------------------------------------
Burton A. Goldstein 500,000 2% $.143 2/28/05
500,000 2% $.09 2/28/06
500,000 2% $.03 2/28/07
7,500,000 27% $.03 12/01/05
Herbert M. Reichlin 500,000 2% $.143 2/28/05
500,000 2% $.09 2/28/06
500,000 2% $.03 2/28/07
7,500,000 27% $.03 12/01/05
17
Aggregated Warrant Exercises in Last Fiscal Year and Fiscal Year-End
Warrant Values
The following table summarizes warrants exercised during 2002 and presents
the value of unexercised warrants held by the named executives at fiscal
year-end:
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised
Acquired Warrants at In-the-Money
on Value Fiscal Year- Warrants at
Exercise Realized End (#) All Fiscal Year-
Name (#) ($) Exercisable End ($)
-------------------------------------------------------------------------------------------------------------------
Burton A. Goldstein 0 0 27,438,642 -0-
Herbert M. Reichlin 0 0 27,438,642 -0-
The Company has employment agreements with the above executives as
discussed in Item 12.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth
on the charts below are known to the Company to be the beneficial owners
of more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
Shares of Common Beneficially Owned
-----------------------------------
Name and Address Shares Acquirable
Of Beneficial Owner Shares Owned Within 60 Days (1) Percent Owned
------------------- ------------ ------------------ -------------
Burton A. Goldstein 15,383,333 27,438,642 16.4%
6900 Jericho Turnpike
Syosset, New York 11791
Herbert M. Reichlin 15,383,333 27,438,642 16.4%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Bruno 1,250,000 2,750,000 1.7%
6900 Jericho Turnpike
Syosset, New York 11791
18
Alfred Fabricant 4,981,434 2,750,000 3.3%
6900 Jericho Turnpike
Syosset, New York 11791
Thomas Kirch 500,000 1,750,000 1.0%
6900 Jericho Turnpike
Syosset, New York 11791
Angelo J. Vassallo 1,000,000 1,750,000 1.2%
6900 Jericho Turnpike
Syosset, New York 11791
Milton J. Walters 1,750,000 4,250,000 2.5%
------------ ------------
6900 Jericho Turnpike
Syosset, New York 11791 40,248,100 68,127,284
------------ ------------
All Directors and Officers and Beneficial Owners 108,375,384 36.0%
of more than 5% of the Company's Common Stock
Under the rules of the Securities and Exchange Commission (the "SEC"), a person
is deemed to have "beneficial ownership" of any Common Stock over which that
person has or shares voting or investment power, plus any Common Stock that
person may acquire within 60 days, including through the exercise of a stock
option or the conversion of a convertible security.
Item 12. Certain Relationships and Related Transactions
a. Loans from Shareholders - The Company received loans from
Shareholders in the amount of $80,000 during the year ended December
31, 2002. The loans are payable on demand plus accrued interest at
10% per annum. In connection with these loans, the shareholders were
issued warrants and options to purchase 2,000,000 shares at $.02 per
share. The portion of the proceeds allocable to the warrants was
accounted for as paid-in capital. The corresponding discount was
written off as these loans are payable on demand.
b. Officer's and Director's Compensation - During 1996, an investor
group brought in by Herbert M. Reichlin and Burton A. Goldstein
("the two individuals") acquired an 18% ownership interest for
$500,000. The two individuals were awarded seats on the Board of
Directors and officers positions. In addition, the two individuals
each received 9,778,975 warrant shares. 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 warrants to purchase 7,500,000
shares each at an exercise price of $.03 per share. As of December
31, 1998, the investor group owned 28,064,340 shares and the two
individuals had warrants to purchase 31,877,284 shares. During 2000,
these two individuals each agreed to receive 10,000,000 shares of
stock in lieu of $400,000 in accrued salaries. As of December 31,
2002, the two individuals were owed $593,154 and $563,852
respectively in accrued salaries and expenses.
c. A group of Directors loaned the Company $5,000, $6,800 and $5,400 in
2002, 2001 and 2000 respectively, payable on demand without
interest.
19
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Articles of Incorporation (4)
3.2 By-laws (4)
10.01 Agreement dated August 21, 1995 with J&R Intercontinental (3)
10.02 Consulting Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (2)
10.03 Consulting Agreement dated July 9, 1996 between the Company and
American Employer Service Corporation (2)
10.04 Warrant Agreement dated July 9, 1996 between the Company and Herbert
M. Reichlin (2)
10.05 Warrant Agreement dated July 9, 1996 between the Company and Burton
A. Goldstein (2)
10.06 Warrant Agreement dated July 9, 1996 between the Company and Milton
J. Walters (2)
10.07 Securities Purchase Agreement dated July 9, 1996 (2)
10.08 Agreement dated April 30, 1997 with Kingdom Blinds Manufacturing,
Inc. (1)
10.09 Employment Agreement dated December 1, 1997 between the Company and
Burton A. Goldstein. (1)
10.10 Employment Agreement dated December 1, 1997 between the Company and
Herbert M. Reichlin. (1)
10.11 Consulting Agreement dated December 9, 1997 between the Company and
Bernard Gutman. (1)
10.12 License Agreement dated October 31, 1999 between the Company and
Charles E. Wheatley, Geoff Coy and James A. Mitchell (5)
10.13 Comprehensive Consulting and Representation Agreement dated June 6,
2000 between the Company and Opsales Inc., its President, Sidney
Friedman, and its Vice President, Dean Friedman.
10.14 Agreement dated November 2, 2000 between the Company and Sol H.
Wynn.
10.15 Domain Investments Inc. Equity Financing Agreement dated November 2,
2000
10.16 Alex W. Hart Consulting Agreement dated March 1, 2001
21 Subsidiaries of Registrant
(1) Incorporated by reference to Exhibits to Form 10-KSB for
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to Form 10-KSB for
fiscal year ended December 31, 1996.
(3) Incorporated by reference to Exhibits to Form 10-KSB for
fiscal year ended December 31, 1995.
(4) Incorporated by reference to Exhibits to Form 10-KSB for
fiscal year ended December 31, 1989.
(5) Incorporated by reference to Exhibits to Form 10-KSB for
fiscal year ended December 31, 1999.
(B) Reports on Form 8-K
(6) No reports on Form 8-K were filed during the last quarter of
1998.
20
Item 14. Control and Procedures
a. Evaluation of Disclosure Controls and Procedures - Within the 90
days prior to the date of this report, Quest Products Corporation
("the Company") carried out an evaluation, under the supervision and
with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Operating Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, Company's Chief Executive
Officer and Chief Operating Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting
the Company to material information required to be included in the
Company's periodic SEC filings relating to the Company (including
its consolidated subsidiaries).
b. Changes in Internal Controls - There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these internal controls subsequent to the date
of our most recent evaluation.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUEST PRODUCTS CORPORATION
Dated: April 11, 2003 By: /s/: Herbert M. Reichlin
-----------------------
Herbert M. Reichlin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES AND TITLE DATE
-------------------- ----
/s/ Burton A. Goldstein April 11, 2003
---------------------------------------
Burton A. Goldstein
Chairman of the Board of Directors
Secretary, Chief Executive Officer
/s/ Herbert M. Reichlin April 11, 2003
---------------------------------------
Herbert M. Reichlin
President, Treasurer, Chief
Operating Officer, Director
/s/ Richard A. Bruno April 11, 2003
---------------------------------------
Richard A. Bruno
Director
/s/ Alfred Fabricant April 11, 2003
---------------------------------------
Alfred Fabricant
Director
/s/ Thomas E. Kirch April 11, 2003
---------------------------------------
Thomas E. Kirch
Director
/s/ Angelo J. Vassallo April 11, 2003
---------------------------------------
Angelo J. Vassallo
Director
/s/ Milton J. Walters April 11, 2003
---------------------------------------
Milton J. Walters
Director
22
SUPPLEMENTAL INFORMATION
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to
Section 12 of the Act.
NONE
23