U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION (formerly PHASEOUT OF AMERICA, INC.)
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
(State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES _X_ NO ___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
_X_
The registrant's operating revenues for its most recent fiscal year were
$300,584.
The number of shares outstanding on December 31, 1997 was 138,083,713 shares of
Common Stock, .00003 par value.
Continued...
<PAGE>
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.02) of
the Company's Common Stock, as of March 30, 1998, is approximately $2,043,892
based upon the 102,194,594 shares of Registrant's Common Stock held by
non-affiliates.
(1) "Affiliates" solely for purposes of this item refers to those persons who,
during the three months preceding the filing of this Form 10-KSB were officers
or directors of the Company and/or beneficial owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: (check one) Yes____ No X
2
<PAGE>
QUEST PRODUCTS CORPORATION
Form 10-KSB
Fiscal Year Ended December 31, 1997
Table of Contents
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C>
Item 1. Business 4 - 7
Item 2. Properties 7
Item 3. Legal Proceedings 7 - 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters. 9
Item 6. Management's Discussion and Analysis of Financial Condition and Results 9 - 10
of Operations.
Item 7. Financial Statements F1 - F14
Item 8. Changes in or Disagreement with Accountants on Accounting and Financial 11
Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 11 - 13
Section 16(a) of the Exchange Act.
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners and Management 13 - 14
Item 12. Certain Relationships and Related Transactions 14 - 15
PART IV
Item 13. Exhibits and Reports on Form 8-K 15
Signatures 16
Supplemental Information 17
</TABLE>
3
<PAGE>
PART 1
ITEM 1. Business
The Company
Quest Products Corporation (the Company) is a corporation organized under
the laws of Delaware on July 17, 1987, has a limited operating history and has
operated at a loss since inception. Since the completion of its initial public
offering in April 1989, the Company had primarily concentrated its efforts in
two areas: the establishment of medical credibility through clinical trials
performed at an independent testing facility and the test marketing of PHASEOUT
(also referred to as the "Product" or the "device') throughout the United States
and internationally via various channels of distribution.
The Company's primary product, PHASEOUT, is a patented device developed to
help a person quit smoking without the use of any drugs, chemicals or
attachments. The device was designed to gradually reduce the amounts of
nicotine, tar and carbon monoxide consumed from cigarette smoke.
During the last four years, the Company has been concentrating its efforts
in two areas: (1) test marketing the product domestically through various
channels of distribution and (2) entering into international distribution
agreements utilizing television infomercials and commercials.
The Product
The PHASEOUT device is a simple, easy to use, mechanical, light-weight
instrument that allows the smoker to continue to smoke their preferred brand
cigarettes and at the same time, gradually and sequentially reduce their
nicotine intake by over 80%. This weaning process is the same type of
detoxification methodology that has proved successful with many other addictive
substances. Once the smoker has been weaned, their chances to quit for good are
greatly enhanced. PHASEOUT's weaning methodology has an important additional
psychological benefit for all smokers. It allows the smoker to continue to smoke
their preferred brand until they are ready to quit. Of course, to achieve these
results under normal smoking conditions, smokers must avoid compensatory
practices, such as smoking more cigarettes and blocking the ventilation holes
created by the PHASEOUT device.
The PHASEOUT system works without the use of any drugs, chemicals or
attachments The average retail price to consumers is $39.95 plus shipping and
handling. The average wholesale price is approximately $9.00.
The Company is currently having the product manufactured by two vendors,
one in South Korea and one in China. These two sources of supply will be able to
produce all future PhaseOut units required for sale.
The Company had received a "warning letter" from the Food and Drug
Administration "FDA" in mid 1993, stating that the PhaseOut product was a
medical device and subject to the provisions of the FDA. The Company responded
through legal counsel, taking the position that the PhaseOut product is not a
medical device within the meaning of the Food, Drug and Cosmetics Act "FDCA"
(see Item 3, Legal Proceedings).
4
<PAGE>
How PhaseOut Works
A smoker inserts their entire unopened pack of cigarettes (filtered or
unfiltered - soft pack or box) into the PHASEOUT device. With a simple press and
release that takes just seconds, PHASEOUT processes all of the cigarettes within
the pack.
The device strategically creates from one to four microfine perforations in
the lip end of each cigarette. These perforations filter and ventilate the smoke
drawn through the cigarette, thereby reducing the amount of nicotine and other
toxins inhaled by the smoker.
One miniature filter (perforation) is created in Phase one, filtering out
up to 26% of the nicotine, and similar amounts of other toxins such as carbon
monoxide and tar. Additional perforations are created as the smoker proceeds
through each of the four Phases. With each additional perforation there is a
progressive reduction of nicotine and other harmful substances based upon
controlled laboratory studies. By Phase IV, 80.7% of the nicotine, 91.6% of the
tar, 89.2% of carbon monoxide and 90% of all other tobacco constituents (Total
Particulate Matter) have been eliminated. As discussed above, these reductions
under normal smoking conditions depend upon proper use of the product and the
treated cigarettes by smokers. The suggested period on each phase is two weeks
(eight week total), however, smokers can tailor the program to their own
individual liking and proceed at their own pace, under their own timetable. The
smoker is in control. There is no pressure, no fear of failure. Importantly, any
change in the taste, flavor or draw of the cigarette is lessened as the smoker
proceeds through the program due to the gradual transition from phase to phase.
The Smoking Cessation Market
Cigarette smoking is the number one cause of preventable illness and death
in the United States. In excess of 450,000 deaths were directly attributed to
cigarette smoking last year. More than one of every six deaths in the U.S. is
caused by cigarette smoking. Of the country's total health care budget,
approximately 25% ($65 billion) is spent for smoking related illness and
disease. This does not include an additional $35 billion in lost productivity
and higher insurance costs.
In the United States, there are currently reported to be approximately 46
million smokers and worldwide the number of smokers is estimated to be 1.2
billion.
Scientific and Clinical Testing
Scientific
The United States Testing Company, Inc., an independent testing facility
which tests cigarettes in accordance with government standards for major
cigarette manufacturers, conducted laboratory tests on the use of PHASEOUT on
cigarettes. These tests were based upon the F.T.C. method, which is used to rate
the tar, nicotine and carbon monoxide yields of cigarettes sold in the United
States. Their findings were reported in Determination of Percent Reduction of
Tar, Nicotine and Carbon Monoxide of Cigarettes with the Use of Phase-Out device
for Perforating Packaged Cigarettes/U.S. Patent #4,231,378 . This report showed
reductions of tar, nicotine and carbon monoxide yields ranging from 26% in Phase
I to 92% in Phase IV using the PHASEOUT method.
5
<PAGE>
Additional Studies
The Company conducted a scientific study at Ameritech Laboratories to
demonstrate the condensation of nicotine and tars within the filter of
cigarettes due to the use of the PhaseOut device. This study demonstrated an
increase of nicotine content within the filter, proportionate to the number of
PhaseOut perforations in the cigarette. The study concluded that the increased
weight of the filter was due to the condensation of nicotine due to the cooling
effect of the external air introduced through the wholes pierced into the
cigarette filters by the PhaseOut device.
The Company is in the final stages of a clinical study taking place at the
University of Miami, which will gauge the effective quit rate of smokers using
the PhaseOut device in conjunction with behavior modification. This study will
also measure the effectiveness of the PhaseOut device as a cigarette toxin
reduction technology in an natural environment. Previous studies were machine
studies or human studies in a tightly controlled laboratory environment.
Patents
The United States Patent Office has issued two patents for the PhaseOut
System (Patent Number 4,231,378 issued November 4, 1980 and Patent number
5,218,976 issued June 15, 1993). The Company has received patents in China,
Taiwan and Japan. In addition, the Company has applied for patents in fifteen
(15) foreign countries, including England, France, Germany and Italy.
Marketing (Domestic)
The focus of the Company's marketing to date has been to create an
awareness for the product through the use of various direct response marketing
venues. Some of these are: the use of a thirty minute television infomercial,
short form television commercials, sixty second radio commercials, mail order
catalogs, print advertising and through credit card mailings (syndication).
During 1997, the Company's marketing activities domestically, were
curtailed due to the negotiations with the Federal Trade Commission as to what
advertising claims could be made to describe the PhaseOut product (see Legal
Proceedings). In 1998, management intends to aggressively enter the U.S. retail
market under the category of smoke cessation products.
Marketing (International)
On August 21, 1995, the Company entered into an agreement with a South
Korean trading company for the distribution and manufacture of a modified
(design) PhaseOut product in South Korea. Because of the improved design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers and Japan has 35 million smokers.
Distribution in South Korea is expected to begin in the 2nd quarter of 1998. The
Company sold 51% of its products in 1997 to one major foreign distributor.
New Products
In May 1997, the Company executed a letter of intent with Automotive
Marketing, Inc. to manufacture and distribute aftermarket automobile products.
As of December 31, 1997, the Company has incurred expenses of $116,111 with the
understanding that such expenses will be reimbursed when revenue-producing
operations commence.
6
<PAGE>
Competition
The Company competes with numerous products and techniques designed to aid
smokers to stop smoking. Many of the companies promoting these products have
been in existence for longer periods of time, are better established than the
Company, have financial resources substantially greater than the Company and
have more extensive facilities than those which now or in the foreseeable future
will become available to the Company. In addition, other firms may enter into
competition with the Company in the near future.
One type of significant competitive product is the nicotine patch, which
requires a prescription by licensed physicians for treatment of nicotine
withdrawal. This appears to be the quit smoking method that is now most commonly
prescribed. However, management expects to counter the initial success of the
patch program because there are stirrings of adverse publicity regarding patches
due to their side effects and usage limitations.
In addition to the nicotine patch, other pharmaceutical companies are in
the process of introducing alternate nicotine delivery methods in the form of a
nasal spray, which will have many of the same side effects as the nicotine patch
and will most probably require a prescription when first brought to the market.
Recently, the FDA has allowed the nicotine gum, which was formerly only
available by prescription, to be sold over-the-counter.
Employees
At the present time, the Company has six employees, including the Company's
two officers and directors and four administrative and secretarial personnel.
Item 2. Properties
The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11719.
Item 3. Legal Proceedings
In June, 1993, the Company received a "Warning Letter" from the FDA in
which the FDA stated its belief that the Product is a "medical device" and is,
therefore, subject to the provisions of the FDA. Since the Company has been
marketing the product without seeking or obtaining pre-marketing approval from
the FDA, if the FDA's position is correct, the Company's activities are in
violation of the Food Drug and Cosmetics Act and the FDA would have the right to
enjoin further marketing by the Company of the product. The Company does not
believe that the product is a medical device within the meaning of the FDCA and
has advised the FDA of its position through the Company's Washington, D.C.
counsel, Hyman, Phelps & McNamara, specializing in FDA matters. The answer
submitted on July 7, 1993, by the Company counsel took the position that
PHASEOUT is a mechanical device that treats just the cigarette (not the smoker)
by creating additional internal filters within the existing filter or cigarette.
However, in an effort to cooperate with the FDA, the Company proposed to make
substantial revisions to the promotional statements for the product to make it
clearer to the public that the product is not intended to be used as a medical
device. Neither the Company nor its counsel has received any written or oral
response from the FDA since that time. However, no assurance can be given that
the FDA will not in the future seek to enjoin the Company from marketing the
product without complying with the FDCA and seeking other remedies against the
Company.
7
<PAGE>
Management believes that the FDA letter came as a result of the FDA's
investigation of the smoke cessation industry. As a result of that
investigation, the FDA banned the sale of certain over-the-counter smoke
cessation product using active ingredients as of December, 1993. PHASEOUT was
not affected by this ban.
The Company was advised by the FTC by letter dated October 20, 1993, that
the FTC was conducting a non-public, informal inquiry to determine whether the
Company had engaged in deceptive or unfair practices in violation of the Federal
Trade Commission Act (the "FTC Act") in connection with certain of the Company's
advertising claims. In that connection, the FTC requested that the Company
provide it with certain information and documents and also requested a meeting
on June 9. 1994, with the Company's officers. The Company supplied the FTC with
all the information they requested.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the PhaseOut device ("the
device") were unsubstantiated or false. The order required the Company to send a
postcard to identifiable past purchasers of the device notifying them of the
commission's action and advising them that the device has not been proven to
reduce the risk of smoking related diseases or make cigarettes "safer". The
order also prohibits the Company from making certain claims in its current
advertising. The Company cost to comply with this order was $15,102,
representing the cost of identifying each purchaser and to mail the post cards.
In February 1995, the Company's former attorney, John B. Lowy, brought an
action against the Company in New York State Supreme Court, New York County for
unpaid attorney fees and disbursements of approximately $39,000. In July 1997,
the Company agreed to pay the balance owed of $16,603. Payments of $7,000 were
made in 1997 against this liability. The remaining balance of $9,603 is payable
in monthly installments of $1,000 through October 1998.
In January 1998, the Company's former advertising agency, Popofsky
Advertising, Inc., brought an action against the Company in New York State
Supreme Court, New York County for unpaid services rendered in the amount of
$74,000. In March 1998, the parties reached an agreement to settle all claims.
The Company will pay Popofsky Advertising, Inc. $50,000 in installments of
$15,000 by December 1998, $15,000 by March 1999, and the final $20,000 by June
1999.
In July 1997, the Company's former attorney, who is a relative of a
director, brought an action against the Company in New York State Supreme Court,
New York County for unpaid attorney fees and disbursements of approximately
$18,000. During 1997, $5,000 was paid by the Company and, therefore, the
financial statements include a liability for approximately $13,000 payable to
this party. Legal counsel expects that this case will either be abandoned or
will settle for an amount less than $10,000.
In March 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against the direct
response TV and marketing company ("On-Air Infonetwork") that was purchasing
television time for the Company's thirty minute infomercial, to seek damages
sustained as a result of their failure to perform pursuant to an agreement with
the Company. Based on the Award of Arbitrator dated October 28, 1996 which
disposed of all claims by both parties, the Company paid $123,157 to On-Air and
issued a note for $20,940 which was paid in 1997.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
8
<PAGE>
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) Market information - The principal U.S. market in which the Company's Common
Shares ($.00003 par value) were tradable is in the over-the-counter market.
The Class A Warrants expired on November 2, 1993 and the Class B Warrants
expired on December 31, 1997. The aforesaid securities are not traded or quoted
on any automated quotation system. The OTC Bulletin Board symbol for the
Company's Common Stock is "QPRC". The following table sets forth the range of
high and low bid quotes of the Company's Common Stock per quarter as provided by
the National Quotation Bureau (which reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions).
Bid Price
---------
Period High Low
- ------ ---- ---
Quarter Ended March 31, 1996 .05 .04
Quarter Ended June 30, 1996 .05 .03
Quarter Ended September 30, 1996 .05 .03
Quarter Ended December 31, 1996 .02 .01
Quarter Ended March 31, 1997 .02 .01
Quarter Ended June 30, 1997 .016 .01
Quarter Ended September 30, 1997 .012 .008
Quarter Ended December 31, 1997 .012 .008
(b) Holders -- As of December 31, 1997, the approximate number of the Company's
shareholders was 415.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial status
and its contemplated financial requirements, does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
During 1997, the Company's domestic marketing activities were curtailed due
to the ongoing negotiations with the FTC. As a result, total sales decreased by
approximately $1,189,000 from $1,489,000 in 1996 to $300,000 in 1997. The number
of units shipped during 1997 decreased by 72,059 to 35,911, and the average
selling price dropped by $5.42 to $8.37 per unit. In 1998, the Company intends
to re-enter the domestic retail market.
Cost of sales decreased by approximately $230,000 from $375,000 in 1996 to
$145,000 in 1997. Of this amount, approximately $250,000 was due to decreased
volume offset by approximately $20,000 due to increased average unit cost.
Selling expenses decreased by approximately $754,000 from $1,032,000 in
1996 to $278,000 in 1997. This decrease is attributed to the curtailment of
television direct response marketing in mid 1996 during the ongoing FTC
negotiations.
9
<PAGE>
General and administrative expenses decreased by approximately $281,000
from $776,000 in 1996 to $495,000 in 1997. This decrease is primarily
attributable to a $136,000 decrease in legal fees in connection with the FTC
negotiations, a $111,000 decrease in salaries and related payroll costs, and a
$34,000 net decrease in various other administrative costs.
Interest expense decreased by approximately $75,000 from $108,000 in 1996
to $33,000 in 1997 due to interest no longer being charged by a major vendor and
interest rate adjustments on other loans.
During 1997, the Company negotiated a $61,000 reduction in the amount owed
to a major vendor.
Liquidity and Capital Resources
Cash of $367,809 was used for operations for the year ended December 31,
1997 as compared to $546,646 used last year. Cash decreased during the year by
$232.784.
The Company's working capital has deteriorated due to the use of current
assets for operations. Working capital and current ratios were:
December 31, December 31,
1997 1996
---- ----
Working capital
(deficiency) $(752,933) $(436,465)
Current ratios 0.12:1 0.49:1
In order to meet short-term marketing goals, in July 1997 certain officers
and directors agreed to acquire an aggregate of 10,000,000 shares of the
Company's common stock (representing 8% of total shares outstanding) for an
aggregate purchase price of $100,000. The Company is also seeking an additional
$240,000 of financing under the same terms and conditions as offered to the
officers and directors. As of December 31, 1997, the Company has received
$172,500. There is no assurance that the Company will be able to obtain
additional financing.
Item 7. Financial Statements
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Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
NONE
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the directors
and executive officers of the Company:
Name Age Position(s) with the Company
- ---- --- ----------------------------
Burton A. Goldstein 62 Chairman of the Board of Directors
Secretary, Chief Executive Officer
Herbert M. Reichlin 56 President, Treasurer,
Chief Operating Officer, Director
Bernard Gutman 71 Director
James F. Leary 68 Director
Luther H. Hodges, Jr. 61 Director
Alfred Fabricant 44 Director
Richard Mascola 61 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified. Each director receives $1,500 annually for
attendance fees, warrants for 500,000 shares at market price each February, and
out-of-pocket travel expenses.
A summary of the business experience of each officer and director of the
Company is as follows:
BURTON A. GOLDSTEIN has been Chairman of the Board of Directors of the
Company since March 10, 1997 and became its Secretary in December 1997. Mr.
Goldstein is President of American Employer Services Corp., a provider of
employee benefit consulting services to industry and associations. A chartered
Life Underwriter, Mr. Goldstein is also active in estate preservation for
business owners and wealthy individuals.
HERBERT M. REICHLIN has been a Director and Treasurer of the Company since
July 30, 1996 and became its President in December 1997. Mr. Reichlin is a
Certified Public Accountant and is also the President of Program Resource
Organization, a consulting company to the health industry.
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BERNARD GUTMAN has been a Director of the Company since inception. From
inception, Mr. Gutman was President of the Company until September 14, 1987 and
was Chairman of the Board of Directors until March 10, 1997. He has also been an
officer, director and principal shareholder of Products & Patents, a publicly
held company since its inception on December 11, 1981.
From 1978 to February 1982, Mr. Gutman served as President and Chairman of
the Board of Directors of National Vitamin Corporation, a publicly-held
corporation involved in the marketing and distribution of vitamins. From 1981 to
1983, Mr. Gutman was President of the Gutman Consulting Company, which was
wholly owned by Mr. Gutman and which provided financial and marketing consulting
services to various companies. From 1955 to 1978, Mr. Gutman was Chairman of
Delco Corporation, a publicly-held corporation engaged in the home improvement
business.
JAMES F. LEARY has been a Director of the Company since August 1994. Mr.
Leary the President and Founder of Sunwestern Management, Inc., Dallas, Texas,
engaged in venture capital investing through two limited partnerships. Prior to
Sunwestern's inception in 1981, Mr. Leary was Senior Executive Vice President,
Chief Financial Officer and Director of the Associates Corporation of North
America, Dallas, Texas. Prior to his tenure with Associates, he served as Senior
Vice President of The National Bank of North America (now National Westminster
Bank USA) and as an Assistant Treasurer of CIT Financial Corporation. Mr. Leary
is Vice Chairman of Finance of Search Capital Group, Inc., Dallas, TX (NASDAQ)
and is a director of MaxServ, Inc. (NASDAQ), several open-end mutual stock funds
under the management of Capstone Asset Management Company, and Anthem Financial
Services, Inc. Mr. Leary has a B.A. degree in Business Administration from
Georgetown University 1951, an MBA in Banking and Finance from New York
University 1953, and is also a graduate of the Advanced Management Program of
the Harvard University Graduate School of Business in 1956.
LUTHER H. HODGES, JR. has been a Director of the Company since April 1995.
He currently serves as a member of the faculty of the Anderson Schools of
Management, the University of New Mexico; Chairman of the Board of the Santa Fe,
LLC and is a Director of Search Capital Corporation, Dallas, Texas; and a
director of Safety Floor International, Bethesda, MD., Zomeworks Corporation,
Albuquerque, and CWF Energy Company, Dallas, Texas. Additionally, Mr. Hodges
manages two closely held investment partnerships and operates the Santa Fe
Buyers Brokerage Company, a licensed real estate broker in New Mexico. He serves
on the Governor's Economic Development Commission and the State Treasurer's
Investment committee in New Mexico. Mr. Hodges is also a trustee of the North
American Institute in Santa Fe and the National Symphony Orchestra in
Washington, D.C. Previously, Mr. Hodges was Chairman and Chief Executive Officer
of Washington Bancorporation (1983-89), a regional bank holding company, and The
National Bank of Washington (1981-89) and served as Chairman of the Board of
Starlight Publishing Company, Albuquerque, N.M. He served as Undersecretary of
the U.S. Department of Commerce (1979) and as the first Deputy Secretary of
Commerce (1980). He had been a democratic candidate for the United States Senate
from North Carolina (1978) and from 1962-1977 served in various management
positions at the North Carolina National Bank (presently Nations Bank),
including Chairman of the Board (1974-77). Mr. Hodges has long been active on
the Board of Directors of numerous community, educational and corporate
organizations. Mr. Hodges was educated at the University of North Carolina
(1957) and at the Harvard Graduate School of Business Administration (1961). He
served to the rank of Lieutenant, United States Navy.
ALFRED FABRICANT has been a Director since October 7, 1997. Mr. Fabricant
is the founding partner of the New York law firm of Fabricant & Yeskoo LLP. Mr.
Fabricant was educated at the University of Miami (1975) and at the John
Marshall Law School (1978).
12
<PAGE>
DR. RICHARD F. MASCOLA has been a Director since December 16, 1997. Dr.
Mascola is a practicing Doctor of Dental Surgery and is also the Executive
Director of the Queens New York Dental Society. Dr. Mascola was educated at Holy
Cross (1958) at New York University College of Dentistry, D.D.S. and at
Brookdale Dental Center of New York University.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.
Item 10. Executive Compensation
The following Summary Compensation Table sets forth certain information
concerning compensation paid as required under applicable rules of the
Securities and Exchange Commission (the "SEC").
Summary Compensation Table
Name and
Principal Positions Year Salary
- ------------------- ---- ------
Burton A. Goldstein
(Chairman and Chief
Executive Officer) 1997 $67,500
1996 $30,000
1995 None
Mr. Goldstein has an employment agreement as described in Item 12.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth on
the charts below are known to the Company to be the beneficial owners of
more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
<TABLE>
<CAPTION>
Shares of Common Beneficially Owned
-------------------------------------------------
Name and Address Shares Acquirable
Of Beneficial Owner Shares Owned Within 60 Days (1) Percent Owned
- ------------------- ------------ ------------------ -------------
<S> <C> <C> <C>
Burton A. Goldstein 5,333,333 20,427,534 16.3%
6900 Jericho Turnpike
Syosset, New York 11791
Herbert M. Reichlin 5,333,333 20,427,534 16.3%
6900 Jericho Turnpike
Syosset, New York 11791
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Bernard Gutman 15,840,643 (2) 11.5%
6900 Jericho Turnpike
Syosset, New York 11791
James F. Leary 998,653 1,500,000 1.8%
6900 Jericho Turnpike
Syosset, New York 11791
Luther H. Hodges, Jr. 3,412,143 1,500,000 3.5%
6900 Jericho Turnpike
Syosset, New York 11791
Alfred Fabricant 2,485,507 1.8%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Mascola 2,485,507 1.8%
6900 Jericho Turnpike
Syosset, New York 11791
Products & Patents, Ltd. ("P&P") 1,760,530 1.3%
6900 Jericho Turnpike
Syosset, New York 11791
All Directors and Officers 79,744,187 43.8%
as a group (seven persons)
</TABLE>
(1) Under the rules of the Securities and Exchange Commission (the "SEC"), a
person is deemed to have "beneficial ownership" of any Common Stock over
which that person has or shares voting or investment power, plus any Common
Stock that person may acquire within 60 days, including through the
exercise of a stock option or the conversion of a convertible security.
(2) Includes 1,760,530 shares held by P&P inasmuch as Bernard Gutman is an
officer and director of P&P. Mr. Gutman has sole discretionary power of
these shares. P&P currently has no active business operations.
Item 12. Certain Relationships and Related Transactions
a. Loans from Director and Officer - A former officer/shareholder, who is
still a director of the Company, is owed $34,415 by the Company. The amount
is payable on demand with a stated interest rate of 11%. Effective June 30,
1997, the former officer/shareholder agreed to no longer charge interest.
In addition, $1,400 is owed to an officer on a short-term loan without
terms, which was repaid in 1998.
b. Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals which acquired an 18% ownership interest for
$500,000 was awarded two seats on the Board of Directors and one officer's
position. The two individuals had consulting agreements for which the
Company accrued fees of $5,000 per month for each individual from July 1996
through November 1997. During 1997, these two individuals each agreed to
receive 3,333,333 shares of stock in lieu of $50,000 in accrued consulting
fees. In December 1997, the Company entered into
14
<PAGE>
employment contracts with each of these two individuals for $150,000 per
year for five years from December 1997 through November 2002 and issued
options to purchase 7,500,000 shares each an exercise price of $.03 per
share. As of December 31, 1997, the two individuals were owed $47,500 each
in accrued consulting fees and salaries.
A director, who was previously the Company's chief executive officer,
entered into a consulting agreement with the Company for $2,000 per month
from October 1997 through September 1998. As of December 31, 1997, he is
owed $48,493 in accrued salary, consulting fees and expenses.
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Articles of Incorporation (3)
3.2 By-laws (3)
10.01 Agreement dated August 21, 1995 with J&R Intercontinental (2)
10.02 Consulting Agreement dated July 9, 1996 between the Company
and Herbert M. Reichlin (1)
10.03 Consulting Agreement dated July 9, 1996 between the Company
and American Employer Service Corporation (1)
10.04 Warrant Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (1)
10.05 Warrant Agreement dated July 9, 1996 between the Company and
Burton A. Goldstein (1)
10.06 Warrant Agreement dated July 9, 1996 between the Company and
Milton J. Walters (1)
10.07 Securities Purchase Agreement dated July 9, 1996 (1)
10.08 Agreement dated April 30, 1997 with Kingdom Blinds
Manufacturing, Inc.
10.09 Employment Agreement dated December 1, 1997 between the
Company and Burton A. Goldstein.
10.10 Employment Agreement dated December 1, 1997 between the
Company and Herbert M. Reichlin.
10.11 Consulting Agreement dated December 9, 1997 between the
Company and Bernard Gutman.
1) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1996.
2) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1995.
3) Incorporated by reference to Exhibits to Form 10K for
the fiscal year ended December 31, 1989.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUEST PRODUCTS CORPORATION
Dated: April 10, 1998 By: /S/: Herbert M. Reichlin
------------------------------
Herbert M. Reichlin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES AND TITLE DATE
-------------------- ----
/s/ Burton A. Goldstein April 10, 1998
- --------------------------------------
Chairman of the Board of Directors
Secretary, Chief Executive Officer
/s/ Herbert M. Reichlin April 10, 1998
- --------------------------------------
President, Treasurer, Chief
Operating Officer, Director
/s/ Bernard Gutman April 10, 1998
- --------------------------------------
Director
/s/ James F. Leary April 10, 1998
- --------------------------------------
Director
/s/ Luther H. Hodges, Jr. April 10, 1998
- --------------------------------------
Director
/s/ Alfred Fabricant April 10, 1998
- --------------------------------------
Director
/s/ Richard Mascola April 10, 1998
- --------------------------------------
Director
16
<PAGE>
SUPPLEMENTAL INFORMATION
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to
Section 12 of the Act.
NONE
17
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Quest Products Corporation (formerly Phase-Out of America, Inc.)
We have audited the accompanying balance sheet of Quest Products Corporation as
of December 31, 1997, and the related statements of operations, shareholders'
(deficit), and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quest Products Corporation as
of December 31, 1997, and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, the Company has been
subject to certain governmental regulatory matters by the U.S. Food and Drug
Administration. At present time, neither the Company nor its legal counsel can
predict the ultimate outcome of the matters addressed by this agency. These
matters, if pursued by this agency, may have a material adverse effect on the
operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has had recurring net operating losses since
its inception, has relied upon debt and equity financing to provide funds for
operations and, as of December 31, 1997, current liabilities exceed current
assets by $880,433. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
April 2, 1998
-F1-
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1997
================================================================================
Assets
Current Assets
Cash $ 27,588
Accounts receivable - net of allowance for doubtful
accounts of $1,000 2,712
Inventory 68,461
Prepaid expenses 1,496
--------
100,257
--------
Furniture and Equipment - at cost - net of accumulated
depreciation of $19,343 29,072
Patents - at cost - net of accumulated amortization of
$9,774 39,661
Security Deposits 4,137
--------
72,870
--------
$173,127
========
See notes to financial statements.
-F2-
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1997
================================================================================
<TABLE>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $5,900 $ 15,900
Shareholder's loan 176,202
Accounts payable 583,978
Accrued officer and director's compensation 143,493
Loans from director and officer 35,815
Accrued expenses 25,302
-----------
980,690
-----------
Shareholders' (Deficit)
Series A Convertible Preferred Stock - par value $.001 -
authorized 600,000 shares - no shares issued and outstanding
Series B Convertible Preferred Stock - par value $.001 -
authorized 5,000,000 shares - no shares issued and outstanding
Common Stock - par value $.00003 - authorized
200,000,000 shares - 138,083,713 shares issued and outstanding 4,142
Capital in excess of par 3,360,410
Accumulated (deficit) (4,172,115)
-----------
(807,563)
-----------
$ 173,127
===========
</TABLE>
See notes to financial statements.
-F3-
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations
================================================================================
For the Years Ended
December 31,
-------------------------------
1997 1996
------------- -------------
Sales - net $ 300,584 $ 1,489,250
Cost of Sales 145,499 374,520
------------- -------------
155,085 1,114,730
------------- -------------
Selling Expenses 277,727 1,032,492
General and Administrative Expenses 494,685 775,718
------------- -------------
772,412 1,808,210
------------- -------------
(Loss) Before Other Income (Expenses) (617,327) (693,480)
------------- -------------
Other Income (Expenses)
Interest income 3,966 5,694
Interest (expense) (33,167) (107,748)
Settlement of trade payable claim 61,000 --
------------- -------------
31,799 (102,054)
------------- -------------
Net (Loss) $ (585,528) $ (795,534)
============= =============
Basic and Diluted Net (Loss) Per Share $ (.01) $ (.01)
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 116,000,000 90,000,000
============= =============
See notes to financial statements.
-F4-
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Shareholders' (Deficit)
For the Years Ended December 31, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
Number of
Common Stock Amount Capital in
Shares $.00003 Excess of Accumulated
(Post-Split) Par Value Par Value (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 74,871,677 $ 2,246 $ 1,937,688 $(2,791,053)
Proceeds from sales of stock 20,045,592 601 514,881 --
Bond and accrued interest conversions
to stock 210,517 6 10,520 --
Senior subordinated convertible
debentures and accrued interest
conversions to stock 8,700,000 261 434,739 --
Shareholder's loan converted to stock 125,000 4 7,496 --
Stock issued for accrued services
rendered:
Officers and directors 3,857,143 116 160,294 --
Outside services 560,000 17 14,433 --
Net (loss) -- -- -- (795,534)
----------- ----------- ----------- -----------
Balance - December 31, 1996 108,369,929 3,251 3,080,051 (3,586,587)
Proceeds from sale of stock 22,547,118 676 171,824 --
Stock issued for accrued services
rendered - officers and directors 7,166,666 215 108,535 --
Net (loss) -- -- -- (585,528)
----------- ----------- ----------- -----------
Balance - December 31, 1997 138,083,713 $ 4,142 $ 3,360,410 $(4,172,115)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-F5-
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 1 of 2
================================================================================
For the Years Ended
December 31,
----------------------
1997 1996
--------- ---------
Cash Flows from Operating Activities
Net (loss) $(585,528) $(795,534)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 2,704 2,664
Amortization 3,041 2,938
Expenses paid through the issuance of stock 48,750 30,700
Accrued interest 18,009 --
(Increase) decrease in:
Accounts receivable 1,575 67,680
Inventories 58,952 (28,113)
Advances for clinical study 25,000 (25,000)
Prepaid expenses 3,918 4,438
Other current assets -- 18,592
Increase (decrease) in:
Accounts payable (30,349) 32,168
Accrued officer compensation 143,493 60,000
Taxes payable -- (3,780)
Accrued expenses (57,374) 86,601
--------- ---------
(367,809) (546,646)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (5,500) (21,390)
Acquisition of patents (2,435) --
Payment of security deposits -- (595)
--------- ---------
(7,935) (21,985)
--------- ---------
Cash Flows from Financing Activities
Repayments of debentures -- (29,297)
Proceeds from sales of common stock 172,500 515,482
Payments of notes payable - vendor (20,940) --
Loans from directors 5,000 56,000
Repayments to directors (3,600) (65,000)
Loan from shareholder -- 200,000
Repayments to shareholder (10,000) (25,000)
--------- ---------
142,960 652,185
--------- ---------
See notes to financial statements.
-F6-
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 2 of 2
================================================================================
For the Years Ended
December 31,
----------------------
1997 1996
--------- ---------
Net Increase in Cash $(232,784) $ 83,554
Cash - beginning 260,372 176,818
--------- ---------
Cash - end $ 27,588 $ 260,372
========= =========
Supplemental Disclosures
Cash paid for:
Interest $ -- $ 83,463
========= =========
Non-cash investing and financing transactions:
Bond and accrued interest conversions
to common stock $ -- $ 445,526
========= =========
Stock issued for accrued services rendered $ 60,000 $ 144,160
========= =========
Shareholder loan converted to common stock $ -- $ 7,500
========= =========
See notes to financial statements.
-F7-
<PAGE>
QUEST PRODUCTS CORPORATION
Notes to Financial Statements
December 31, 1997
================================================================================
1 - The Company
Quest Products Corporation (formerly Phase-Out of America, Inc.) (the
"Company") was organized as a Delaware Corporation on July 17, 1987 and
operated as a development stage company through 1993. The Company's purpose
is to market and distribute its patented phase-out system smoking cessation
device (the "product").
The Company had primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials. This domestic marketing was curtailed due to the ongoing
negotiations with the Federal Trade Commission ("FTC") as discussed in Note
10b. In 1998, the Company intends to re-enter the domestic retail market.
The Company also distributes the product overseas.
2 - Summary of Significant Accounting Policies
a. Inventory - Inventory is valued at cost (on a first-in, first-out
basis) which is not in excess of market value. Inventory is comprised
entirely of finished goods.
b. Furniture and Equipment - Furniture and equipment are carried at cost.
Depreciation is computed on the straight-line method over the
estimated useful lives (three to seven years) of the assets.
c. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Patents - Patents represent a patent dated June 15, 1993 that was
acquired by the Company on October 25, 1994 and a foreign patent
acquired in 1997. The acquisition cost has been capitalized and
amortized (straight-line method) over the life of 16 years.
Continued
-F8-
<PAGE>
e. Advertising Costs - All costs relating to direct response advertising
and marketing have been expensed in the period incurred. The Company's
direct response advertising costs do not qualify for capitalization
under the American Institute of Certified Public Accountants Statement
of Position 93-7 Reporting on Advertising Costs guidelines because
there is no historical data to provide a basis that the direct
response advertising and marketing will have measurable future
benefit.
Advertising and marketing expense was $16,531 and $364,381 for 1997
and 1996, respectively.
f. Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123 Accounting for Stock-Based Compensation, encourages,
but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. APB No. 25
requires no recognition of compensation expense for the stock-based
compensation arrangements provided by the Company where the exercise
price is equal to the market price at the date of the grants.
g. Recent Accounting Pronouncements
> Earnings (Loss) Per Share - The Company has chosen to adopt
Financial Accounting Standards No. 128 Earnings Per Share which
replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share.
3 - Status of the Company
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business over a reasonable length of time.
The Company has had recurring net operating losses since its inception and
has made use of privately-placed debt and equity financing to provide funds
for operations. As of December 31, 1997, current liabilities exceed current
assets by $880,433. Those factors, as well as the Company's relatively
recent entry into the marketplace, create an uncertainty about the
Company's ability to continue as a going concern.
The Company has intentions of expanding and refining its marketing efforts
to improve the efficiency of these efforts and to increase revenues. In
addition, the Company is continuing its efforts to obtain long-term
financing through the issuance of long-term debt and equity securities.
The financial statements do not include any adjustments that might be
necessary should the above or other factors affect the Company's ability to
continue as a going concern.
Continued
-F9-
<PAGE>
4 - Warrants and Convertible Debentures
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented as if the Company had accounted for
its warrants under the fair value method. The fair value of each warrant
is estimated on the date of the warrant using the Black-Scholes option
pricing model with the following weighted average assumptions:
1997 1996
============================
Assumptions:
Expected life of warrants 4.7 years 4.9 years
Risk free interest rate 5.5% 6.0%
Volatility of stock 553% 260%
Expected dividend yield -- --
The weighted average fair value of the warrants granted during 1997
and 1996 was $220,000 and $917,000, respectively. Had the fair value
of the warrants been amortized to expense over the related service
period, the pro forma impact on earnings of the stock-based
compensation for the warrants under the provision would have been as
follows:
1997 1996
=======================
Net (Loss):
As reported $(585,528) $(795,534)
Pro forma $(844,053) $(940,585)
Earnings Per Share:
As reported $ (.01) $ (.01)
Pro forma $ (.01) $ (.01)
In accordance with SFAS 123, the weighted average fair value of
warrants is required to be based on a theoretical statistical model
using the preceding assumptions. In actuality, the Company=s warrants
do not trade on a secondary exchange and, therefore, the employees and
directors cannot derive any benefit from holding the warrants under
these plans without an increase in the market price of Company stock.
Such an increase in stock price would benefit all shareholders
commensurately.
Continued
-F10-
<PAGE>
Presented below is a summary of stock option plans activity for the
years shown:
a. Warrants -
<TABLE>
<CAPTION>
Weighted
Average
Exercise Expiration
Shares Price Total Dates
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 7,940,061 $ .18 $ 1,424,409
Granted 23,307,950 .05 - .10 1,215,398 1999 - 2001
---------- -----------
Balance - December 31, 1996 31,248,011 .08 2,639,807
Granted 24,297,118 .025 - .05 864,856 2001 - 2002
Expired (3,034,000) .25 (758,500) 1997
---------- ---------- -----------
Balance - December 31, 1997 52,511,129 .05 $ 2,746,163
========== ========== ===========
</TABLE>
b. 1992 Convertible Debentures - In 1992, the Company initiated a
series of private placement offerings of two and three
Subordinated Convertible Debentures with an annual interest rate
of 10% and with variable conversion rates (ranging from $.05 to
$.10 per share). These offerings raised a total of $117,500. The
Company is in default on interest payments and is in violation of
covenants. Of the original $117,500 raised, $107,500 has been
paid back or converted into stock. As of December 31, 1997,
$10,000 of principal and $5,900 of interest remain unpaid or
unconverted on these debentures.
5 - Related Party Transactions
a. Loans from Director and Officer - A former officer/shareholder,
who is still a director of the Company, is owed $34,415 by the
Company. The amount is payable on demand with a stated interest
rate of 11%. Effective June 30, 1997, the former
officer/shareholder agreed to no longer charge interest. In
addition, $1,400 is owed to an officer on a short-term loan
without terms, which was repaid in 1998.
b. Officer=s and Director's Compensation - During 1996, an investor
group brought in by two individuals, which acquired an 18%
ownership interest for $500,000, was awarded two seats on the
Board of Directors and one officer=s position. The two
individuals had consulting agreements for which the Company
accrued fees of $5,000 per month for each individual from July,
1996 through November, 1997. During 1997, these two individuals
each agreed to receive 3,333,333 shares of stock in lieu of
$50,000 in accrued consulting fees. In December, 1997, the
Company entered into employment contracts with each of these two
individuals for $150,000 per year for five years from December,
1997 through November, 2002 and issued options to purchase
7,500,000 shares each at an exercise price of $.03 per share. As
of December 31, 1997, the two individuals were owed $47,500 each
in accrued consulting fees and salaries.
Continued
-F11-
<PAGE>
A director, who was previously the Company=s chief executive
officer, entered into a consulting agreement with the Company for
$2,000 per month from October, 1997 through September, 1998. As
of December 31, 1997, he is owed $48,493 in accrued salary,
consulting fees and expenses.
6 - Shareholder's Loan
During 1996, the Company received $200,000 from an individual as a loan in
connection with the Company's media campaign. Repayments of $35,000 were
made in cash and $7,500 in stock. The repayment of the $157,500 of
remaining principal at December 31, 1997 and $18,702 of interest which
accrues at 10% will be negotiated.
7 - Income Taxes
The Company has available net operating loss carryforwards of approximately
$4,500,000, which expire in 2002 until 2012. Deferred income taxes reflect
the net tax effects of net operating loss carryforwards and result in
deferred tax assets of approximately $1,350,000 and $960,000 at December
31, 1997 and 1996, respectively, which were fully offset by valuation
allowances due to uncertainties surrounding the ultimate realization of
these assets.
8 - Leases
The Company is obligated under a lease for office space through November,
2001. Rental expense was $38,760 and $15,080 for 1997 and 1996,
respectively. The future minimum lease payments required under this lease
are as follows:
1998 $ 58,354
1999 60,449
2000 62,626
2001 49,941
The Company received sublease payments of $1,800 per month in 1997 for a
portion of their office space, but there is no formal sublease agreement.
9 - Economic Dependence
The Company purchased 100% of its products from two vendors in 1997 and
from two other vendors in 1996. The Company sold 51% of its products in
1997 to one customer.
Continued
-F12-
<PAGE>
10 - Commitments and Contingencies
a. Direct Response Marketing Agreement - In 1994, the Company entered
into certain agreements with On-Air Infonetwork, Inc. ("On-Air")
relating to the Company's direct response marketing campaign during
1995 and 1996.
In March, 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against
On-Air, to seek damages sustained as a result of their failure to
perform pursuant to an agreement with the Company. Based on the Award
of Arbitrator dated October 28, 1996, which disposed of all claims by
both parties, the Company paid $123,157 to On-Air and gave them a note
for $20,940 which was paid in 1997.
b. Regulatory Matters - On June 1, 1993, the U.S. Food and Drug
Administration ("FDA") sent a warning letter to the Company. The
letter stated that due to the Company's marketing and promotional
materials used at the time for the product, the FDA believed the
product was being sold as a medical device and should be subject to
regulation as a medical device under the Federal Food, Drug and
Cosmetic Act ("FDC Act"), and that the product was in violation of
certain provisions of that Act.
The Company believes that the product is not a medical device within
the meaning of the FDC Act and has advised the FDA of its position.
However, in an act of cooperation with the FDA, the Company
volunteered to make revisions in its promotional material in order to
make it clearer to the public that the product is not intended to be
used as a medical device.
Since these revisions have been made, the Company has not received any
communications from the FDA about this matter. However, no assurance
can be given that the FDA will not in the future continue its
investigation and prohibit the Company from marketing the product, or
invoke other remedies, without the Company complying with medical
device status requirements of the FDC Act.
On October 20, 1993, the Federal Trade Commission ("FTC") advised the
Company that they were conducting a non-public, informal inquiry to
determine whether the Company had engaged in deceptive or unfair
practices in violation of the Federal Trade Commission Act ("FTC Act")
in connection with certain advertising claims made by the Company. The
Company provided certain information and documents requested by the
FTC.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the product were
unsubstantiated or false. The order required the Company to send a
postcard to identifiable past-purchasers of the product notifying them
of the FTC's action and advising them that the product has not been
proven to reduce the risk of smoking-related diseases or make
cigarettes safer. The order also prohibits the Company from making
certain claims in its current advertising. The Company=s cost to
comply with this order was $15,102.
Continued
-F13-
<PAGE>
c. Other - In February, 1995, the Company's former attorney, John B.
Lowy, brought an action against the Company in New York State Supreme
Court, New York County for unpaid attorney fees and disbursements of
approximately $39,000. In July, 1997, the Company agreed to pay the
balance owed of $16,603. Payments of $7,000 were made in 1997 against
this liability. The remaining balance of $9,603 is payable in monthly
installments of $1,000 through October, 1998.
In January, 1998, the Company=s former advertising agency, Popofsky
Advertising, Inc., brought an action against the Company in New York
State Supreme Court, New York County for unpaid services rendered in
the amount of $74,000. In March, 1998, the parties reached an
agreement to settle all claims. The Company will pay Popofsky
Advertising, Inc. $50,000 in installments of $15,000 by December,
1998, $15,000 by March, 1999 and the final $20,000 by June, 1999.
In July, 1997, the Company=s former attorney, who is a relative of a
director, brought an action against the Company in New York State
Supreme Court, New York County for unpaid attorney fees and
disbursements of approximately $18,000. During 1997, $5,000 was paid
by the Company and, therefore, the financial statements include a
liability for approximately $13,000 payable to this party. Legal
counsel expects that this case will either be abandoned or will settle
for an amount less than $10,000.
11 - Disclosure About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other current assets and liabilities approximate fair value because of the
short maturity of these items.
The carrying amounts of various loans payable exceed the fair value by
approximately $3,000, based on an estimated borrowing rate of 10%.
These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect these estimates.
-F14-
April 30, 1997
Mr. Henry Hsu, President
Kingdom Blinds Manufacturing, Inc.
715 Pondwood Circle
Pottsville, PA 17901
Dear Henry:
I sincerely appreciate the attitude and cooperation you demonstrated at our
meeting on April 24th. As you requested, I will memorialize in this letter the
terms and conditions that we have agreed upon.
1. Upon receipt of $5,000 for the month of April, Kingdom Blinds will prepare
and submit a proposal regarding the joint venture for the distribution of
PhaseOut units in Taiwan and other Asian countries.
2. Kingdom Blinds will prepare the information necessary to determine the
landed cost of PhaseOut units for sale in Brazil.
3. PhaseOut will provide Kingdom Blinds with the specifications in order for
Kingdom Blinds to submit a quotation regarding the Fuelmaster and eyeglass
products.
4. In consideration of Kingdom Blinds ceasing to charge interest on PhaseOut's
outstanding balances as of April 30, 1997, PhaseOut will issue one million
warrants exercisable at 5 cents per warrant with a life of four years. At
the time the current outstanding balance is fully paid, if the value of the
warrents less the exercise price is greater than the equivalent interest
that would have been charged from April 30, 1997, then no additional
amounts will be due. If the warrants are exercised prior to the time the
outstanding balance is fully paid and its value is greater than the
equivalent interest and the outstanding balance at that time, then also no
additional amounts would be due.
5. Kingdom Blinds will reduce the current balance due from PhaseOut by $61,000
as consideration for the breakage of units experienced by PhaseOut.
<PAGE>
Henry Hsu - 2 - April 30, 1997
7. Beginning in May 1997, Kingdom Blinds will receive $5,000 per month plus 5%
of PhaseOut's sales each month.
8. Prior to the end of 1997, PhaseOut will evaluate its financial condition in
order to determine its ability to accelerate the payment of the outstanding
balance due Kingdom Blinds, with the goal of completing the payments within
thirty months.
If the foregoing is the entire understanding that we reached, please sign below.
Sincerely,
/S/: Herbert M. Reichlin
Herbert M. Reichlin
Treasurer, COO
Accepted:
- -----------------------------------------
Henry Hsu, President
Kingdom Blinds
EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of December, 1997, between Quest
Products Corporation, Inc., a Delaware corporation, with offices at 6900 Jericho
Turnpike, Syosset, New York (the "Company") and Burton A. Goldstein, an
individual residing at 419 Centre Island Road, Centre Island, New York 11771
(the "Employee").
RECITALS
The Company desires to secure the services and employment of the Employee
on behalf of the Company, and the Employee desires to be employed by the
Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agrees as follows:
1. EMPLOYMENT. The Company hereby employs the Employee as the Chairman
of the Board and Chief Executive Officer of the Company, and the Employee
accepts such employment for the term of employment specified in Section 3
below (the "Employment Term"). During the Employment Term, the Employee
shall serve as the Chairman of the Board and Chief Executive Officer of the
Company, performing such duties as shall be reasonably required of an
executive-level employee of the Company, reporting only to the Board of
Directors of the Company (the "Board"). In addition, Employee shall have
such other powers and perform such other additional executive duties as may
from time to time be assigned to him by the Board including:
(a) Managing day-to-day operations;
(b) Hiring and firing of all employees and independent
contractors;
(c) Managing the marketing and sales of the Company;
(d) Managing the operations of the company in full conformity
with all state and federal laws.
3
<PAGE>
2. PERFORMANCE. The Employee will serve the Company faithfully and to
the best of his ability and will devote such time and energy to his
employment as is reasonably necessary to perform his employment duties.
3. EMPLOYMENT TERM. The Employment Term shall begin on the date of
this Agreement and continue for a five (5) year term until December 1, 2002
(the "Employment Term"). Employment during the Employment Term shall be
subject to termination only in accordance with the terms of this Agreement.
The Employment Term shall be automatically renewable for successive one (1)
year terms ("Renewal Term") provided that at the end of the Employment Term
and any Renewal Term the Employee is not in breach of this Agreement.
4. COMPENSATION.
4.1 Salary. During the Employment Term, and any Renewal Term, the
Company shall pay the Employee a base salary at the annual rate of
$150,000 per year payable in equal, monthly installments, subject to
withholding and other applicable taxes.
4.2 Accrual of Salary. If at the time required for payment of any
of the monthly installments of salary set forth in paragraph 4.1
above, the Company does not have sufficient cash flow to pay the base
salary to Employee as set forth above than in such case the Employee
agrees that such salary in whole or in part shall be deferred and
accrued until such time as the Corporation is reasonably able to pay
all or part of the deferred and accrued salary.
4.3 Bonus Compensation. In addition to the base compensation set
forth in paragraph 4.1 above Employee shall be entitled to receive
bonus compensation which shall be equal to 10% of the annual
consolidated pre-tax profits realized by the Company after the first
$750,000 in profits. The $750,000 threshold before calculation of
bonus shall be a one time threshold and shall not be included in
subsequent bonus calculations once the initial profit threshold is
realized by the Company. Notwithstanding this paragraph, total
compensation in any given year shall not exceed the sum of $500,000.
4.4 Stock Options. The Company will grant the Employee options to
purchase 7,500,000 shares of its common stock pursuant to a stock
option plan to be adopted by the Company. The exercise price of the
options shall be [$.03] per share. All such options shall vest
immediately. Options must be exercised within 5 years.
4.5 Additional Benefits. In addition to the other compensation
payable to the Employee hereunder, during the Employment Term, the
Company shall provide Employee with health, life and disability
insurance and with a reasonable monthly allowance for automobile
expenses.
5. EXPENSES. The Employee shall be reimbursed by the Company for all
reasonable expenses incurred by him in connection with the performance of
his duties hereunder in accordance with policies established by the Board
of Directors from time to time and upon receipt of appropriate
documentation.
6. AGREEMENT NOT TO COMPETE. The Employee agrees that during the
Noncompetition Period (defined below) he will not in any capacity, either
separately, jointly or in association with others, directly or indirectly,
as an officer, director, consultant, agent, employee, owner, partner,
stockholder or otherwise, engage or have a financial interest in any
business which competes with the Company or with any affiliate of the
Company in the United States; provided, however, that the record of
beneficial ownership by the Employee of not more than five percent (5%) of
the outstanding publicly traded securities of any class of any such
business shall not be deemed to be in violation of this Section 6, provided
that the Employee is not an officer, director, consultant, or employee of
such business. The "Noncompetition Period" shall mean the period ending
three years after the termination of his employment hereunder for any
reason, other than a termination upon the expiration of the term of this
Agreement and any renewal term. The Employee further agrees that during the
Noncompetition Period, except in connection with the performance of
services hereunder, he will not in any capacity, either separately, jointly
or in association with others, directly or indirectly, solicit or contact
with regard to a business competitor of the Company any of the Company's
employees, consultants, agents, customers or prospects, as shown by the
Company's records, that were employees, consultants, agents, customers or
prospects of the Company at any time during the two years immediately
preceding termination of employment hereunder or that become such at any
time during the Noncompetition Period.
If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to the
duration, scope or geographic area, the court is hereby requested and
authorized by the parties hereto to revise the foregoing restrictions to
include the maximum restrictions allowed under the applicable law. The
Employee expressly agrees that breach of the foregoing would result in
irreparable injuries to the Company, that the remedy at law for any such
breach will be inadequate and that upon breach of this provision, the
Company, in addition to all other available remedies, shall be entitled as
a matter of right to injunctive relief in any court of competent
jurisdiction without the necessity of proving the actual damage to the
Company.
7. SECRET PROCESSES AND CONFIDENTIAL INFORMATION. For the Employment
Term and all Renewal Terms and thereafter, (a) the Employee will not
divulge, transmit or otherwise disclose (except as legally compelled by
court order, and then only to the extent required, after prompt notice to
the Company of any such order), directly or indirectly, other than in the
regular and proper course of business of the Company, any confidential
knowledge or information which Employee acquires after the effective date
of this agreement with respect to confidential or secret processes,
services, techniques, customers or plans with respect to the Company and
(b) the Employee will not use, directly or indirectly, any confidential
information for the benefit of anyone other than the Company; provided,
however, that the Employee has no obligation, express or implied, to
refrain from using or disclosing to others any such knowledge or
information which he acquired or possessed before the effective date of
this Agreement or which he brought to the Company or which is or hereafter
shall become available to the public other than through disclosure by the
Employee. All new processes, techniques, know-how, inventions, plans,
products, patents and devices developed, made or invented by the Employee,
alone or with others, while an employee of the Company, shall be and become
the sole property of the Company, unless released in writing by the
Company, and the Employee hereby assigns any and all rights therein or
thereto to the Company.
8. TERMINATION.
8.1 Termination at End Term. The employment of the Employee
hereunder shall automatically terminate at the end of the Employment
Term unless renewed by the Employee in writing for a one (1) year
Renewal Term, at least sixty (60) days prior to expiration of the
Employment Term or a Renewal Term.
8.2 Termination by the Company with Cause. The Company shall have
the right at any time to terminate with Employee's employment
hereunder upon the occurrence of any of the following (any such
termination being referred to as a termination for "Cause"):
8.2.1 the commission by the Employee of any embezzlement or
other deliberate and premeditated act of dishonesty against the
financial or business interest of the Company;
8.2.2 the habitual drug addiction or habitual intoxication
of the Employee;
8.2.3 the conviction by the Employee of, or the pleading by
the Employee of nolo contendere to, a felony;
8.2.4 the unreasonable and willful failure or refusal of the
Employee to perform his material duties hereunder, which failure
or refusal is not cured within ten (10) days subsequent to notice
from the Company to the Employee specifying the nature of such
failure or refusal; or
8.2.5 the breach by the Employee of any terms of this
Agreement, which breach is not cured within ten (10) days
subsequent to notice from the Company to the Employee specifying
such breach.
8.3 Termination Upon Death or Disability. The Employee's
employment hereunder shall automatically terminate upon the Employee's
death or his inability to perform his duties hereunder by reason of
any mental, physical or other disability for a period of at least six
(6) consecutive months, as determined by a qualified physician.
9. EFFECT OF TERMINATION OF EMPLOYMENT.
For Cause; Resignation; Death or Disability. If the Employee's
employment is termination for Cause (pursuant to Section 8.2), if the
Employee's employment is terminated by the death or disability of the
Employee (pursuant to Section 8.2) the Employee's base salary and other
benefits specified in Sections 4.1 and 4.3 shall cease at the time of such
termination.
10. Insurance. The Company may purchase insurance on the life of the
Employee (Key Man Insurance) and, if it does so, the Employee shall
cooperate fully by performing all the requirements of the life insurer
which are necessary conditions precedent to the insurance of the life
insurance policy issued by it.
11. Notice. Any notices required or permitted hereunder shall be in
writing and shall be deemed to have been given when personally delivered or
when mailed, certified or registered mail, postage prepaid, to the
following addresses:
If to the Employee: Burton A. Goldstein
419 Centre Island Road Centre
Island, New York 11771
If to the Company: Quest Products Corporation
6900 Jericho Turnpike, Suite 300W
Syosset, New York 11791
With a copy to: Alfred R. Fabricant, Esq.
Fabricant & Yeskoo LLP
535 Fifth Avenue
New York, New York 10017
12. GENERAL.
12.1 Governing Law. The terms of this Agreement shall be governed
by and construed under the laws of the State of New York without
regard to its principles of conflicts of laws.
12.2 Assignability. The Employee may not assign his interest in
or delegate his duties under this Agreement.
12.3 Enforcement Costs. In the event that either the Company or
the Employee initiates an action or claim to enforce any provision or
term of this Agreement, the costs and expenses (including attorney's
fees) of the prevailing party shall be paid by the other party, such
party to be deemed to have prevailed if such action or claim is
concluded pursuant to a court order or final judgment which is not
subject to appeal, a settlement agreement or dismissal of the
principle claims.
12.4 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company, its successors and assigns.
12.5 Entire Agreement; Modification. This Agreement constitutes
the entire agreement of the parties hereto with respect to the subject
matter hereof and may not be modified or amended in any way except in
writing by the parties hereto.
12.6 Duration. Notwithstanding the term of employment hereunder,
this Agreement shall continue for so long as any obligations remain
under this Agreement.
IN WITNESS WHEREOF, the parties hereto, intended to be legally bound, have
hereunto executed this Agreement the day and year first written above. COMPANY:
Quest Products Corporation a New York corporation
BY:
NAME:
TITLE:
EMPLOYEE:
/S/: Burton A. Goldstein
EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of December, 1997, between Quest
Products Corporation, Inc., a Delaware corporation, with offices at 6900 Jericho
Turnpike, Syosset, New York (the "Company") and Herbert M. Reichlin, an
individual residing at 19 Fortune Lane, Jericho, New York 11753 (the
"Employee").
RECITALS
The Company desires to secure the services and employment of the Employee
on behalf of the Company, and the Employee desires to be employed by the
Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agrees as follows:
1. EMPLOYMENT. The Company hereby employs the Employee as the President and
Chief Operating Officer of the Company, and the Employee accepts such employment
for the term of employment specified in Section 3 below (the "Employment Term").
During the Employment Term, the Employee shall serve as the President and Chief
Operating Officer of the Company, performing such duties as shall be reasonably
required of an executive-level employee of the Company, reporting only to the
Board of Directors of the Company (the "Board"). In addition, Employee shall
have such other powers and perform such other additional executive duties as may
from time to time be assigned to him by the Board including:
(a) Managing day-to-day operations;
(b) Hiring and firing of all employees and independent contractors;
(c) Managing the marketing and sales of the Company;
(d) Managing the operations of the company in full conformity with all
state and federal laws.
<PAGE>
2. PERFORMANCE. The Employee will serve the Company faithfully and to the
best of his ability and will devote such time and energy to his employment as is
reasonably necessary to perform his employment duties.
3. EMPLOYMENT TERM. The Employment Term shall begin on the date of this
Agreement and continue for a five (5) year term until December 1, 2002 (the
"Employment Term"). Employment during the Employment Term shall be subject to
termination only in accordance with the terms of this Agreement. The Employment
Term shall be automatically renewable for successive one (1) year terms
("Renewal Term") provided that at the end of the Employment Term and any Renewal
Term the Employee is not in breach of this Agreement.
4. COMPENSATION.
4.1 Salary. During the Employment Term, and any Renewal Term, the Company
shall pay the Employee a base salary at the annual rate of $150,000 per year
payable in equal, monthly installments, subject to withholding and other
applicable taxes.
4.2 Accrual of Salary. If at the time required for payment of any of the
monthly installments of salary set forth in paragraph 4.1 above, the Company
does not have sufficient cash flow to pay the base salary to Employee as set
forth above than in such case the Employee agrees that such salary in whole or
in part shall be deferred and accrued until such time as the Corporation is
reasonably able to pay all or part of the deferred and accrued salary.
4.3 Bonus Compensation. In addition to the base compensation set forth in
paragraph 4.1 above Employee shall be entitled to receive bonus compensation
which shall be equal to 10% of the annual consolidated pre-tax profits realized
by the Company after the first $750,000 in profits. The $750,000 threshold
before calculation of bonus shall be a one time threshold and shall not be
included in subsequent bonus calculations once the initial profit threshold is
realized by the Company. Notwithstanding this paragraph, total compensation in
any given year shall not exceed the sum of $500,000.
4.4 Stock Options. The Company will grant the Employee options to purchase
7,500,000 shares of its common stock pursuant to a stock option plan to be
adopted by the Company. The exercise price of the options shall be [$.03] per
share. All such options shall vest immediately. Options must be exercised within
5 years.
4.5 Additional Benefits. In addition to the other compensation payable to
the Employee hereunder, during the Employment Term, the Company shall provide
Employee with health, life and disability insurance and with a reasonable
monthly allowance for automobile expenses.
5. EXPENSES. The Employee shall be reimbursed by the Company for all
reasonable expenses incurred by him in connection with the performance of his
duties hereunder in accordance with policies established by the Board of
Directors from time to time and upon receipt of appropriate documentation.
6. AGREEMENT NOT TO COMPETE. The Employee agrees that during the
Noncompetition Period (defined below) he will not in any capacity, either
separately, jointly or in association with others, directly or indirectly, as an
officer, director, consultant, agent, employee, owner, partner, stockholder or
otherwise, engage or have a financial interest in any business which competes
with the Company or with any affiliate of the Company in the United States;
provided, however, that the record of beneficial ownership by the Employee of
not more than five percent (5%) of the outstanding publicly traded securities of
any class of any such business shall not be deemed to be in violation of this
Section 6, provided that the Employee is not an officer, director, consultant,
or employee of such business. The "Noncompetition Period" shall mean the period
ending three years after the termination of his employment hereunder for any
reason, other than a termination upon the expiration of the term of this
Agreement and any renewal term. The Employee further agrees that during the
Noncompetition Period, except in connection with the performance of services
hereunder, he will not in any capacity, either separately, jointly or in
association with others, directly or indirectly, solicit or contact with regard
to a business competitor of the Company any of the Company's employees,
consultants, agents, customers or prospects, as shown by the Company's records,
that were employees, consultants, agents, customers or prospects of the Company
at any time during the two years immediately preceding termination of employment
hereunder or that become such at any time during the Noncompetition Period.
If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to the
duration, scope or geographic area, the court is hereby requested and authorized
by the parties hereto to revise the foregoing restrictions to include the
maximum restrictions allowed under the applicable law. The Employee expressly
agrees that breach of the foregoing would result in irreparable injuries to the
Company, that the remedy at law for any such breach will be inadequate and that
upon breach of this provision, the Company, in addition to all other available
remedies, shall be entitled as a matter of right to injunctive relief in any
court of competent jurisdiction without the necessity of proving the actual
damage to the Company.
7. SECRET PROCESSES AND CONFIDENTIAL INFORMATION. For the Employment Term
and all Renewal Terms and thereafter, (a) the Employee will not divulge,
transmit or otherwise disclose (except as legally compelled by court order, and
then only to the extent required, after prompt notice to the Company of any such
order), directly or indirectly, other than in the regular and proper course of
business of the Company, any confidential knowledge or information which
Employee acquires after the effective date of this agreement with respect to
confidential or secret processes, services, techniques, customers or plans with
respect to the Company and (b) the Employee will not use, directly or
indirectly, any confidential information for the benefit of anyone other than
the Company; provided, however, that the Employee has no obligation, express or
implied, to refrain from using or disclosing to others any such knowledge or
information which he acquired or possessed before the effective date of this
Agreement or which he brought to the Company or which is or hereafter shall
become available to the public other than through disclosure by the Employee.
All new processes, techniques, know-how, inventions, plans, products, patents
and devices developed, made or invented by the Employee, alone or with others,
while an employee of the Company, shall be and become the sole property of the
Company, unless released in writing by the Company, and the Employee hereby
assigns any and all rights therein or thereto to the Company.
8. TERMINATION.
8.1 Termination at End Term. The employment of the Employee hereunder shall
automatically terminate at the end of the Employment Term unless renewed by the
Employee in writing for a one (1) year Renewal Term, at least sixty (60) days
prior to expiration of the Employment Term or a Renewal Term.
8.2 Termination by the Company with Cause. The Company shall have the right
at any time to terminate with Employee's employment hereunder upon the
occurrence of any of the following (any such termination being referred to as a
termination for "Cause"):
8.2.1 the commission by the Employee of any embezzlement or other
deliberate and premeditated act of dishonesty against the financial or
business interest of the Company; 8.2.2 the habitual drug addiction or
habitual intoxication of the Employee; 8.2.3 the conviction by the Employee
of, or the pleading by the Employee of nolo contendere to, a felony;
8.2.4 the unreasonable and willful failure or refusal of the Employee
to perform his material duties hereunder, which failure or refusal is not
cured within ten (10) days subsequent to notice from the Company to the
Employee specifying the nature of such failure or refusal; or
8.2.5 the breach by the Employee of any terms of this Agreement, which
breach is not cured within ten (10) days subsequent to notice from the
Company to the Employee specifying such breach.
8.3 Termination Upon Death or Disability. The Employee's employment
hereunder shall automatically terminate upon the Employee's death or his
inability to perform his duties hereunder by reason of any mental, physical or
other disability for a period of at least six (6) consecutive months, as
determined by a qualified physician.
9. EFFECT OF TERMINATION OF EMPLOYMENT.
For Cause; Resignation; Death or Disability. If the Employee's employment
is termination for Cause (pursuant to Section 8.2), if the Employee's employment
is terminated by the death or disability of the Employee (pursuant to Section
8.2) the Employee's base salary and other benefits specified in Sections 4.1 and
4.3 shall cease at the time of such termination.
10. Insurance. The Company may purchase insurance on the life of the
Employee (Key Man Insurance) and, if it does so, the Employee shall cooperate
fully by performing all the requirements of the life insurer which are necessary
conditions precedent to the insurance of the life insurance policy issued by it.
11. Notice. Any notices required or permitted hereunder shall be in writing
and shall be deemed to have been given when personally delivered or when mailed,
certified or registered mail, postage prepaid, to the following addresses:
If to the Employee: Herbert M. Reichlin
19 Fortune Way
Jericho, New York 11753
If to the Company: Quest Products Corporation
6900 Jericho Turnpike, Suite 300W
Syosset, New York 11791
With a copy to: Alfred R. Fabricant, Esq.
Fabricant & Yeskoo LLP
535 Fifth Avenue
New York, New York 10017
12. GENERAL.
12.1 Governing Law. The terms of this Agreement shall be governed by and
construed under the laws of the State of New York without regard to its
principles of conflicts of laws.
12.2 Assignability. The Employee may not assign his interest in or delegate
his duties under this Agreement.
12.3 Enforcement Costs. In the event that either the Company or the
Employee initiates an action or claim to enforce any provision or term of this
Agreement, the costs and expenses (including attorney's fees) of the prevailing
party shall be paid by the other party, such party to be deemed to have
prevailed if such action or claim is concluded pursuant to a court order or
final judgment which is not subject to appeal, a settlement agreement or
dismissal of the principle claims.
12.4 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors and assigns.
12.5 Entire Agreement; Modification. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
may not be modified or amended in any way except in writing by the parties
hereto.
12.6 Duration. Notwithstanding the term of employment hereunder, this
Agreement shall continue for so long as any obligations remain under this
Agreement.
IN WITNESS WHEREOF, the parties hereto, intended to be legally bound, have
hereunto executed this Agreement the day and year first written above. COMPANY:
Quest Products Corporation a New York corporation
BY:
NAME:
TITLE:
EMPLOYEE:
/S/: Herbert M. Reichlin
-------------------------
Herbert M. Reichlin
December 9, 1997
Mr. Bernard Gutman
1950 South Ocean Drive, Apt. 21G
Hallandale, FL 33009
Dear Bernie:
This letter will memorialize the understanding the Company has reached with you
with regard to consulting services. In the year beginning October 1, 1997 and
ending September 30, 1998, the Company, when deemed necessary, shall have the
ability to seek your advice and counsel, and you shall make yourself reasonably
available either in person or by telephone. The fee for such consulting services
shall be $2,000 a month.
If, at the time required for payment of such consulting fees, the Company does
not have sufficient cash flow to pay these fees, you agree that such fees, in
whole or in part, shall be deferred and accrued until such time as the Company
is reasonably able to pay all or part of the deferred and accrued fees.
The annual renewal of this agreement will be at the Company's option.
Very truly yours,
/S/ Herbert M. Reichlin
Herbert M. Reichlin
Treasurer and Chief Operating Officer
HMR:car
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