Document:

ex103.htm

    Exhibit
      10.3

     

    LAWRENCE
      JAY SCHMERZLER,

    Professor
      Emeritus

    1
      Claridge Drive

    Verona,
      NewJersey 07079 

    
      
        
Phone:
        973-857-0365

    

     

    I
      am a
      Mechanical Engineer specializing in Thermal Power Systems and have worked in
      and
      supervised the research, testing, design, maintenance and development of
      Internal Combustion Engines (ICE) and their components for over 30 years. I
      have
      also researched and taught ICE, Pollution Control and Energy Conversion (EC)
      during that span of years. I am past President of the National Society of
      Inventors and have an active interest in energy conversion systems, especially
      Internal Combustion Engines.

     

    Mr.
      George J. Coates, President of Coates International, Ltd. invited me to his
      research & development facility to examine, review and evaluate engine
      systems having the Coates Rotary Valve System. I visited his plant a number
      of
      times, the last time being June 28, 2006.

     

    During
      my
      first visit, September 25, 1998, I rode in three cars having Coates Rotary
      Valve
      engine systems. The engines performed smoothly and quietly and had exceptionally
      good acceleration. There was no perceptible combustion knock or valve
      clatter.

     

    I
      was
      shown a Coates Rotary Valve system disassembled for a 30,000-mile inspection.
      The system showed evidence of use in a combustion system but showed no
      discernable wear, scuffing or scratches. I expect the conventional piston and
      the piston rings will have a much greater limiting effect on the life of the
      engine than the Coates Rotary Valve System.

     

    I
      also
      observed a number of other rotary valve applications in various stages of
      progress, including a motorcycle and racing car.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    During
      my
      visit of June 28, 2006, I arrived at approximately 12 noon, and was introduced
      to the Coates latest development of an alternate-fuel 855 CI generator engine
      running on natural gas, which is capable of utilizing mixtures of: hydrogen,
      natural gas, alcohol, diesel fuel, and/or gasoline. The engine was run under
      various loads, and its performance noted by George Coates, Mark Goldsmith,
      and
      myself.

     

    The
      engine demonstrated its capability to utilize alternate fuels and air mixtures.
      The engine makes use of the unique Coates Rotary Shaft to phase in the various
      fuel and air mixtures.

     

    The
      engine fuel flexibility lends itself to the current world situation wherein
      fuel-use flexibility is necessary in response to availability and
      costs.

     

    TEST
      DATE JANUARY 3, 2003

     

    On
      the
      first preliminary tests carried out on an electric power generator incorporating
      the 855 Natural Gas Coates CSRV Engine, it passed the EPA emission standards
      with a savings in fuel consumption of more than 35%.

     
      
        

      

    

     

    TEST
      DATE FEBRUARY 27, 1995

     

    A
      and B
      Tests were carried out by Compliance and Research Services, an independent
      EPA
      approved testing laboratory, showing the CSRV superior performance and lower
      emissions than the conventional poppet valve engine in hydro carbons (HC),
      carbon monoxide (C.O.), nitrous oxides (NOX), and (CO2) and fuel
      savings.

    

     

    A
      test
      carried out on a chassis dynamometer by Compliance and Research Services on
      a
      351 Ford Windsor V8 engine equipped with the Coates CSRV System showed almost
      double the output of torque and horsepower at 3200 RPM. The
      conventional poppet valve version put out 139 H.P. and 278 ft. pounds of torque
      at 1400 RPM. The CSRV put out 460.4 ft. pounds of torque, and
      280.6 H.P. and at 3704 RPM. The CSRV put out 471.2 ft. of
      torque and 332.3 H.P.

     
       

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    TEST
      DATE MARCH 24, 2003

     

    Test
      by
      Compliance and Research Services — The CSRV 1600 motorcycle has passed EPA
      emission standards by 50%, and fuel economy 40
      MPG.

     

     

    I
      was
      also shown the latest Coates Motorcycle production units. They are capable
      of
      going up to 130 mph in response to the fuel demands of economy and versatility.
      The model as shown had neat attractive lines capable of competing successfully
      with foreign competition.

     

    Opinion

    While
      there have been other rotating valve systems, none have been successfully
      applied to internal combustion engines until now.

     

    The
      Coates Rotary Valve System promises:

    
      	
              1.  

            	
              A
                quieter engine with higher specific power output (horsepower output/pound)
                and longer life than conventional poppet valve engines due to better
                "breathing" capability and higher speed
                capability.

            

    

    
      	
              2.  

            	
              The
                use of smaller, lighter and more efficient
                engines.

            

    

    
      	
              3.  

            	
              High
                temperature permanently lubricated exhaust and intake spherical valve
                assemblies.

            

    

    
      	
              4.  

            	
              Elimination
                of oil flow needed to cool the conventional exhaust poppet valve
                stem,
                cams, cam followers, camshaft bearings and assemblies and intake
                poppet
                valve assemblies; thereby eliminating contamination of the lube oil
                and
                atmospheric pollution from this
                source.

            

    

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    
      	
              5.  

            	
              Flexibility
                in optimizing performance over a wide range of
                applications.

            

    

    
      	
              6.  

            	
              The
                prototype for the next generation of state-of-the-art ICE
                technology.

            

    

     

    SUMMATION

     

    In
      summation, I believe that the Coates CSRV Combustion Engine will substantially
      outperforrn the conventional poppet valve engines and the micro turbines in
      the
      following categories:

     

    
      
        
          
            	
                    ·  

                  	
                    Significant
                      reduction in harmful emissions

                  

          

           

        

        
          	
                  ·  

                	
                  A
                    reduction in fuel consumption while maintaining consistent power
                    output

                

        

         

      

    

    
      	
              ·  

            	
              Higher
                density power output resulting from complete
                combustion

            

    

     

    
      	
              ·  

            	
              I
                predicate my findings on the utilization of higher compression ratios
                and
                higher volumetric efficiencies of the CSRV Valve System and the reduction
                in frictional losses versus the reciprocating spring-loaded components
                as
                in all conventional poppet valve
                engines.

            

    

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    
      	 THE
              CSRV 	 VERSUS
              	 THE
              POPPET VALVE

    

     

    Coates
      Spherical Rotary Valve 

    
      

    

     

    
      	
              The
                CSRV has a rotational motion, and requires no
                adjustments.

            	 	
              The
                poppet valve reciprocates in its working motion, which means it must
                stop
                at the top and stop at the bottom in mile-seconds of its working
                cycle.
                This causes component wearing out of adjustment.

            
	 	 	 
	
              The
                CSRV System has no possibility of float or bounce and is positively
                closed
                and positively opened and its motion is completely silent.

            	 	
              When
                it comes to rest at closing at approximately 2500RMP, it bounces
                on its
                seat. This is called bounce or float where the poppet valve is never
                fully
                closed and never fully opened. This causes tapping engine noise,
                inefficiency in fuel consumption, and adds unburned fuel to the atmosphere
                creating high pollution.

            
	 	 	 
	
              The
                CSRV is not lubricated with engine oil. Its bearings are sealed and
                do not
                require lube oil. The valves themselves do not require lubrication,
                therefore, do not emit engine oil burning pollutants into the atmosphere.
                The CSRV reduces emissions by creating a cleaner complete
                combustion.

            	 	
              The
                poppet valve is lubricated with engine oil, which is sprayed over
                the
                entire valve system to cool and lubricate its components. Engine
                oil is
                inducted through the inlet poppet valve stem into the combustion
                chamber
                and is burned with the fuel. It slows down the burning of the fuel
                mixture, and causes inefficiency in the complete combustion
                cycle.

            

    

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    
    

     

    
      	 THE
              CSRV 	 VERSUS
              	 THE
              POPPET VALVE

    

     

    Coates
      Spherical Rotary Valve 

    
      

    

     

    
      	
              The
                CSRV exhaust valves do not utilize engine oil for its lubrication.
                All its
                bearings are sealed and there is no contamination of engine oil into
                the
                air and fuel mixture and no clogging of the catalytic converter while
                reducing pollution to our atmosphere. There is no breakdown in the
                atomic
                structure of the engine oil and does not lower its
                viscosity.

            	 	
              The
                exhaust poppet valve is also cooled and lubricated with engine oil
                and
                reaches extremely high temperatures, which breaks down the atomic
                structure of the engine oil which lowers its viscosity. Engine oil
                must be
                changed every 3,000 to 5,000 miles. It is also lubricated at stem
                and when
                opened, oil is burned off into the exhaust system causing clogging
                of the
                catalytic converter and more pollution into our
                atmosphere.

            
	 	 	 
	
              
                The
                  CSRV has a volumetric efficiency of twice that of the poppet valve
                  with a
                  complete open port and no poppet valve in the center. CSRV permits
                  complete free flow of air into the combustion chamber and cylinder
                  throughout the acceleration curve. Only one CSRV is needed for
                  inlet and
                  one for exhaust. Air pumps, super chargers are not necessary, unless
                  there
                  is a factor or extreme speed is required. Normally aspirated inlet
                  air
                  speed is 450 ft. per second good to 350 to 400 MPH, higher than
                  that would
                  require blowers.

              

            	 	
              
                The
                  poppet valves have limited capacity of volumetric efficiency because
                  they
                  inhibit the free flow of air into the combustion chamber and cylinder
                  and
                  causes pulsation of airflow mixture throughout the acceleration
                  curve.
                  That is why manufacturers incorporate 3, 4, and 5 poppet valves
                  per
                  cylinder, also adding air pumps, super chargers, turbos,
                  etc.

              

               

            

    

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    
       

      
        	 THE
                CSRV 	 VERSUS
                	 THE
                POPPET VALVE

      

       

      Coates
        Spherical Rotary Valve 

      
        

      

       

    

    
      	
              The
                CSRV is free rotating with less than 90% of the friction losses that
                the
                poppet valve system has with all the springs, of which use is completely
                eliminated.

            	 	
              All
                these poppet valves are spring loaded with very strong springs and
                sometimes double springs. This causes tremendous fictional losses
                and wear
                of components, which cannot be avoided while using poppet
                valves.

            
	 	 	 
	
              The
                CSRV has unlimited valve timing possibilities and no restrictions
                within
                the valve timing duration and no possibilities of making contact
                with the pistons, preventing major damage to the
                engine.

            	 	
              Valve
                timing is limited because the poppet valve opens into the combustion
                chamber and could make contact with the piston, where destruction
                of the
                engine occurs. This mostly happens on sport cars, racing cars and
                OHV
                engines or when a valve sticks, and on de-acceleration on engines
                with
                over 30,000 miles and more.

            
	 	 	 
	
              The
                CSRV rotates away from the chamber and is moving constantly, which
                eliminates the possibilities of hot spots, and reduces the constant
                temperature of the combustion chamber. This reduces NOX, nitrous
                oxides,
                HC hydro-carbons, CO carbon monoxide. Even though tetraethyl lead
                is
                removed from the fuel today, the CSRV can utilize higher compression
                ratios in its engine designs, which results in thermal efficiencies
                in the
                40%, 50% and possibly 60% range with significant reductions in fuel
                consumption, harmful emissions, and complete combustion.

            	 	
              The
                poppet valve is in the combustion chamber permanently and the exhaust
                poppet valve gets red hot, which caused hot spots, and at times,
                pre-ignition occurs, when the constant temperature of the combustion
                chamber exceeds 2,500°
                F. The
                engine manufactures NOX, oxides of nitrogen, and since tetraethyl
                lead was
                removed from fuels, poppet valve engines cannot utilize higher compression
                ratios above 10 1⁄2 to 1. This results in engine efficiency at only 22%. For
                every dollar worth of fuel you put into your vehicle, you get 22
                cents of
                drivability, the other 78 cents is lost in heat, friction and pumping
                losses.

            

    

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    
       

      
        	 THE
                CSRV 	 VERSUS
                	 THE
                POPPET VALVE

      

       

      Coates
        Spherical Rotary Valve 

      
        

      

       

      
        	
                No
                  maintenance, adjusting servicing is required to the CSRV for the
                  life of
                  the engine. No noise is caused by the CSRV System. No damage occurs
                  to the
                  engine.

              	 	Most poppet valve engines
                must
                have these valves adjusted manually every 5,000 miles when servicing
                intervals are due. This is downtime and costly, and if not done,
                will
                cause more excessive wear, noise and serious damage to the
                engine.
	 	 	 
	The
                CSRV will replace the poppet valve and eliminate all its
                problems.	 	The
                poppet valve is the main problem with the combustion engine which
                limits
                its efficiencies.
	 	 	 
	The
                CSRV System was invented and designed by George J. Coates. No other
                company has tried to improve in its design. It is fully patented
                worldwide. In the future, when it is in the main stream, no doubt
                people
                will try to improve it.	 	Manufacturers
                have tried for more than 100 years with side valves, pushrod, overhead
                inlet poppet valves, and side exhaust valves, overhead camshafts,
                high
                lift camshafts, twin overhead camshafts, air pumps, turbo chargers
                and the results in the 50s, 60s, 70s, were 29% thermal efficiencies
                and
                after the removal of lead, 22% thermal efficiencies today.
	 	 	 
	
                There
                  are approximately 90% fewer parts in the CSRV System compared to
                  conventional poppet valve systems and only two moving, easy to
                  assemble,
                  and relatively inexpensive parts per cylinder bank

              	 	There
                are literally hundreds and thousands of parts, springs, and components
                in
                the poppet valve system, most of which are moving, are hard to assemble,
                and are costly.

      

    

    
       

      
        	 	 	 Sincerely,	 
	 	 	 	 
	
              	
                By:
                  

              	/s/ Prof.
                Lawrence Schmerzler, P.E.	 
	 	 	Prof.
                Lawrence Schmerzler, P.E.	 
	 	 	 	 
	 	 	 	 

      

    

     

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    COMPARISON
      OF THE COATES CSRV ENGINE

    TO
      THE STANDARD POPPET VALVE ENGINE

     

    FIRST
      EXAMPLE

     

    The
      oil
      and gas companies all over the world are being prevented by their governments
      from burning off the raw natural gas into the atmosphere. This gas is a
      by-product of the process of retrieving oil. They have been pumping this raw
      gas
      into our atmosphere for the past 120 years producing tremendous amounts of
      poisonous gases and contributing in a major way to global warming.

     

    Up
      until
      now, they used diesel engines for electric generation, compression and pumping
      for oil production. Attempts were made to run normal poppet valve engines on
      raw
      natural gas. They only lasted 60 days before they were destroyed. Then they
      used
      micro turbine generators, where the jets got blocked and they burned out also,
      in approximately the same time period. In comparison to this, the Coates CSRV
      855 Industrial Engine was designed to run on the natural gas at the oil well,
      which uses less fuel, runs on low pressure of gas supply and does not have
      any
      problem running on natural gas as all components are self-cleaning and
      durable.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    LAWRENCE
      JAY SCHMERZLER, P.E.

    Professor
      Emeritus

     

    Background
      Information

     

    I
      left
      college and volunteered to serve in any engine room of any ship that needed
      to
      leave. I was assigned and served on the U.S.S. Malabar (a quadruple expansion
      steam engine which had been built as WWI ended for Rockefeller as
      an
oil tanker and subsequently put in storage since 1919).

     

    I
      received accelerated training at the Coast Guard Training Station in New London,
      Connecticut. I received a Marine Engineering degree there for steam, diesel,
      and
      electrical engines. I then shipped out to England, France, Italy, and North
      Africa on turbo and triple-expanse engines. After this, the war was over in
      Europe, and I volunteered to serve in the Pacific region, where 36 other marine
      engineers, along with me, were to work on Nordberg Diesel engines. The need
      for
      these engineers, however, no longer existed as the war
      was over. We all had taken one month training.

     

    I
      was
      directed to serve on a diesel advanced development ship that had various
      advanced engineering equipment, such as: variable pitched propellers that could
      go from full astern to full ahead, and advanced refrigeration equipment. The
      ship had just completed a run to South America, with a full complement of Coast
      Guard engineers, and had to dump the cargo because of malfunction of the
      refrigeration equipment. I was responsible for a subsequent successful voyage,
      also to South America. It was powered by a Nordberg Diesel Engine.

     

    After
      graduation from the University of Texas, with a mechanical engineering degree,
      I
      subsequently worked for a U.S. steel division in Kansas City, MO.; it was an
      oil
      well supply company. I worked on improvement of oil-field engines operating
      on
      diesel, natural gas and kerosene. I also taught internal combustion engines
      and
      design at Kansas City Junior College in the evenings.

     

    Subsequently,
      I was employed by U.S. Boch in the laboratory on development of fuel injection
      equipment. I also worked for Hamilton Standard Division of United Aircraft
      on
      propeller transmission gear.

     

    Then
      I
      worked at Newark College of Engineering (now NJIT) teaching internal combustion
      engines. I received my Masters Degree from NCE. At this time, I also patented
      a
      number of invention, which include:

     

    1.  Heat
      Pumps

    2.  Desalinization
      Equipment

    3.  Exercising
      Machine

     

    I
      also
      consulted with a number of organizations on secret projects, which include
      the
      following companies:

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    Lawrence
      Jay Schmerzler background (continued)

     

    1.  Westinghouse

    2.  General
      Instrument (Thermal Electric Division)

    3.  Western
      Electric

    4.  Hydrometrics

     

    Under
      General Instrument, I had U.S. Secret Clearance for evaluating the latest
      developments on energy conversion. I was hired as Director of Engineering
      (Thermo-Electric Division), after doing consulting work for them.

     

    As
      a
      member of Consultant Services I worked as an expert witness on many cases.
      In
      all these, only one case was lost.

     

    1. 
      Performance
      of high production hamburger heating equipment

    2.  Defects
      in modern apartment heating systems due to catalytic action between some of
      the
      components of the system.

     

     

    While
      teaching at NJIT, I taught (during my summer vacations) Western Electric field
      engineers air-conditioning and ventilation.

     

    After
      serving in various lower level positions, I became President of: 

     

    1. 
National
      Society of Investors

    2. 
AAUP
      - New Jersey (American Association of
      University Professors)

    At
      NJIT:

     

    1.  I
      was Chairman of the Faculty Council at NJIT

    2.  Elected
      "Secretary of the Faculty"

    3.
      Appointed to sit on the Patent Committee

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Professor
      Lawrence Jay
      Schmerzler

    Professional
      Engineer

     

    Professor
      Schmerzler, P.E. is a Fellow in the American Society of Mechanical Engineers
      (ASME) and Emeritus Professor of Mechanical Engineering at the New Jersey
      Institute of Technology. He is an inventor and Forensic Engineer who has served
      with distinction in both industry and higher education.

     

    His
      Teaching, Industrial, Forensic and Consulting Work has encompassed: Supervision
      of Internal Combustion Engines (I.C.E.) Test and Development Labs; Supervision
      of Mechanical Engineering (ME) Laboratories; Supervision of ME Department
      Thermal Area Courses; Basic and Advanced Energy Conversion; Desalination; Steam,
      Diesel and Electrical Power; Cogeneration; I.C.E. Test and Development; Jet
      Engine and Rocket Fuel Controls; Pollution Control of Internal Combustion
      Engines; Refrigeration; Fuel Injection Systems; Carburetors; Development of
      Hybrid Gasoline-Electric Auto; Utilization of Mixed-Fission Products; Energy
      Conservation in Paper-making Operations; and Matrix Heat
      Exchangers.

     

    Professional
      Organizational Activities have included:

     

     

    
      	
               ●

            	 President
              of the National Society of Inventors (NSI)
	
               ●

            	 President
              of the American Association of University Professors (AAUP), New Jersey
              (NJ) State Conference 
	
               ●

            	 Chairman
              of the Executive Committee of the American Society of Mechanical Engineers
              (ASME) North Jersey Section
	
               ●

            	 Chairman
              of ASME Region II History and Heritage Committee
	
               ●

            	 New
              Jersey State Legislative Coordinator for ASME
	
               ●

            	 Chairman
              of the American Society for Engineering Education, Mechanical Engineering
              Division of the Mid-Atlantic Region
	
               ●

            	 Chairman
              of the ASME Mechanical Engineering Department Advisors of the North-East
              Region 
	
               ●

            	 Member
              of the ASME National Nominating Committee
	
               ●

            	 Member
              of ASME Sloan Project Advisory Committee
	
               ●

            	 Member
              of the Executive Committee of the Entrepreneurs Forum
	
               ●

            	 Member
              of the Governing Board of the Professional Staff Association at the
              New
              Jersey Institute of Technology (NJIT)
	
               ●

            	 Secretary
              of the Faculty at NJIT
	
               ●

            	 Chairman
              of the Faculty Council at NJIT
	
               ●

            	 Secretary
              of the NJ Engineer's Committee for Student Guidance
	
               ●

            	 Chairman
              of the NJIT Mechanical Engineering Department Long Range Planning
              Committee 
	
               ●

            	 Chairman
              of the North Jersey Industry Fund Drive for
              ASME

    

     

    His
      Honors, Awards and Citations include:

     

    
      	
               ●

            	 The ASME Centennial Medallion for
              Contributions to Engineering
	
               ●

            	 The National Science Foundation (NSF)
              Fellowship in Energy Conversion 
	
               ●

            	 The NSF Research Grant for Faculty
              Research in Industry Program
	
               ●

            	 The NJIT Van Houten Alumni Award for
              Teaching Excellence 
	
               ●

            	 The AAUP-NJSC Award for Outstanding
              Service to Higher Education 
	
               ●

            	 Fellow in the American Society of
              Mechanical Engineers 
	
               ●

            	 Membership in Pi Tau Sigma and the
              Sigma XI Research Society 
	
               ●

            	 Eight
              Patents

    

     

    He
      is a
      graduate of: the University of Texas in Austin with a BS in Mechanical
      Engineering; NJIT with an MS in Mechanical Engineering: and the U.S. Maritime
      School at Fort Trumbull as a Marine Engineer.

     

    12SETTLEMENT AND RELEASE AGREEMENT

 

This Release and Settlement Agreement (this "Agreement") is made and entered into the 8th day of November 2007, between Richard Andrew Hoover ("Hoover") on one side and Quest Midstream GP, LLC (the "Company") and  Quest Resource Corporation ("QRC").  Hoover, the Company, and QRC may be referred to individually as a "Party" and collectively as  the "Parties".

 

WHEREAS, Hoover was previously employed by the Company as its President and Chief Operating Officer;

 

WHEREAS, Hoover and the Company entered into an Executive Employment Agreement which set forth specific terms and conditions related to the employment of Hoover by the Company;

 

WHEREAS, the Company terminated the Executive Employment Agreement pursuant to notice provided to Hoover on or about September 21, 2007 and, accordingly, the Company involuntary terminated Hoover's employment with the Company;

 

WHEREAS, the Parties desire to resolve any disputes Hoover may have against the Company, disputes arising out of the Executive Employment Agreement, any disputes arising out of Hoover's employment with the Company, and any disputes the Company or QRC may have against Hoover through this Agreement;

 

NOW THEREFORE in consideration of the mutual obligations of this Agreement and the benefits to be derived by the Parties hereto, which benefits the Parties agree they are not otherwise entitled to receive, the Parties agree as follows:

1.   Payment and/or Distribution(s):  Hoover acknowledges the Company has: (i) provided Hoover with payment of any and all accrued and unpaid salary through Hoover's last day of work, September 18, 2007; (ii) provided Hoover with payment of any and all unused paid time off to which Hoover was entitled as of September 18, 2007; and (iii) reimbursed any and all business expenses incurred by Hoover prior to September 18, 2007.  

 

The Company further agrees to provide the following additional payments and/or distributions pursuant to the terms set forth herein:

 

a.  Immediate Payments:  Based upon the involuntary separation of Hoover and Hoover's agreement to release the Company from any liability arising out of the payment of the following items:

 

	
             
 	
            §
 	
            Base Salary Installment Payments:  On the tenth business day after Hoover's execution of this Agreement (the "Effective Date"), the Company shall pay Hoover an amount equal to one-half of the base salary, less applicable withholdings, that would have been payable under the Executive 
 

 

1

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

Employment Agreement for the period from September 19, 2007 through and including the last regularly scheduled payment date for the Company immediately preceding the Effective Date.  On the Company's next regularly scheduled payroll date and on each regularly scheduled payment date thereafter prior to April 1, 2008, the Company shall pay Hoover an amount equal to one-half of the base salary, less applicable withholdings, that would have been payable to Hoover on such regularly scheduled payment date under the Executive Employment Agreement; and

 

	
             
 	
            §
 	
            Bonus Share Award: On the Effective Date, Hoover will become vested in 5,000 shares of Quest Resource Corporation common stock (hereinafter "QRC stock").  The QRC stock will be delivered to a broker selected by Hoover upon receipt by the Company from Hoover of documentation reasonably satisfactory to the Company instructing such broker to remit to the Company proceeds from the sale of the QRC Stock sufficient to cover the necessary withholding taxes. The Company agrees that the documentation used by Hoover in the past to instruct brokers to sell QRC bonus shares and remit to the Company sale proceeds sufficient to cover the necessary withholding taxes is acceptable to the Company. Any and all remaining bonus shares of QRC stock over which Hoover may claim an interest are forfeited. 
 

 

b.   Remaining Base Salary Installment Payments:  On the first regularly scheduled payroll date, beginning with the first regularly scheduled payroll date of the Company occurring after April 1, 2008 and continuing through December 31, 2009, the Company agrees to pay Hoover an amount equal to one-half of the base salary, less applicable withholdings, that would have been payable to Hoover on such regularly scheduled payment date under the Executive Employment Agreement.  It is the intention of the Parties that the combination of the Base Salary Installment Payments from September 19, 2007 through the last regularly scheduled payroll date prior to April 1, 2008 and from the first regularly scheduled payroll rate after April 1, 2008 through December 31, 2009, in gross, shall result in a total amount paid
to Hoover of $392,447.50.  The Company is entitled to cease payment once this amount has been reached if it is reached prior to December 31, 2009.  If this amount will not be reached by December 31, 2009, then Hoover must notify the Company of any deficiency at least ten (10) days prior to December 31, 2009 in order to allow the Company to timely process the additional amount to be paid.  Failure by Hoover to notify the Company of any deficiency prior to the time period set forth herein will result in a waiver of any amount owed and not paid by December 31, 2009.  This time requirement is in place due to an effort by the Parties to fully comply with the requirements of I.R.C. § 409A.

 

c.  Incentive Bonus:  Hoover will receive a pro rata portion in the amount of 75% of any incentive bonus payable for 2007.  The amount to be paid will be determined without 

 

2

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

netting any production bonus payments paid to Hoover during 2007.  Such amount shall not be paid prior to April 1, 2008 in an effort to comply with the requirements of I.R.C. § 409A. Any payment after April 1, 2008 shall be made at the same time incentive bonuses are paid to the other executive officers of the Company, but in any event shall not be paid later than May 15, 2008.  The Company will provide calculations that set forth the basis for the payment to Hoover.  The Company agrees that the Incentive Bonus payable to Hoover will be determined in a manner consistent with the criteria and calculations of the final plan adopted by the Company for employee(s) holding a position equivalent to Hoover's prior position with the Company.  The Company further agrees that Hoover's incentive bonus will be within the top tier of any bonus amount
distributed by the Company under the final plan adopted by the Company.

 

d.  QMP Common Units:  On the Effective Date, Hoover will become vested in 37,500 Quest Midstream Partners, L.P. ("QMP") Common Units ("Units") to be delivered to Hoover in two tranches - the first tranche of 18,750 Units to be delivered upon the later of a Liquidity Event or April 1, 2008; and the second tranche of 18,750 Units to be delivered upon the later of a Liquidity Event or April 1, 2009 (each a "Delivery Date").  If the Units are Publicly Traded on a Delivery Date, the Units will be delivered to a broker selected by Hoover upon receipt by the Company from Hoover of documentation reasonably satisfactory to the Company instructing such broker to remit to the Company proceeds from the sale of the Units sufficient to cover the necessary withholding taxes. The Company agrees that documentation similar to that
used by Hoover in the past to instruct brokers to sell QRC bonus shares and remit to the Company sale proceeds sufficient to cover the necessary withholding taxes is acceptable to the Company.  If the Units are not Publicly Traded on a Delivery Date, any applicable withholding taxes will be paid by Hoover to the Company at the time of delivery.

 

For purposes of this paragraph only, a "Liquidity Event" shall be defined as: (i) the successful completion of an initial public offering for the Units, such that there is a public market for the Units to trade through a traditional brokerage house on the NYSE or NASDAQ ("Publicly Traded"), or (ii) a sale in a single transaction, of all or substantially all of either: (a) the assets of QMP, or (b) the partnership interests in QMP.

 

	
             
 	
            Any and all remaining Units over which Hoover may claim an interest are forfeited.
 

 

e.         QMP Common Unit Distributions:  The Company shall pay distribution equivalents to Hoover (i) on 75,000 Units for the 3rd Quarter of 2007 and (ii) on the 37,500 Units described in 1(d) above for the 4th Quarter of 2007 and each quarter thereafter until such Units are issued and delivered to Hoover.  Distribution equivalents shall be paid to Hoover at the same time as distributions are paid to the other holders of Units, and shall be net of any appropriate withholdings, including appropriate withholdings for prior quarter distribution equivalents received by Hoover in which withholdings were not made if it is determined by the Company that such withholdings are necessary to comply with the 

 

3

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

Internal Revenue Code and such withholdings are made for all employee(s) receiving distribution equivalents from the Company.  Following delivery of any Units, Hoover will cease to be entitled to distribution equivalents on such Units.  Hoover will not have any rights as a Unit holder until the Units are actually delivered to him.  Once the Units are delivered, Hoover will have all rights afforded to all other Unit holders, including the right to receive distributions. These distributions will be paid on a gross basis with Hoover managing tax payments.  

 

2.   COBRA Reimbursement:  Hoover has elected to continue group health insurance coverage pursuant to his continuation rights under Section 4980B of the Code and will be able to continue such coverage for 18 months from his termination of employment.  The Company agrees to reimburse Hoover for all COBRA premium costs until the earlier of September 30, 2008 or the date upon which Hoover becomes eligible for health insurance because of employment with a different employer.  COBRA premium payments made prior to September 30, 2008 will be paid directly by the Company.  If Hoover becomes eligible for health insurance because of employment with a different employer, Hoover must notify the Company with ten (10) days of the change in his eligibility for coverage.  After September 30, 2008, Hoover will be responsible for paying
any COBRA premiums.  For any previous premiums which were due and have already been paid by Hoover as of the Effective Date of this Agreement, Hoover will submit proof of payment and the amount paid by him.  The Company will have fifteen (15) days following submission of this information in which to reimburse Hoover.

 

	
             
 	
            3.
 	
            Release.
 

 

a.      By signing this Agreement, Hoover does hereby for himself, his successors, heirs and assigns, release, waive and forever discharge the Company, it agents, owners, employees, officers, directors, stockholders, representatives and all related companies, divisions, subsidiaries, parent and affiliated companies from all claims, liabilities, demands, and causes of action, whether known or unknown, fixed or contingent, including claims for wages, damages (whether or not liquidated) and/or attorneys' fees and costs, which Hoover may have or claim to have against the Company, it agents, owners, employees, officers, directors, stockholders, representatives and all related companies, divisions, subsidiaries, parent and affiliated companies in any way arising out of his employment with the Company and/or
his Executive Employment Agreement or that otherwise may exist on the date this Agreement is executed, including, but not limited to claims arising under any purported contract, written or oral, express or implied; claims arising under any tort theory of recovery; claims arising under any federal, state, and local laws prohibiting employment discrimination on account of race, religion, color, sex, national origin, age, and/or disability, including but not limited to, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act (ADEA), as amended, the Rehabilitation Act, the Americans with Disabilities Act (ADA), the Texas Labor Code, the National Labor Relations Act, the Family and Medical Leave Act of 1993, the Fair Labor Standards Act, the Texas Workers Compensation Act, the Texas 

 

4

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

Unemployment Compensation Act, the Employee Retirement Income Security Act of 1974, and any other federal, state or local law, statute, regulation, code or ordinance; and claims arising in any other way, directly or indirectly, and without regard to the legal theory or form of action underlying such claims, arising or alleged to arise out of Hoover's employment by the Company and/or the Executive Employment Agreement or that otherwise may exist against the Company, it agents, owners, employees, officers, directors, stockholders, representatives and all related companies, divisions, subsidiaries, parent and affiliated companies.  Hoover further agrees to release, waive, relinquish and forego all legal relief, equitable relief, statutory relief, reinstatement, back pay, front pay and any other damages, benefits, remedies or relief that he could receive from actions or suits filed, charged,
instituted, or pursued by any agency or commission based upon or arising out of the matters which are released and waived by this Agreement.  This release does not affect Hoover’s ability to enforce all of the terms of this Settlement and Release Agreement.

 

b.         The Company and QRC do hereby for themselves, their agents, owners, employees, officers, directors, stockholders, representatives and all related companies, divisions, subsidiaries, parent and affiliated companies release, waive and forever discharge Hoover, his successors, heirs and assigns from all claims, liabilities, demands, and causes of action, whether known or unknown, fixed or contingent, including claims for damages (whether or not liquidated) and/or attorneys’ fees and costs, which the Company or QRC may have or claim to have against Hoover, his successors, heirs and assigns in any arising out of his employment with the Company or with QRC in any way arising out of his employment with the Company and/or his Executive Employment Agreement or that
otherwise may exist on the date this Agreement is executed, including, but not limited to claims arising under any purported contract, written or oral, express or implied; claims arising under any tort theory of recovery; and any other federal, state or local law, statute, regulation, code or ordinance; and claims arising in any other way, directly or indirectly, and without regard to the legal theory or form of action underlying such claims, arising or alleged to arise out of Hoover's employment by the Company and/or the Executive Employment Agreement or that otherwise may exist against Hoover, his successors, heirs and assigns.  This release does not affect the Company's or QRC's ability to enforce all of the terms of this Settlement and Release Agreement.

 

c.         The Parties further hereby mutually release and covenant not to sue one another, their past, present and future agents, servants, representatives, shareholders, principals, attorneys, affiliates, parent corporations, subsidiaries, alter egos, joint venturers, licensees, officers, directors, employees, predecessors, successors, heirs, executors, assigns, transferees, beneficiaries, and all other persons, entities, and/or corporations acting on behalf of either of them from any and all legal, equitable or other claims, liabilities, promises, agreements, debts, counterclaims, actions, causes of action, damages or expenses (including attorneys fees and costs actually incurred), and any past, present or future duties, responsibilities or obligations, of any nature whatsoever known to be existing prior and up to the date
of this Agreement, that arise in any way out of 

 

5

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

Hoover's employment by the Company and/or the Executive Employment Agreement or that might otherwise exist against the other Party as of the Effective Date.  Nothing within this paragraph, however, precludes a Party from enforcing his or its rights under this Agreement.

 

4.   Noncompetition:  Hoover agrees that for a period equal to one (1) year following the date of his termination by the Company, Hoover, without the prior written permission of the Company, shall not, within the geographical area of the Cherokee Basin, (i) be employed by, or render any services to, any person, firm or corporation engaged in any business which is directly or indirectly in competition with the Company ("Competitive Business"); (ii) engage in any Competitive Business for his or its own account; (iii) be associated with or interested in any Competitive Business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity; (iv) employ or retain, or have or cause any other person or entity to employ or
retain, any person who was employed or retained by the Company on the date of  Hoover's termination of employment; or (v) solicit, interfere with, or endeavor to entice away from the Company, for the benefit of a Competitive Business, any of the Company’s customers, clients or other persons with whom the Company has a contractual relationship as of the date Hoover's termination of employment.  Notwithstanding the foregoing, nothing in this Agreement shall preclude Hoover from investing his personal assets in the securities of any corporation or other business entity which is engaged in a Competitive Business if such securities are traded on a national stock exchange or in the over-the-counter market and if such investment does not result in his beneficially owning, at any time, more than 4.9% of the publicly-traded equity securities of such Competitive Business.

 

Hoover acknowledges and agrees that the covenants contained within this paragraph 4 of the Agreement may be enforced by the Company by injunction, or damages, or both.  Hoover agrees that such injunction may be issued to the Company without bond.  

 

5.   I.R.C. §409A:  The Parties intend that the Agreement fully complies with all requirements under I.R.C. § 409A.  The parties agree that if any provision of this Agreement would cause any payment to fail to satisfy I.R.C. § 409A, the Agreement will be amended by the parties (any such amendment may be made on a retroactive basis) to comply with I.R.C. § 409A on a timely basis, in accordance with regulations and other guidance issued under I.R.C. § 409A. Hoover acknowledges and agrees that the Company will not be responsible or liable for any additional personal income tax Hoover may become liable for resulting from or arising out of any violation of I.R.C. § 409A and hereby fully releases the Company from any such liability. 

 

	
             
  	
            6.
 	
            Confidential Information.  
 

 

a.         Definition:  Hoover agrees to hold in strictest confidence, and not to use, disclose or permit to be disclosed except for the benefit of the Company, to any person, firm or Company without the express written authorization of the Company, any Confidential Information of the Company.  For purposes of this Agreement, "Confidential 

 

6

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

Information" means any information or data used by or belonging or relating to the Company, or any party to whom the Company owes a duty of confidentiality, including, without limitation, any and all trade secrets, proprietary data, and information relating to the Company, or any party to whom the Company owes a duty of confidentiality, the past, present, or future business and services of the Company, or any party to whom the Company owes a duty of confidentiality, including, without limitation, customer lists, processes, procedures, or standards, know-how, manuals, hardware, software, source code, business strategies, records, marketing plans, drawings, technical information, specifications, designs, patent information, financial information, whether or not reduced to writing, or information or data that the Company, or any party to whom the Company owes a duty of confidentiality and
advises Hoover should be treated as confidential information.  Confidential Information does not include any information that:  (i) is rightfully known to Hoover prior to Hoover's employment and independent of any disclosure or access to the information via the Company as evidenced by Hoover's written records; or (ii) is or later becomes part of the public domain and generally known within the relevant industry through no fault of Hoover.

 

b.         Legal Compliance:  If Hoover is requested or becomes legally compelled to disclose any such Confidential Information, Hoover shall provide the Company with prompt written notice so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement and Hoover shall reasonably cooperate with the Company in any effort the Company undertakes to obtain a protective order or other remedy.  If such a protective order or other remedy is not obtained, or the Company waives compliance with this Agreement, Hoover shall furnish only that portion of such information that is legally required and shall exercise all reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the
information to be disclosed.

 

c.         Return of Confidential Information:  Hoover agrees that he will return to the Company and will not take originals or copies of, any records, papers, programs, computer software or documents whether in printed or electronic format or otherwise, containing or derived from Confidential Information in Hoover's possession or under Hoover's control or any other matter of whatever nature that contains Confidential Information or any equipment or other physical property furnished to Hoover by the Company, all of which shall be and remain the sole and exclusive property of the Company.  

d.         Enforceability:  Hoover acknowledges and agrees that the covenants contained within paragraph 6 and its subsections of the Agreement may be enforced by the Company by injunction, or damages, or both.  Hoover agrees that such injunction may be issued to the Company without bond.    

 

7.   No Rehire.  The Parties agree that Hoover is not eligible for rehire by the Company and/or all related companies, divisions, subsidiaries, parent and affiliated companies.  Hoover 

 

7

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

agrees that he will not apply for a position with the Company and/or all related companies, divisions, subsidiaries, parent and affiliated companies in the future and that should such application be made, no cause of action shall arise out of the failure to hire Hoover pursuant to this Agreement.  

 

8.   Tax Indemnity.  By executing this Agreement, Hoover acknowledges that the Company has not made and he has not relied on any tax, financial, legal or other advice from the Company with respect to this Agreement or any possible tax, financial, or legal consequences arising out of this Agreement.  Hoover hereby expressly agrees to hold the Company harmless and specifically agrees to indemnify it from any claims, demands, liabilities, or causes of action directly relating to or arising from any tax consequences incurred by Hoover.  The Company will issue a W-2 for all amounts from which applicable employment withholdings are made.

 

9.   No Admission of Any Claim.  The Parties agree that this Agreement and any payment and/or other consideration provided herewith shall not be construed in any fashion as an admission of wrongdoing or liability on the part of either party.  Instead, this Agreement is entered into solely for the purpose of compromise.

 

10. Violations.  Hoover acknowledges that during the course of his employment and at the time of the signing of this Agreement, he is not aware of any alleged violations and/or potential violations of any federal, state, and/or local laws or regulations by the Company.  Should Hoover have such knowledge, he agrees to report such alleged violations and/or potential violations internally and, if requested, to cooperate in the investigation of such alleged violations and/or potential violations prior to executing this Agreement.  

 

11. Supersedes:  To the extent there are any conflicts or inconsistencies between this Agreement and the terms and conditions contained within the Executive Employment Agreement or any other prior agreement between the Parties, the terms of this Agreement supersedes the prior agreement(s) and governs.  

 

12. Entire Agreement.  In signing this Agreement, the Parties understand that the terms hereof are contractual and not merely a recital, and that they are not relying upon any statement or representation made by the other party (other than those reflected in this Agreement), but, instead, they are relying solely upon their own judgment and/or the advice of their attorney.  The Parties acknowledge that this Agreement is the entire agreement of the Parties regarding this matter.

 

13. Severability.  If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired thereby.

 

14. Multiple Counterparts.  This Agreement may be executed in multiple counterparts, each of which will be deemed an original but all of which will constitute one agreement.  Fully executed copies of this Agreement will serve as duplicate originals.

 

8

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

15. Choice of Law/Venue/Prevailing Party.   This Agreement is to be interpreted and enforced according to the laws of the State of Texas.  The Parties agree that venue for any litigation under this Agreement brought by Hoover against the Company and/or QRC shall lie exclusively in federal or state courts located in Oklahoma County, Oklahoma and expressly submit to the jurisdiction of such courts for purposes of hearing any such disputes between them.  The Parties further agree that venue for any litigation under this Agreement brought by the Company and/or QRC against  Hoover shall lie exclusively in federal or state courts located in Harris County, Texas and expressly submit to the jurisdiction of such courts for purposes of hearing any such disputes between them.  For the purpose
of any counterclaim(s) brought by a party, the Parties agree that venue will lie in the jurisdiction in which the litigation was originally filed.  The prevailing party in any dispute arising under this Agreement shall be entitled to recover its attorneys’ fees and costs of court should litigation be filed to enforce its terms.

 

16. Acceptance/Revocation.  Hoover has twenty-one (21) days in which to decide to enter into this Agreement although he may accept it at any time prior to the expiration of that period.  Hoover may revoke any acceptance of this Agreement within seven (7) days of signing, and this Agreement shall not become effective until such revocation period has expired.

 

THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THIS ENTIRE AGREEMENT, THAT THEY HAVE BEEN GIVEN THE OPPORTUNITY TO CONSULT WITH AN ATTORNEY REGARDING THIS AGREEMENT, THAT THEY ARE SIGNING IT KNOWINGLY AND VOLUNTARILY AND THAT THEY ARE UNDER NO DURESS OR PRESSURE TO DO SO.

 

 

	
            Date:  November 8, 2007
 	
            By
 	
            /s/ Richard Andrew Hoover
 
	
             
 	
             
 	
            Richard Andrew Hoover
 
	
             
 	
             
 
	
             
 	
             
 
	
             
 	
            Quest Midstream GP, LLC
 
	
             
 	
             
 
	
             
 	
             
 
	
            Date:  November 8, 2007
 	
            By
 	
            /s/ Jerry D. Cash
 
	
             
 	
            Name
 	
            Jerry D. Cash
 
	
             
 	
            Title
 	
            CEO
 
	
             
 	
             
 	
             
 
	
             
 	
             
 	
             
 

 

 

9

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

 

 

 

 

	
             
 	
            Quest Resource Corporation
 
	
             
 	
             
 
	
             
 	
             
 
	
            Date:  November 8, 2007
 	
            By
 	
            /s/ Jerry D. Cash
 
	
             
 	
            Name
 	
            Jerry D. Cash
 
	
             
 	
            Title
 	
            CEO
 

 

 

 

10

HOOVER/QUEST MIDSTREAM GP, LLC/QUEST RESOURCE CORPORATION SETTLEMENT AND RELEASE AGREEMENT

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