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, 1999
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
(State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES __X__ NO _____
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. __X__
The registrant's operating revenues for its most recent fiscal year were $1,227.
The number of shares outstanding on December 31, 1999 was 183,087,985 shares of
Common Stock, .00003 par value.
Continued...
<PAGE>
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.05) of
the Company's Common Stock, as of December 31, 1999, is approximately $4,866,118
based upon the 162,203,995 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__
<PAGE>
QUEST PRODUCTS CORPORATION
Form 10-KSB
Fiscal Year Ended December 31, 1999
Table of Contents
PART I PAGE
- ------ ----
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 9
Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial 10 - 12
Condition and Results of Operations
Item 7. Financial Statements F1 - F16
Item 8. Changes in or Disagreement with Accountants on 13
Accounting and Financial Disclosure
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and 13 - 14
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Item 10. Executive Compensation 15 - 16
Item 11. Security Ownership of Certain Beneficial 16 - 17
Owners and Management
Item 12. Certain Relationships and Related Transactions 17 - 18
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K 18
Signatures 19
Supplemental Information 20
<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 three areas: (1) test marketing the product domestically through various
channels of distribution (2) entering into international distribution agreements
utilizing television infomercials and commercials, and (3) distributing the
product into domestic retail chain drug stores.
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 $19.95 plus shipping and
handling. The wholesale price averages approximately $12.00.
The Company is currently having the product manufactured by one vendor in
South Korea. This source 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.
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 1998, the Company entered into a joint venture agreement with SAS
Group, Inc. whereby distribution began of the PhaseOut product into domestic
retail chain drug stores totaling approximately 12,000 stores. The Company is
primarily responsible for the manufacturing of the product and SAS Group, Inc.
is primarily responsible for the sale and distribution of the product.
New Products
In October 1999, the Company successfully completed development of
adjustable polarized sunglasses, which allow the wearer to change the color of
the sunglass lenses to a variety of colors without changing the lenses or
altering the frame. The Company will strive to begin worldwide distribution
during 2001.
In addition, on October 31, 1999 the Company entered into a license
agreement with the owner of a patented technology as it pertains to eyewear.
Under the agreement, the licensor grants under the provisions of his patent the
exclusive license to make, use, and sell the patented inventions through all
channels of distribution and to otherwise practice the patent on an exclusive
basis to the exclusion of the entire world, including the inventor. The patent
licensed hereunder relates to an adjustable glasses product including but not
limited to sunglasses, ski goggles and diving masks. The territory covered by
the patent is the World.
In consideration for this license granted to the Company, the licensor
will receive royalty payments based on the number of glasses sold. A $10,000
advance royalty was paid on signing of contract.
The Company continues to add new technology to the patent.
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 five employees, including the
Company's two officers and directors and three administrative and secretarial
personnel.
Item 2. Properties
The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11791.
Item 3. Legal Proceedings
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.
On April 7, 1999, the Company received a letter from the FTC concluding, on the
assumption that the information submitted is accurate and complete, that no
action is indicated.
In December 1999, a former officer and director, Bernard Gutman, brought
an action against the Company in New York State Supreme Court, Nassau County,
for alleged consulting fees and loan repayments due him in the amount of
$100,445. The Company has counterclaimed for fraud and breach of contract. The
action has been settled as of March 6, 2000, although the final settlement
documents have not yet been executed. The parties have agreed to issue to the
former director 400,000 shares of common stock which, on the date of settlement,
was valued at 17 cents per share based upon its closing price on that date.
On March 30, 2000, Quest Products Corporation initiated a lawsuit in the
United States District Court for the Southern District of New York against SAS
Group Inc., Michael Sobo, Scott Sobo and Century Factors. SAS Group Inc. has
been the Company's joint venture partner since 1998 in connection with the
distribution of the Company's patented PhaseOut product to drug stores and other
retailers. The lawsuit asserts claims for patent and trademark infringement,
unfair competition, breach of the joint venture agreement, fraud, conversion and
breach of fiduciary duty, and seeks injunctive relief, monetary damages in
excess of $750,000 and punitive damages of at least $7,500,000
Item 4. Submission of Matters to a Vote of Security Holders
NONE
8
<PAGE>
Item 5. Market for Company's Common Equity and Related Stockholder
Matters
(a) Market information - The principal U.S. market in which the Company's Common
Shares ($.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, 1998 .018 .018
Quarter Ended June 30, 1998 .014 .011
Quarter Ended September 30, 1998 .012 .009
Quarter Ended December 31, 1998 .011 .008
Quarter Ended March 31, 1999 .01 .007
Quarter Ended June 30, 1999 .058 .008
Quarter Ended September 30, 1999 .063 .022
Quarter Ended December 31, 1999 .056 .021
(b) Holders -- As of December 31, 1999, the approximate number of the
Company's shareholders was 500.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial
status and its contemplated financial requirements, does not contemplate
or anticipate paying any dividends upon its Common Stock in the
foreseeable future.
9
<PAGE>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
During 1998, the Company began distribution of the PhaseOut product into
retail chain stores, totaling approximately 12,000 stores, pursuant to an oral
joint venture agreement with SAS Group, Inc. ("SAS"), for which it is entitled
to 50% of the income. SAS handles all the marketing and operational activities
of the joint venture. The investment in the joint venture is accounted for under
the equity method whereby the investment account is increased for contributions
by the Company plus its share of the income of the joint venture and reduced for
distributions and its share of any losses incurred by the joint venture. The
Company's results of operations include its 50% share of the income from the
joint venture as a separate line item. As such, sales, cost of sales and selling
expenses of the joint venture in 1999 and 1998 are reported in this separate
"equity in net income of the joint venture" line item. In January 2000, the
Company informed SAS Group, Inc. that the Joint Venture was terminated.
For 1999, the Company sold 59 units at an average price of $20.80, for
sales of $1,277, and the joint venture sold 3,188 units at an average price of
$12.93, for sales of $41,225. The 1999 sales for the joint venture were then
reduced by current and estimated future sales returns and allowances totaling
$669,820. The Company disputes the various adjustments to sales and has
instituted legal proceedings against SAS Group, Inc. to recover all monies for
which it is entitled, which the Company believes is in excess of $750,000. For
1998, the Company sold 3,375 units at an average price of $13.27 for sales of
$44,781 and the joint venture sold 62,659 units at an average price of $16.42
for sales of $1,028,595.
For 1999, the Company's average cost was $3.36, for a cost of sales of
$198, and the joint venture had an average cost of sales of $3.87. During 1999,
the Company adjusted its cost of sales figure as a result of current and future
cost estimates based on information provided by SAS Group, Inc. The Company
disputes the various adjustments to cost of sales and has instituted legal
proceedings as discussed above. For 1998 the Company's average cost was $5.55
for a cost of sales of $18,735. The average cost for the joint venture was $2.18
for a cost of sales of $136,433 due to a decrease in unit cost, which resulted
from a change in suppliers.
Selling expenses incurred by the Company increased by approximately
$54,000 from $25,000 in 1998 to $79,000 in 1999. This increase is primarily
attributable to an approximately $52,000 increase in product development costs
as it relates to the Company's sunglass product, an approximately $8,000
increase in costs related to the design and upkeep of the Company's corporate
website, an approximate $15,000 decrease in expenses incurred in connection with
the after market automobile products program which ended in January 1998, an
approximately $9,000 increase in travel expenses, and an approximately $2,000
decrease in shipping and postage expenses.
General and administrative expenses incurred by the Company increased by
approximately $13,000 from $543,000 in 1998 to $556,000 in 1999. This increase
is primarily attributable to an approximately $6,000 increase in salaries and
related payroll costs, and an approximately $7,000 net increase in various other
administrative areas.
Interest expense increased by approximately $2,000 from $18,000 in 1998 to
$20,000 in 1999 due to an approximately $2,000 net increase in interest on loans
made to the Company.
10
<PAGE>
Liquidity and Capital Resources
Cash of $343,907 was used for operations for the year ended December 31,
1999 as compared to $192,673 used last year. Cash increased during the year by
$100,738.
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,
1999 1998
---- ----
Working capital
(deficiency) $(1,309,038) $(1,108,922)
Current ratios 0.09:1 0.15:1
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
$1,100,000 of financing under the same terms and conditions as offered to the
officers and directors. From 1997 through December 31, 1999, the Company has
received $798,700. There is no assurance that the Company will be able to obtain
additional financing.
In October 1999, the Company has successfully completed development of
adjustable polarized sunglasses which allow the wearer to change the color of
the sunglass lenses to a variety of colors without changing the lenses or
altering the frame. The Company is seeking the required financing needed for
this sunglass project and will strive to begin worldwide distribution during
2001.
Year 2000
The "Year 2000 issue" refers to the potential harm from computer programs
that identify dates by the last two digits of the year rather than using the
full four digits. Such programs could fail due to misidentification of dates on
or after January 1, 2000. If such a failure were to occur to the Company's
internal computer-based systems or to the crucial computer-based systems
operated by third parties, the Company could be unable to process transactions,
send invoices, or engage in similar normal business operations. Such failures,
if they occurred, would have a material adverse effect on the Company's
business, results of operations and financial condition. However, because of the
complexity of the issues, the number of parties involved and the fact that many
of the issues are outside the Company's control, the Company cannot reasonably
predict with certainty the nature or likelihood of such effects.
The Company has conducted a review of most of its internal computer-based
systems. Much of the software used by the Company has been developed internally
and is regularly modified and updated to meet the changing requirements of its
business. The Company expects that its critical internal systems will be able to
process relevant date information in the future to permit the Company to
continue to provide its services without significant interruption or material
adverse effect on its business, results of operations and financial condition.
However, there can be no assurances that the Company will not experience
unanticipated negative consequence caused by undetected errors or defects in the
technology used in its internal systems.
11
<PAGE>
Notwithstanding the Company's expectation that its own systems will be
able to process Year 2000 date information, the Company's business depends
significantly on receiving uninterrupted services by other parties. The Company
has made inquiries of some of these parties regarding their respective levels of
preparedness for Year 2000 issues as they may affect the Company. The Company
will continue to make such inquiries and will monitor the public disclosures of
such companies regarding their Year 2000 status. So far, the responses to such
inquiries have been generally non-committal regarding levels of preparedness or
willingness to provide assurances to the Company. In almost all cases, the
Company is not in a position to require either affirmative action or assurances
by these parties regarding continued provision of services in the Year 2000.
Accordingly, while the Company has not been advised by any of these other
companies on which it depends that they do not expect to be ready for Year 2000
issues, the Company does not believe it is in a position to project the
likelihood of such parties' abilities to provide uninterrupted services to the
Company. The failure of any of these companies to provide uninterrupted service
to the Company would likely have a material adverse effect on the Company's
business and its results of operations and financial condition.
The Company does not separately identify costs incurred in connection with
Year 2000 compliance activities. To date, however, the Company does not believe
such costs to be significant because they generally have been incurred in the
normal course of internally modifying and updating the Company's software
programs. Future expenditures are not expected to be significant and will be
funded out of cash flows.
Item 7. Financial Statements
12
<PAGE>
QUEST PRODUCTS CORPORATION
Table of Contents
================================================================================
Page
Independent Auditors' Report F-1
Financial Statements
Balance Sheet
December 31, 1999 F-2 - F-3
Statements of Operations
For the Years Ended December 31, 1999 and 1998 F-4 - F-5
Statements of Changes in Shareholders' (Deficit)
For the Years Ended December 31, 1999 and 1998 F-6
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 F-7 - F-8
Notes to Financial Statements F-9 - F-16
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Quest Products Corporation
We have audited the accompanying balance sheet of Quest Products Corporation as
of December 31, 1999 and the related statements of operations, shareholders'
(deficit), and cash flows for the years ended December 31, 1999 and 1998. 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, 1999 and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 12 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, 1999 current liabilities exceed current
assets by $1,105,108. 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
March 21, 2000
- F1 -
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1999
================================================================================
Assets
Current Assets
Cash $113,338
Inventory 7,301
Prepaid expenses 6,234
--------
126,873
--------
Investment and Advances - PhaseOut Partners 85,874
Furniture and Equipment - at cost - net of accumulated
depreciation of $35,513 12,902
Deferred royalties 10,000
License acquisition cost - net of accumulated
amortization of $500 28,500
Patents - at cost - net of accumulated
amortization of $5,856 33,579
Security Deposits 3,861
--------
174,716
--------
$301,589
========
- F2 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1999
================================================================================
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $7,900 $ 17,900
Accounts payable 517,019
Accrued officer and director's compensation 628,142
Accrued expenses 68,920
-----------
1,231,981
-----------
Other Liabilities
Due to former officer and directors 203,431
-----------
Commitments and Contingencies
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 - 183,087,985 shares
issued and outstanding 5,492
Capital in excess of par 4,156,599
Accumulated (deficit) (5,295,914)
-----------
(1,133,823)
-----------
$ 301,589
===========
- F3 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations Page 1 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December31,
1999 1998
------------- -------------
<S> <C> <C>
Sales - net $ 1,227 $ 44,781
Cost of Sales 198 18,735
------------- -------------
1,029 26,046
------------- -------------
Selling Expenses 79,051 25,428
General and Administrative Expenses 556,308 543,389
------------- -------------
635,359 568,817
------------- -------------
(Loss) Before Other Income (Expenses) and
Equity in Net Income of PhaseOut Partners (634,330) (542,771)
------------- -------------
Other Income (Expenses)
Interest income -- 15
Interest (expense) (19,622) (17,634)
------------- -------------
(19,622) (17,619)
------------- -------------
(Loss) Before Equity in Net Income of PhaseOut Partners (653,952) (560,390)
Equity in Net Income (Loss) of PhaseOut Partners (228,738) 272,329
------------- -------------
Net (Loss) Before Extraordinary Item (882,690) (288,061)
Extraordinary Item - Gain on Settlement of Debt
(No applicable income taxes) 46,952 --
------------- -------------
Net (Loss) $ (835,738) $ (288,061)
============= =============
</TABLE>
- F4 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Operations Page 2 of 2
================================================================================
<TABLE>
<S> <C> <C>
Net (Loss) per Share:
Basic:
(Loss) from Continuing Operations - 0 - - 0 -
Extraordinary Item - 0 - - 0 -
------------- -------------
Net (Loss) - 0 - - 0 -
============= =============
Diluted:
(Loss) from Continuing Operations - 0 - - 0 -
Extraordinary Item - 0 - - 0 -
------------- -------------
Net (Loss) - 0 - - 0 -
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 169,000,000 152,000,000
============= =============
</TABLE>
- F5 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Shareholders' (Deficit)
For the Years Ended December 31, 1999 and 1998
================================================================================
<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, 1997 138,083,713 $ 4,142 $ 3,360,410 $(4,172,115)
Proceeds from sales of stock 22,829,272 685 195,515 --
-----------
Net (loss) -- -- -- (288,061)
----------- ----------- ----------- -----------
Balance - December 31, 1998 160,912,985 4,827 3,555,925 (4,460,176)
Proceeds from sales of stock 19,000,000 570 379,430 --
Proceeds from issuance of warrants -- -- 50,000 --
Stock issued in settlement of debt 3,175,000 95 171,244 --
Net (loss) -- -- -- (835,738)
----------- ----------- ----------- -----------
Balance - December 31, 1999 183,087,985 $ 5,492 $ 4,156,599 $(5,295,914)
=========== =========== =========== ===========
</TABLE>
- F6 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 1 of 2
===============================================================================
For the Years Ended
December 31,
1999 1998
--------- ---------
Cash Flows from Operating Activities
Net (loss) $(835,738) $(288,061)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 8,708 7,462
Amortization 3,541 3,041
Gain on settlement of debt (46,952) --
Accrued interest 19,236 17,634
Equity in net (income) loss of PhaseOut Partners 228,738 (272,329)
(Increase) decrease in:
Accounts receivable -- 2,712
Inventories 199 60,961
Prepaid expenses (6,234) 1,496
Increase (decrease) in:
Accounts payable (9,936) (43,818)
Accrued officer compensation 290,143 308,000
Accrued expenses 4,388 10,229
--------- ---------
(343,907) (192,673)
--------- ---------
Cash Flows from Investing Activities
Deferral of royalty paid (10,000) --
Distributions from PhaseOut Partners 25,000 (67,283)
Payment of security deposits (355) 631
--------- ---------
14,645 (66,652)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of common stock 380,000 196,200
Proceeds from issuance of stock options 50,000 --
Loans from directors -- 50,000
Repayments to directors -- (1,863)
--------- ---------
430,000 244,337
--------- ---------
- F7 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Statements of Cash Flows Page 2 of 2
===============================================================================
For the Years Ended
December 31,
1999 1998
--------- ---------
Net Increase (Decrease) in Cash $ 100,738 $ (14,988)
Cash - beginning 12,600 27,588
--------- ---------
Cash - end $ 113,338 $ 12,600
========= =========
Cash paid for:
Interest 386 --
--------- ---------
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ 171,339 $ --
--------- ---------
License acquisition cost accrued $ 29,000 $ --
--------- ---------
- F8 -
See notes to financial statements.
<PAGE>
QUEST PRODUCTS CORPORATION
Notes to Financial Statements
December 31, 1999
================================================================================
1 - The Company
Quest Products Corporation (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company's purpose is to market and distribute its
consumer products, including the patented "Phase-Out" system smoking
cessation device (the "Product").
In 1998, the Company began distribution of the PhaseOut device into
domestic retail chain drug stores through PhaseOut Partners pursuant to an
oral joint venture arrangement with SAS Group Inc. ("SAS").
During 1999, the Company entered into a License Agreement with the holders
of a patent for the exclusive worldwide license to make, use and sell
inventions related to an adjustable lens product such as sunglasses, ski
goggles or diving masks.
2 - Summary of Significant Accounting Policies
a. Cash and Cash Equivalents - The Company considers all short-term,
highly liquid investments with maturities of three months or less at
the date of their acquisition to be cash equivalents. These balances
are maintained at a high quality financial institution. At times,
these balances are in excess of FDIC insurance limits.
b. 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.
c. Furniture and Equipment - Furniture and equipment are carried at cost.
Depreciation is computed using the straight-line and accelerated
methods over the estimated useful lives (three to seven years) of the
assets.
d. Long-lived Assets - The Company reviews furniture and equipment and
certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. A review for impairment includes comparing the
carrying value of an asset to an estimate of the undiscounted net
future cash inflows over the life of the asset. An asset is considered
impaired when the carrying value exceeds the calculation of the
undiscounted net future cash inflows or fair market value. An
impairment loss is defined as the amount of the excess of the carrying
value over the fair market value of the asset.
- F9 -
<PAGE>
e. Intangibles:
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.
License Acquisition Cost -- The cost of obtaining the license
will be amortized using the straight-line method over the
remaining life of the agreement.
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. Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted
average numbers of shares of common stock outstanding during the
period. Diluted earnings (loss) per share is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of warrants. For fiscal 1999,
potentially dilutive securities that related to shares issuable upon
the exercise of stock options granted by the Company were excluded, as
their effect was antidilutive. See Note 4 of the financial statements.
h. Advertising - The Company and the joint venture expense the cost of
advertising as incurred. Advertising expense was $4,000 and -0- in
1999 and 1998 respectively. The joint venture's expense was -0- and
$51,000 in 1999 and 1998 respectively.
i. Revenue Recognition - The Company's customers include end users,
retailers and distributors. Revenue, less reserves for returns, is
generally recognized upon shipment to the customer.
The Joint Venture's customers are primarily retail chain drug stores.
For customers to whom sales are subject to return, revenue is
recognized upon collection, at which time the sale is considered
final. For customers to whom sales are not subject to return, revenue
is recognized upon shipment.
- F10 -
<PAGE>
j. 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.
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, 1999, current liabilities exceed current
assets by $1,105,108. 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.
4 - Joint Venture
In 1998, the Company began distribution of the PhaseOut device into
domestic retail chain drug stores through PhaseOut Partners pursuant to an
oral joint venture agreement with SAS Group Inc. ("SAS"). SAS handles all
the marketing and operational activities of the joint venture. The
investment in PhaseOut Partners is accounted for under the equity method,
whereby the investment account is increased for contributions by the
Company plus its 50% share of the income of the joint venture and reduced
for distributions and its 50% share of any losses incurred by the joint
venture. In 1998 the Company invested $67,283, consisting of cash and
inventory and in 1999 received a $25,000 distribution from the joint
venture.
During 1998, the Company recorded its increase in the equity in the Joint
Venture of $272,329, based on information reported to it by SAS. This
information included collected sales of $1,028,595 and net income of
$544,658. During 1999, the Company reduced its investment by $228,738 to
$85,874 based on information provided by SAS which includes purported price
concessions given to certain retail chain drug stores, estimates of future
returns, projected future price concessions and charges for certain other
costs. The Company disputes these price concessions and charges, which it
believes were not originally agreed to nor actually incurred in connection
with the PhaseOut program. In January 2000, the Company informed SAS Group,
Inc. that the Joint Venture was terminated. In March 2000 the Company has
instituted legal proceedings against SAS to recover all monies for which it
is entitled under the joint venture agreement, which the Company believes
is in excess of $750,000. The outcome of litigation cannot be reasonably
predicted at this time.
- F11 -
<PAGE>
5 - License Agreement
Under the License Agreement described in Note 1, the Company has agreed to
issue warrants to purchase 1,000,000 shares of stock at a 25% discount from
the closing price on October 6, 1999, the date the License was executed.
The Company has estimated the fair value of these warrants to be $29,000
and has recorded this License Acquisition Cost as a long-term asset on its
balance sheet. These acquisition costs will be amortized using the
straight-line method over the remaining life of the Agreement. The life of
the Agreement is based on the remaining life of the Patent which, at
acquisition date, had 13 years remaining.
Pursuant to the License Agreement, the Company is subject to annual minimum
royalty payments of $25,000, commencing from the date of the first
commercial sale of any product covered by the License Agreement. The
Company paid $10,000, which will be used to offset future royalty payments
due.
6 - Warrants and Convertible Debentures
The pro forma information required by SFAS 123 regarding net income and
earnings per share has been presented as if the Company had accounted for
its warrants under the fair value method. The fair value of each warrant is
estimated on the date of the warrant grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
1999 1998
---- ----
Assumptions:
Expected life of warrants 3.9 years 3.6 years
Risk free interest rate 6.0% 6.0%
Volatility of stock 194% 266%
Expected dividend yield -- --
The weighted average fair value of the warrants granted during 1999
and 1998 was $45,900 and $173,561, 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:
1999 1998
---- ----
Net (Loss):
As reported $ (835,738) $ (288,061)
Pro forma $ (1,080,239) $ (659,223)
Earnings Per Share:
As reported $ - 0 - $ - 0 -
Pro forma $ (.01) $ - 0 -
- F12 -
<PAGE>
In accordance with SFAS 123, the weighted average fair value of warrants is
required to be based on a theoretical statistical model using the preceding
assumptions. In actuality, the Company's warrants do not trade on a
secondary exchange and, therefore, the employees and directors cannot
derive any benefit from holding the warrants under these plans without an
increase in the market price of Company stock. Such an increase in stock
price would benefit all shareholders commensurately.
a. Warrants -Presented below is a summary of warrant activity for the
years shown: All warrants are immediately exercisable upon grant.
Weighted Average
Warrants Exercise Price
Balance - December 31, 1997 52,511,129 0.05
Granted 12,272,216 0.04
----------
Balance - December 31, 1998 64,783,345 0.05
Granted 9,000,000 0.02
Expired (5,156,061) 0.13
----------
Balance - December 31, 1999 68,627,284 0.04
==========
The following table summarizes information for warrants currently outstanding
and exercisable at December 31, 1999:
Warrants Outstanding
------------------------------------------------------
Range of Weighted Average Weighted Average
Prices Number Remaining Life Exercise Price
----------- ------------------------------------------------------
$ .015-.025 9,750,000 3 years 0.02
.030-.040 21,500,000 3 years 0.03
.050-.075 37,377,284 2 years 0.05
----------
$ .01-.075 68,627,284 2 years 0.04
b. 1992 Convertible Debentures - In 1992, the Company initiated a series
of private placement offerings of two and three-year Subordinated
Convertible Debentures with an annual interest rate of 10% and with
variable conversion rates (ranging from $.05 to $.10 per share). These
offerings raised a total of $117,500. The Company is in default on
interest payments and is in violation of covenants. Of the original
$117,500 raised, $107,500 has been paid back or converted into stock.
As of December 31, 1999, $10,000 of principal and $7,900 of interest
remain unpaid or unconverted on these debentures.
At December 31, 1999, the amount of shares issuable on exercise of all
convertible securities would exceed the number of authorized shares by
approximately 52,000,000.
- F13 -
<PAGE>
7 - Related Party Transactions
a. Loans from Former Officer and Director - A former officer and director
was owed $100,445 for various expenses and loans which are included in
the December 31, 1999 Balance Sheet. In December 1999, he brought suit
against the Company in New York State Supreme Court, Nassau County,
for alleged consulting fees and loan repayments due him. The Company
counterclaimed for fraud and breach of contract. The action has been
settled as of March 6, 2000 although final settlement documents have
not been executed. The parties have agreed to issue the former
director 400,000 shares of common stock in settlement of the debt. The
debt was reclassified to non-current liabilities at December 31, 1999.
During 1998, the Company received from a former director $50,000
payable with a stated interest rate of 10%. Accrued interest at
December 31, 1999 amounted to $5,986. Both the loan amount and accrued
interest are included in the December 31, 1999 balance sheet. On
February 3, 2000, the former director accepted 1,250,000 shares of
common stock in settlement of this debt plus accrued consulting fees
in the amount of $47,000. The debt was reclassified to non-current
liabilities at December 31, 1999.
b. Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals acquired an 18% ownership interest for
$500,000. In addition, if and when any warrants existing at the time
of the $500,000 investment to purchase common stock of the Company are
exercised or, if during the next five years the Company raises
additional funds through issuance of equity, then the investors will
be issued, without additional payment, additional shares of common
stock of the Company pro rata so that they will own in the aggregate
18% of the then outstanding shares of common stock of the Company. The
two individuals were awarded seats on the Board of Directors and
officers positions. In addition, the two individuals each received
9,778,975 warrant shares with the same anti-dilution provisions as the
investor group. 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 warrants to purchase 7,500,000 shares each
at an exercise price of $.03 per share. As of December 31, 1999, the
two individuals were owed $315,062 and $313,080 respectively in
accrued expenses and salaries. As of December 31, 1998, the investor
group owns 28,064,340 shares and the two individuals have warrants to
purchase 31,877,284 shares under these anti-dilution provisions.
8 - 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. In November 1999, the Company issued
2,875,000 shares of Company stock in repayment of the $157,500 loan balance
and any accrued interest. Consequently, the Company recognized a $46,952
gain on the restructuring of this debt.
- F14 -
<PAGE>
9 - Income Taxes
The Company has available net operating loss carryforwards of approximately
$6,100,000, which expire in 2002 until 2014. Deferred income taxes reflect
the net tax effects of net operating loss carryforwards and result in
deferred tax assets of approximately $2,086,000 and $1,590,000 at December
31, 1999 and 1998, respectively, which were fully offset by valuation
allowances due to uncertainties surrounding the ultimate realization of
these assets.
10 - Lease Commitments
The Company is obligated under a lease for office space through November,
2001. Rental expense was $60,361 and $38,760 for 1998 and 1997,
respectively. The future minimum lease payments required under this lease
are as follows:
2000 62,626
2001 49,941
11 - Economic Dependence
The Company purchased 100% of its products from one vendor in 1998 and
there were no purchases in 1999.
12 - Contingencies
a. 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.
- F15 -
<PAGE>
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.
On April 7, 1999, the Company received a letter from the FTC concluding, on
the assumption that the information submitted is accurate and complete,
that no action is indicated.
13 - 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.
- F16 -
<PAGE>
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 64 Chairman of the Board of Directors
Secretary, Chief Executive Officer
Herbert M. Reichlin 58 President, Treasurer,
Chief Operating Officer, Director
Richard Bruno 54 Director
James F. Leary 70 Director
Alfred Fabricant 46 Director
Richard Mascola 63 Director
Angelo J. Vassallo 54 Director
Milton J. Walters 55 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 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.
13
<PAGE>
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.
RICHARD BRUNO has been a Director of the Company since June 1998. Prior to
retirement, Mr. Bruno was employed as Managing Director of NASDAQ trading at
Paine Webber Inc. from 1964 thru June 1998.
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.
ALFRED FABRICANT has been a Director since October 7, 1997. Mr. Fabricant
is the founding partner of the New York law firm of Fabricant & Yeskoo LLP and
is currently a partner of the law firm of Ostrolenk, Faber, Gerb & Sofken. Mr.
Fabricant was educated at the University of Miami (1975) and at the John
Marshall Law School (1978).
DR. RICHARD F. MASCOLA has been a Director since December 16, 1997. Dr.
Mascola is a practicing Doctor of Dental Surgery and is President of the
American Dental Association. 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.
ANGELO J. VASSALLO has been a Director since October 22, 1999. Mr. Vassallo
has 30 years of marketing and sales experience at Seagram where he is presently
the Director of Marketing for the North America Atlantic/Pacific Region.
MILTON J. WALTERS has been a Director since December 28, 1999. Mr. Walters
is President of Tri-River Capital Group, a company that serves the specialized
investment banking needs of the financial service industry.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.
14
<PAGE>
Item 10. Executive Compensation
The following table sets forth the annual long-term compensation for the
Company's Chief Executive Officer, and the only other executive officer during
the Company's last three fiscal years:
Summary Compensation Table
Annual Long-Term All Other
Compensation Compensation Compensation
Securities
Underlying
Name and Principal Positions Year Salary Warrants (#)
- --------------------------------------------------------------------------------
Burton A. Goldstein 1999 $ 150,000 500,000 $ 7,200
(Chief Executive Officer) 1998 $ 150,000 4,511,108 --
1997 $ 67,500 10,648,559 --
Herbert M. Reichlin 1999 $ 150,000 500,000 $ 15,362
(President and Chief 1998 $ 150,000 4,511,108 --
Operating Officer) 1997 $ 67,500 10,648,559 --
Warrant Grants in Last Fiscal Year
The following table sets forth certain information concerning warrants
granted during 1999 to the named executives:
Individual Grants
Number of % of Total Exercise
Securities Warrants Granted or Base
Underlying to Employees in Price Expiration
Name Warrants Granted Fiscal Year ($/share) Date
- --------------------------------------------------------------------------------
Burton A. Goldstein 500,000 6% 0.01 2/15/04
Herbert M. Reichlin 500,000 6% 0.01 2/15/04
15
<PAGE>
Aggregated Warrant Exercises in Last Fiscal Year and Fiscal Year-End Warrant
Values
The following table summarizes warrants exercised during 1999 and presents
the value of unexercised warrants held by the named executives at fiscal
year-end:
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised
Acquired Warrants at In-the-Money
on Value Fiscal Year- Warrants at
Exercise Realized End (#) All Fiscal Year-
Name (#) ($) Exercisable End ($)
- ------------------------------------------------------------------------------
Burton A. Goldstein 0 0 25,438,642 38,000
Herbert M. Reichlin 0 0 25,438,642 38,000
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth on
the charts below are known to the Company to be the beneficial owners of
more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
Shares of Common Beneficially Owned
-----------------------------------
Name and Address Shares Acquirable
Of Beneficial Owner Shares Owned Within 60 Days(1) Percent Owned
- ------------------- ------------ ----------------- -------------
Burton A. Goldstein 5,333,333 25,438,642 14.8%
6900 Jericho Turnpike
Syosset, New York 11791
Herbert M. Reichlin 5,333,333 25,438,642 14.8%
6900 Jericho Turnpike
Syosset, New York 11791
James F. Leary 104,516 2,500,000 1.4%
6900 Jericho Turnpike
Syosset, New York 11791
16
<PAGE>
Alfred Fabricant 2,806,434 1,000,000 2.1%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Mascola 2,806,434 1,000,000 2.1%
6900 Jericho Turnpike
Syosset, New York 11791
Richard Bruno 2,500,000 750,000 1.8%
6900 Jericho Turnpike
Syosset, New York 11791
Angelo J. Vassallo 0 1,000,000 0.5%
6900 Jericho Turnpike
Syosset, New York 11791
Milton J. Walters 2,000,000 2,000,000 2.2%
6900 Jericho Turnpike
Syosset, New York 11791
All Directors and Officers 80,011,334 33.0%
and Beneficial Owners of more
than 5% of the Company's Common Stock
Under the rules of the Securities and Exchange Commission (the "SEC"), a person
is deemed to have "beneficial ownership" of any Common Stock over which that
person has or shares voting or investment power, plus any Common Stock that
person may acquire within 60 days, including through the exercise of a stock
option or the conversion of a convertible security.
Item 12. Certain Relationships and Related Transactions
a. Loans from Former Officer and Director - A former officer and
director, Bernard Gutman, was owed $100,445 for various expenses and
loans due him at December 31, 1999. In December 1999, he brought suit
against the Company in New York State Supreme Court, Nassau County,
for alleged consulting fees and loan repayments due him. The Company
counterclaimed for fraud and breach of contract. The action has been
settled as of March 6, 2000 although final settlement documents have
not been executed. The parties have agreed to issue the former
director 400,000 shares of common stock in settlement of the debt.
During 1998, the Company received $50,000 from a former director,
Luther H. Hodges, Jr., payable with a stated interest rate of 10%.
Accrued interest at December 31, 1999 amounted to $5,986. On February
3, 2000, the former director accepted 1,250,000 shares of common stock
in settlement of this debt plus accrued consulting fees in the amount
of $47,000.
17
<PAGE>
b. Officer's and Director's Compensation - During 1996, an investor group
brought in by two individuals acquired an 18% ownership interest for
$500,000. In addition, if and when any warrants existing at the time
of the $500,000 investment to purchase common stock of the Company are
exercised or, if during the next five years the Company raises
additional funds through issuance of equity, then the investors will
be issued, without additional payment, additional shares of common
stock of the Company pro rata so that they will own in the aggregate
18% of the then outstanding shares of common stock of the Company. The
two individuals were awarded seats on the Board of Directors and
officers positions. In addition, the two individuals each received
9,778,975 warrant shares with the same anti-dilution provisions as the
investor group. 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, 1999, the two
individuals were owed $315,062 and $313,080 respectively in accrued
salaries and various expenses.
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Articles of Incorporation (4)
3.2 By-laws (4)
10.01 Agreement dated August 21, 1995 with J&R Intercontinental (3)
10.02 Consulting Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (2)
10.03 Consulting Agreement dated July 9, 1996 between the Company and
American Employer Service Corporation (2)
10.04 Warrant Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin (2)
10.05 Warrant Agreement dated July 9, 1996 between the Company and
Burton A. Goldstein (2)
10.06 Warrant Agreement dated July 9, 1996 between the Company and
Milton J. Walters (2)
10.07 Securities Purchase Agreement dated July 9, 1996 (2)
10.08 Agreement dated April 30, 1997 with Kingdom Blinds Manufacturing,
Inc. (1)
10.09 Employment Agreement dated December 1, 1997 between the Company
and Burton A. Goldstein. (1)
10.10 Employment Agreement dated December 1, 1997 between the Company
and Herbert M. Reichlin. (1)
10.11 Consulting Agreement dated December 9, 1997 between the Company
and Bernard Gutman. (1)
10.12 License Agreement dated October 31, 1999 between the Company and
Charles E. Wheatley, Geoff Coy and James A. Mitchell
(1) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1996.
(3) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1995.
(4) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1989.
(B) Reports on Form 8-K
(5) No reports on Form 8-K were filed during the last quarter
of 1998.
18
<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: March 30, 2000 By: /S/:
-----------------------------------
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
-------------------- ----
March 30, 2000
- ----------------------------------
Burton A. Goldstein
Chairman of the Board of Directors
Secretary, Chief Executive Officer
March 30, 2000
- ----------------------------------
Herbert M. Reichlin
President, Treasurer, Chief
Operating Officer, Director
March 30, 2000
- ----------------------------------
Richard Bruno
Director
March 30, 2000
- ----------------------------------
James F. Leary
Director
March 30, 2000
- ----------------------------------
Alfred Fabricant
Director
March 30, 2000
- ----------------------------------
Richard Mascola
Director
March 30, 1000
- ----------------------------------
Angelo J. Vassallo
Director
March 30, 1000
- ----------------------------------
Milton J. Walters
Director
19
<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
20
LICENSE AGREEMENT
This Agreement is made and entered into as of the 31st day of October (the
effective date) by and between Charles E. Wheatley residing at 1220 Rambling
Hills Drive, Cincinnati, Ohio 45230, Geoff Coy, residing at 8588 Morning Calm
Drive, Cincinnati, Ohio 45255 and James A. Mitchell, residing at 4090 E. Fulton,
Grand Rapids, Michigan ("Licensor") and Quest Products Corporation Inc., a
Delaware corporation located at 6900 Jericho Turnpike, Syosset, New York 11791
("Licensee").
WHEREAS, LICENSOR represents that they are the owners of all right, title
and interest in and to the Patent (as hereinafter defined), and that said patent
is owned free and clear of all liens, encumbrances and licenses, and
WHEREAS, Licensor represents and warrants to Licensee that Licensor is
legally empowered to grant an exclusive license in and to the manufacturer,
and/or sale and/or use of the Invention, and
WHEREAS. LICENSEE desires to acquire an exclusive license under said Patent
to make use and sell the patented inventions and LICENSOR is willing to grant
such exclusive license,
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter contained, it is hereby agreed as follows:
I. GRANT OF LICENSE.
1.1 Licensor hereby grants under United States Patent No. 5.546,141, issued
or assigned to LICENSOR and any reissues, divisions, continuances, and
extensions thereof as well as improvement patents related thereto issued to
LICENSOR, or to any of their controlled entities or corporations (hereinafter
"the
<PAGE>
Patent") the exclusive license to make, use and sell the patented Inventions
through all channels of distribution and to otherwise practice the patent on an
exclusive basis to the exclusion of the entire world including the inventor. The
Patent licensed hereunder relates to an adjustable glasses product including but
not limited to sunglasses, ski goggles and diving masks (hereinafter "the
Product").
1.2 Licensee shall have the right to enter into sub-licenses of the Patent
under which Licensee grants to third parties the right to practice the Patent.
1.3 Licensee agrees to mark the Product or the packaging of each Product
covered by this license with the appropriate patent notice in accordance with 35
U.S.C. ss. 287.
II. TERRITORY.
2.1. The Territory covered by the License is the World.
III. ROYALTY PAYMENTS.
3.1. In consideration for the License granted herein, LICENSEE shall pay
LICENSOR, at the times and in the manner hereinafter provided, a Royalty as set
forth below on sales of the Product:
(a) LICENSEE agrees to pay LICENSOR, as a Royalty Payment, the sum of
thirty cents (.30) for each Product which is covered by the Patent sold by
LICENSEE to third parties throughout the Territory during the term of the
License, as defined in Section VI hereof, where the Product takes the form
of eyeglasses, sunglasses, ski goggles, diving masks or other type of
wearable sport glasses, On ski
2
<PAGE>
goggles, diving masks or other types of sport glasses (but not sunglasses)
the royalty will be 1% of the wholesale price charged by licensee where
that price is over $30.00.
(b) Where the Product takes some form other than as described in
subparagraph (a) above and provided that the Product is covered by the
claims of the Patent, Licensee agrees to pay Licensor, as a Royalty
Payment, a sum equal to 3% of the wholesale price charged by Licensee for
the Product for each Product sold throughout the Territory during the term
of the License as defined in Section VI hereof.
3.2. In the determination of the Royalties due LICENSOR hereunder an
allowance shall be permitted to LICENSEE for returned merchandise.
3.3. Sales of Products by LICENSEE to third parties shall be deemed to have
accrued for purposes of calculating Royalty Payments on the date upon which the
invoice to which they relate is paid by the third party.
3.4. Royalty Payments as specified herein shall be calculated as of the
last day of each six month period for all sales accruing in that six month
period. L1CENSEE shall remit Royalty Payments accruing in that six (6) month
period within thirty (30) days after the last day of that period for each period
up to and including the first day of any such month following the termination of
this Agreement. For purposes of this license the first six-month royalty period
shall commence on the date of the first commercial sale of any of the Products
covered under this License by Licensee to a third party, provided, however that
this Agreement shall be cancellable at the election of Licensor if the first
commercial sale does not take place within eighteen (18) months after the
effective date of this Agreement as set forth above.
3
<PAGE>
3 5. LICENSEE agrees that notwithstanding the provisions for calculating
Royalty Payments as set forth in Sections 3.1., 3.2 & 3.3 above, LICENSEE agrees
to make a minimum annual Royalty Payment to LICENSOR in an amount not less than
$25,000 under the following terms and conditions:
(a) The minimum annual Royalty Payment shall be paid to Licensor on
the following basis: (i) ten thousand dollars ($10,000) at the commencement
of each twelve month period; (ii) additional royalty payments, if any are
due pursuant to P. P. 3.1. 3.2 & 3.3, at the close of the six month period
in accordance with P. 3.4 with the understanding that the $10,000 advance
shall be credited against all royalty payments due until exhausted; and
(iii) additional royalty payments, if any are due pursuant to P. P. 3.1,
3.2 & 3.3, at the close of the twelve month period in accordance with P.
3.4 with the understanding that the balance of the $25,000 annual minimum
royalty, if any, shall be paid at this time.
(b) Notwithstanding sub-paragraph (a) the first minimum annual Royalty
Payment advance in the amount of $10,000 shall be paid at the time of
execution of this license and applied against Royalty Payments, if any,
which are due during the first and second semi-annual royalty periods.
(c) Notwithstanding sub-paragraph (a) the first year's minimum annual
royalty period shall not commence to run until the first commercial sale of
any of the Products covered under this License by Licensee to a third party
which sale shall immediately be reported in writing by Licensee to
Licensor.
4
<PAGE>
3.6 As further and additional consideration to the LICENSOR for the grant
of this exclusive license, LICENSEE agrees to issue to LICENSOR or to his
designee(s) within five (5) days after the execution hereof warrants to purchase
1,000,000 shares of the common stock of LICENSEE at a price per share which is
25% less than the closing price of the stock, as reported on the NASDAQ bulletin
board, on the date that this license is executed by LICENSOR and delivered by
facsimile to LICENSEE.
(a) These warrants shall be exercisable by LICENSOR or his designee(s)
at said price for a period of thirty (36) months from the date of the first
commercial sale of any of the Products covered under this License by
Licensee to a third party which sale shall immediately be reported in
writing by Licensee to Licensor.
IV. REPORTS AND PAYMENTS.
4.1. Within thirty (30) days after the close of each six month royalty
period, LICENSEE shall render a written Royalty Report for the preceding six (6)
months showing the quantity of Products sold and paid for which are covered
under the Patent.
4.2. Within thirty (30) days after the close of each six month royalty
period Licensee shall render a written report setting forth the calculation of
the minimum annual Royalty Payment, if any, for the period as described in
Section 3.5.
4.3. Each Report described in this Section 4 shall be accompanied by the
payment of any Royalties due for such period including any minimum annual
Royalty Payment in the manner provided in Section III.
4.4. Each Report shall be signed and certified to be accurate by an officer
5
<PAGE>
of L1CENSEE,
4.5 All royalty checks will be made payable to, and all reports will be
rendered to: James A. Mitchell, at Price, Heneveld, Cooper DeWitt and Litton,
P.O. Box 2567, Grand Rapids, Michigan 49501
V. ACCOUNTING AND EXAMINATION OF BOOKS.
5.1. LICENSEE shall keep, at its own expense, correct and complete records
of books of account covering all transactions relating to this License, and
containing all information required for the computation and verification of the
Royalties to be paid hereunder. LICENSEE agrees, at the request and cost of
LICENSOR to permit an independent public accountant selected by LICENSOR (except
one to whom LICENSEE has some reasonable objection), to have access (for the
purpose of examination and/or audit) during ordinary business hours, to such
records and books of account and all other documents and materials in the
possession of or under the control of LICENSEE, relating to or pertaining to the
subject matter of this License, and to make copies and/or extracts therefrom as
may be necessary: (1) to determine in respect of any six month royalty period
ending not more than one year prior to the date of such request, the correctness
of any report and/or payment made under this Agreement, or (2) to obtain
information as to the Royalties payable for any six month period in case of
failure of LICENSE to report and/or pay pursuant to the terms of this Agreement.
Such accountant shall be entitled, at LICENSEE'S request, to furnish LICENSEE
with a written report on the accuracy and preparation of any report required
hereunder.
6
<PAGE>
5 2. LICENSEE shall keep all such records and books of account available to
LICENSOR for at least one (1) year after the termination or expiration of this
License or any extensions or renewals thereof.
5.3. If any audit or examination of the independent public accountant shall
reveal a deficiency of Royalty due, and LICENSEE agrees with such deficiency,
than LICENSEE shall make payment to LICENSOR of such deficiency. Payment of such
deficiency, if not disputed, shall be made in the manner prescribed in Section
IV within thirty (30) days of notification of LICENSEE by LICENSOR of such
deficiency. If the deficiency is disputed by LICENSEE the matter of the amount
of Royalty due for any disputed period covered under this Agreement shall be
submitted to Arbitration in accordance with Section XI below.
VI. DURATION.
6,1. This Agreement shall remain in full force and effect until the
expiration of the Patent. This Agreement shall terminate automatically upon such
expiration, without the obligation of notice from one party to the other
relating thereto.
6.2. In the event that LICENSEE shall at any time materially fail to make
Royalty payments or minimum annual Royalty Payments or render Royalty reports as
herein provided, LICENSOR shall have the right to notify LICENSEE of such
default by certified mail, return receipt requested and that it intends to
terminate this Agreement unless such default is cured. Unless such default shall
be cured by L1CENSEE within sixty (60) days from the date of such notice,
LICENSOR shall be entitled to terminate this Agreement at any time after the end
of said sixty (60) day period.
7
<PAGE>
(a) It shall not be grounds for termination of this Agreement that
there is a dispute as to a Royalty deficiency as described in Section 5
unless and until LICENSEE fails to remit said deficiency pursuant to the
ruling of an Arbitrator as contemplated in Section XI below within thirty
(30) days after service of the Arbitrator's ruling upon LICENSEE by
certified mail, return receipt requested.
6.3 The termination of this Agreement for any reason shall not prejudice
LICENSOR'S rights to Royalties due hereunder and unpaid on the effective date of
termination, or to any examination of LICENSEE'S books and records for any
period as herein provided.
6.4. If, for any reason, this Agreement is validly terminated, such
termination shall not affect the rights of either party against the other with
respect to antecedent breaches by the other.
VII. DISCLAIMERS, WARRANTIES AND REPRESENTATIONS
7.1. Nothing in this Agreement shall be construed as:
(a) A warranty or representation by LICENSOR as to the validity or
scope of the Patent; or
(b) A warranty or representation that anything made, used, sold or
otherwise disposed of under the License is or will be free from
infringement of any patents or claims of any third parties; or
(c) An obligation on the part of LlCENSOR to defend or reimburse
LICENSEE in whole or in part for the defense of any legal action brought by
any third party for patent infringement or any other claim based on
8
<PAGE>
LICENSEE manufacturing, using, selling or otherwise disposing of anything
under this License; or
(d) An obligation on the part of LICENSOR to bring or prosecute
actions or suits against third parties for infringement.
7.2 Notwithstanding the above, LICENSOR agrees to cooperate fully in any
lawsuit for patent infringement brought against LICENSEE arising out of the
Patent and LICENSEE further agrees to cooperate fully in any lawsuit for patent
infringement brought by LICENSEE against a third party and hereby consents to
being named as a nominal plaintiff in such proceeding with all costs and
expenses of such litigation to be borne by LICENSOR. However, in such a case
where LICENSOR is a nominal plaintiff, LICENSOR shall not be entitled to retain
separate counsel at LICENSEE's expense.
7.3. L1CENSOR makes no representations, extends no warranties of any kind,
either express or implied, and assumes no responsibilities whatsoever with
respect to the use, sale or other disposition by LICENSEE or its vendees or
other transferees of any products related to the Patent.
7.4. LICENSEE will hold LICENSOR harmless against all liabilities, demands,
damages, expenses or losses arising out of any use, sale or other disposition by
LICENSEE or its vendees or other transferees of any products related to the
Patent.
7.5 Licensor agrees to cooperate with Licensee with respect to the filing
of any re-issues, divisions, continuances and extensions of the Patent provided
that Licensee bears the full cost of all such prosecutions.
9
<PAGE>
VIII. ASSIGNMENT.
8.1. This Agreement may be assigned, sold, transferred or sublicensed by
LICENSEE provided that such assignee, successor or sublicensee or purchaser
shall agree in writing to assume, or otherwise abide, by all of the obligations
of the transferor under this Agreement.
8.2. This Agreement and the provisions hereof shall be binding at all times
upon and inure to the benefit of the parties hereto, their successors and
permitted assigns, and any others who may derive their interest from any of the
parties hereto.
IX. ARBITRATION OF ROYALTY DISPUTES.
9.1 LICENSOR and LICENSEE agree that there shall be mandatory Arbitration
of any Royalty deficiency dispute which arises under this Agreement,
9.2. The Arbitration shall be in accordance with the Rules of the American
Arbitration Association in New York City and shall be conducted before a single
Arbitrator.
9.3, The ruling of the Arbitrator shall be final and binding on the
LICENSOR and LICENSEE.
9.4. It shall be a pre-requisite to the commencement of Arbitration by
LICENSOR: (I) that LICENSOR has conducted an audit of the books and records of
LICENSEE as described in Section 5 hereof and that an independent public
accountant has found a royalty deficiency to exist for any one or more quarters;
and (ii) that LICENSEE disputes the deficiency.
10
<PAGE>
9.5. The mandatory arbitration provisions of this Section shall only be
applicable to disputes limited to Royalty deficiencies as that term is used in
Section 7 hereof.
X. MISCELLANEOUS.
10.1. This writing constitutes the entire Agreement between the parties and
there are no understandings representations or warranties of any kind which form
part of this agreement except as expressly provided herein. None of the
provisions hereof shall be deemed to be waived or modified, nor shall they be
renewed, extended, altered, changed or modified in any respect, except by an
express agreement in writing duly executed by the party against whom enforcement
of such waiver, modification, etc. is sought.
10.2. Any notice required or permitted to be given or made under this
Agreement by one of the parties to the other shall be deemed to have been
significantly given or made for all purposes if mailed, by registered or
certified mail, postage prepaid, addressed to such party at such party's address
indicated at the beginning of this Agreement, or to such other address as the
addressee shall have furnished in writing to the address or for the purpose of
providing notice under this Agreement. The date of mailing shall be deemed the
date of notice.
10.3. This Agreement shall be construed, interpreted and applied in
accordance with the laws of the State of New York applying to contracts fully
executed and performed in New York.
11
<PAGE>
10.4. LICENSOR and LICENSEE and any of their successors and assigns agree
to submit to jurisdiction in the courts (both Federal and State) of New York for
any action brought by LICENSOR or LICENSEE hereunder. LICENSOR and LICENSEE
further agree to accept service of process by mail at the addresses indicated at
the beginning of this Agreement.
10.5. The titles and headings of the sections of this Agreement are
inserted merely for convenience and identification, and shall not be used or
relied upon in connection with the construction or interpretation of this
Agreement.
10.6. The parties agree that it is the intention of neither party to
violate any public policy, statutory or common law, or governmental regulation;
that if any sentence, paragraph, clause or combination of the same is, or
becomes, in violation of any applicable law or regulation, or is unenforceable
or void for any reason, such sentence, paragraph, clause or combination shall be
inoperative and the remainder of the Agreement shall remain binding upon the
parties.
10.7. This Agreement has been entered into after negotiation and review of
its terms and conditions by parties with substantially equal bargaining power
and under no compulsion to execute and deliver a disadvantageous agreement. The
Agreement incorporates provisions, comments and suggestions proposed by both
parties. No ambiguity or omission in this Agreement shall be construed or
resolved against either party on the ground that this Agreement to any of its
provisions was drafted or proposed by that party.
12
<PAGE>
10.8 All notices that may or are required to be given under this Agreement
or with respect to it, shall be in writing, and shall be given by fax and
certified mail, return receipt requested, addressed to the respective parties as
follows:
(a) If to Licensee;
Quest Products Corporation
6900 Jericho Turnpike
Syosset, New York 11791
Fax No. (516) 364-6268
With a copy to:
Fabricant & Yeskoo LLP
535 Fifth Avenue
New York, New York 10017
Attn: Alfred R. Fabricant, Esq.
Fax No. (212) 983-0907
(b) If to Licensor:
James A. Mitchell, Esq.
Price, Heneweld, Cooper, Dewitt and Litton
P.O. Box 2587
Grand Rapids, Michigan 49501
ATTEST
IN WITNESS WHEREOF and intending to be legally bound thereby, the parties
have caused this instrument to be duly executed in duplicate as of the date and
the year first above written. The officers of both LICENSOR and LICENSEE
executing this Agreement represent that they have been authorized by their
respective corporations to enter into this Agreement and to legally bind their
corporation hereto.
13
<PAGE>
Dated: October 31, 1999 By: /s/CHARLES E. WHEATLEY
--------------------------------
CHARLES E. WHEATLEY
/s/JAMES A. MITCHELL
--------------------------------
JAMES A. MITCHELL
/s/GEOFF COY
--------------------------------
GEOFF COY
Dated: November 22, 1999 QUEST PRODUCTS CORPORATION
By: /s/HERBERT REICHLIN
--------------------------------
President
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 113,338
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 7,301
<CURRENT-ASSETS> 126,873
<PP&E> 48,415
<DEPRECIATION> (35,513)
<TOTAL-ASSETS> 301,589
<CURRENT-LIABILITIES> 1,231,981
<BONDS> 0
0
0
<COMMON> 5,492
<OTHER-SE> (1,139,315)
<TOTAL-LIABILITY-AND-EQUITY> 301,589
<SALES> 1,227
<TOTAL-REVENUES> 1,227
<CGS> 198
<TOTAL-COSTS> 198
<OTHER-EXPENSES> 635,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,622
<INCOME-PRETAX> (882,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> (882,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 46,952
<CHANGES> 0
<NET-INCOME> (835,738)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
