-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PV/AUniFDSd4iKKinPJaIcG3g72rv2mKmFuvhXGZ6ujgJxenrgt17aP85retxEwC 57hRXBvy9ZL45LBq4vIEzw== 0001028596-99-000006.txt : 19990402 0001028596-99-000006.hdr.sgml : 19990402 ACCESSION NUMBER: 0001028596-99-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUANTUM GROUP INC /NV/ CENTRAL INDEX KEY: 0000921450 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 954255962 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23812 FILM NUMBER: 99582235 BUSINESS ADDRESS: STREET 1: PARK IRVINE CTR BLDG B STREET 2: 14771 MYFORD RD CITY: TUSTIN STATE: CA ZIP: 90744 BUSINESS PHONE: 7142525462 MAIL ADDRESS: STREET 1: PARK IRVINE BUSINESS CENTER STREET 2: 14771 MYFORD RD CITY: TUSTIN STATE: CA ZIP: 92780 10KSB 1 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, 1998 --------------------- [ ] 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: $ 2,952,900. The aggregate market value of the issuer's voting stock held as of March 26, 1999, by non-affiliates of the issuer was $17,851,652. As of December 31, 1998, issuer had 8,400,075 shares of its $.001 par value common stock outstanding. Transitional Small Busines Disclosure Format. Yes [ ] No [X] Documents incorporated by reference: none Page 1 of 33 consecutively numbered pages 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. . . . . . . . . . . . . . . . . . . . 16 ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 16 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . 16 PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . 17 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . 18 ITEM 7 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 24 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . 24 PART III ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 27 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . 29 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 30 PART IV ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 31 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2 _________________________________________________________________________ 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 limited the foregoing, words such as "may," "will," "expect," "believe," anticipate," "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, 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 successfully to 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 investigating innovative products and technologies in the environmental and recycling industries which it further develops and designs for rubber recycling and after market products plants. The principal offices of the Company are located at the Park Irvine Business Center, 14771 Myford Road, Building B, Tustin, California. The Company was organized as a corporation in 1968, under the laws of the state of California. In 1988 the Company changed its domicile from California to the State of Nevada and has operated as a Nevada corporation since that time. Since the beginning of 1993, the primary sales activities of the Company have been conducted through its subsidiary, Eurectec, Inc., a Nevada corporation, ("Eurectec") which is engaged in the world-wide marketing of automobile and truck tire recycling equipment, supplied by third parties, which produces recycled rubber which is commonly known in the recycling industry as "crumb rubber." Eurectec also markets presses and other equipment, also supplied by third parties, which utilize crumb rubber to make various after-market products. Areas of growth in the Company are in the technology transfer, EGS tire recycling systems, ECO press technology and equipment marketing of asphalt paving technology, the devulcanization of crumb rubber for use in processes requiring vulcanization such as new tire production, and the production of fine mesh, (to -60 mesh ASTM), crumb rubber from buffings and larger mesh crumb rubber. 3 In 1998, the Company began to focus its energies on the design and development of rubber recycling systems and subsystems which encompass initial rubber tire recycling and after market crumb rubber products rather than rely solely upon third paty equipment sales. This aspect of the Company's business is being conducted through its subsidiary, Eurectec Industries, Inc. Eurectec Industries provides feasibility studies, engineering, equipment, installation and training for its clients with rubber recycling systems. The Company is marketing its systems individually and through joint venture arrangements. The Company has developed a Website which can be viewed at http://www.thequantumgroupinc.com. The Website allows the viewer to access an overview of the Company's activities, obtain market information for the Company's trading stock, view the Company's EDGAR filings and provides a link to the Eurectec, Inc. website (http://www.eurectec.com). The Company is in the process of updating its website and will offer e-commerce capabilities in the second half of 1999, allowing customers to purchase products directly from the Company from an additional website, Eurectec-products.com. An additional Website can be viewed at www.tirerecycling.com, which will become a main portal for the Company. This Website, which should be operational during the second quarter of 1999, is multi-lingual in order to enhance global communication and awareness of the Company and its subsidiaries. It has links to The Quantum Group, Inc. site and allows the viewer to access an overview of the Company's activities, obtain market information for the Company's stock, view the Company's EDGAR filings, retrieve information on the Company's joint venture projects and link to the Company's subsidiaries websites. Business Operations The Company's goal is to design and market the most efficient and cost-effective rubber recycling systems, producing high-quality crumb rubber. In keeping with this goal, the Company designs environmentally friendly, efficient and profitable turnkey recycling plants that satisfy the requirements of developers, engineers and governments for a process to turn the huge, toxic and unsightly piles of scrap tires into attractive, high-quality consumer and industrial products. In alliance with FDC Engineering of Switzerland, the Company is able to provide complete engineering design for its recycling systems and subsystems. Joint venture arrangements are one vehicle the Company employs to market and showcase its turnkey recycling plants. It is anticipated that by participating as an equity partner in recycling joint ventures, the Company will develop cash flow through operations conducted by such recycling facilities. The Company also performs direct marketing of its equipment and technologies. In addition to recycling systems and subsystems, the Company is developing markets for its crumb rubber value added after market products. The Company intends to establish a manufacturing facility in California and produce sports mats for gyms and ball courts, door mats, anti-fatigue mats, cattle mats, heated pet mats and safety flooring products such as playground tiles for the U.S. and export markets. 4 Company Subsidiaries Eurectec, Inc. To date, the majority of the Company's business has been transacted through Eurectec, Inc. Eurectec, Inc. was formed by the Company, under the laws of the State of Nevada in 1991. The Company negotiated its licensing agreements with CISAP and SMS through Eurectec, Inc. and the Company uses Eurectec, Inc. to market and sell the tire recycling equipment of third parties. Eurectec, Inc. also markets and sells sub-licenses for the Company. The Company expects to enter into various other businesses most of which will be related either directly or indirectly to the environmental technologies business. Pursuant to that expectation, the Company has formed various subsidiaries of Eurectec, Inc. which will be used to transact the Company's business dealings in these areas. Eurectec Industries, Inc., is a wholly owned subsidiary of The Quantum Group, Inc. and was established pursuant to the laws of the Province of Alberta on February 15, 1996. The Company formed Eurectec Industries, Inc. to transact the business of designing, development and marketing of its rubber recycling systems. Eurectec International, Ltd., is a wholly owned subsidiary of Eurectec Inc. Eurectec International was established pursuant to the laws of the Province of British Columbia and was incorporated in May 1991. The Company formed Eurectec International to transact the international affairs of the Company in individual recycling projects. The organization costs of establishing Eurectec International were funded by Mr. Liebich. Eurectec International is currently not engaged in any business transactions. Eurectec Marketing, Inc., is a wholly owned subsidiary of Eurectec, Inc. and was formed to market recycled rubber products, both from Company plants and from other participating manufacturers. Eurectec Marketing, Inc. is not currently engaged in any business transactions. Pacific Rubber Recycling Ltd., ("Pacific Rubber") is a wholly owned subsidiary of Eurectec International. Pacific Rubber was organized pursuant to the laws of the Province of British Columbia and was incorporated in May 1995. When cash flow improves, the Company intends to open its own tire recycling facility operated through this company. The Company currently is not pursuing the establishment of a recycling facility. Pacific Rubber is unfunded and has not transacted any business activities. Quantum Environmental Solutions & Technology, Inc., ("QEST"). QEST is a wholly owned subsidiary of the Company. Incorporated on April 21, 1997, and is inactive at this time. 5 Quantum Modified Asphalt Xcetera, ("QMAX"). The Company has established this division to market specialized mobile equipment concerned with the mixing of crumb rubber and asphalt. Presently dormant, this division will soon be incorporated and will be responsible for crumb rubber technology transfer programs. Eurectec Granulating System (EGS) Eurectec Industries, Inc., working with outside engineering firms, has designed plans for a complete tire recycling, granulating and after-market production system which integrates individual pieces of tire recycling equipment made by other manufacturers. 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. The process will begin by sending truck tires through a de-beader, slitter and shredder and automobile tires directly to a shredder. In the next step, the shredded material is then fed to a grizzly which extracts approximately 90% of the steel from the shredded tires and further reduces the size of the material to minus one inch. Then the material will be processed through a magnetic separator which removes the steel shred and a pneumatic aspiration system which removes the nylon fibers. The product is then processed through a granulator which further reduces the shred to approximately 5 mesh and removes any remaining steel and fabric. Finally, the crumb rubber is processed through a granulator which reduces the product to particle sizes down to a ranges of sizes 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 crumb rubber is then further processed using the Company's press product manufacturing technology into road paving materials, tiles, roofing products, irrigation hoses, trailer liners, door and floor mats, 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 just a few of the more than 200 end products manufactured utilizing crumb rubber. The EGS System will not require Eurectec Industries to engage in any equipment manufacturing. Most of the items of equipment utilized in the system e.g., de-beaders, slitters, grizzlies, grinders and granulators are currently manufactured by other companies. Third party contractors will manufacture all of the equipment and parts required to integrate the individual pieces of equipment into unified recycling system. It is estimated by the design engineers that the complete EGS System will have an estimated input capacity of sixteen thousand tons per annum on two shifts. The Company is currently offering EGS granulating systems and specifically, an EGS system is being incorporated in the Poseidon joint venture project in Penkun, in the state of Mecklenberg-Vorpommern, Germany. 6 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, as a result. These markets include extrusion products, press products and products combining super-fine crumb and plastic. The Company is currently finalizing the engineering for the SuperCollider and concluded the development, prototype work and performance testing during 1998. Initially the Company will contract manufacture of the equipment and will be supplying the first of these machines under the brand name Impact 500, to clients in the second quarter of 1999. The Company will explore viability of making patent applications for the new compact Impact 500 SuperCollider. 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 (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 systems, under the brand name Revulc 300, during 1999 for projects in Germany. 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 by adding REVULCON (R) compound in the manufacture of 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 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 vibration deadening, blocking and insulating layers against heat and moisture, etc., in mixtures with fresh rubber or plastic, profiles and other goods can be made by extrusion or injection molding. The REVULCON (R) prototype equipment has been manufactured and is currently being tested. The Company is further developing the system to allow for feed input and output with the first three Revulc 300 systems to be installed at the Chemnitz project. Rothbury Agreement Eurectec Industries, Inc., entered 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 rubber granulates, resins and other additives heat conductive characteristics for use in products such as heatable floor coverings and underlayments. 7 In heatable tile products production, Eurectec Industries will utilize heating filaments currently manufactured by others. The heating filament operates on AC or DC electricity and is imbedded in a variety of interior and exterior tile designs, underlayments and mats. The heating tile and underlayment products can be operated more cost effectively than interior forced air and radiant heating systems. In exterior applications, the heated rubber tiles provide superior heat conducting properties to other available technology such as heating coils in concrete. The heated fatigue mats and pet mats also provide Eurectec Industries with new products and new markets for crumb rubber. Eurectec Industries, Inc., has filed for patent protection on the technology subject to the license agreement. Eurectec Industries expects to develop procedures and techniques utilizing the Rothbury technology with various press equipment to produce commercially viable heatable rubber floor tiles utilizing crumb rubber, pending the filing of any patent applications by Eurectec Industries. CISAP Agreement In 1993, Eurectec, Inc. acquired rights to license and market CISAP tire recycling equipment. The license agreement provides that CISAP will manufacture, ship and install the CISAP equipment sold by Eurectec, Inc. as well as provide training in equipment operation and maintenance to the purchaser of any CISAP equipment. The Company sold CISAP granulator systems in Canada, China, Saudi Arabia, and Mexico. The Saudi Arabia and Mexico clients have experienced problems with the CISAP equipment which the Company and CISAP are attempting to resolve. Because of the difficulties with the CISAP equipment Eurectec, Inc. will look to other manufacturers as suppliers of compact granulating equipment systems. SMS Agreement In May of 1996, Eurectec, Inc. entered an agreement with SMS Sondermaschinen GmbH, a German corporation, ("SMS") which provided Eurectec, Inc. the right to sell and market SMS press equipment and machinery. Eurectec, Inc. sold SMS equipment to its client in Saudi Arabia who has experienced problems with the SMS equipment. Eurectec, Inc. is attempting to resolve the difficulties and has other manufacturers in place for its press equipment needs. Research and Development In 1998, the Company spent approximately $76,746 for research and development on its Impact 500 technology. A prototype unit was completed during the fourth quarter of 1998 which is valued at $63,203. Tire Recycling Industry and Competition In the United States alone there are over 275,000,000 tires discarded each year. There are currently between two and three billion tires 8 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 was to require the tires to be shred into small pieces in order to reduce the size of the tire dumps, the potential for fires, and the health hazards from the dumps which existed because of mosquitoes and rodents which inhabit tire dumps. The European Union has issued a directive banning landfilling of all tires, whether whole or shredded, by the year 2007. Some market developed for shredded tires as fuel in cement kilns and electric power plants, however, most states have prohibited or strictly limited tire burning because of its adverse environmental impact. In addition, it has been recognized that tire burning is an inadequate use of the valuable rubber resource contained in the tires. In the effort to reclaim valuable resources from tires, attempts have been made to recover oil from tires through a process call pyrolysis in which the tires are heated to very high temperatures and petroleum is extracted. To date pyrolysis systems have not reached commercial viability because of the substantial capital investment required to construct such systems, the high operating cost and low efficiency of such systems when compared to the price of crude oil. One of the challenges facing the tire recycling industry has been the lack of reasonably priced equipment for the production of crumb rubber, given the production capacity of such equipment and the prevailing market prices of crumb rubber. Prices of crumb rubber vary according to the mesh (size) of the rubber. Rubber with a mesh of minus 10 to 25 sells for $.17 - - .20 per pound and is the common size used in asphalt paving. The after- market products manufactured from the SMS press equipment use rubber of approximately minus 30 mesh and sells for approximately $.20 - .22 per pound. Very finely ground crumb rubber which is suitable for treatment with devulcanizing chemical process is usually minus 80-100 mesh and sells for $.40 - .45 per pound. A second obstacle to investing in available recycling equipment has been the limited or uncertain demand for crumb rubber by manufacturers of rubber products. Without an established market for crumb rubber and reasonably predictable prices for crumb rubber there is no way to assure a recycler that he could recover his capital investment or make a profit on a recycling operation. In turn manufacturers have been reluctant to specify the use of crumb rubber in products because of the lack of a broad and consistent supply of high quality crumb rubber at predictable prices. In an effort to induce recycling of tires, many states have enacted laws which charge purchasers a recycling fee on all new tire sales. The fees are deposited to state operated funds which are used for grants to fund tire recycling technology research projects and to compensate tire recyclers for recycling tires. In addition, the federal and state governments have created markets for recycled rubber by enacting statutes which require that new road construction include a certain percentage of recycled rubber in the roads. A typical street one mile long and 30 feet wide using a 1.5 inch topping will use approximately 39,000 pounds of crumb rubber. An interstate highway one mile long and 72 feet wide using a 3 inch topping will require 186,000 pounds of crumb rubber in the topping mix. 9 The Chicago Board of Trade (CBOT) Recyclables Exchange operates an internet based listing of recyclable materials including crumb rubber. Access to the CBOT Recyclables Exchange is found on the Internet at: http://cbot-recycle.com. The Recyclables Exchange allows participants to use the on-line exchange to post listings to sell or enter materials wanted for purchase. Whenever there is a match of a sell listing with a buyer's parameters, the system will automatically e-mail a response to the buyer who can then communicate with the seller to transact business. The CBOT system allows for detailed product descriptions of material quality and other data important to buyers and sellers. The Exchange users can select predetermined commercial specifications or set customized product specifications. The Recyclables Exchange will contribute significantly to the recognition and growth of an established crumb rubber market. The Company, acting on behalf of clients which have purchased equipment, has posted offers on the Recyclables Exchange. The Recyclables Exchange is currently operated as a cash market matching buyers and sellers. It is the intent of the CBOT to monitor this cash market to determine the viability of creating a futures contract in recyclable products like crumb rubber. If a futures contract does develop for crumb rubber it will further enhance the industry by allowing crumb rubber manufacturers and crumb rubber consumers to begin hedging transactions which will give price and supply stability to the market. This in turn will contribute to wider use and acceptance of crumb rubber in a variety of applications and industries. All of these developments over the past few years have contributed to a growing interest in the tire recycling industry. Although the tire recycling industry is highly competitive, no single competitor holds a dominant market position. Some of 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. However, few companies offer complete recycling systems which include all equipment required to process whole tires to crumb rubber. Those competitors which offer complete systems, sell systems which are based on one of two design types. The older systems use efficient shredding equipment but rely on hammermill technology for rubber granulation. These systems tend to be very large, noisy and inefficient, in large part because the hammermill technology was designed for other industrial applications and has been adapted for use in tire recycling. The second type of system offered by competitors is a cryogenic (freezing) process which freezes the tires to very cold temperatures using liquid nitrogen, at which point the brittle rubber can be broken free of the steel and fabric content of the tire. Cryogenic systems are expensive, costing from 4 to 20 million dollars. To date, the Company is not aware of any facilities using a cryogenic system that is not subsidized by government grants or private grants from producers of liquid nitrogen. Although this process uses much more sophisticated technology, the process tends to be cumbersome and expensive to operate. If the equipment is shut down for maintenance or repairs the entire system must be taken off line for a period of days. The second disadvantage of such systems is that the crumb rubber made by the cryogenic process has reduced elasticity, which limits the usefulness of the crumb rubber for after market products. 10 The advantages of the Company's EGS system over systems offered by competitors are (i) lower initial cost of a system; (ii) higher operating efficiencies and lower operating expense; (iii) lower maintenance down time; and (iv) recycling at ambient temperatures resulting in high quality crumb rubber output. Marketing and Sales The Company, through Eurectec, Inc. has had most success marketing and selling outside of the United States where there are attractive incentives offered to investors by way of government grants, low interest loans and tax advantaged investment programs. The Company has encountered challenges in making sales of its tire recycling systems in the United States. These obstacles arise from the substantial capital expenditure required to commence a recycling facility and the ability of interested parties to secure adequate supplies of tires for recycling. The owners of large tire dumps have been reluctant to make the substantial capital investment necessary to realize additional value from the discarded tires. Tire dump operations have been profitable simply from the tipping charges received at the time tires are delivered to such tire dumps. However, tire dumps are now being recognized as nuisances and public safety hazards. The emerging trend is, as the viability and profitability of tire recycling continues to develop, to require storage operators to do more than store tires in large dumps. As the tire recycling industry matures, owners of tire dumps will be prohibited from operating mere dumps and will be required to begin recycling activities. In addition, efficient and profitable recycling facilities will open the way for other persons interested in tire recycling to negotiate contracts for the acquisition of discarded tires necessary to supply feed stock to such recycling facilities. An additional challenge to the Company in marketing the recycling systems is that there is a long sales cycle. Typically, it takes six to eighteen 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 majority of the Company's marketing efforts are through trade shows, technical and trade journal advertising and articles, independent sales representatives, joint venture projects and the Company's website. The Company continues to rely principally on the efforts of its officers and directors to generate sales. The Company's principal method of marketing is done through direct sales by officers of the Company and approximately 12 independent commissioned sales representatives worldwide through participation at trade shows and active membership in trade organizations. 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. 11 The Company's management attended and made a presentation at the first International Symposium on Asphalt-Rubber held in Phoenix Arizona where the Company announced it will be initiating the formation of a European Rubber Pavements Association to be allied with the Rubber Pavements Association in the United States. The Company's management also plans to attend the ETRA European Tire Recycling Congress and Annual General Meeting to be held in Brussels, March 17 - 19, 1999. Also planned for the third quarter 1999, the Company will jointly host with the state government of Mecklenburg-Vorpommern, Germany, the first European International Symposium on Crumb Rubber in Asphalt Paving. The Symposium will coincide with the opening of the Poseidon plant and serve as a showcase for prospective customers. Although the environmental problem of waste tires has existed for decades, the tire recycling industry is still in its early stages of development worldwide. No single response to the problem of waste tires has become generally accepted. However, the momentum in the industry favors tire recycling which reclaims the rubber resource. No single technology has achieved market dominance. Under such market conditions, potential investors are slow to make investment decisions. Manufacturers of recycling equipment do not carry large inventories of equipment. The Company has limited capital and limited full time personnel engaged in marketing and sales activities. These are the major reasons that the Company has not established a consistent volume of sales. At the same time the Company is aware that these challenges also form significant barriers to entry by competitors which will face many of the same challenges. Joint Venture Projects 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 joint venture agreement, Poseidon Products GmbH. was established and 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 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 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, interlocking tiles and heated tiles as well as other products. 12 The Poseidon joint venture funding is expected to be completed by the end of the first quarter, 1999. Funding consists of 50% of the total project costs (approximately $5,900,000) 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. Eurectec Industries, Inc., 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 the second quarter of 1999. 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 presently scheduled to begin during the second quarter of 1999. 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, 1999. Poseidon has opened offices in Penkun and has commenced a German wide marketing study and plan to introduce and sell its manufactured products in Germany and Europe. The Company anticipates the Poseidon project to be a showcase for future tire recycling plant sales. The plant equipment and technology is the culmination of research and development by the Company. A Poseidon web site has been established and may be viewed at 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. Proposed Joint Venture Projects California Prison Manufacturing Project. The Company is currently negotiating with the California State Prisons - Department of Corrections, Sacramento, California to investigate the feasibility of establishing a joint venture between the Company and the Department of Corrections Manufacturing Department to manufacture crumb rubber derived products utilizing inmate and prison facilities. The first phase of this project will incorporate Company designed press equipment and the second phase will incorporate both shredding and granulating processes as well as the REVULCON (R) technology. The Company anticipates producing a wide variety of products including heated mats using the Company's Rothbury technology. A result of this joint venture would be to provide the Company with a manufacturing platform for products and serve as a showcase for marketing efforts. Negotiations are expected to be concluded during the second quarter of 1999 following a series of meetings at a number of potential facilities. Scotland. The Company has established a new subsidiary, Caladonian Envirotech Rubber Recycling Limited, a Scottish limited liability company, ("Caladonian"). Caladonian was established in anticipation of entering a joint venture agreement with local Scottish investors to build a tire recycling plant modeled after the Poseidon project. The Company is embarking on a market study to determine the feasibility of the project, which is expected to be complete the end of first quarter 1999. 13 Ireland. The Company has established a new subsidiary, Hibernian Envirotech Rubber Recycling Limited, an Irish limited liability company, ("Hibernian"). Hibernian was established in anticipation of entering a joint venture agreement with local Irish investors to build a tire recycling plant modeled after the Poseidon project. The Company is embarking on a market study to determine the feasibility of the project, which is expected to be complete during the second quarter of 1999. Portugal. The Company is continuing negotiations with investors in Portugal to enter a joint venture agreement to build a tire recycling facility. The Company's president has been in Lisbon, Portugal meeting with a potential joint venture partner. It is anticipated the joint venture partner will undertake a feasibility study with assistance from the Company. Spain. The Company is negotiating with investors in Spain to enter a joint venture agreement to build a tire recycling facility in Barcelona. It is anticipated the joint venture partner will undertake a feasibility study with assistance from the Company. France. The Company is currently negotiating with interested parties so the Company can initiate a feasibility study for a joint venture to build a tire recycling facility in France. Also, the Company is actively promoting its after market products and user applications within France to develop key relationships. Brazil. The Company's vice-president has met with potential joint venture partners in Brazil. As a result of negotiations, the Company has signed a memorandum of understanding to the potential joint venture partner whereby the Company will undertake a feasibility study to determine the viability of developing a tire recycling facility in Belo Horizonte, Brazil. South Africa. Through the Company's contacts in Scotland, the Company has been introduced to potential joint venture partners in South Africa and Zimbabwe. The Company's president met in South Africa and Zimbabwe in December 1998, with the potential joint venture partners to explore the possibility of developing a tire recycling plant. The Company continues negotiations with various potential clients in the United States, Europe, the Arabian Gulf, South America, Puerto Rico, Great Britain and Asia. Current Contracts Atzendorf, Germany. The Company has a two phase order for press equipment including flocking equipment, granulators and grizzlies for the manufacture of continuous roll material and after market flooring products. The Company anticipates equipment delivery during the second half of 1999. 14 Chemnitz, Germany. The Company has an order for a mini tire recycling plant including three Revulc 300 systems and press equipment. The Company anticipates equipment delivery during the second half of 1999. Mexico Agreement. The CISAP equipment sale to Mexico was entered in 1994. The client has experienced problems in the commissioning of the C9000 machines supplied by CISAP mainly relating to the high fiber content tires in Mexico and the high altitude of the project site near Mexico City. The Company has sent an engineering team to the site to correct the problems and anticipated the equipment to be fully operational by the end of April 1998. However, the engineering team uncovered additional problems with the CISAP equipment which have required re-engineering of the CISAP equipment on-site and re-engineering of the plant itself. CISAP has shipped additional equipment to the Mexico site and has sent engineers to Mexico to resolve the problems. In an effort to mitigate the problems encountered by the Mexico client, the Company is currently purchasing crumb rubber from the client which it is further processing into finer mesh for sale. Saudi Agreement. The agreement for the initial phase of CISAP equipment to be delivered to Saudi Arabia was entered in 1994 with additional equipment purchased by the clients from CISAP in 1995 and 1997. Initial equipment for Phase One of this project has been delivered and partially installed at the site in Dammam. The equipment has not been completely installed by CISAP and the Company has elected to send its own engineer to expedite installation and operation of the equipment. CISAP SpA Relationship . 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 Projecti 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. 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, Eurectec, Inc. has determined that the exclusive right to market CISAP equipment has been diminished. Therefore, Eurectec, Inc. 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 in 1998 from the resultant delays with the second phase of the Mexico project and the third phase of the Saudi project, both of which have been suspended pending resolution of the problems on site. 15 Employees Currently the Company has no direct employees other than its officers and directors. The Company contracts with an employee service agency to provide office staff and secretarial services. The Company relies heavily on the efforts of its President, Ehrenfried Liebich, it also relies upon the services of various consulting agencies including agencies owned and operated by Keith Fryer, a Company Vice President, Secretary and Director and John Pope, the Company Treasurer, a Vice President and Director. Through its employee service agency the Company has two administrative staff, three management staff, one sales person and one technical staff member. Two additional people will be hired during the second quarter of 1999 to fill the positions of financial controller and operations manager. The Company intends to restructure the employee status by terminating the service agency relationship and bring all its employees into the Company as direct hires. _________________________________________________________________________ ITEM 2. DESCRIPTION OF PROPERTY _________________________________________________________________________ In July, 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 $3,371.00 per month for 4,495 square foot facility. The lease has a renewal option for an additional year and will be reviewed in July 1999. 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 _________________________________________________________________________ None. _________________________________________________________________________ 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, 1998. 16 _________________________________________________________________________ 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 December 31, 1998 the Company had 494 shareholders holding 8,400,075 common shares. Of the issued and outstanding common stock, 1,238,069 are free trading, the balance are "restricted securities" shares as that term is defined in Rule 144 promulgated by the Securities and Exchange Commission . The Company has never declared a dividend on its common shares. The published bid and ask quotations for the previous two fiscal years are included in the chart below. These quotations represent prices between dealers and do not include retail markup, markdown or commissions. In addition, these quotations do not represent actual transactions.
BID PRICES ASK PRICES HIGH LOW HIGH LOW 1997 First Quarter ended March 31 .125 .03125 .46875 .40625 Second Quarter ended June 30 .03125 .03125 .46875 .46875 Third Quarter ended Sept. 30 .0625 .0625 ----- ----- Fourth Quarter ended Dec. 31 .50 .062 1.00 1.00 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
The foregoing figures were furnished to the Company by the National Quotation Bureau, 1 Penn Plaza, 15th Floor, New York, New York 10001. 17 _________________________________________________________________________ ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS _________________________________________________________________________ Liquidity and Capital Resources As of December 31, 1998, the Company had on hand cash of $1,781,944 and booked orders of approximately $13,588,491 for equipment. The Company raised $4,647,500 in Regulation S offerings during 1998. The Company currently has no outstanding debt. It is anticipated that revenues from currently booked orders will enable the Company the continue operations throughout 1999. The Company also anticipates initiating a Regulation S offering during the second quarter of 1999 for approximately $2,100,000. Proceeds from the Regulation S offering are anticipated to be used for the California Prison Project and additional working capital. The Company does not currently have any capital commitments for 1999. However, at such time the Company enters a firm agreement for the California Prison Project, it may have a capital commitment for approximately $1,500,000. The Company is emphasizing product and services sales via the Internet and trade show participation. Additionally, the Company is vigorously pursuing joint venture arrangements similar to that of the Poseidon Project. The Company anticipates it will experience modest growth during 1999 through these efforts. Year 2000 Compliance Many financial information and operational systems in use today may not be able to interpret dates after December 31, 1999 because such systems allow only two digits to indicate the year in a date. As a result, such systems are unable to distinguish January 1, 2000 from January 1, 1900, which could have adverse consequences on the operations of an entity and the integrity of information processing. This potential problem is referred to as the "Year 2000" or "Y2K" issue. The Company has reviewed all of its current systems that could be impacted by the Y2K issue and is currently Year 2000 compliant. However, vendors, banks and other suppliers and parties upon whom the Company relies, may not be Year 2000 compliant. The Company is currently in the process of requesting Y2K compliance status from the parties with which it conducts business in order to evaluate any impact to the Company. The Company has not been notified that any of its bendores, banks or other suppliers or paties upon whom it relies are non-compliant with Y2K matters. 18 Results of Operations 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. 19 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. 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 (See Financial Statement footnote #23). Comparison of the year ended December 31, 1998, and the year ended December 31,1997. 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. 20 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. 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. 21 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. Comparison of the year ended December 31, 1997, and the year ended December 31,1996. Revenue for the year ended December 31, 1997 was $3,424,809. This is a $517,130 increase over the revenues of $2,907,679 generated in the year ended December 31, 1996. The increase in 1997 is from an increase in equipment sales of $51,137 and an increase of $465,000 in License Sales. 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, 1997 was $2,261,677, a $366,209 increase over the $1,895,468 for the year ended December 31, 1996. Cost of Sales as a percentage of equipment sales was 77% in 1997 compared to 66% in 1996. This increase resulted from concessions to the buyer in relation to the granting of the territorial license for Mexico. The Company believes that the decline in gross margin experienced in 1997 is not indicative of a trend or ongoing factors and that margins should return to 1996 levels in the upcoming year. Commission expense for the year ended December 31, 1997 of $37,008 is less than the 1996 expense of $195,077 by $158,069. This is due to the Mexico contract having been negotiated by Company personal with out the use of outside sales personal or agents. Depreciation expense increased in 1997 to $47,737 from 22,926 due to the purchase in 1996 of the SMS tile press and the inclusion of a full year of depreciation in 1997. 22 The Company amortizes the license agreement with Rothbury Engineering over the anticipated 10 year economic life of the technology. The year ended December 31, 1997 includes a full years amortization while the year ended December 31, 1996 includes the amortization from the date of acquisition, resulting in an increase in amortization expense of $14,587. Travel expenses decreases in the twelve months ended December 31, 1997 by $11,530 compared to 1996 ( $56,056 vs $ 67,586 ), due primarily to the closer proximity of the 1997 project. Professional Fees increased to $78,596 in the year ended December 31, 1997, compared to $67,586 in the year ended December 31, 1996, do to 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. Office Expenses and Administrative Expenses increase by $15,162 and $8,094, respectively from the year ended December 31, 1996. This is due to the addition of support personal, and the repair, maintenance and cleaning of the company's offices, some of which were included in the rent at the prior facility. Rent and Utilities expense declined in the year ended December 31, 1997 by $17,469 as general office support is not provided in the current facilities. Consulting Fees declined to $232,571 in the twelve months ended December 31, 1997 compared to $265,375 for the year ended December 31, 1996. The Company employed outside consultants for marketing and accounting in 1996 and 1997. Additional consulting expense was incurred in 1996 for the start up of the technical ans sales efforts associated with the SMS press equipment, without a corresponding expense in 1997. Interest Expense increased in 1997 compared to 1996 due to accruing a full years interest on the Machinery and Technology Notes Payable obligations incurred in 1996. In 1997 the Company wrote off the balance of the Receivable from Atlantic Rubber. The Company does not believe that Atlanta Rubber will proceed with its planned project. 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 1996 the Company wrote off a note receivable from a client for $338, 181 and a loan to it's German subsidiary of $38,750. Foreign Currency translation gains of $63,880 in the year ended December 31, 1997 compared to a gain of $6,344 in the twelve months ended December 31, 1996. 23 _________________________________________________________________________ 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, 1998 and December 31, 1997; Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996; Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996; 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, 1998 the name, age, and position of each executive officer and director and the term of office of each director of the Corporation.
Name Age Position Director or Officer Since _________________________________________________________________________ Ehrenfried Liebich 56 President March 1989 Director March 1989 Keith J. Fryer 49 Vice President March 1995 Director March 1995 Secretary July 1997 John F. Pope 56 Vice President January 1991 Treasurer January 1991 Director March 1989 Markus J. Lenger 34 Vice President October 1995 _________________________________________________________________________
25 All officers hold their positions at the will of the Board of Directors. All directors hold their positions for one year or until their successors are elected and qualified. Set forth below is certain biographical information regarding each of the Company's executive officers and directors: Ehrenfried Liebich is the President and a Director of the Company. Mr. Liebich first became involved with the Company in March 1989. Mr. Liebich was born and educated in Germany. After his formal secondary education in Germany he joined the Merchant Marine, which he left as a Ship's Officer with the Court Line, London, U.K. Mr. Liebich immigrated to Canada in 1965 where he started various businesses in the areas of real estate, investment, chemical distribution and electronics. In March of 1989 he became the President, a Director and controlling shareholder of the Company. Keith J. Fryer is a Vice President, 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 also a life member of the Wig & Pen Club, The Strand, London. Mr. Fryer successfully operated Keith Fryer Associates England, a business he formed in 1986, that provided marketing consulting services in various business areas. In 1992, Mr. Fryer established Keith Fryer Associates California, Inc., a marketing consulting firm. Mr. Fryer became a Vice President and Director of the Company in March 1995 and Secretary of the Company in July 1997. John F. 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. 25 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. In 1989, Mr. Pope became a founding member of the Board of Directors of the Quantum Group, Inc., in addition to other activities. 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 the Curriculum Steering Committee, School of Accountancy, University of Southern California, and a number of other professional and civic organizations. Dr. Markus J. Lenger is a Vice President of the Company. Dr. Lenger first became involved with the Company in October 1995. Dr. Lenger received a B.S. in electronic engineering from The University in St. Gallen, Switzerland. He also has a Doctorate degree in high energy physics from the Max Plank Institute in Munich, Germany. Dr. Lenger has been self- employed as a consultant through his company, BioSurf, Inc., a California corporation he founded in 1994. Previously, Dr. Lenger was a Vice President of Research and Development for Green Earth Technologies. He has also been associated with BioVersal and OekoSens. Both companies are in the environmental remediation business. Dr. Lenger has eight years experience in developing bioremediation technologies. His technologies have been used in Europe to successfully decontaminate more than 600,000 tons of highly contaminated soil. Dr. Lenger also spent eight months in Valdez, Alaska during the Exxon Valdez oil spill where he developed systems for waste water processing, soil remediation and biological mixed surfactant systems. There are no family relationships between any of the Company's officers and directors. In addition, none of the officers and directors have been involved in certain legal proceeding which require disclosure in this annual report of the Company. 26 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. All directors and executive officers complied with Section 16(a). _________________________________________________________________________ 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, 1998 the end of the Registrant's last completed fiscal year).
_____________________________________________________________________________________ Summary Compensation Table -------------------------- Long Term Compensation ------------------------- Awards Payouts -------- -------- Other Rest- Name & Annual Compensation Annual ricted All Principal --------------------- Compen- Stock Options Other Position Year Salary Bonus sation Awards /SARs# LTIP Payouts - ------------------- ----- ------ ------ ------- ------ ------- ------ -------- Ehrenfried Liebich 1998 72,806 -0- -0- -0- -0- -0- -0- President/Director 1997 -0- -0- -0- -0- -0- -0- -0- 1996 -0- -0- -0- -0- -0- -0- -0- Keith Fryer(1) 1998 105,000 -0- -0- -0- -0- -0- -0- Vice President/ 1997 68,559 -0- -0- 20,000 333,334 -0- 36,008 Director/Secretary 1996 65,321 -0- -0- -0- -0- -0- 65,415 John F. Pope (2) 1998 30,000 -0- -0- -0- -0- -0- -0- Vice President/ 1997 28,850 -0- -0- -0- -0- -0- -0- Treasurer/Director 1996 45,500 -0- -0- -0- -0- -0- -0- Markus J. Lenger (3) 1998 25,084 -0- -0- -0- -0- -0- -0- Vice President 1997 9,859 -0- -0- -0- -0- -0- -0- 1996 23,944 -0- -0- -0- -0- -0- -0- _____________________________________________________________________________________
27 (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. Included in the salary figure is $20,000 paid for office staff salaries. These services were provided on terms at least as favorable as could have been negotiated with an independent third party. The "other compensation" paid to Keith Fryer was in the form of commissions for license and equipment sales. 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. (3) Markus Lenger provided consulting services to the Company. The salary figure represents amounts paid by the Company to Dr. Lenger for services to the Company as an officer and as a consultant overseeing the Company's website development. 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 $0.0625 per share. The options are exercisable at a rate of 66,666 shares per year for a period of five years commencing immediately upon the date of grant. To date, 66,666 options have been exercised. 28 Option / SAR Grants in Last Fiscal Year Individual Grants
Name Number of % of Total Exercise Expiration Grant Securities Options/SARs or Base Date Date Options/SARs Granted to Price Present Granted Employees ($/share) Value ($) Fiscal Year _____________________________________________________________________________________ Keith Fryer 333,334 100% $.0625 2002 $20,000 _____________________________________________________________________________________
Termination of Employment and Change of Control Arrangement There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in cash compensation set out above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person's employment with the company or its subsidiaries, or any change in control of the Company, or a change in the person's responsibilities following a changing in control of the Company. _________________________________________________________________________ ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT _________________________________________________________________________ The following table sets forth as of December 31, 1998 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 8,400,075 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.
Amount and Name of Nature of Title of Class Beneficial Owner Beneficial Owner Percentag of Class - --------------------- ---------------------- ----------------- ------------------- Common Ehrenfried Liebich 2,887,593 34.37% 14771 Myford Road Building B Tustin, California 90744 29 Common Keith J. Fryer (1) 351,666 4.18% 14771 Myford Road Building B Tustin, California 90744 Common John F. Pope (2) 33,668 0.400% 14771 Myford Road Building B Tustin, California 90744 Common Dr. Markus J. Lenger 0 0% 14771 Myford Road Building B Tustin, California 90744 _____________________________________________________________________________________ Common All Officers, Directors as a Group: (4 persons) 3,272,927 38.96% ______________________________________________________________________________________
(1) These shares are owned by Keith Fryer Associates California, Inc. Mr. Fryer is the owner operator of that business and is deemed to be the beneficial owner of these shares because he holds the sole voting and investment power regarding such shares. (2) 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. _________________________________________________________________________ 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. The note was at an interest rate of 9% per annum and was due and payable on December 28, 1998 unless extended by the Company. The promissory note has been extended by the Company and is now due December 31, 1999. 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. 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 1998. 30 _________________________________________________________________________ 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:
Exhibit Reference SEC Exhibit Number Number Title of Document Location - --------- ----------- ---------------------------- --------------- 3.01 3 Articles of Amendment to the Incorporated Articles of Incorporation by reference* 3.02 3 Articles of Incorporation Incorporated by reference* 3.03 3 Bylaws Incorporated by reference* 10.01 10 Poseidon Products GmbH. Incorporated Agreement by reference** 10.02 10 Atzendorf Agreement Attached 10.03 10 Chemnitz Agreement Attached 23.01 23 Consent of Accountant Attached 27.01 27 Financial Data Schedule Attached
*Incorporated by reference from the Registrant's registration statement on form 10-SB, as amended, filed with the Commission, SEC file no. 0-23812. **Incorporated by reference from the Registrant's Form 10-KSB for the year ended December 31, 1997, filed with the commission, SEC file no. 0-23812 31 _________________________________________________________________________ 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, 1998 The Quantum Group, Inc. a Nevada corporation By: /s/ Ehrenfried Liebich ----------------------------- Ehrenfried Liebich, President DATE NAME AND TITLE SIGNATURE - ---- -------------- --------- March 30, 1998 Ehrenfried Liebich By: /s/ Ehrenfried Liebich President/Director ----------------------------- Ehrenfried Liebich, President March 30, 1998 Keith J. Fryer By: /s/ Keith J. Fryer ---------------------- Vice President/ Director/Secretary Keith J. Fryer March 30, 1998 John F. Pope By: /s/ John F. Pope Vice President, -------------------- Treasurer/Director John F. Pope 32 _________________________________________________________________________ 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, 1998 The Quantum Group, Inc. a Nevada corporation By: ----------------------------- Ehrenfried Liebich, President DATE NAME AND TITLE SIGNATURE March 30, 1998 Ehrenfried Liebich By: President/Director ----------------------------- Ehrenfried Liebich, President March 30, 1998 Keith J. Fryer By: Vice President/ ----------------------------- Director/Secretary Keith J. Fryer March 30, 1998 John F. Pope By: Vice President/ ----------------------------- Treasurer/Director John F. Pope 32 Exhibit Index SEC Exhibit Exhibit Reference Number Number Title of Document Location 10.02 10 Atzendorf Agreement E- 10.03 10 Chemnitz Agreement E- 23.01 23 Consent of Accountant E- 27.01 27 Financial Data Schedule E- 33 THE QUANTUM GROUP, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS DECEMBER 31, 1998 & DECEMBER 31, 1997 F-1 /Letterhead/ Schvaneveldt & Company Certified Public Accountant 275 East South Temple, #300 Salt Lake City, Utah 84111 (801) 521-2392 Phone 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, 1998 and 1997, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1998, 1997, and 1996. 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, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998, 1997, and 1996, in conformity with generally accepted accounting principles. /S/ Schvaneveldt & Company Salt Lake City, Utah March 17, 1999 F-2 The Quantum Group Inc., and Subsidiaries Balance Sheets December 31, 1998 and 1997
December December 31, 1998 31, 1997 ------------ ------------ Assets Current Assets - -------------- Cash $ 1,781,944 $ 142,690 Accounts Receivable 3,065,040 710,979 Inventory 19,425 29,760 Deposit 303,021 421,451 Note & Interest Received - Officer 30,932 -0- Prepaid Expenses 440 -0- ------------ ------------ Total Current Assets 5,200,802 1,304,880 Property & Equipment - -------------------- Furniture & Fixtures -0- 3,054 Equipment 29,963 154,778 Vehicles 41,382 -0- Land 179,309 -0- ------------ ------------ Total Property & Equipment 250,654 157,832 Other Assets - ------------ Securities -0- 73,125 Cash Pledged 5,329 5,225 License Rights 507,367 414,622 Deposit 1,807,789 3,281 Prototype Impact 500 63,203 -0- ------------ ------------ Other Assets 2,383,688 496,253 ------------ ------------ Total Assets $ 7,835,144 $ 1,958,965 ============ ============
The accompanying notes are an integral part of these financial statements F-3 The Quantum Group Inc., and Subsidiaries Balance Sheets -Continued- December 31, 1998 and 1997
December December 31, 1998 31, 1997 ------------ ------------ Liabilities & Stockholders' Equity Current Liabilities - ------------------- Accrued Expenses $ 450,084 $ 552,399 Accounts Payable 725,201 140,016 Due Officers -0- 7,919 Customer Deposits 2,192,962 2,500 Franchise Taxes Payable 103,548 103,548 Current Maturities -0- 721,318 ------------ ------------ Total Current Liabilities 3,471,795 1,527,700 Long Term Liabilities - --------------------- Capital Lease 25,503 -0- Note Payable - Machinery -0- 145,631 Note Payable - Technology -0- 347,547 Note Payable -0- 228,140 Less Current Maturities -0- ( 721,318) ------------ ------------ Total Long Term Liabilities 25,503 -0- Minority Interest in Subsidiary 9,463 109,256 Stockholders' Equity - -------------------- Common Stock 50,000,000 Shares Authorized; Par Value of $0.001 Per Share, 8,400,075 & 4,853,409 Shares Issued Retroactively Restated Respectively 8,400 4,853 Paid In Capital 6,018,287 1,932,968 Accumulated Deficit ( 1,698,304) ( 1,615,812) ------------ ------------ Total Stockholders' Equity 4,328,383 322,009 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,835,144 $ 1,958,965 ============ ============
The accompanying notes are an integral part of these financial statements F-4 The Quantum Group Inc., and Subsidiaries Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996
December December December 31, 1998 31, 1997 31, 1996 ------------ ------------ ------------ Revenues - -------- Equipment Sales $ 2,882,007 $ 2,923,816 $ 2,872,679 License Sales -0- 500,000 35,000 Other Income 70,893 993 -0- ------------ ------------ ------------ Total Revenues 2,952,900 3,424,809 2,907,679 Cost of Sales 1,761,775 2,261,677 1,895,468 ------------ ------------ ------------ Gross Profit 1,191,125 1,163,132 1,012,211 Expenses - -------- Commission -0- 37,008 195,077 Depreciation 47,691 47,737 22,926 Amortization 57,256 49,756 33,169 Travel 155,442 56,056 67,586 Professional Fees 56,978 78,596 68,147 Office 98,139 36,708 21,546 Rent & Utilities 63,259 65,634 83,103 Administrative Expenses 249,909 95,377 87,283 Consultant Fees 449,508 232,571 265,375 Interest 804 95,656 88,161 Accounts Receivable Written Off 100,000 195,000 376,931 Foreign Currency Translation ( 27,764) ( 63,880) ( 6,344) Research & Development 13,544 -0- -0- ------------ ------------ ------------ Total Expenses 1,264,766 926,219 1,302,960 ------------ ------------ ------------ Net Income (Loss) From Operations ( 73,641) 236,913 ( 290,749)
The accompanying notes are an integral part of these financial statements F-5 The Quantum Group Inc., and Subsidiaries Statements of Operations -Continued- For the Years Ended December 31, 1998, 1997 and 1996
December December December 31, 1998 31, 1997 31, 1996 ------------ ------------ ------------ Other Income (Expenses) - ----------------------- Interest Income $ 13,583 $ -0- $ 122 Gain on Sale of Residence -0- -0- 38,327 Loss on Investment ( 20,000) -0- ( 6,250) Investment Evaluation Loss -0- ( 6,875) -0- ------------ ------------ ------------ Total Other Income (Expense) ( 6,417) ( 6,875) 32,199 ------------ ------------ ------------ Net Income (Loss) Before Extraordinary Items ( 80,058) 230,038 ( 258,550) Extraordinary Items - ------------------- Income Capital Lease -0- -0- 16,741 ------------ ------------ ------------ Net (Loss) After Extraordinary Items ( 80,058) 230,038 ( 241,809) Taxes & Minority Interest Minority Interest ( 2,492) 24,517 12,989 Provisions for Taxes - Current 23,125 103,628 -0- ------------ ------------ ------------ Total Taxes & Minority Interest 20,633 128,145 12,989 ------------ ------------ ------------ Net Income (Loss) ($ 100,691) $ 101,893 ($ 228,820) ============ ============ ============ Net (Loss) Per Share Before Extraordinary Items ($ .01) $ .02 ($ .05) Net (Loss) Per Share After Extraordinary Items ( .01) .02 ( .04) Weighted Average Shares Outstanding 6,846,696 4,728,348 4,728,348
The accompanying notes are an integral part of these financial statements F-6 The Quantum Group, Inc., and Subsidiaries Statements of Stockholders' Equity From January 1, 1997 to December 31, 1998
Common Stock Paid In Accumulated Stock Amount Capital Deficit ----------------------------------------------------- Balance, January 1, 1997 3,153,409 3,153 1,684,668 ( 1,717,705) Shares Issued for Cash 100,000 100 149,900 Shares Issued to Officers For Debt 1,600,000 1,600 98,400 Profit for Year Ended December 31, 1997 101,893 ----------------------------------------------------- Balance, December 31, 1997 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 Loss for Year Ended December 31, 1998 ( 100,691) ----------------------------------------------------- Balance, December 31, 1998 8,400,075 $ 8,400 $6,018,287 ($ 1,716,503) =====================================================
The accompanying notes are an integral part of these financial statements F-7 The Quantum Group, Inc., and Subsidiaries Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash Flows from Operating Activities - ------------------------------------ Net Profit or (Loss) ($ 100,691) $ 101,892 ($ 228,820) Adjustments to Reconcile Net Profit or (Loss) to Net Cash: Write Off Accounts Receivable 100,000 195,000 -0- Write Off Investment -0- -0- 6,250 Write Off Loan Receivable -0- -0- 38,750 Write Off Long Term Receivable -0- -0- 338,181 Amortization & Depreciation 104,947 84,745 56,095 Non Cash Income -0- -0- ( 16,741) Minority Interest 12,210 24,517 ( 12,989) Changes in Operating Assets & Liabilities: (Increase) Decrease in Accounts Receivable (2,354,061) ( 681,457) ( 24,559) (Increase) Decrease in Inventory 10,335 38,991 -0- (Increase) Decrease in Deposit on Inventory 118,430 -0- 424,820 (Increase) Decrease in Prototype Impact 500 ( 63,203) -0- -0- (Increase) Decrease in Notes Receivable - Officer ( 30,932) -0- -0- (Increase) Decrease in Prepaid Insurance ( 440) -0- -0- (Increase) Decrease in Deposits (1,804,508) -0- ( 3,281) Increase (Decrease) in Accrued Expenses ( 102,315) 393,577 ( 68,034) Increase (Decrease) in Accounts Payable 585,185 ( 65,316) ( 271,047) Increase (Decrease) in Tax Payable - Current -0- 103,548 -0- Increase (Decrease) in Customer Deposits 2,190,462 2,500 ( 244,464) Increase (Decrease) in Taxes Payable Deferred -0- 80 -0- (Increase) Decrease in Cash Pledged ( 104) ( 103) ( 5,122) Rounding -0- -0- ( 3) ------------ ------------ ------------ Net Cash (Used) by Operating Activities (1,334,685) 197,974 ( 10,964)
The accompanying notes are an integral part of these financial statements F-8 The Quantum Group, Inc., and Subsidiaries Statements of Cash Flows -Continued- For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash Flows from Investing Activities - ------------------------------------ Purchase of Property - Lot -0- -0- ( 45,000) Addition to Miami Residential Property -0- -0- ( 8,903) Purchase of Land ( 179,309) -0- -0- Refund of Import Duty -0- 718 -0- Purchase of Equipment ( 82,389) ( 25,492) ( 182,295) Purchase of License Rights ( 150,000) -0- ( 497,547) Sale of Residential Property -0- -0- 306,435 Purchase of Furniture 40,000 -0- ( 11,086) Purchase of Securities 73,125 ( 80,000) -0- Sale of Press 216,635 -0- -0- ------------ ------------ ------------ Net Cash Provided (Used) by Investing Activities ( 81,938) ( 104,774) ( 438,396) Cash Flows from Financing Activities - ------------------------------------ Sale of Common Stock 3,759,611 150,000 -0- Payment on Long Term Debt ( 721,318) ( 63,879) ( 169,781) Increase (Decrease) in Notes Payable -0- -0- 505,552 Increase (Decrease) in Amounts Due Officers ( 7,919) ( 43,233) 92,451 Contributed Capital -0- -0- 1,600 Increase Capital Lease 27,655 -0- -0- Payment Capital Lease ( 2,152) -0- -0- ------------ ------------ ------------ Net Cash Provided by Financing Activities 3,055,877 42,888 429,822 ------------ ------------ ------------ Increase (Decrease) in Cash 1,639,254 136,088 ( 19,538) Cash at Beginning of Period 142,690 6,602 26,140 ------------ ------------ ------------ Cash at End of Period $ 1,781,944 $ 142,690 $ 6,602 ============ ============ ============ Disclosures from Operating Activities: Interest $ 804 $ 95,656 $ 88,161 Taxes -0- 103,628 8,675 Significant Non Cash Transactions: 1,600,000 Shares Common Stock Issued to Officer Debt Satisfaction $ -0- $ 100,000 $ -0- 650,000 Shares of Common Stock Issued to Acquire Minority Interest in Subsidiary 109,256 -0- -0-
The accompanying notes are an integral part of these financial statements F-9 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, 1997. 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. F-10 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #2 - Significant Accounting Policies -Continued- - ----------------------------------------------------- J. 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. Adoption of SFAS No. 130 is not expected to have a material impact on the Company's financial statements. 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. Adoption of SFAS No. 131 is not expected to have a material impact on the Company's financial statements. NOTE #3 - Inventory and Deposits - -------------------------------- In 1997, the Company returned inventory purchased from an Italian manufacturer to the manufacturer for a credit of $421,451. During 1998, the credit was applied to purchase equipment sold to customers in Germany. 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. 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. F-11 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #5 - Notes Payable - -----------------------
The Company has the following notes payable obligations. 1998 1997 ------------ ------------ Notes Payable to a Non U.S. Entity, Stated in US Dollars: No Collateral: Due December 31, 1997, Interest at 16.67% Original Note $273,158 - Remeasurement for Foreign Currency Translation at Exchange Rates on December 31 $ -0- $ 228,140 Note Payable on Press Master Machine, Interest at 16.67%, Due December 31, 1997, Original Note $171,029 Remeasurement for Foreign Currency Translation at Exchange Rates on December 31 -0- 145,631 Note Payable on Purchase of Rubber Product Technology Due December 31, 1997, No Interest, Purchased and Payable in U.S. Dollars -0- 347,547 ------------ ------------ Total Notes Payable $ -0- $ 721,318 Less Current Obligation -0- 721,318 ------------ ------------ Net Long Term $ -0- $ -0- ============ ============
The Company borrowed funds from a non US entity. It received in quarterly installments Deutsche Marks of DM 411,381 these were translated to US $273,158 at the quarterly exchange rate. At December 31, 1996, the exchange rate was US $1.54 for DM $1.00. The Company revalued the note at its current US $ equivalent and realized in the statement of operations a translation gain of $6,344. At December 31, 1997, the exchange rate was US $1.54 for DM $1.00. The Company revalued its foreign notes with German lenders and realized $63,880 as a foreign currency translation agreement. These notes were paid in full in 1998. NOTE #6 - Lease Commitments - ---------------------------- On July 15, 1996, the Company leased an office in Tustin, California. The lease requires a security deposit of $3,281, monthly payments of $4,101 and expires on July 14, 1998. 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. F-12 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #7 - Depreciation -Continued- - ---------------------------------- Scheduled below are the assets, costs and accumulated depreciations at December 31, 1998 and December 31, 1997.
December 31, Depreciation Accumulated 1998 1997 Expenses Depreciation Assets Cost Cost 1998 1997 1998 1997 - ------------------------------------------------------------------------------------ Furniture & Fixtures $ 41,668 $37,986 $ 3,054 $ 7,597 $37,986 $34,932 Capital Lease Assets 27,655 -0- 1,375 -0- 1,375 -0- Equipment 216,636 207,068 42,561 40,140 94,852 52,290 Vehicle 42,084 -0- 701 -0- 701 -0- Vehicle 8,994 8,994 -0- -0- 8,994 8,994 Equipment Sold ( 216,636) -0- -0- -0- (94,852) -0- ------------------------------------------------------------ Balance 120,401 254,048 47,691 47,737 49,056 96,216 ============================================================
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 - --------------------------- Eurectec, Inc., (a subsidiary) holds a license granted by CISAP, SpA (an Italian Corporation), which grants exclusive rights and license to technology and plant operations for tire recycling and recovery facilities in North and Central America. The Company's subsidiary Eurectec, Inc., has the right to 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. 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, Eurectec has determined that the exclusive right to market CISAP equipment has been diminished. Therefore, Eurectec will not pursue additional sales of CISAP equipment at performance levels required by the agreement with CISAP to maintain such exclusivity. F-13 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #9 - License Agreement -Continued- - --------------------------------------- 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
Consulting Commissions Fees ------------ ----------- 1998 Keith Fryer $ -0- $ 105,000 John Pope -0- 30,000 Ehrenfried Liebich -0- 72,807 Marcus J. Lenger -0- 25,084 1997 Keith Fryer $ 36,008 $ 68,599 John Pope -0- 28,850 Marcus J. Lenger -0- 9,859 1996 Keith Fryer $ 65,415 $ 65,321 John Pope -0- 45,500 Marcus J. Lenger -0- 23,944 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. An Officer of the Company has loaned the Company $7,919 at December 31, 1997 to fund its operations. The loan is non interest bearing and is due on demand. F-14 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:
Year of Expiration Loss Amount Date -------- ---------- ----------- 1992 $ 440,338 2007 1993 -0- 2008 1994 198,818 2009 1995 782,181 2010 1996 241,809 2011 1997 -0- 2012 1998 80,058 2013
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.
1998 1997 1996 ---------- ---------- ---------- Current Tax Asset Value of Net Operating Loss Carryforwards at Current Prevailing Federal Tax Rate $ 525,092 $ 497,872 $ 576,085 Evaluation Allowance ( 525,092) ( 497,872) ( 576,085) ---------- ---------- ---------- Net Tax Asset $ -0- $ -0- $ -0- ========== ========== ========== Current Income Tax Expense $ -0- $ 103,628 $ -0- Deferred Income Tax Benefit -0- -0- 80
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 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #13 - Accounts Receivable Written Off - ------------------------------------------ In 1996, the Company wrote off sales it made in 1995 to a German buyer of $345,000. After a remeasurement allowance in 1995 of $6,819 the 1996 write off was $338,181. The Company wrote off $38,750 loaned to Eurectec GmbH, and an investment of $6,250. The Company owned 10% of Eurectec GmbH. Eurectec GmbH has no operations and no plans for future operations. In 1997, the Company wrote off an account receivable of $20,000 and created a reserve for bad debt of $175,000 against current accounts receivable resulting from the Mexico contract. In 1998, the Company increased its reserve for bad debts against accounts receivable from the Mexico contract by $100,000. NOTE #14 - Litigation Matters - ----------------------------- The Company has no litigation pending at December 31, 1998. NOTE #15 - 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.
Country 1998 Sales 1997 Sales 1996 Sales - ------------- ------------- ------------- ------------- Mexico $ 460,000 $ 3,202,891 $ -0- Saudi Arabia -0- -0- 2,711,489 Germany 2,422,007 -0- 161,190 Phillippines -0- 79,000 -0- Total $ 2,882,007 $ 3,281,891 $ 2,907,679 ============= ============= =============
Sales by quarter of 1998, 1997 and 1996 are scheduled below. 1998 1997 1996 ------------- ------------- ------------- First Quarter $ 460,000 $ 186,561 $ 1,001,071 Second Quarter -0- 154,889 -0- Third Quarter -0- 2,336,232 1,662,149 Fourth Quarter 2,422,007 747,127 244,459 ------------- ------------- ------------- Totals $ 2,882,007 $ 3,424,809 $ 2,872,679 ============= ============= =============
NOTE #16 - Subsequent Events - ---------------------------- Proposed Joint Venture Projects On January 8, 1999, the Company transferred $1,531,369 from its operating account to the bank account of its joint venture project in Germany. F-16 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #16 - Subsequent Events -Continued- - ---------------------------------------- California Prison Manufacturing Project The Company is currently negotiating with the California State Prisons - Department of Corrections, Sacramento, California to investigate the feasibility of establishing a joint venture between the Company and the Department of Corrections Manufacturing Department to manufacture crumb rubber derived products utilizing inmate and prison facilities. The first phase of this project will incorporate Company designed press equipment and the second phase will incorporate both shredding and granulating processes as well as the REVULCON (R) technology. The Company anticipates producing a wide variety of products including heated mats using the Company's Rothbury technology. A result of this joint venture would be to provide the Company with a manufacturing platform for products and serve as a showcase for marketing efforts. Negotiations are expected to be concluded during the second quarter of 1999 following a series of meetings at a number of potential facilities. Scotland. The Company has established a new subsidiary, Caladonian Envirotech Rubber Recycling Limited, a Scottish limited liability company, ("Caladonian"). Caladonian was established in anticipation of entering into a joint venture agreement with the local Scottish investors to build a tire recycling plant modeled after the Poseidon project. The Company is embarking on a market study to determine the feasibility of the project, which is expected to be complete the end of first quarter of 1999. Ireland The Company has established a new subsidiary, Hibernian Envirotech Rubber Recycling Limited, an Irish Limited Liability Company, ("Hibernian"). Hibernian was established in anticipation of entering a joint venture agreement with local Irish investors to build a tire recycling plant modeled after the Poseidon project. The Company is embarking on a market study to determine the feasibility of the project, which is expected to be complete at the end of the first quarter of 1999. Portugal The Company is continuing negotiations in Portugal to enter a joint venture agreement to build a tire recycling facility. The Company's President has been in Lisbon, Portugal meeting with a potential joint venture partner. It is anticipated the joint venture partner will undertake a feasibility study with assistance from the Company. France The Company is currently negotiating with interested parties so the Company can initiate a feasibility study for a joint venture to build a tire recycling facility in France. Also, the Company is actively promoting its after market products and user applications within France to develop key relationships. F-17 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #16 - Subsequent Events -Continued- - ---------------------------------------- Brazil The Company's Vice President, has met with potential joint venture partners in Brazil. As a result of negotiations, the Company has signed a memorandum of understanding to the potential joint venture partner whereby the Company will undertake a feasibility study to determine the feasibility of developing a tire recycling facility in Belo Horizonte, Brazil. South Africa Through the Company's contacts in Scotland, the Company has been introduced to potential joint venture partners in South Africa and Zimbabwe. The Company's President met in South Africa and Zimbabwe in December 1998, with the potential joint venture partners to explore the possibility of developing a tire recycling plant. The Company continues negotiations with various potential clients in the United States, Europe, the Arabian Gulf, South America, Puerto Rico, Great Britain and Asia. Current Contracts Atzendorf, Germany The Company has a two phase order for press equipment including flocking equipment, granulators and grizzlies for the manufacture of continuous roll material and after market flooring products. The Company anticipates equipment delivery during the second half of 1999. Chemnitz, Germany The Company has an order for a mini tire recycling plant including three Revulc 300 systems and press equipment. The Company anticipates equipment delivery during the second half of 1999. Mexico Agreement The CISAP equipment sale to Mexico was entered in 1994. The client has experienced problems in the commissioning of the C9000 machines supplied by CISAP mainly relating to the high fiber content tires in Mexico and the high altitude of the project site near Mexico City. The Company has sent an engineering team to the site to correct the problems and anticipated the equipment to be fully operational by the end of April 1998. However, the engineering team uncovered additional problems with the CISAP equipment which have required re-engineering of the CISAP equipment on-site and re-engineering of the plant itself. CISAP has shipped additional equipment to the Mexico site and has sent engineers to Mexico to resolve the problems. F-18 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #16 - Subsequent Events -Continued- - ---------------------------------------- Saudi Agreement The agreement for the initial phase of CISAP equipment to be delivered to Saudi Arabia was entered in 1994 with additional equipment purchased by the clients from CISAP in 1995 and 1997. Initial equipment for Phase One of this project has been delivered and partially installed at the site in Dammam. The equipment has not been completely installed by CISAP and the Company has elected to send its own engineer to expedite installation and operation of the equipment. NOTE #17 - Stockholders' Equity - ------------------------------- During the year ending December 31, 1997, the Company effected a one for three stock split of its outstanding common shares. The financial statements have been retroactively restated to reflect the stock split. In December the Company sold 100,000 shares for $150,000 cash. The Company issued 1,600,000 shares to its President in satisfaction of $100,000 of amounts due Officers. The Company issued 650,000 shares of its common stock to acquire 100% of the shares held by the minority interest of Eurectec, Inc. 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. NOTE #18 - Principles of Consolidation - -------------------------------------- The consolidated financial statements of The Quantum Group, Inc., and its subsidiaries include the amounts of all majority owned subsidiaries. Eurectec, Inc., is the only subsidiary with assets, liabilities and operations and is 100% owned at December 31, 1997. In 1998, the Company began to focus its energies on the design and development rubber recycling systems and subsystems which encompass initial rubber tire recycling and after market crumb rubber products rather than rely solely upon equipment and technology sales. This aspect of the Company's business is being conducted through its subsidiary, Eurectec, Inc. Eurectec, Inc., provides feasibility studies, engineering, equipment, installation and training for its rubber recycling systems. The Company is marketing its systems individually and through joint venture arrangements. Eurectec, Inc., has the following wholly owned subsidiaries; Eurectec International, Ltd., a Province of British Columbia Corporation, Eurectec Industries, Inc., a Province of Alberta Canada Corporation, Pacific Rubber Recycling Ltd., a Province of British Columbia Corporation, and Eurectec Marketing, Inc., a US Domestic Corporation. None of the above subsidiaries of Eurectec have assets or operations. F-19 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #18 - Principles of Consolidation -Continued- - -------------------------------------------------- The Company has two US domestic subsidiaries, Quantum Environmental Solution and Technology, Inc., and Quantum Modified Asphalt Xcetra, Inc. Both of these subsidiaries also have no assets or operations. NOTE #19 - Stock Options 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, the Company granted an option, pursuant to the 1997 Stock Option Plan, to an officer and director of the Company for 333,334 shares, exercisable at $0.062 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 the grant. In 1998, 66,666 shares were exercised under this option, at $0.0062 per share. Additionally 330,000 shares were granted and exercised by others pursuant to the 1997 stock option plan at $0.062 per share. NOTE #20 - Prototype Impact 500 - ------------------------------- Eurectec, working with outside engineering firms, has designed plans for a complete tire recycling, granulating and after-market production system, known as the Eurectec 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. NOTE #21 - License Right - ------------------------ In April of 1996, Eurectec, 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. F-20 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #21 - License Right -Continued- - ------------------------------------ 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 1999 for projects in Germany. 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.
License Amortization Accumulated Licensor Cost Expense 1998 Amortization - ---------------------------------------------------------------------- Rothbury $ 497,547 $ 49,756 $ 132,677 Faru GmbH 150,000 7,500 7,500 ------------------------------------------ Total $ 647,547 $ 57,256 $ 140,177 ==========================================
NOTE #22 - 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. F-21 The Quantum Group, Inc., and Subsidiaries Notes to Financial Statements -Continued- NOTE #22 - Joint Venture -Continued- - ------------------------------------ The Poseidon joint venture funding is expected to be completed by the end of the first quarter, 1999. 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. Eurectec Industries, Inc., 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 the second quarter of 1999. 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 the first half of 1999. 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, 1999. Poseidon has opened offices in Penkun and has commenced a German wide marketing study and plan to introduce and sell its manufactured products. 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 loss of $2,747 for a net minority position of $9,463. NOTE #23 - Employees - -------------------- Currently the Company has no direct employees other than its officers and directors. The Company contracts with an employee service agency to provide staff and secretarial services. The Company relies heavily on the efforts of its President, Ehrenfried Liebich, it also relies upon the services of various consulting agencies including agencies owned and operated by Keith Fryer, a Company Vice President, Secretary and Director and John Pope, the Company Treasurer, a Vice President and Director. Through its employee service agency the Company has two administrative staff, three management staff, one sales person and one technical staff member. Two additional people will be hired during the second quarter of 1999 to fill the positions of financial controller and operations manager. The Company intends to restructure the employee status by terminating the service agency relationship and bring all its employees into the Company as direct hires. F-22 EX-10 2 Exhibit 10.02 SALES AGREEMENT by and between The Quantum Group, Inc. Tustin, California and Fonds Concept GmbH. + Co. Recycling KG Germany for Supply and Installation of Tire Recycling and Product Manufacturing Equipment in Atzendorf, Germany December 11, 1998 Sales Agreement The Quantum Group, Inc. This Agreement is made and entered into this day of December 11, 1998 by and between The Quantum Group, Inc., a Nevada corporation ("Seller") and FONDS CONCEPT GMBH. + CO. RECYCLING KG ("Buyer"). Seller has agreed to sell, and Buyer has agreed to purchase, PressMaster 200 press machine and other equipment, as per EXHIBIT A under the terms and conditions set forth below. Accordingly the parties, intending to be legally bound thereby, agree as follows: 1. IDENTIFICATION OF PRESSMASTER. The equipment to which this Agreement relates is a Eurectec PressMaster Press, Model No.200, for product manufacture together with additional equipment: AS PER ATTACHED LIST EXHIBIT A. (collectively the "PressMaster and other equipment to schedule"). Unless otherwise specified herein, Seller will have manufactured the PressMaster/ancillary equipment for the express purpose of fulfilling this Agreement. 2. AGREEMENT TO PURCHASE. a) Buyer agrees to purchase form Seller PHASE ONE equipment package, and Seller agrees to sell to Buyer, the PressMaster 200 including additional equipment for the total Purchase Price of DM 6,132, 094 PER EXHIBIT A. b) PAYMENTS. Payment of 30% is due and payable at time of signing this agreement with the balance due at time of shipment of the equipment with presentation of clean "on-board" bills of lading at sight duly legalized (partial payments allowed) and is to be wire transferred to the following account details: Beneficiary: The Quantum Group, Inc. Account # 023 758 644 ABA Route # 1220 16066 City National Bank, 4685 MacArthur Court, Newport Beach, CA 92660, USA. The prices do not include any taxes applicable in the United States. Total purchase price quoted INCLUDES: freight and insurance of a common carrier chosen by Seller, and equipment installation, but excludes extraordinary shipping services that may be required by Buyer and cost of installation. Taxes which the Seller must pay or collect with respect to the sale of the PressMaster equipment (other than income taxes) shall be added to the total purchase price and shall be payable by Buyer upon delivery of the PressMaster and other equipment. Buyer bears the risk of loss for the PressMaster and other equipment after delivery, in accordance with Buyer's instructions. 3. DELIVERY DATE. C3000: C3000 granulator to be delivered and installed by 12/21/1998. E-1 Sales Agreement The Quantum Group, Inc. MICROMAT GRIZZLY : The Micromat Grizzly equipment package, 1 # Pressmaster and 1 # Flockmaster, can be delivered and installed in April 1999. PRESS & FLOCMASTER : 3 # Pressmaster and 2 # Flockmaster machines can be delivered and installed October 1999. In the event of loss during shipment, actual delivery shall be delayed a reasonable time to allow Seller to collect insurance and effect repairs or replacement. 4. OBLIGATIONS OF SELLER. Seller agrees to make available to Buyer via telephone, or in person at Buyer's premises (at Buyer Option), such of Seller's personnel as Buyer reasonably deems necessary for the purpose of instructing and training Buyer's employees in the operation and maintenance of the PressMaster in connection with the uses proposed to be made by Buyer of the PressMaster, provide that such instruction and training is performed during initial installation of the PressMaster. Unless otherwise agreed in writing, Seller shall pay transportation and lodging costs for Seller's personnel required to travel to Buyer's location and Seller shall bear all other costs of providing such services. 5. BUYERS' INSTALLATION OBLIGATIONS. Buyer shall be responsible to obtain all necessary inspections, licenses and permits for this installation and operation of the PressMaster presses. Buyer acknowledges that the total purchase price for the PressMaster 200 and other equipment does not include any power hook-ups pads or floor reinforcements required in Buyer's facility prior to installation. Buyer shall reimburse Seller for any additional costs of Seller's training and installation personnel occasioned by Buyer's failure to properly prepare the installation site. WARRANTY. Seller makes on warranty. Seller hereby passes to Buyer the manufactures warranty. Manufacturer to guarantee the equipment supplied for a period of twelve (12) months, not exceeding 18 months from shipment date. The guarantee does not cover electrical equipment for which the manufacturer will pass on the appropriate guarantee from each sub-vendor supplier. The guarantee does not cover consumable parts. Parts or components found defective during the guarantee period will be replaced or repaired depending on the vendors choice. The guarantee period will commence with the installation of the equipment. Damages caused by the modifications brought about by the buyer and not conforming to the specifications, or which have been previously approved in writing by the Vendor, are not covered by the guarantee. Damages caused to the equipment by using spare parts purchased by the Buyer and without the vendor's approval, or due to modifications purchase in contrast with specifications, are not covered by this guarantee. The guarantee does not cover damages caused by the introduction of dangerous materials, such as but not limited to, screws bolts, or material other than that designed for which the equipment has been specifically designed. E-2 Sales Agreement The Quantum Group, Inc. Any use of the PressMaster equipment other than as stated in Seller's maintenance manuals supplied with the Press shall constitute abuse. The nominal cycle time of the PressMaster is between 5 and 15 minutes depending upon the thickness and density of the products being manufactured. If we consider the machine is idle for maintenance and other different factors, the effective capacity of the PressMaster must be calculated at APPROX. 80% of the nominal capacity. In the event of any defects covered by this warranty, Seller will remedy such defects by repairing or replacing any parts found to be defective. This warranty is limited to parts and labor only and does not include any labor other than the removal and replacement of any defective parts. This shall be the exclusive remedy for all claims whether based on contracts, negligence, or strict liability, Seller or vendor shall not, in any event, be liable for any loss of the use of any equipment or incidental or consequential damages or commercial loss. The Warranties set forth in this Agreement are exclusive and in lieu of all other warranties expressed or implied including without limitation any warranty of merchantability or fitness for a particular purpose. Seller shall not be liable to Buyer for any delay or failure in performance caused by acts beyond Seller's control, including without limitation, acts of God, war, vandalism, sabotage, accidents, fires, floods, strikes, labor disputes, mechanical breakdown, shortages or delays in obtaining suitable parts or equipment, material, labor, or transportation, acts of subcontractors, interruption of utility services, acts of any unit of government or governmental agency, or any similar or dissimilar cause. The maximum liability, if any, of the Seller for all direct damages, including without limitation contract damages and damages for injuries to persons or property, whether arising form Seller's breach of this Agreement, breach of Warranty, negligence, strict liability, or other tor with respect to the goods, or any services in connection with the goods, is limited to an amount not to exceed the price of the particular goods. In no event shall Seller be liable to Buyer for any incidental, consequential, or special damages, including without limitation lost revenues and profits, even if it has been advised of the possibility of such damages. The right to recover damages within the limitations specified is the Buyer's exclusive alternative remedy in the event that any other contractual remedy fails of it's essential purpose. 7. SPECIFICATIONS -- ENGINEERING CHANGES. Specifications contained in Seller's quotations or brochures and illustrations were in effect at the time of the quotation or of printing of brochures and illustrations. Seller reserves the right to make design or specification changes without notice; provided that any such change shall not materially reduce the production capacity of the PressMaster. Unless incorporated herein by specific reference, such specifications do not form a part of this Agreement. E-4 Sales Agreement The Quantum Group, Inc. 8. DEFAULT -- REMEDIES. In the event of the failure by Seller to fulfill any material term or condition of this Agreement prior to the Seller's notice of its readiness to make delivery of the PressMaster, which failure remains uncured ten (10) days after receipt by Seller of written notice thereof, Buyer shall be entitled to withhold all unpaid amounts and to seek the return of any amounts previously paid to Seller, and Buyer shall be under no further obligation to Seller hereunder. In the event of failure by Buyer to purchase the equipment in accordance with Section 2 hereof, other than as a result of Seller's default after receipt by Buyer of written notice thereof, Seller shall be entitled, at its option, to terminate this Agreement. However, under these circumstances, all amounts previously paid by Buyer hereunder to the seller, will be used by the seller as liquidated damages to cover all costs associated with the establishment of the Buyers purchase order. 9. MUTUAL REPRESENTATIONS. The individuals executing this Agreement on behalf of each of the parties hereto represents and warrants to the other party that he or she has full power and authority to act for and bind the party for whom he or she purports to act, and that this agreement has been authorized by all necessary corporate action, if applicable. 10. MISCELLANEOUS. (a) This Agreement represents the entire agreement of the parties with respect to the subject matter hereof, and supersedes any prior written or oral expressions of parties with respect to such subject matter. This Agreement may be amended or modified only in writing signed by each of the parties hereto. (b) The goods herein described are to be manufactured in Canada and Europe and delivered to Europe. However, the parties agree that a contract resulting herefrom in the United States, shall be deemed a US contract and shall be construed in accordance with the Laws of Orange County, California, United States, other than principles of conflicts of Law. Buyer hereby: (i) agrees that the courts of the Orange County, California, United States who shall have the exclusive jurisdiction to adjudicate any matter arising out of or as a result of this Agreement, (ii) consents to the jurisdiction of each such court, (iii) waives any objection it may have to the laying of venue of any such suit in such courts, and (iv) irrevocably designates the Director of the Orange County Department of Commerce as its agent in California, United States to receive service of any process in any such suit in the United States. E-5 Sales Agreement The Quantum Group, Inc. (c) The addresses of each of the parties for the purpose of any notice required or permitted to be given hereunder shall be as indicated following such parties signature, and Notice addresses may be changed by giving notice to the other party. Notices shall be effective upon delivery to the notice address by personal delivery, overnight express service, mail or facsimile transmission (with hard copy to follow by first class mail). IN WITNESS WHEREOF, the parties have caused this agreement to be executed by their duly authorized officers on the date and year first above written. Seller > > > > > > The Quantum Group, Inc. WITNESS: /s/ Keith J. Fryer BY /s/ Ehrenfried Liebich ------------------ Keith J. Fryer Ehrenfried Liebich President & CEO Notice address: 14771 Myford Road Bldg., B, Tustin, CA 92780, USA Tel: (714) 508-1470 Fax: (714) 508-1475 Buyer > > > > > > Fonds Concept GmbH + Co. Recycling KG WITNESS: BY /s/ Johann Brendgens Name: ------------------------- Johann Brendgens Principal Notice Address: Hagschestr.30,47533 Kleve, Germany Tel: 49 2821 77510 Date: December 11th 1998 Fax: 49 2821 775111 E-6 Sales Agreement The Quantum Group, Inc. EQUIPMENT COSTS SUMMARY -- EXHIBIT "A" -------------------------------------- Part A -- PressMaster 200 : Price DM: - --------------------------- ----------- sub section 1/. Price DM : --------------- 1/. PressMaster 200 press one hydraulic twin-press (size of press plate 1400 x 3000 mm) one control panel & one hydraulic unit two press plates top/bottom two roll cases to feed the press 288,840 2/. Blendmaster 100 complete with one hopper unit, one fill auger with variable speed drive and auto on/off one "big bag" support rack, one hopper system on mixer for EPDM and/or pigment, one mixing chamber tube/auger, one variable speed pump for polyurethane and one for water, one control panel computerized, for automatic/manual op's. 150,288 3/. Sets of molds : ----------------------- a/ Pet Bed Mats (2 press sides) each made of 6 plates each 68.5 x 90 cm ) b/ Anti-Fatigue mat (2 press sides) each made of 6 plates each 68.5 x 90 cm ) 074,580 c/ Playground tile mats (2 press sides) (1) 071,250 each made of 6 plates 68.5 x 90 cm (2) 070,050 three sets (3) 3.8, 5.7, 8.2 cm thick (3) 068,850 d/ Livestock mats (2 press sides) each made of 3 plates 4' x 6' 066,900 subtotal : DM 790,758 - ----------- -- -------- Sales Agreement The Qauntum Group, Inc. Bought in item : Price DM : - ---------------- ---------- sub total carried page 1/. 0,790,758 - --------------------------- ---------- 4/ Cleaning Tank : 0,039,708 sub section 2/. --------------- 5/ FlockMaster machine : (1000 mm wide) 0,200,535 6/ ScreenMaster (glue) machine : 0,055,500 7/ CureMaster : 0,044,355 subtotal : 1,130,856 x 4 sets (with one set excluding FlockMaster) less (1) flockmaster set @ DM 200,535 Total Part A : DM 4,322,889 - -------------- --- --------- Part B -- C3000 granulator - -------------------------- C3000 granulator complete with feed hopper and weigh scale as well as retrofit parts DM 750,00 net Total Part B : DM 0,750,000 -------------- --- --------- E-7 Sales Agreement The Quantum Group, Inc. Bought in item : Price DM ---------------- --------- Part C -- Micromat Grizzly machine : - ------------------------------------ 1/ Micromat MS 1500 0,944,824 2/ Spare parts : 0,030,687 a/ With permanent magnet -0- b/ Suitable for belt convey width 400 mm -0- 3/ Set screen Hardox 14 mm 0,019,528 4/ Set of knives (104 pieces) 0,022,133 5/ Set of Counterknives (6 pieces) 0,014,135 6/ Belt Conveyor : Length approx. 4500 mm Width 400 mm kW 2.2 with antimagnetic part 0,027,898 Total Part C : DM 1,059,205 - -------------- --- --------- E-8 Sales Agreement The Quantum Group, Inc. SUMMARY : ---------- Item : Sell DM: ------ -------- Part A -- PressMaster 200 package : 4,322,889 Part B -- C3000 granulator etc. 0,750,000 Part C -- Micromat Grizzly Machine 1,059,205 Totals : DM 6,132,094 - -------- --- ---------- Notes : - ------- 1/ 4 # PressMaster sets include 3 # Flock Master machines 2/ All supplied equipment is net of local taxes 4/ Payment per agreed payment plan .10 5/ Delivery and installation as follows : -------------------------------------- i/ C3000 granulator to be delivered and installed December 21st, 1998 ii/ Micromat grizzly machine, 1 # PressMaster and 1# FlockMaster to be delivered and installed in April 1999 iii/ 3 # PressMaster and 2 # FlockMaster to be delivered and installed October 1999 E-9 EX-10 3 Exhibit 10.03 SALES AGREEMENT by and between The Quantum Group, Inc. Tustin, California and Fonds Concept GmbH. + Co. Recycling Dresden KG Germany for Supply and Installation of PressMaster Product Manufacturing Equipment & REVULCON processing equipment in Chemnitz, Germany December 11, 1998 E-10 SALES AGREEMENT THE QUANTUM GROUP, INC. This Agreement is made and entered into this day of December 11, 1998 by and between the Quantum Group, Inc., a Nevada corporation ("Seller") and FOND'S CONCEPT GMBH + CO. RECYCLING DRESDEN KG ("Buyer"). Seller has agreed to sell, and Buyer has agreed to purchase, PressMaster 100 press machine and other REVULCON equipment, as per EXHIBIT A under the terms and conditions set forth below. Accordingly the parties, intending to be legally bound thereby, agree as follows: 1. IDENTIFICATION OF PRESSMASTER. The equipment to which this Agreement relates is a Eurectec PressMaster Press, Model No. 100, for product manufacture together with additional REVULCON EQUIPMENT: AS PER ATTACHED LIST EXHIBIT A. (collectively the "PressMaster and other REVULCON equipment to schedule"). Unless otherwise specified herein, Seller will have manufactured the PressMaster/ancillary equipment for the express purpose of fulfilling this Agreement. 2. AGREEMENT TO PURCHASE. a) Buyer agrees to purchase from Seller equipment package, and Seller agrees to sell to Buyer, the PressMaster 100 including additional REVULCON equipment for the total Purchase Price of DM 5,870,052.00 PER EXHIBIT A. b) PAYMENTS. Payment of 30% is due and payable at the time of signing this agreement with the balance due at the time of shipment of the equipment with the presentation of clean "on-board" bills of lading in sight duly legalized (partial payments allowed) and is to be wire transferred to the following account details: Beneficiary: The Quantum Group, Inc. Account # 023 758 644 ABA Route # 1220 16066 City National Bank, 4685 MacArthur Court, Newport Beach, CA 92660 USA. The prices quoted do not include any taxes applicable in the United States. Total purchase price quoted INCLUDES : freight and insurance of a common carrier chosen by Seller, and equipment installation, but excludes extraordinary shipping services that may be required by Buyer and cost of installation. The REVULCON machines are supplied from Germany and the local Mahrwertsteuer taxes at the rate of 16% will be added. Taxes which the Seller must pay or collect with respect to the sale of the PressMaster equipment (other than income taxes) shall be added to the total purchase price and shall be payable by Buyer upon delivery of the PressMaster and other equipment. Buyer bears the risk of loss for the PressMaster and other equipment after delivery, in accordance with Buyer's instructions. E-11 SALES AGREEMENT THE QUANTUM GROUP, INC. 3. DELIVERY DATE. 1 # Revulcon machine can be delivered and installed by December 21, 1998. The balance of the equipment will be delivered and installed during the first half of 1999 per an agreed program to be confirmed. In the event of loss during shipment, actual delivery shall be delayed a reasonable time to allow Seller to collect insurance and effect repairs or replacement. 4. OBLIGATIONS OF SELLER. Seller agrees to make available to Buyer via telephone, or in person at Buyer's premises (at Buyer option), such of Seller's personnel as Buyer reasonably deems necessary for the purpose of instructing and training Buyer's employees in the operation and maintenance of the Press Master in connection with the uses proposed to be made by Buyer of the PressMaster, provided such instruction and training is performed during initial installation of the PressMaster. Unless otherwise agreed in writing, Seller shall pay transportation and lodging costs for Seller's personnel required to travel to Buyer's location and Seller shall bear all other costs of providing such services. 5. BUYER'S INSTALLATION OBLIGATIONS. Buyer shall be responsible to obtain all necessary inspections, licenses and permits for the installation and operation of the PressMaster presses. Buyer acknowledges that the total purchase price for the PressMaster 100 and other equipment does not include any power hook-ups pads or floor reinforcement required in Buyer's facility prior to installation. Buyer shall reimburse Seller for any additional costs of Seller's training and installation personnel occasioned by Buyer's failure to properly prepare the installation site. WARRANTY Seller makes no warranty. Seller hereby passes to Buyer the manufactures warranty. Manufacturer to guarantee the equipment supplied for a period of twelve (12) months, not exceeding 18 months from shipment date. The guarantee does not cover electrical equipment for which manufacturer will pass on the appropriate guarantee from each sub-vendor supplier. The guarantee does not cover consumable parts. Parts or components found defective during the guarantee period will be replaced or repaired depending on the vendors choice. The guarantee period will commence with the installation of the equipment. Damages caused by the modifications brought about by the buyer and not conforming to the specifications, or which have been previously approved in writing by the Vendor, are not covered by the guarantee. Damages to the equipment caused by using spare parts purchased by buyer and without vendor's approval, or due to modifications purchased in contrast with specifications, are not covered by this guarantee. The guarantee does not cover damages caused by the introduction on the equipment of dangerous materials, such as but not limited to, screws, bolts, or material other than that for which the equipment has been specifically designed. E-12 SALES AGREEMENT THE QUANTUM GROUP, INC. Any use of the PressMaster equipment other than as stated in the Seller's maintenance manuals supplied with the Press shall constitute abuse. The nominal cycle time of the PressMaster is between 5 and 15 minutes depending upon the thickness and density of the products being manufactured. If we consider the machine is idle for maintenance and other different factors, the effective capacity of the PressMaster must be calculated at APPROX. 80% of the nominal capacity. In the event of any defects covered by this warranty, Seller will remedy such defects by repairing or replacing any parts found to be defective. This warranty is limited to parts and labor only and does not include any labor other than the removal and replacement of any defective parts. This shall be the exclusive remedy for all claims whether based on contracts, negligence, or strict liability, Seller or vendor shall not, in any event, be liable for any loss of the use of any equipment or incidental or consequential damages or commercial loss. The Warranties set forth in this Agreement are exclusive and in lieu of all other warranties expressed or implied including without limitation any warranty of merchantability or fitness for a particular purpose. Seller shall not be liable to Buyer for any delay or failure in performance caused by acts beyond Seller's reasonable control, including without limitation, acts of God, war, vandalism, sabotage, accidents, fires, floods, strikes, labor disputes, mechanical breakdown, shortages or delays in obtaining suitable parts or equipment, material, labor or transportation, acts of subcontractors, interruption of utility services, acts of any unit of government or governmental agency, or any similar or dissimilar cause. The maximum liability, if any, of the Seller for all direct damages, including without limitation contract damages and damages for injuries to persons or property, whether arising from Seller's breach of this Agreement, breach of Warranty, negligence, strict liability, or other tort with respect to the goods, or any services in connection with the goods, is limited to an amount not to exceed the price of the particular goods. In no event shall Seller be liable to Buyer for any incidental, consequential, or special damages. The right to recover damages within the limitations specified is Buyer's exclusive alternative remedy in the event that any other contractual remedy fails of it's essential purpose. 7. SPECIFICATION -- ENGINEERING CHANGES. Specifications contained in Seller's quotation or brochures and illustrations were in effect at the time of the quotation or of printing of brochures and illustrations. Seller reserves the right to make design or specification changes without notice; provided that any such change shall not materially reduce the production capacity of the PressMaster. Unless incorporated herein by specific reference, such specifications do not form a part of this Agreement. 8. DEFAULT - REMEDIES. In the event of the failure by Seller to fulfill any material term or condition of this Agreement prior to the Seller's notice of its readiness to make delivery of the PressMaster, which failure remains uncured ten (10) days after receipt by Seller of written notice thereof, Buyer shall be entitled to withhold all unpaid amounts and to seek the return of any amounts previously paid to Seller, and Buyer shall be under no further obligation to Seller hereunder. In the event of failure by Buyer to purchase the equipment in accordance with Section 2 hereof, other than as a result of Seller's default hereunder, and if such failure remains uncured ten (10) days after receipt by Buyer of written notice thereof, Seller shall be entitled, at its own option to terminate this Agreement. However, under these circumstances, all amounts previously paid by Buyer hereunder to the seller, will by used by the seller as liquidated damages to cover all costs associated with the establishment of the Buyer's purchase order. 9. MUTUAL REPRESENTATION. The individuals executing this Agreement on behalf of each of the parties hereto represents and warrants to the other party that he or she has full power and authority to act for and bind the party for whom he or she purports to act, and this Agreement has been authorized by all necessary corporate action, if applicable. 10. MISCELLANEOUS. (a) This Agreement represents to entire agreement of the parties with respect to the subject matter hereof, and supersedes any prior written or oral expressions of the parties with respect to such subject matter. This agreement may be amended or modified only in writing by each of the parties hereto. (b) The goods herein described are to be manufactured in Canada and Europe and delivered to Europe. However, the parties agree that a contract resulting herefrom in the United States, shall be deemed a US contract and shall be construed in accordance with the Laws of Orange County, California, United States, other than principles of conflicts of Law. Buyer hereby: (i) agrees that the courts of the Orange County, California United States who shall the exclusive jurisdiction to adjudicate any matter arising out of or as a result of this Agreement, (ii) consents to the jurisdiction of each such court, (iii) waives any objection it may have to the laying of venue of any such suit in court, and E-13 SALES AGREEMENT THE QUANTUM GROUP, INC. (iv) irrevocably designates the Director of the Orange County Department of Commerce as its agent in California , United States to receive service of any process in any such suit in the United States. (c) The addresses of each of the parties for the purpose of any notice required or permitted to be given hereunder shall be as indicated following such parties signature, and Notice addresses may be changed by giving notice to the other party. Notices shall be effective upon delivery to the notice address by personal delivery, overnight express service, mail or facsimile transmission (with hard copy to follow by first class mail). IN WITNESS WHEREOF, the parties have caused this agreement to be executed by their duly authorized officers on the date and year first above written. Seller > > > > > > The Quantum Group, Inc. WITNESS: /s/ Keith J. Fryer BY: /s/ Ehrenfried Liebich Keith J. Fryer ------------------- Ehrenfried Liebich President & CEO Notice address: 14771 Myford Road, Bldg., B Tustin, CA 92780, USA Tel : (714) 508-1470 Fax : (714) 508-1476 Buyer > > > > > > Fonds Concept GmbH + Co. Recycling Dresden KG WITNESS: __________________ BY: /s/ Johann Bredgens Name: --------------- Johann Brendgens Principal Notice address : Hagschestr. 30,47533 Kleve, Germany Tel : 49 2821 77510 Date : December 11th, 1998 Fax : 49 2821 775111 E-14 SALES AGREEMENT THE QUANTUM GROUP, INC. EQUIPMENT COSTS SUMMARY -EXHIBIT "A" ------------------------------------ Crumb rubber product manufacturing Equipment: Price DM Part A - PressMaster 100 : (sub section One) 1/. PressMaster 100 press with 2 sets of top plates: 1/ with flat base plus 6 plates attached for pressing mats 2/ with flat base plus 2 plates for pressing wave or dog bone pattern in each of three sizes :0.75", 1.5" and 2" all complete with PressMaster feed hopper ) 2/. Blend master ) 3/. Sets of molds : ------------- a/ dog bone pattern for 1 press side made of 2 plates each 23.5" x 34.5" ) b/ wave pattern for 1 press side made of 2 plates each 23.5" x 34.5" ) c/ door mats (2 press sides) with 6 mats per side (12 total) with each mat being 24" x 16" in five (5) designs ) 4/ FlockMaster & Glue Master (610 mm wide) ) subtotal: (inclusive items 1-4 ) --------- ---------------------- DM 0,708,037 -- --------- E-15 SALES AGREEMENT THE QUANTUM GROUP, INC. Price DM -------- sub total carried: - ------------------ 0,708,037 --------- 5/ Flocking material (2 mm) 16 boxes @ 25 pounds 400 pounds @ $6.75 = $2,700 0,008,100 6/ Flocking glue : 4 # buckets @ 25 kg. = 100 Kg. @ $6.75 = $675 0,002,025 7/ Polyurethane : 4 # drums @ 470 pounds x $0.78/pound say $500 0,001,500 sub total : ----------- 0,719,622 --------- (sub section 2) 8/ FlockMaster machine : (1000 mm wide) 0,260,535 9/ ScreenMaster (glue) machine : 0,075,500 10/ CureMaster : 0,064,355 Total Part A : DM 1,120,052 - -------------- -- --------- E-16 SALES AGREEMENT THE QUANTUM GROUP, INC. Part B - Revulcon machinery : - ----------------------------- (sub section 1) Price DM --------------- -------- 1/ REVULCON Callander press with accessories Each DM 1, 150,000^ _______________________________ sub total: DM 1,150,000 1,150,000 (sub section 2) ------------- 1/ REVULCON Callander Press with accessories Each DM 1,200,000 x 3 # = 3,600,000 Total Part D : DM 4,750,000 - -------------- -- --------- SUMMARY : - --------- Item : Price DM ------- --------- Part A - PressMaster 100 package 1,120,052 Part B- REVULCON package 4,750,000 Total : DM 5,870,052 ------- -- --------- Notes : ^ This machine can be delivered and installed 12/21/98 1/ PressMaster 100 package shipped form California and is net of any local taxes which may become payable upon arrival in Germany 2/. Revulcon machines are supplied from Germany and the local Mehrwertsteuer taxes at the rate of 16% will be added E-17 EX-23 4 /Letterhead/ Schvaneveldt & Company Certified Public Acccountant 275 East South Temple, #300 Salt Lake City, Utah 84111 (801) 521-2392 Exhibit 23.01 Darrell T. Schvaneveldt, C.P.A. Consent of Darrell T. Schvaneveldt Independent Auditor I consent to the use, of our report dated March 17, 1999, of the Financial Statements for The Quantum Group, Inc., and Subsidiaries, dated December 31, 1998, included herein and to the reference made to me. /S/ Schvaneveldt & Company Salt Lake City, Utah March 31, 1999 EX-27 5
5 0000921450 THE QUANTUM GROUP, INC., AND SUBSIDIARIES 12-MOS DEC-31-1998 DEC-31-1998 1,781,944 0 3,065,040 0 19,425 5,200,802 120,401 49,056 7,835,144 3,471,795 0 0 0 8,400 4,319,983 7,835,144 2,952,900 2,952,900 1,761,775 1,264,766 0 0 0 (80,058) 0 (80,058) 0 0 0 (100,691) (.01) (.01)
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