Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration of Securities by a Small-Business 66 320K
Issuer
2: EX-5 Opinion re: Legality 1 8K
3: EX-10 (Exhibit 10.13) 24 105K
4: EX-10 (Exhibit 10.14) 16 70K
5: EX-10 (Exhibit 10.15) 11 49K
6: EX-10 (Exhibit 10.16) 9 31K
7: EX-10 (Exhibit 10.17) 25 121K
8: EX-10 (Exhibit 10.18) 14 65K
9: EX-10 (Exhibit 10.19) 14 60K
10: EX-10 (Exhibit 10.20) 13 63K
11: EX-23 (Exhibit 23.1) 1 7K
12: EX-23 (Exhibit 23.2) 1 5K
SB-2 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
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As filed with the Securities and Exchange Commission on December 17, 2001
Registration No. __________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
TORQUE ENGINEERING CORPORATION
(Name of Registrant in Our Charter)
DELAWARE 3519 83-0317306
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation
or Organization) Classification Code Number)
2932 THORNE DRIVE RICHARD D. WEDEL
ELKHART, INDIANA 46514 2932 THORNE DRIVE
(219) 264-2628 ELKHART, INDIANA 46514
(Address and telephone number of Principal (219) 264-2628
Executive Offices and Principal Place of (Name, address and telephone number of agent
Business) for service)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard, Suite 2000 201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale to the public: AS
SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
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Common stock, par value $0.0001 per share 13,825,000 Shares $0.515 $7,119,875 $1,701.65
Common stock underlying convertible debentures 5,000,000 Shares $0.515 $2,575,000 $615.43
Common stock underlying options 200,000 Shares $0.515 $103,000 $24.62
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TOTAL 19,025,000 Shares $0.515 $9,797,875 $2,341.70
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked prices
as of December 12, 2001.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to completion, dated December 17, 2001
TORQUE ENGINEERING CORPORATION
19,025,000 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 19,025,000 shares of our
common stock by certain persons who are, or will become, stockholders of Torque.
Please refer to "Selling Stockholders" beginning on page 11. Torque is not
selling any shares of common stock in this offering and therefore will not
receive any proceeds from this offering. Torque will, however, receive proceeds
from the sale of common stock under the Equity Line of Credit. All costs
associated with this registration will be borne by us. Torque has also agreed
that Cornell Capital Partners, L.P. will retain 5.0% of the proceeds raised by
us under the Equity Line of Credit.
The shares of common stock are being offered for sale on a "best
efforts" basis by the selling stockholders at prices established on the
Over-the-Counter Bulletin Board during the term of this offering. There are no
minimum purchase requirements. These prices will fluctuate based on the demand
for the shares of common stock.
The selling stockholders consist of:
o Cornell Capital Partners, L.P., which intends to sell up to
19,025,000 shares of common stock.
o Other selling stockholders, which intend to sell up to 900,000
shares of common stock purchased in private offerings and issued
pursuant to consulting agreements.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the Equity Line of Credit Agreement. Cornell Capital Partners, L.P. will pay
Torque 91% of the market price of our common stock. The 9% discount on the
purchase of the common stock to be received by Cornell Capital Partners, L.P.
will be an underwriting discount.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "TORQ." On December 7, 2001, the last reported sale price of our
common stock on the Over-the-Counter Bulletin Board was $0.43 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 5.
PRICE TO PUBLIC* PROCEEDS TO SELLING SHAREHOLDERS
Per share $0.43 $0.43
----- -----
Total $0.43 $8,180,750
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* For purposes of this table, we have assumed a market price of $0.43 per
share of common stock, the closing price as of December 7, 2001.
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no underwriter
or any other person has been engaged to facilitate the sale of shares of common
stock in this offering. This offering will terminate sixty days after Cornell
Capital Partners, L.P. has advanced $5.0 million or thirty-six months after the
effective date of the accompanying Registration Statement, whichever occurs
first. None of the proceeds from the sale of stock by the selling stockholders
will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___________ ___, 2001.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................3
SUMMARY FINANCIAL INFORMATION.................................................4
RISK FACTORS..................................................................5
FORWARD-LOOKING STATEMENTS...................................................10
SELLING STOCKHOLDERS.........................................................11
USE OF PROCEEDS..............................................................12
DILUTION.....................................................................13
CAPITALIZATION...............................................................14
EQUITY LINE OF CREDIT........................................................15
PLAN OF DISTRIBUTION.........................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................18
DESCRIPTION OF BUSINESS......................................................21
MANAGEMENT...................................................................26
DESCRIPTION OF PROPERTY......................................................29
LITIGATION PROCEEDINGS.......................................................29
PRINCIPAL SHAREHOLDERS.......................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................33
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS........................... ..................34
DESCRIPTION OF SECURITIES....................................................35
EXPERTS......................................................................35
LEGAL MATTERS................................................................35
AVAILABLE INFORMATION........................................................35
FINANCIAL STATEMENTS........................................................F-1
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We intend to distribute to our shareholders annual reports containing
audited financial statements. Our audited financial statements for the fiscal
year December 31, 2000, were contained in our Annual Report on Form 10-KSB.
2
PROSPECTUS SUMMARY
OUR COMPANY
Torque develops and manufactures a high-powered, 12-cylinder,
14-liter/860-cubic-inch, V-12 aluminum marine engine for use in marine pleasure
craft. We have developed the Torque V-12, an all-aluminum, electronically
fuel-injected engine designed to run on premium gasoline. The Torque V-12 has a
broad torque band, which allows the engine to generate significant power at low
throttle settings, thus providing greater fuel economy.
Torque focuses its sales efforts for the marine pleasure craft
industry. That industry is divided into the high-end stern drive segment and the
outboard segment. The Torque V-12 is targeted toward the stern drive segment.
More specifically, Torque currently targets the Torque V-12 toward a limited
niche market for purchasers and existing owners of high-power,
luxury-performance marine crafts sold in the United States. We believe this
niche market is generally characterized as having customers who are primarily
concerned with engine performance, dependability, and life expectancy of the
engine.
ABOUT US
Our principal office is located at 2932 Thorne Drive, Elkhart, Indiana
46514, telephone number (219) 624-2628.
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners, L.P. that intends to sell up to
18,125,000 shares of common stock.
o Other selling stockholders, which intend to sell up to 900,000
shares of common stock purchased in private offerings and issued
pursuant to consulting agreements.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $5.0 million. Cornell Capital Partners, L.P.
will purchase the shares of our common stock for a 9% discount to the prevailing
market price of our common stock. Cornell Capital Partners, L.P. intends to sell
any shares purchased under the Equity Line of Credit at the then prevailing
market price.
Common Stock Offered 19,025,000 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding 9,597,112 shares
Before the Offering(1)
Use of Proceeds We will not receive any proceeds of the shares
offered by the selling stockholders. Any proceeds
we receive from the sale of our common stock
under the Equity Line of Credit will be used for
general corporate purposes.
Risk Factors The securities offered hereby involve a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and "Dilution."
Over-the-Counter Bulletin TORQ
Board Symbol
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1 This table excludes outstanding options and convertible debentures
which, if exercised or converted into shares of common stock, together
with the shares of common stock to be issued under the Equity Line of
Credit, would result in Torque issuing an additional 17,750,000 shares
of common stock.
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SUMMARY FINANCIAL INFORMATION
The following information was taken from Torque's financial statements
for the quarter ended September 30, 2001 (unaudited) and the year ended December
31, 2000 (audited) appearing elsewhere in this filing. This information should
be read in conjunction with such financial statements and the notes thereto. In
management's opinion all adjustment (consisting of normal recurring items)
considered necessary for a fair presentation have been included.
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FOR THE NINE MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2001 2000 1999
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STATEMENT OF OPERATION DATA:
Sales $ 360,485 $ 718,801 $ 91,300
Cost of sales 859,752 1,607,494 72,726
Gross loss (499,267) (888,693) 18,574
Total operating expenses 1,505,645 1,863,434 1,427,682
Net (loss) from operations $ (2,004,912) $ (2,752,127) $ (1,409,108)
Other income (expense) (126,077) (29,189) 83,364
Gain on extinguishments of debt -- 28,708 --
Net loss (2,130,989) (2,752,608) (1,325,744)
Other comprehensive (loss), net of tax 0 (30,932) (180,131)
Comprehensive loss $ (2,130,989) $ (2,783,540) $ (1,505,875)
Loss before extraordinary gain (0.163) (0.347) (0.232)
Extraordinary gain -- 0.004 --
Net loss per share - basic and diluted
$ (0.163) $ (0.343) $ (0.232)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2001 2000 1999
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BALANCE SHEET DATA:
Cash $ -- $ 160,113 $ 798,019
Accounts receivable, net 233,407 311,159 2,289
Marketable securities 1,213 1,213 32,145
Prepaid expenses 37,124 50,008 4,768
Advances to suppliers 84,756 109,180 --
Due from factor 76,855 -- --
Inventory, net 682,094 789,135 1,165,010
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Total current assets 1,115,449 1,420,808 2,002,231
Property and equipment, net 8,618,281 9,451,698 10,454,045
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Total assets 9,773,730 10,872,506 12,456,276
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Total current liabilities 1,277,629 540,003 143,596
Total liabilities 1,636,723 994,366 719,132
Accumulated deficit (6,219,924) (4,088,936) (1,336,328)
Stockholders' equity $8,097,007 $9,878,140 $11,737,144
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RISK FACTORS
We are subject to various risks which may materially harm our business,
financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. In the nine months ended September 30,
2001 and year ended December 31, 2000, we sustained losses from operations of
$2.1 million and $2.8 million, respectively. Future losses are likely to occur.
Accordingly, we may experience significant liquidity and cash flow problems if
we are not able to raise additional capital as needed and on acceptable terms.
No assurances can be given that we will be successful in reaching or maintaining
profitable operations.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
Our operations have relied almost entirely on external financing to
fund our operations. Such financing has historically come from a combination of
borrowings from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated operating expenses and future expansion. Among other things,
external financing will be required to cover our operating costs. We cannot
assure you that financing whether from external sources or related parties will
be available if needed or on favorable terms. The sale of our common stock to
raise capital may cause dilution to our existing shareholders. Our inability to
obtain adequate financing will result in the need to curtail business
operations. Any of these events would be materially harmful to our business and
may result in a lower stock price.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING
The report of our independent accountants on our December 31, 2000 and
December 31, 1999 financial statements included an explanatory paragraph
indicating that there is substantial doubt about our ability to continue as a
going concern due to recurring losses and working capital shortages. Our ability
to continue as a going concern will be determined by our ability to obtain
additional funding. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
Prior to this offering, there has been a limited public market for our
common stock and there can be no assurance that an active trading market for our
common stock will develop. As a result, this could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations which could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
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o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not less
than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less than
three years), or with average revenues of less than $6.0 million
for the last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key
executives, including Richard D. Wedel, our Chief Executive Officer and Chairman
of the Board; Raymond B. Wedel, Jr., our President and a Director; and I. Paul
Arcuri, our Chief Financial Officer and a Director. The loss of the services of
Messrs. Wedel, Arcuri and/or Wedel, Jr., could materially harm our business
because of the cost and time necessary to replace and train a replacement. Such
a loss would also divert management attention away from operational issues. We
do not have employment agreements with Messrs. Wedel, Arcuri or Wedel, Jr. We do
not presently maintain a key-man life insurance policy covering these
individuals.
WE CANNOT ASSURE YOU THAT THE MARKET FOR THE TORQUE V-12 WILL BE SUFFICIENT TO
COVER OUR OPERATING EXPENSES
Sales of our Torque V-12 engines are currently targeted toward owners
of high-performance, luxury marine craft. This market is a limited niche market
in which the price of the boats for which the Torque V-12 is designed in many
cases exceeds $500,000. We cannot assure you that sales of engines in this
market will be sufficient to allow us to become profitable in the future.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO ADAPT THE TORQUE V-12 TO ANY OTHER
USE OUTSIDE OF THE LUXURY MARINE ENGINE MARKET
Our current business strategy is to market and sell the Torque V-12
engines in the high-performance marine engine industry. Because this is a
limited niche market, we also anticipate we will attempt to adapt the Torque
V-12 engines to other industries and uses in order for us to increase our future
profitability. We cannot assure you that we will be able to adapt the Torque
V-12 engine to other uses or to other industries.
WE HAVE NOT YET MANUFACTURED THE TORQUE V-12 ON A FULL PRODUCTION BASIS
Our current business strategy is to manufacture the Torque V-12 engine
on a production basis, as opposed to customizing the Torque V-12 for individual
customer requests. In 1999 and 2000, we continued the tooling, fixturing,
programming and installation of manufacturing equipment in preparation for
production. The initial production engines were completed and shipped in the
later part of 2000. We have begun to implement quantity production of the Torque
V-12, but cannot assure you that we will not experience initial or recurring
quality control or cost problems.
WE HAVE NOT YET ESTABLISHED A DISTRIBUTION CHANNEL FOR THE TORQUE V-12
We currently market the Torque V-12 engine through
original-equipment-manufacturing boat manufacturers, an Internet website, trade
show appearances, magazine articles and personal contacts of the members of our
company in the pleasure craft marine industry. We cannot assure you that these
marketing efforts will prove sufficient to allow us to be profitable.
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WE EXPECT INTENSE COMPETITION IN OUR INDUSTRY
Although we are not aware of any other gasoline-powered aluminum V-12
engine with performance characteristics similar to the Torque V-12 engine, we
believe that if the Torque V-12 becomes popular with consumers, other
manufacturers will design and market their own aluminum V-12 engines that will
directly compete with the Torque V-12. Many of our competitors have
significantly greater name recognition and financial and other resources than we
do. We cannot assure you that we will succeed in the face of strong competition
from other engine manufacturers.
WE CANNOT ASSURE YOU THAT OUR PATENTS WILL PROVIDE ADEQUATE PROTECTION
Although we hold a U.S. patent for our Torque V-12 engines' lubrication
system, Torque cannot assure you that any future patent applications we submit
will result in patents being issued or that, if issued, such patents or
pre-existing patents will afford adequate protection against competitors with
similar technology. In addition, Torque's competitors may independently develop
superior technology.
Torque also cannot assure you that any patents issued to or licensed by
Torque will not be infringed upon or designed around by others, that others will
not obtain patents that Torque will need to license or design around or that
Torque's products will not inadvertently infringe upon the valid patents of
others. In addition, Torque cannot assure you that the Torque patent will not be
invalidated or that Torque will have adequate funds to finance the high cost of
defending or prosecuting patent validity or infringement issues.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
Certain industries, such as ours, are characterized by an increasing
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright and
other intellectual property rights to technologies that are important to us.
While there currently are no outstanding infringement claims pending by or
against us, we cannot assure you that third parties will not assert infringement
claims against us in the future, that assertions by such parties will not result
in costly litigation, or that they will not prevail in any such litigation. In
addition, we cannot assure you that we will be able to license any valid and
infringed patents from third parties on commercially reasonable terms or,
alternatively, be able to redesign products on a cost-effective basis to avoid
infringement. Any infringement claim or other litigation against or by us could
have a material adverse effect on us.
NO ASSURANCE OF TECHNOLOGICAL SUCCESS
Our ability to commercialize our products is dependent on the
advancement of our existing technology. In order to obtain and maintain a
significant market share we will continually be required to make advances in
technology. Due to cash shortages, we did not expend any money in research and
development in 2000. We cannot assure you that our research and development
efforts will result in the development of such technology on a timely basis or
at all. Any failures in such research and development efforts could result in
significant delays in product development and have a material adverse effect on
us. We cannot assure you that we will not encounter unanticipated technological
obstacles which either delay or prevent us from completing the development of
our products. Such obstacles could have a material adverse effect on us.
WE COULD FAIL TO COMPLY WITH GOVERNMENTAL REGULATIONS
Torque is subject to regulation under various federal, state and local
laws relating to the environment and to employee safety and health. These laws
include those relating to the generation, storage, transportation, disposal and
emission into the environment of various substances, those relating to drinking
water quality initiatives, and those which allow regulatory authorities to
compel or seek reimbursement for clean-up of environmental contamination at its
owned or operated sites and at facilities where its waste is or has been
disposed. Permits are required for operation of Torque's business, and these
permits are subject to renewal, modification and, in certain circumstances,
revocation. Torque believes that it is in substantial compliance with
environmental laws and permit requirements.
The EPA has adopted regulations governing emissions from marine
engines. The regulations relating to outboard engines phase in over nine years,
beginning in model year 1998 and concluding in model year 2006. For personal
watercraft the regulations phase in over eight years, beginning in model year
1999 and concluding in model year 2006. Marine engine manufacturers are required
to reduce hydrocarbon emissions from outboard engines, on average, by 8.3% per
year beginning with the 1998 model year, and emissions from personal watercraft
by 9.4% per year beginning in model year 1999. These regulations apply to
two-stroke engines and to personal watercraft, such as jet skis. Since the
Torque V-12 is a four-stroke engine, Torque does not believe that compliance
7
with these standards will have a material adverse effect on the cost of our
engine products or our future sales.
Certain states, including California, have adopted environmental laws
that require marine engines to comply with future federal annual hydrocarbon
emissions standards more quickly than federal law requires. While Torque has not
been able to fully assess the impact that these standards will have on our
business, Torque does not believe these more stringent state requirements will
have a material adverse effect on the cost of our engine products or our future
sales.
Torque cannot predict the environmental legislation or regulations that
may be enacted in the future or how existing or future laws or regulations will
be administered or interpreted. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, may require expenditures
by Torque.
WE DO NOT MAINTAIN ANY PRODUCT LIABILITY INSURANCE, WHICH MAY EXPOSE US TO THE
EXPENSE OF DEFENDING ANY LIABILITY CLAIMS
The manufacture and sale of our products entails the risk of product
liability claims. In addition, certain companies with which we do or may do
business may require financial assurances of product reliability. At the present
time we do not maintain product liability insurance.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided from the Equity Line of Credit, in
large part. No assurances can be given that such financing will be available in
sufficient amounts when needed.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 9,597,112 shares of our common stock outstanding as of December 7, 2001,
1,884,093 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 7,713,019 shares of common stock held by
existing stockholders are "restricted securities" and may be resold in the
public market only if registered or pursuant to an exemption from registration.
In addition, there are outstanding options and convertible debentures, and
which, upon exercise or conversion, together with the shares of common stock to
be issued under the Equity Line of Credit, would result in the issuance of an
additional 17,750,000 shares of our common stock. All of the shares underlying
the options and convertible debentures may be immediately resold in the public
market upon effectiveness of the accompanying registration statement.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT
The sale of shares pursuant to the Equity Line of Credit will have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In addition, the lower our stock price is the more shares of common
stock we will have to issue under the Equity Line of Credit to draw down the
full amount. If our stock price is lower, then our existing stockholders would
experience greater dilution.
THE INVESTOR UNDER THE LINE OF CREDIT WILL PAY LESS THAN THE THEN-PREVAILING
MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at a 9% discount to the average of the two lowest closing bid prices on
the Over-the-Counter Bulletin Board or other principal market on which our
8
common stock is traded for the five days immediately following the notice date.
These discounted sales could cause the price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
19,025,000 shares of common stock, the number of shares being registered in this
offering, may be sold. Such sales may cause our stock price to decline.
THE SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR STOCK CAUSED BY THE SALE
OF MATERIAL AMOUNTS OF COMMON STOCK UNDER THE ACCOMPANYING REGISTRATION
STATEMENT COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE
TO THE FURTHER DECLINE OF OUR STOCK PRICE
The significant downward pressure on our stock price caused by the sale
of stock registered in this offering could encourage short sales by third
parties. Such short sales could place further downward pressure on our stock
price.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, our common stock has traded on the
Over-the-Counter Bulletin Board. Our common stock is thinly traded compared to
larger more widely known companies in our industry. Thinly traded common stock
can be more volatile than common stock trading in an active public market. We
cannot predict the extent to which an active public market for the common stock
will develop or be sustained after this offering.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
THE ISSUANCE OF SHARES OF COMMON STOCK UNDER THIS OFFERING COULD RESULT IN A
CHANGE OF CONTROL
We are registering 19,025,000 shares of common stock in this offering.
These shares represent over 38.0% of our authorized capital stock, and we
anticipate all such shares will be sold in this offering. If all or a
significant block of these shares are held by one or more shareholders working
together, then such shareholder or shareholders would have enough shares to
assume control of Torque by electing its or their own directors.
9
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
10
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. Pursuant to the Equity Line of Credit, Cornell Capital Partners,
L.P. has agreed to purchase up to $5.0 million of our common stock. None of the
selling stockholders have held a position or office, or had any other material
relationship, with us, except as follows:
o Cornell Capital Partners, L.P. is the investor under the Equity
Line of Credit and previously purchased convertible debentures of
Torque. All investment decisions of Cornell Capital Partners are
made by its general partner, Yorkville Advisors, LLC. Mark
Angelo, the managing member of Yorkville Advisors, LLC, makes the
investment decisions on behalf of Yorkville Advisors.
o Kenneth Hersch and Peter Cardillo are consultants to Torque.
The table follows:
[Enlarge/Download Table]
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING(1) OFFERING(2) CREDIT OFFERING(1) OFFERING
----------- ----------- ----------- ------ ----------- --------
Cornell Capital Partners, L.P. 5,625,000 38.5% 12,500,000(3) 18,125,000 0.0%
V. T. Lincoln Financial
Corporation 430,000 4.5% 0 430,000 0.0%
Peter Cardillo 250,000(4) 2.6% 0 250,000 0.0%
Kenneth Hersch 220,000 2.3% 0 220,000 0.0%
-----------------------------------------
* Less than 1%.
(1) The shares represented in this column represent outstanding shares of
common stock, as well as shares of common stock that may be obtained
upon conversion or exercise of outstanding options and convertible
debentures.
(2) Percentage of outstanding shares is based on 9,597,112 shares of common
stock outstanding as of December 7, 2001, together with shares deemed
beneficially owned by each such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with
respect to securities. Shares of common stock that may be obtained
within 60 days of December 7, 2001 are deemed to be beneficially owned
by the person holding such securities that are convertible or
exchangeable into shares of common stock for the purpose of computing
the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of
any other person.
(3) The number of shares of common stock available under the Equity Line of
Credit may be increased by any unused shares of common stock not used
upon the conversion of debentures held by other selling shareholders.
(4) Includes 200,000 shares of common stock underlying options issued to
Mr. Cardillo that are exercisable at $0.75 per share.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the Equity Line of Credit. The purchase
price of the shares purchased under the Equity Line of Credit will be equal to
91% of the average of the two lowest closing bid prices on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded for
the five days immediately following the notice date.
For illustrative purposes, we have set forth below its intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Line of Credit. The table assumes estimated offering expenses of $85,000
and 5.0% of the gross proceeds raised under the Equity Line of Credit retained
by Cornell Capital Partners, L.P. have been deducted from the gross proceeds.
GROSS PROCEEDS $1.00 MILLION $2.50 MILLION $5.00 MILLION
NET PROCEEDS $0.865 MILLION $2.290 MILLION $4.665 MILLION
USE OF PROCEEDS:
--------------------------------------------------------------------------------
Repayment of Debt $100,000 $100,000 $235,000
Research and Development $50,000 $100,000 $100,000
General Working Capital $715,000 $2,090,000 $4,330,000
12
DILUTION
Since this offering is being made solely by the selling stockholders
and none of the proceeds will be paid to us, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted by the common stock to be issued under the Equity Line of Credit.
Our net tangible book value as of September 30, 2001 was $8,137,007 or
$0.95 per share of common stock. Net tangible book value is determined by
dividing our tangible book value (total tangible assets less total liabilities)
by the number of outstanding shares of our common stock.
For example, if we assume that we had issued 12,500,000 shares of
common stock under the Equity Line of Credit at an assumed offering price of
$0.43 per share, less $250,000 retained by Cornell Capital Partners, L.P. and
$85,000 of offering expenses, our net tangible book value as of September 30,
2001 would have been $12,802,007 or $0.61 per share. This represents an
immediate decrease in net tangible book value to existing shareholders of $0.34
per share and an immediate increase to new shareholders of $0.18 per share, or
41.9%. The following table illustrates the per share dilution:
Assumed public offering price per share $0.43
Net tangible book value per share before this offering $0.95
Increase attributable to new investors $0.34
Net tangible book value per share after this offering $0.61
Dilution per share to new shareholders $0.18
The offering price of our common stock under the Equity Line of Credit
is based on 91% of the average of the 2 lowest closing bid prices on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 5 days immediately following the notice date. In order
to give prospective investors an idea of the dilution per share they may
experience, we have prepared the following table showing the dilution per share
at various assumed offering prices. Torque is registering 17,500,000 shares of
common stock under the Equity Line of Credit and the convertible debentures.
Accordingly, Torque would need to register additional shares of common stock in
order to fully utilize the $5.0 million available under the Equity Line of
Credit at the prices set forth below.
ASSUMED NO. OF SHARES TO BE DILUTION PER SHARE TO
OFFERING PRICE ISSUED NEW INVESTORS
------------------------ ------------------------- -----------------------
$0.125 17,500,000 0.26
$0.20 17,500,000 0.23
$0.30 16,666,667 0.21
$0.40 12,500,000 0.21
13
CAPITALIZATION
The following table sets forth the total capitalization of Torque as of
September 30, 2001.
September 30, 2001
(Actual)
------------------
Long-term liabilities 359,094
Stockholders' deficit:
Common stock, $0.00001 par value; 50,000,000
shares authorized and 8,571,842 shares
issued and outstanding at September 30,
2001 86
Additional paid-in capital 14,589,966
Accumulated deficit (6,219,924)
Accumulated other comprehensive loss (211,063)
Less: treasury stock at cost, 6,750 shares (56,970)
Less: deferred compensation expense (5,088)
----------------
Total stockholders' deficit 8,097,007
================
Total capitalization 8,159,065
================
14
EQUITY LINE OF CREDIT
SUMMARY. On November 14, 2001, we entered into an Equity Line of Credit
("EQUITY LINE OF CREDIT") with Cornell Capital Partners, L.P. (the "INVESTOR").
Pursuant to the Equity Line of Credit, we may, at our discretion, periodically
sell to the Investor shares of common stock for a total purchase price of up to
$5.0 million. For each share of common stock purchased under the Equity Line of
Credit, the Investor will pay 91% of the average of the 2 lowest closing bid
prices on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the 5 days immediately following the notice date.
The Investor is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further, the
Investor will retain 5.0% of each advance under the Equity Line of Credit. The
effectiveness of the sale of the shares under the Equity Line of Credit is
conditioned upon us registering the shares of common stock with the Securities
and Exchange Commission. The costs associated with this registration will be
borne by us.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit,
we may periodically sell shares of common stock to Cornell Capital Partners,
L.P. to raise capital to fund our working capital needs. The periodic sale of
shares is known as an advance. We may request an advance every 5 trading days. A
closing will be held 7 trading days after such written notice at which time we
will deliver shares of common stock and Cornell Capital Partners, L.P. will pay
the advance amount.
We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until the Investor has advanced
$5.0 million or November 14, 2003, whichever occurs first.
The amount of each advance is subject to an aggregate monthly maximum
advance amount of $208,333.33.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we drew down the entire $5.0 million
available under the Equity Line of Credit in a single advance (which is not
permitted under the terms of the Equity Line of Credit) and the purchase price
was equal to $0.40 per share, then we would issue 12,500,000 shares of our
common stock to Cornell Capital Partners, L.P. These shares would represent
56.6% of our outstanding common stock upon issuance. Torque is registering
17,500,000 shares of common stock for the sale under the Equity Line of Credit
and the conversion of debentures. Accordingly, Torque would need to register
additional shares of common stock in order to fully utilize the $5.0 million
available under the Equity Line of Credit at the prices set forth below.
You should be aware that there is an inverse relationship between our
stock price and the number of shares to be issued under the Equity Line of
Credit. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Equity Line of Credit for a given advance.
This inverse relationship is demonstrated by the following table, which shows
the number of shares to be issued under the Equity Line of Credit at a recent
price of $0.43 per share and discounts to the recent price. This table does not
take into account any shares of our common stock that would be issued upon
conversion of any options outstanding.
Purchase Price: $0.125 $0.150 $0.25 $0.30 $0.40
No. of Shares(1): 40,000,000 33,333,333 20,000,000 16,666,667 12,500,000
Total Outstanding(2): 49,597,112 42,930,445 29,597,112 26,263,779 21,252,112
Percent Outstanding(3): 80.7% 77.6% 67.6% 76.2% 58.8%
----------------------
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, L.P.
15
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
In addition to showing the inverse relationship, the above table also
shows that the issuance of shares under the Equity Line of Credit may result in
a change of control. That is, between 12,500,000 and 40,000,000 shares of stock
could be issued under the Equity Line of Credit. If all or a significant block
of these shares are held by one or more shareholders working together, then such
shareholder or shareholders would have enough shares to assume control of Torque
by electing its or their own directors. Upon a change of control, all
outstanding options under our stock option plans would immediately vest.
Proceeds used under the Equity Line of Credit will be used for
repayment of debt, research and development, and working capital to support
continued operations and marketing. We cannot predict the total amount of
proceeds to be raised in this transaction, in part, because we have not
determined the total amount of the advances we intend to draw. However, we
expect to incur expenses of approximately $85,000 consisting primarily of
professional fees incurred in connection with this registration. In addition, we
are obligated to allow the Investor to retain 5.0% of each advance.
In addition, in connection with the Equity Line of Credit, we issued
600,000 shares of our common stock to Cornell Capital Partners, L.P. as a
commitment fee and 25,000 shares of our common stock to Westport Partners, Ltd.
as a placement agent fee.
16
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of common stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of our
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved). The selling stockholders and any brokers, dealers or
agents that participate in the distribution of the common stock may be deemed to
be underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the Equity Line of Credit agreement. Cornell Capital Partners, L.P. will pay us
91% of the average of the 2 lowest closing bid prices on the Over-the-Counter
Bulletin Board or other principal trading market on which our common stock is
traded for the 5 days immediately following the notice date. The 9% discount on
the purchase of the common stock to be received by Cornell Capital Partners,
L.P. will be an underwriting discount. In addition, Cornell Capital Partners,
L.P. will retain 5.0% of the gross proceeds raised in the Equity Line of Credit.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in certain states the shares of common stock may not be
sold unless the shares have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied
with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify the selling stockholders and their controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000 as well as the 5.0% of the gross proceeds received under
the Equity Line of Credit that will be retained by Cornell Capital Partners,
L.P. We will not receive any proceeds from the sale of any of the shares of
common stock by the selling stockholders. We will, however, receive proceeds
from the sale of common stock under the Equity Line of Credit.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling shareholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock of Torque while such selling shareholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling shareholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners, L.P. can cover any short positions only with shares received from us
under the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF TORQUE AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
OVERVIEW
The following discussion of the financial condition and results of
Torque should be read together with the interim financial statements included in
this report. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
expressed or implied in those forward-looking statements.
Torque is a company that continues to devote its efforts toward
establishing itself as a manufacturer of a lightweight, high-powered marine
engine built on a production line basis for the luxury performance pleasure
craft industry. For the three and nine months ended September 30, 2001, Torque
had a net loss of $794,420 and $2,130,989, respectively. Torque had negative
cash flows from operating activities of $681,584 and an accumulated deficit of
$6,219,924 for the nine months ended September 30, 2001. These conditions raise
substantial doubt about Torque's ability to continue as a going concern.
Torque's financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Torque's ability to continue as a going concern is dependent upon
management's ability to increase sales of the Torque V-12 engines and to obtain
adequate levels of additional financing. Management believes that its current
efforts will provide for Torque to continue as a going concern. We cannot assure
you, however, that we will be successful.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
SALES. For the three months ended September 30, 2001, we had sales of
$14,054 as compared to $229,840 for the same period in 2000, a decrease of
$215,786, or 938.9%. This decrease is primarily attributable to no shipment of
engines in the three-month period ended September 30, 2001.
COST OF SALES. For the three months ended September 30, 2001, we had
cost of sales of $278,086, as compared to $295,828 for the same period in 2000,
a decrease of $17,742, or 6.0%. Cost of sales as a percentage of sales increased
from 128.7% in the three months ended September 30, 2000 to 1.978.7% in the
three months ended September 30, 2001. This increase is primarily attributable
to a provision for inventory obsolescence of $176,724 taken during the
three-month period ended September 30, 2001.
OPERATING EXPENSES. For the three months ended September 30, 2001,
operating expenses were $483,712, as compared to $479,198 for the same period in
2000, an increase of $4,514, or 0.9%. This increase is primarily attributable to
increased expenses in connection with the development of the Torque V-12 engine
and an increase in marketing and related travel expenses in connection with the
establishment and execution of Torque's business plan.
NET LOSS. For the three months ended September 30, 2001, net loss was
$794,420, as compared to $579,579 for the same period in 2000, an increase of
$214,841, or 37.1%. This increase is primarily attributable to a decrease in
sales, an increase in cost of sales and an increase in financing costs
associated with our accounts receivable factoring agreement.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
SALES. For the nine months ended September 30, 2001, we had sales of
$360,485, as compared to $238,774 for the same period in 2000, an increase of
$121,711, or 51.0%. This increase is primarily attributable to the sale of one
(1) additional engine in the nine-month period ended September 30, 2001 compared
to the same period in 2000.
COST OF SALES. For the nine months ended September 30, 2001, we had
cost of sales of $859,752, as compared to $559,894 for the same period in 2000,
an increase of $299,858, or 53.6%. Cost of sales as a percentage of sales
increased from 234.5% in the nine months ended September 30, 2000 to 238.3% in
the nine months ended September 30, 2001. This increase is primarily the result
18
of a provision for inventory obsolescence of $176,724 taken during the nine
months ended September 30, 2001 and an increase in marketing and related travel
expense in connection with the establishment and execution of our business plan.
OPERATING EXPENSES. For the nine months ended September 30, 2001,
operating expenses were $1,505,645, as compared to 1,540,024 for the same period
in 2000, an increase of $1,621, or 0.1%.
NET LOSS. For the nine months ended September 30, 2001, net loss was
$2,130,989, as compared to $1,821,837 for the same period in 2000, an increase
of $309,152, or 17.0%. This increase is primarily attributable to decreased
expenses in connection with the development of the Torque V-12 engine and an
increase in marketing and related travel expenses in connection with the
establishment and execution of our business plan.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
SALES. For the year ended December 31, 2000, we had sales of $718,801,
as compared to $91,300 for the same period in 1999, an increase of $627,501 or
687.3%. The increase was attributable to the sale of six Torque V-12 engines in
the year ended December 31, 2000, as compared to the one Torque V-12 engine in
the same period in 1999.
COST OF SALES. For the year ended December 31, 2000, we had cost of
sales of $1,607,494, as compared to $72,726 for the same period in 1999, an
increase of $1,534,768 or 2,100.3%. Cost of sales as a percentage of sales
increased from 79.7% in the year ended December 31, 1999 to 223.6% in the year
ended December 31, 2000. This increase is primarily attributable to a noncash
charge incurred for depreciation. In addition, a large part of the increase in
cost of sales is comprised of salary for labor in the production of the Torque
V-12 engines, building rent and other manufacturing overhead.
OPERATING EXPENSES. For the year ended December 31, 2000, we had
operating expenses of $2,752,127, as compared to $1,409,108 for the same period
in 1999, an increase of $1,343,019 or 95.3%. Payroll and other compensation
decreased to $240,538 for the year ended December 31, 2000 from $392,795 for the
year ended December 31, 1999. This decrease is primarily attributable to the
reclassification of certain salary expense of employees directly involved in the
production of Torque V-12 engines to cost of goods sold. Depreciation increased
to $1,118,079 for the year ended December 31, 2000, from $643,703 for the year
ended December 31, 1999. This increase is primarily attributable to the fact
that Torque took depreciation for the entire year ended December 31, 2000.
Torque began taking depreciation during the year ended December 31, 1999 only
after the acquisition of IPSL, Inc. in May 1999. The increase in rental expense
from $70,168 for the year ended December 31, 1999 to $120,000 for the year ended
December 31, 2000 is also attributable to the payment of rent on Torque's
manufacturing facility for the entire year ended December 31, 2000. General and
administrative expenses increased to $384,817 for the year ended December 31,
2000 from $321,016 for the year ended December 31, 1999. The increase was
primarily attributable to marketing and related travel expenses in connection
with the establishment and execution of Torque's business plan.
NET LOSS. For the year ended December 31, 2000, net loss was
$2,752,608, as compared to $1,325,744 for the year ended December 31, 1999, an
increase of $1,426,846 or 107.8%. This increase is primarily attributable to the
increase in general and administrative expense discussed above, and $1,118,079
of depreciation of property and equipment acquired through the IPSL acquisition
in order to establish and executed our business plan.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 3 to our financial statements, on May 2, 2001, we
entered into an accounts receivable financing agreement. Amounts received were
utilized for inventory and working capital. In October 2001, we sold $300,000 of
6% Convertible Subordinated Debentures, due October 24, 2006 to Cornell Capital
Partners, L.P. After expenses, we received approximately $270,000 from such
offering. We intend to use the proceeds of the offering for working capital
purposes and to pay certain operational expenses.
We anticipate that we will require additional capital to implement our
business plan. We plan to obtain such capital through the sale of additional
securities, obtaining financing from third parties, and from funds generated by
the sale of the Torque V-12 engine. As discussed in Note 11 to our financial
statements, on November 14, 2001, we entered into an Equity Line of Credit
Agreement under which we may sell shares of our common stock to Cornell Capital
Partners, L.P. for a purchase price of up to $5,000,000. As of November 30,
2001, we had not received any funds under such agreement. If we do receive funds
under such agreement, we expect that such amounts will also be used for working
capital and to implement our business plan. If the Equity Line of Credit
Agreement does not provide sufficient capital resources, or if our funds from
our ongoing operations do not increase, it is unlikely we will continue as a
going concern.
19
Cash Flows
A total of $681,584 and $1,101,163 was used for operating activities
for the nine months ended September 30, 2001 and 2000, respectively. The cash
used in operating activities was primarily expended on costs and expenses
related to the production-line manufacture of the Torque V-12 engines.
20
DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Torque Engineering Corporation was formerly known as Quintessence Oil
Company. Quintessence Oil was formed under Wyoming law on June 26, 1996 to
purchase, develop and operate oil and gas leases. On December 3, 1996,
Quintessence Oil voluntarily filed a registration statement on Form 10 with the
SEC to become a publicly reporting company. Prior to May 28, 1999, Quintessence
Oil was essentially inactive and had no operations. Quintessence Oil had
previously acquired one undeveloped oil and gas lease, but had not initiated
drilling or other production operations.
In May 1999, Quintessence Oil's new management began the first phase of
a transition from an inactive oil and gas company to a manufacturer of
high-performance production engines for the boating and transportation industry.
On May 28, 1999, Quintessence Oil issued 1,500,000 shares of its common stock to
acquire IPSL, Inc. Prior to that, on May 1, 1999, IPSL acquired from Glaval
Corporation the proprietary rights to continue to research and develop the
Torque V-12, an aluminum, gasoline-powered engine for the luxury off-shore
marine industry. By acquiring IPSL and other assets, Quintessence Oil obtained
those same proprietary rights. On November 17, 1999, Quintessence Oil
re-incorporated under Delaware law and changed its name to Torque Engineering
Corporation.
Torque's current management has over 40 years experience in the design
and production of high-performance, marine race and pleasure engines. Beginning
in 1986, under the name Lightning Performance Products, Inc., Torque's current
president, Raymond B. Wedel, Jr. continued the design and production of
high-performance marine race and pleasure engines, as well as, developed and
sold after-market performance-enhanced parts and equipment for such engines.
The high-performance marine race and pleasure engines Lightning
Performance originally produced were custom-made. As a result, the market for
these products was extremely limited. In early 1992, Mr. Wedel sold Lightning
Performance to Richard Streffling and Lightning Performance continued operations
as an Indiana corporation under the name Torque. Mr. Wedel joined that business
after the sale and began to transition it from the production of race engines to
the development of a light-weight, high-power marine engine which could be built
on a production-line basis for the luxury performance pleasure craft industry.
In 1997, Mr. Wedel left the prior Torque to pursue other opportunities
in the marine industry. However, that company, utilizing many of the same
employees who worked for Mr. Wedel, continued to develop the Torque V-12. In
1999 IPSL purchased the assets and proprietary rights to continue to research
and develop the Torque V-12 from the prior Torque entity.
On May 21, 1999, Quintessence Oil and IPSL entered into a Plan and
Agreement of Reorganization under which Quintessence Oil agreed to acquire all
of the issued and outstanding shares of common stock of IPSL. Under the plan,
IPSL's sole shareholder, Michel Attias, irrevocably granted Quintessence Oil the
right to exchange 1,500,000 shares of its common stock for all of the
outstanding shares of common stock of IPSL at any time prior to June 15, 1999.
On May 28, 1999 Quintessence Oil exercised its right to close the transaction
and to acquire IPSL and the assets and proprietary rights to research and
develop the Torque V-12. As described above, Quintessence Oil then
reincorporated and changed its name to Torque Engineering Corporation.
Since acquiring IPSL and the rights to develop and manufacture the
Torque V-12, Torque has formulated a plan of operation based on management's
belief that even as boat manufacturers increase the size of pleasure craft,
marine industry consumers are unwilling to settle for less performance than what
is available in smaller marine craft. We believe that in order to provide the
same level of performance, the standard automotive-based gasoline V-8 engine is
being asked to perform beyond its engineered limits. Owners of luxury offshore
pleasure craft are therefore forced to resort to installing three or four high
performance V-8 engines or installing heavier and noisier diesel engines. As a
result, Torque has developed and is now manufacturing and marketing the Torque
V-12, a high-powered, 12-cylinder, 14 liter/860 cubic inch V-12 aluminum marine
engine.
RECENT DEVELOPMENTS
As of September 30, 2001, we had no cash on hand and working capital of
approximately $(162,180). Our operations are financed primarily from the sale of
debt and equity securities. For the foreseeable future, we believe we will
continue to rely on external capital to fund our operations.
21
We are continuing to seek additional sources of capital in order to
repay our obligations and to provide for our working capital requirements for
the long-term. There can be no assurance that we will be able to obtain any such
required additional funds on a timely basis, or on favorable terms, or at all.
The following discussion of our business and, in particular, our sales
and marketing plans, assumes that we will receive sufficient capital to continue
as a going concern. Depending upon the amount of proceeds, if any, received by
us, and the timing of those proceeds, our ability to continue as a going concern
could be adversely affected.
OUR PRODUCTS
The Torque V-12 is an all-aluminum, electronically fuel-injected engine
designed to run on premium gasoline. The engine has a broad torque band, which
allows the Torque V-12 to generate significant power at low throttle settings,
thus providing for greater fuel economy. Presently, Torque is unaware of any
other marine engine manufacturer that produces an all-aluminum, naturally
aspirated, gasoline-powered V-12 engine that provides the same performance
characteristics of the Torque V-12 engines.
In September 1999, the Torque V-12 became an available power plant in
the Carlson Model 2000, 33 foot sport cruiser boat line. Currently, Magnum,
Cigarette, NorTech, Predator, Advantage and Skater boats also list the Torque
V-12 as a power plant selection for some of their current models.
The Torque V-12 is designed for installation in luxury marine pleasure
craft. If significant production of the Torque V-12 begins, Torque anticipates
that it will analyze whether the Torque V-12 may be commercially adapted to
other uses, including potential military, industrial, agricultural or mining
uses. There is no assurance that we will adapt our Torque V-12 to additional
marine or other uses, or that the Torque V-12 will be appropriate for uses other
than in the luxury marine pleasure craft market.
Torque presently offers the Torque V-12 in the following three models:
o The TORQ 1000 - 900 horsepower engine with 1050 ft.-lbs. of torque;
o The TORQ 1100 - 1,050 horsepower engine with 1100 ft.-lbs. of torque;
and
o The TORQ 1200 - 1,150 horsepower engine with 1150 ft.-lbs. of torque.
Retail prices for the Torque V-12 range from $91,159 to $112,838.
Torque offers a one-year limited warranty on all three Torque V-12 models. Each
warranty limits the total number of hours a purchaser may use the Torque V-12
during the one-year warranty period and still remain eligible for warranty
protection. The warranty period for the TORQ 1000 covers 75 hours of total use
and for the TORQ 1100 and TORQ 1200 covers 50 hours of total use.
Torque's products are designed for the marine pleasure craft industry.
That industry is divided primarily into the high-end stern drive segment and the
outboard segment. The Torque V-12 is targeted toward the stern drive segment.
More specifically, Torque's Torque V-12 engines are currently targeted
toward a limited niche market for purchasers and owners of high-powered, luxury
performance pleasure craft sold in the U.S. Torque believes this niche market is
generally characterized as having consumers who are concerned primarily with:
o the performance of the high-powered engines they purchase;
o the dependability of those engines; and
o the overall useful life of those high-powered engines.
Prices for the marine craft for which the Torque V-12 engines are
designed generally range from $250,000 to $1,000,000.
22
INDUSTRY OVERVIEW
According to the National Marine Manufacturers' Association, the
recreational boating industry generated approximately $22.2 billion in overall
sales in 1999 and $25.6 billion in 2000.
There were 99,000 new sales of inboard and stern drive boats in 2000.
Of these, approximately 20,000 were 25' or more in length. Approximately 90% of
these boats would have two or more engines. Torque's management hopes to capture
2-1/2% to 4% of this market over the next three to five years. However, there
can be no assurance Torque will be able to do so.
Torque believes recreational marine industry sales are impacted by
factors such as:
o the general state of the economy;
o interest rates;
o consumer spending;
o technology;
o dealer effectiveness;
o demographics;
o weather conditions;
o fuel availability and price; and
o government regulations.
During the period from 1983 to 1992, the recreational marine industry
experienced both its largest growth (from 1983 to 1988) and its largest decline
(from 1988 to 1992) in over 30 years. The growth was stimulated not only by
increasing real disposable income, but also by readily obtainable marine loans
that required no down payment and could be financed over a term of over ten
years. The contraction in sales from 1988 to 1992 was due to the recession
during the early 1990s and to the increased level of sales in the late 1980s.
Many boat owners had loan balances in the early 1990s that exceeded the value of
their boats, which made trade-up sales more difficult to obtain. In addition, in
1990 the U.S. government imposed a luxury tax on boats sold at prices in excess
of $100,000. However, the luxury tax was repealed in 1993 and boats over 24 feet
continue to be one of the largest growth sectors in the market.
Torque also believes there are three primary factors affecting the
recreational marine industry today.
o There are an increasing number of consumers over the age of 50.
These older consumers typically have larger discretionary income per
capita and increased leisure time. Torque believes that these
consumers are purchasing larger and more luxurious boats.
o Torque believes there is increasing interest in upgrading existing
boats through equipment-based accessories and repowerment. Torque's
research indicates that approximately 1% of the existing boat
engines in use are replaced on an annual basis.
o Women are increasingly influencing or making purchasing decisions.
Torque estimates there are currently approximately 500,000 women
powerboat owners in the U.S. and that the number is expected to
grow.
MANUFACTURING
Torque V-12 engines were developed and are produced in Torque's
Elkhart, Indiana manufacturing facility using computer-controlled machining
centers.
23
In November 1999, Torque completed installation of additional
computer-controlled machining centers it uses to manufacture Torque V-12 engine
components. Haas Automation manufactured these additional computer-controlled
machining centers and Torque leased the machining centers from CNC Associates,
Inc.
The Torque V-12 engine is machined and also hand-assembled by Torque's
employees at the Elkhart, Indiana production facility. Each engine is tested on
a dynamometer and research is conducted using a 41 foot test boat. Torque
believes that this manufacturing arrangement will be sufficient as production
begins to meet consumer demand for the Torque V-12.
RAW MATERIALS
Torque plans to produce internally as many of the necessary components
for the Torque V-12 as possible. Torque expects that the computer-controlled
manufacturing machines acquired in November 1999 will facilitate the internal
component production process. Additionally, Torque utilizes components acquired
in May 1999 as part of the acquisition of IPSL, Inc.
However, subcontractors and supplies will still be needed for some
components, such as crankshafts, electronic controls, and raw aluminum block
castings. Torque solicits competitive quotes for these components whenever
possible. Whenever the price of a component can be substantially reduced by
volume buying Torque plans to do so. Torque believes that adequate sources of
supply exist and will continue to exist, at competitive prices, for all of
Torque's raw material requirements.
MAJOR CUSTOMERS
For the nine months ended September 30, 2001, approximately 66% of our
sales were generated from sales to one customer, Douglas Marine Corporation,
and, for the year ended December 31, 2000, approximately 97.5% of Torque's
revenues were generated from sales to one customer, Cigarette Racing Team, Inc.
We cannot assure you that Douglas Marine Corporation or Cigarette Racing Team,
Inc. will continue to be a major customer.
MARKETING
Torque currently markets its Torque V-12 engines on a direct sale basis
through leads derived from trade shows, magazine articles and personal contacts
of our employees in the power boating industry. Torque markets its products not
only to boat manufacturers, but also to pleasure boat users in an effort to
increase demand through consumer requests to boat manufacturers for the Torque
V-12 as an available power plant in luxury pleasure craft.
DISTRIBUTION
Torque does not currently have a distribution network set up for the
Torque V-12. If Torque's sales increase substantially, Torque may in the future
establish service representatives in various areas to service its products.
Torque believes that it will be able to adequately ship the Torque V-12 to
manufacturers who purchase the Torque V-12 through normal shipping avenues.
COMPETITION
Torque anticipates that it will face intense competition in the market
in which it will produce and sell its Torque V-12 engines. The marine engine
production market generally has high barriers to entry due to the significant
capital investment and technological expertise required in manufacturing marine
engines. As a result, the marine engine market is concentrated among large U.S.,
Japanese and European manufacturers. Industry estimates are that U.S.-based
Brunswick Corporation maintains approximately 70 to 80 percent of the stern
drive market segment with Volvo Penta Corporation enjoying a large portion of
the remaining market share. In the outboard engine market, management believes
Brunswick and Outboard Motor Corporation control roughly 80 percent of the
market.
In the niche market for high-powered marine engines in which Torque
will participate, there are several manufacturers who build gasoline engines
with 700 or more horsepower, including Volvo Penta and Brunswick. Management's
experience is that generally these engines are either modified V-8's with
enhanced aspiration such as turbo-chargers, or diesel fueled engines. As a
result, Torque does not believe that these engines are competing with the Torque
V-12 on an identical product line basis.
24
Nonetheless, Torque's competitors, including Brunswick and Volvo Penta
are large, vertically integrated companies that have greater resources,
including financial resources, than Torque. Economies of scale give these
companies distinct advantages in the market. For example, Brunswick and its
subsidiaries have established dealer networks that offer sales as well as
service and warranty repair and production schedules afford them larger margins
than other competitors in the market. The vertical integration of Torque's
competitors allow them to offer consumers different combinations of boat, engine
and stern drive packages at various pricing levels.
There is no assurance that Torque will be able to successfully compete
against these companies in the stern drive segment of the marine engine market.
INTELLECTUAL PROPERTY
In developing its business strategy for the Torque V-12, Torque expects
to rely on patented and other proprietary technology. In addition, Torque
expects to rely on confidentiality agreements and other contractual covenants to
establish and protect its technology and other intellectual property rights.
Wherever legally permissible and appropriate, Torque plans to file patent
applications and to register its trademarks.
Torque has registered the trademark Torque for its products and also
holds a U.S. patent for its Torque V-12 engines' lubrication system which
patented system has a substantial impact on the useful life of the Torque V-12.
This patent was granted on August 18, 1998 to Torque as the assignee of Raymond
B. Wedel and Richard Moser.
RESEARCH AND DEVELOPMENT
Torque maintains an ongoing research & development program for the
continued development of the Torque V-12 engine. Management believes that Glaval
Corporation spent significant funds on research and development prior to IPSL's
acquisition of the assets and proprietary rights to develop and manufacture the
Torque V-12. These expenditures were included as part of the acquisition price
and will not be passed on to customers. The portion of funds spent after May 1,
1999 to convert to a production line is considered overhead which will be
prorated over the manufacturing cost of the V-12 engines in accordance with
generally accepted accounting principles.
25
MANAGEMENT
Our present directors and executive officers are as follows:
NAME AGE POSITION
----------------------- ----- -------------------------------------------------
Richard D. Wedel 53 Chief Executive Officer and Chairman of the Board
Raymond B. Wedel, Jr. 59 President and Director
I. Paul Arcuri 46 Chief Financial Officer and Director
Donald A. Christenson 70 Secretary
The following is a brief description of the background of our directors
and executive officers.
RICHARD D. WEDEL
Richard D. Wedel has been the Chief Executive Officer and Chairman of
the Board of Directors of Torque since 1999. He is a financial consultant and
since 1998, has been President of Wedel Consultants, a firm involved in mergers
and acquisitions. Since 1999 he has been the Chairman of the Board of Integrated
Homes, Inc., a publicly traded company. Integrated Homes is a provider of
bundled voice & data communication systems and services for planned development
communities. From 1997 through 1998, he was Chief Operating Officer and a
Director of Horizontal Ventures, Inc. From 1982 through 1997 Mr. Wedel was
President and a Director of Petro Union Inc., an energy resource exploration and
production company which merged with Horizontal Ventures, Inc. He is a past
Chairman of the American Petroleum Institute Eastern U.S. Advisory Board. He has
a degree in Business Administration from the University of Evansville.
RAYMOND B. WEDEL, JR.
Raymond B. Wedel, Jr., has been the President and Chief Operating
Officer of Torque since 1999. From 1992 until 1997 he was the President of
Torque, a business of Glaval Corporation, which is the predecessor to the
current Torque. At the time of acquisition, Quintessence obtained the right to
continue business under the old name. From 1986 until 1992, Mr. Wedel was
Vice-President of Lightning Performance Products, also a predecessor to Torque.
Mr. Wedel has an extensive background in the marine industry going back to the
1970's. During 1997-1998 Mr. Wedel served as the Chief Operational Officer of
Sonic Jet Performance, Inc. a manufacturer of personal water-craft,
recreational, and fire-rescue boats, with factories in California, Florida and
China. He has a B.S. degree in Business Administration from the University of
Evansville in Indiana.
I. PAUL ARCURI
I. Paul Arcuri has been the Chief Financial Officer and a Director of
Torque since December 1999. Mr. Arcuri also currently serves as President and
financial principal of the Carney Group, Inc., an investment banking firm,
member of N.A.S.D. Mr. Arcuri has served in this position since 1985. Mr. Arcuri
still maintains his positions with the Carney Group, Inc. He has been a
registered broker since 1978 and was an investment advisor registered with the
Securities and Exchange Commission. He has extensive background in financial
management involving cash flow, cost and budgeting analysis with emphasis on
operations management. He was a Director and Chairman of Gibraltar Savings and
Loan Association from 1987 through 1992. He has a B.A. in Accounting from St.
Thomas University/Biscayne College in Miami, Florida.
DONALD A. CHRISTENSEN
Donald A. Christensen has been the Secretary of Torque since March
1999. He is a business, financial and international trade consultant with an
engineering degree and extensive large corporate management experience. He
currently serves as President of European Whitestone Company and has served in
that capacity since 1992. From August 1997 to July 1998, Mr. Christensen was a
Director of Horizontal Ventures, Inc., a public company specializing in
horizontal drilling sources for the oil and gas industry which is now known as
GREKA Energy Corporation. He has a degree in Engineering from the University of
Missouri. Mr. Christensen served as a Director of Torque from March 1999 to
October 2001.
FAMILY RELATIONSHIP
Raymond B. Wedel, Jr., and Richard D. Wedel are brothers.
MEETINGS
During our fiscal year ending December 31, 2000, our Board of Directors
met on 6 occasions. Each incumbent director attended at least 75% of the total
number of meetings of the Board on which he served.
COMPENSATION OF DIRECTORS
In 2000, our non-employee directors received options to purchase 10,000
shares of our common stock at an exercise price of $3.25 per share.
In 1999, our non-employee directors received options to purchase 10,000
shares of our common stock at an exercise price of $3.25.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual
and long-term compensation for services in all capacities for the fiscal years
ended December 31, 2000, 1999, and 1998 paid to Richard D. Wedel, our Chairman
of the Board and Chief Executive Officer ("Named Executive Officer"). No other
executive officer received compensation exceeding $100,000 during the fiscal
year ended December 31, 2000.
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ ------------------------------------------------
AWARDS
------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) OPTIONS COMPENSATION
--------------------------- ------ ------------- ------- ---------- -------------- ---------------
Richard D. Wedel 2000 $50,000(1) -- -- 10,000(2) --
Chairman of the Board and 1999 $50,000(2) -- -- 10,000(2) --
Chief Executive Officer
-------------------------
(1) Mr. Wedel's annual salary for 2001 is $50,000.
(2) In 1999 and 2000, Mr. Wedel received options to purchase 10,000 shares
of Torque common stock in connection with his service as a member of
the Board of Directors. All of these options were immediately vested
when granted and are exercisable for a period of five years from the
date of grant.
The following table sets forth certain information concerning the
number and value of securities underlying exercisable and unexercisable stock
options as of the fiscal year ended December 31, 2000 by the Named Executive
Officer.
[Enlarge/Download Table]
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 2000 DECEMBER 31, 2000
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Richard D. Wedel -- -- 20,000 -0- -0- -0-
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EMPLOYMENT AGREEMENT
MICHAEL BENNETT. Mr. Bennett was employed as Torque's Chief Operating
Officer from November 6, 2000 until April 18, 2001. Pursuant to his employment
agreement, the term of Mr. Bennett's employment was three years and Mr. Bennett
was to receive an annual base salary of $100,000. The employment agreement
provided that Mr. Bennett was to receive options to purchase 75,000 shares of
common stock in accordance with Torque's 1999 Stock Option Plan. Twenty-five
thousand options were to vest on October 31, 2001, 25,000 options were to vest
on October 31, 2002, and 25,000 options were to vest on October 31, 2003, so
long as Mr. Bennett continued to be employed by Torque. Mr. Bennett resigned
from Torque prior to the vesting of any of these options. Mr. Bennett resigned
as Torque's Chief Operating Officer on April 18, 2001.
1999 STOCK OPTION PLAN
On October 7, 1999, the Board of Directors and stockholders adopted our
1999 Stock Option Plan (the "1999 PLAN"). The 1999 Plan provides for the grant
of options to purchase up to 500,000 shares of common stock to our employees,
officers and directors. Options granted under the 1999 Plan may be either
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options.
The 1999 Plan is administered by our Board of Directors, which serves
as the stock option committee and which determines, among other things, those
individuals who receive options, the time period during which the options may be
partially or fully exercised, the number of shares of common stock issuable upon
the exercise of each option, and the option exercise price.
The exercise price per share of common stock subject to an incentive
stock option may not be less than the fair market value per share of common
stock on the date the option is granted. The per share exercise price of the
common stock subject to a non-qualified option may be established by our Board
of Directors, but may not be less than 85% of the fair market value of the
common stock on the date of the grant. The aggregate fair market value
(determined as of the date the option is granted) of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to such
person, more than 10% of the total combined voting power of all classes of
capital stock of Torque (a "10% STOCKHOLDER") shall be eligible to receive any
incentive stock options under the Plan unless the exercise price is at least
110% of the fair market value of the shares of common stock subject to the
option, determined on the date of the grant.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution and, during the lifetime of an optionee,
the option will be exercisable only by the optionee or a representative of such
optionee. In the event of termination of employment other than by death or
disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise the option,
unless otherwise determined by the stock option committee. Upon termination of
employment of an optionee by reason of death, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination. Under the 1999 Plan, upon termination of
employment of an optionee by reason of total disability (as defined in the 1999
Plan) such optionee's options remain exercisable for one year thereafter.
INDEMNIFICATION
Our Certificate of Incorporation provides that we will indemnify its
officers, directors, employees and agents to the fullest extent permitted by
Delaware law. Indemnitees are entitled to such indemnification in advance of any
final proceeding. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "ACT") may be permitted to directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
28
DESCRIPTION OF PROPERTY
On April 29, 1999, we entered into a three-year lease for a business
office and manufacturing facility with approximately 33,000 square feet of
combined office and manufacturing space at 2932 Thorne Drive, Elkhart, Indiana.
The term of the lease is from May 1, 1999 to April 30, 2007, with an option to
renew for two successive three-year periods. Torque has an option to acquire the
property during the initial three-year term of the lease. Monthly lease payments
average approximately $10,000.00 per month, plus utilities and certain other
maintenance expenses. We believe that the property is in good condition and is
sufficient for its current operating plans.
LITIGATION PROCEEDINGS
We have no pending litigation.
29
PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERS
As of December 7, 2001, other than (i) the persons identified in the
following table and (ii) the directors and executive officers identified in the
table under "Directors and Executive Officers" section below, no person owned
beneficially more than five percent (5%) of our common stock.
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS TITLE OF CLASS OWNED OF CLASS(1)
--------------------------------- -------------- ------------ -----------
Michael Attias Common Stock 1,303,134 13.6%
4 Riviera Avenue
Costa De Caza, California 92679
Clement Lange Common Stock 1,234,629(2) 12.9%
4481 W. Holland Road, East
Huntingburg, IN 47532
-----------------------
(1) Applicable percentage is based on 9,597,112 shares outstanding, plus any
securities convertible or exchangeable into shares of common stock for the
purpose of computing the percentage ownership of such person only.
(2) Excludes 61,540 shares owned by Mr. Lange's adult children, all of whom
maintain separate residences from Mr. Lange. Includes 10,000 shares Mr.
Lange is entitled to acquire within 60 days pursuant to an option granted
to him as a member of the Board of Directors.
30
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount of our capital stock beneficially
owned by our directors, the executive officers named in the Summary Compensation
Table below and by all directors and executive officers as a group as of
December 7, 2001. Unless otherwise indicated, beneficial ownership is direct and
the person indicated has sole voting and investment power. As of December 7,
2001, we had 9,597,112 shares of common stock outstanding.
BENEFICIALLY OWNED PERCENT
NAME AND ADDRESS SHARES OF CLASS(1)
---------------- ------------------ -----------
Raymond B. Wedel, Jr. 1,611,702(2) 16.8%
1415 Meadow Lane
Elkhart, IN 46514
Richard D. Wedel 1,483,334(3) 15.5%
3900 Woodcastle
Evansville, IN 47711
I. Paul Arcuri 176,666(4) 1.8%
c/o Torque Engineering Corporation
2432 Thorne Drive
Elkhart, IN 46674
All officers and directors as a group (3 persons) 3,271,702(5) 34.1%
-----------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 9,597,112 shares of common
stock outstanding, together with applicable options for each shareholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options that are currently exercisable or exercisable within 60
days of December 7, 2001 are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Excludes 740,000 shares owned by Mr. Wedel's brother, Richard D. Wedel.
Includes 316,668 shares owned by Raymond B. Wedel, Jr.'s wife. Mr. Wedel
disclaims beneficial ownership of such shares. Excludes an aggregate of
633,332 shares owned by Mr. Wedel's adult children who do not live with
him. Also includes 20,000 shares Mr. Wedel is entitled to acquire within
60 days pursuant to options granted to him as a member of the Board of
Directors. Excludes 10,000 shares owned by Wanda Pride and 10,000 shares
owned by Blanche Wedel. Ms. Pride and Ms. Wedel are Mr. Wedel's sisters.
Mr. Wedel disclaims beneficial ownership of such shares.
(3) Includes 400,000 shares owned by Richard D. Wedel's wife. Mr. Wedel
disclaims beneficial ownership of such shares. Includes 400,000 shares
owned by Mr. Wedel's minor son who lives with him. Also includes 20,000
shares Mr. Wedel is entitled to acquire within 60 days pursuant to options
granted to him as a member of the Board of Directors. Excludes 10,000
shares owned by Wanda Pride and 10,000 shares owned by Blanche Wedel. Ms.
Pride and Ms. Wedel are Mr. Wedel's sisters. Mr. Wedel disclaims
beneficial ownership of such shares.
(4) Includes 66,666 shares vested under an option to purchase 100,000 shares
granted to him as Vice-President and Chief Financial Officer. Also
includes 10,000 shares Mr. Arcuri is entitled to acquire within 60 days
pursuant to an option granted to him as a member of the Board of
Directors.
(5) Includes options to acquire 156,666 shares of Torque's common stock
exercisable within 60 days.
31
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under U.S. securities laws, directors, executive officers and persons
holding more than 10% of Torque's common stock must report their initial
ownership of the common stock and any changes in that ownership on reports that
must be filed with the SEC and Torque. The SEC has designated specific deadlines
for these reports and Torque must identify in this Form 10-KSB those persons who
did not file these reports when due.
Based upon information provided to Torque by its directors, executive
officers and persons holding more than 10% of Torque's common stock, Torque
believes that Michel Attias filed one late Form 4 to report six (6)
transactions, Michael Bennett, our former Chief Financial Officer and Director,
inadvertently failed to file a Form 3 and Clement Lange, a former Director,
inadvertently failed to file a Form 4 to report one transaction. Torque also
believes Raymond B. Wedel, Jr., Richard D. Wedel, Donald Christensen, I. Paul
Arcuri and Clement Lange, a former Director of Torque, inadvertently failed to
file their respective Form 4's in connection with Torque's grant of stock
options to these current and former officers and directors.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 28, 1999, Torque acquired the outstanding common stock of
IPSL, a Nevada corporation, in exchange for the issuance of 1,500,000 shares of
Torque common stock to Michel Attias, then the sole shareholder of IPSL and now
a significant shareholder of Torque. The principal reason for Torque's
acquisition of IPSL was to acquire certain property and equipment to be used to
manufacture the Torque V-12, which property and equipment IPSL acquired from an
Indiana corporation under the name of Torque in April 1999.
During the year ended December 31, 1999, Torque through IPSL made
repayments on prior loans to IPSL by affiliates of Michel Attias in the total
amount of $280,031.
In June 2000, Torque sold 266,667 shares of common stock to Clement
Lange, a former member of the Board of Directors, at a price of $1.50 per share
for a total purchase price of $400,000. In November 2000, Mr. Lange purchased an
additional 307,692 shares of common stock at a per share price of $1.625, for a
total price of $500,000.
During September, October and December 2000, Torque received a total of
$60,000 in operating funds from two of its stockholders, Richard D. Wedel and
Michel Attias. Mr. Wedel is the Chairman of the Board of Directors and Chief
Executive Officer of Torque. In addition, $11,656 of reimbursable expenses were
owed to Mr. Wedel as of December 31, 2000. Those loans were converted to
non-interest bearing promissory notes due June 30, 2001.
During February 2001, Clement Lange, a former member of the Board of
Directors, acquired 250,000 shares of common stock from Richard D. Wedel,
Raymond Wedel and Michel Attias in exchange for $250,000. In addition, Torque
issued to Richard D. Wedel, Raymond D. Wedel and Michel Attias 125,000 shares of
common stock at a price of $2.00 per share for a total purchase price of
$250,000. Richard D. Wedel and Raymond D. Wedel are officers and directors of
Torque.
33
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock has been quoted on the Over-the-Counter Bulletin Board
maintained by the NASD since October 22, 1999, under the symbol "TORQ." From May
14, 1998 to October 21, 1999, our common stock was quoted on the
Over-the-Counter bulletin Board under the symbol "QTSN."
The following table sets forth the range of high and low bid quotations
for each calendar quarter for our common stock for the prior two years, as well
as the first three calendar quarters of 2001.
BID PRICE PER SHARE
-------------------
HIGH LOW
---- ---
FISCAL YEAR 1999
January 1999 to March 1999 $0.010 $0.010
April 1999 to June 1999 $9.875 $0.010
July 1999 to September 1999 $6.250 $2.125
October 1999 to December 1999 $3.250 $1.125
FISCAL YEAR 2000
January 2000 to March 2000 $6.000 $1.125
April 2000 to June 2000 $4.000 $1.000
July 2000 to September 2000 $4.125 $1.437
October 2000 to December 2000 $4.125 $0.656
FISCAL YEAR 2001
January 2001 to March 2001 $2.625 $0.875
April 2001 to June 2001 $1.600 $0.760
July 2001 to September 2001 $1.270 $0.250
October 2001 to November 2001 $0.530 $0.250
The above prices were obtained from the Over-the-Counter Bulletin
Board. The quotations represent inter-dealer quotations, without retail mark-up,
markdown or commission, and may not necessarily represent actual transactions.
As of December 7, 2001, we believe there were approximately 35 holders
of record and approximately 400 beneficial shareholders of our common stock.
We have not paid dividends in the past on any class of stock and we do
not anticipate paying dividends in the foreseeable future.
34
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL STOCK. Our authorized capital stock consists of
50,000,000 of common stock. Each holder of common stock is entitled to one vote
for each share held on all matters submitted to a vote by our shareholders. As
of December 7, 2001, we had 9,597,112 shares of common stock outstanding.
OPTIONS. As of December 7, 2001, we had outstanding options to purchase
250,000 shares of common stock at a weighted average exercise price of $2.629
per share. Of that total, options to purchase 234,000 shares of common stock
were vested.
CONVERTIBLE DEBENTURES. As of October 28, 2001, we had issued
Convertible Debentures in the original principal amount of $300,000. These
Convertible Debentures are convertible into shares of our common stock at a
price equal to 80% of the average closing bid price of our common stock for the
four trading days immediately preceding conversion. If such conversion had taken
place on December 7, 2001, then the holders of the Convertible Debentures would
have received 955,414 shares of common stock. These Convertible Debentures
accrue interest at a rate of 6% per year and are convertible at the holder's
option. These Convertible Debentures have a term of five years. At Torque's
option, these debentures may be paid in cash or converted into shares of common
stock on the fifth anniversary unless converted earlier by the holder.
TRANSFER AGENT AND REGISTRAR. Computashare Trust Company, Inc., is the
transfer agent and registrar for our common stock. Its address is 12039 West
Alameda Parkway, Suite Z2, Lakewood, Colorado 80228.
EXPERTS
The financial statements as of December 31, 2000 and 1999 and for each
of the two years in the period ended December 31, 2000 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to Torque's ability to continue as a going
concern as described in Note 15 to the financial statements) of Weinberg &
Company, P.A., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity
of the shares of our common stock.
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of these materials may be obtained at prescribed
rates from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Securities and Exchange Commission maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, registration statements, proxy and
information statements and other information. You may obtain information on the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
35
TORQUE ENGINEERING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
-----
Page
----
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 (UNAUDITED)
AND DECEMBER 31, 2000 (AUDITED) F-1
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 F-2
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4
TORQUE ENGINEERING CORPORATION
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
September 30, December 31,
2001 2000
(Unaudited) (Audited)
------------- ----------
ASSETS
CURRENT ASSETS
Cash $ -0- $ 160,113
Accounts receivable, net 233,407 311,159
Marketable securities 1,213 1,213
Prepaid expenses 37,124 50,008
Advances to suppliers 84,756 109,180
Due from factor 76,855 -0-
Inventory, net 682,094 789,135
------------ ------------
Total current assets 1,115,449 1,420,808
Property & Equipment, net 8,618,281 9,451,698
------------ ------------
TOTAL ASSETS $ 9,773,730 $ 10,872,506
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash - Overdraft $ 36,163 $ -0-
Accounts payable & other liabilities 571,812 341,069
Obligations under capital leases - current portion 194,102 127,278
Due to factor 219,586 -0-
Accrued factor fees 16,810 -0-
Loan payable - officer 6,000 -0-
Notes payable - officer 233,156 71,656
------------ ------------
Total current liabilities 1,277,629 540,003
LONG-TERM LIABILITIES
Obligations under capital leases, net of current
portion 359,094 454,363
------------ ------------
TOTAL LIABILITIES 1,636,723 994,366
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $0.00001 par value, 50,000,000
shares authorized, 8,571,842 and 8,099,607 86 84
shares issued and outstanding, respectively
Additional paid in capital 14,589,966 14,243,709
Accumulated deficit (6,219,924) (4,088,936)
Accumulated other comprehensive loss (211,063) (211,063)
------------ ------------
8,159,065 9,943,794
Less treasury stock at cost (6,750 Shares) (56,970) (56,970)
Less deferred compensation expense (5,088) (8,684)
Total stockholders' equity 8,097,007 9,878,140
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,733,730 $ 10,872,506
============ ============
See accompanying notes to consolidated financial statements.
F-1
[Enlarge/Download Table]
TORQUE ENGINEERING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
SALES $ 14,054 $ 229,840 $ 360,485 $ 238,774
COST OF SALES 278,086 295,828 859,752 559,894
------------ ------------ ---------- ----------
GROSS LOSS (264,032) (65,988) (499,267) (321,120)
------------ ------------ ---------- ----------
OPERATING EXPENSES
Payroll 53,061 55,253 163,558 180,840
Depreciation 280,910 279,588 843,732 818,960
Rent 30,000 30,000 90,000 90,000
Stock based compensation 1,199 -0- 42,429 -0-
Stock based consulting -0- -0- 55,028 -0-
Other selling, general & administrative 118,542 114,357 310,898 414,224
Total Operation Expenses 483,712 479,198 1,505,645 1,504,024
------------ ------------ ---------- ------------
NET (LOSS) FROM OPERATIONS ($747,744) ($545,186) ($2,004,912) ($1,825,144)
---------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest Income -0- 1,210 379 9,774
Interest Expense (10,218) (35,603) (50,973) (35,603)
Factoring fees (26,442) -0- (56,767) -0-
Other (10,016) -0- (18,716) 428
------------ ------------ -------------
Total Other Income (Expenses) (46,676) (34,393) (126,077) (25,401)
------------ ------------ ------------- ------------
NET (LOSS)
BEFORE EXTRAORDINARY ITEMS ($794,420) ($579,579) ($2,130,989) ($1,850,545)
EXTRAORDINARY ITEMS
Gain on extinguishments of debt -0- -0- -0- 28,708
------------ ------------ ------------ ------------
NET (LOSS) ($794,420) ($579,579) ($2,130,989) ($1,821,837)
OTHER COMPREHENSIVE (LOSS), NET OF TAX
Unrealized gain (loss)
on marketable securities - net (2,426) (9,492) -0- (22,684)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS ($796,846) ($589,071) ($2,130,989) ($1,844,521)
============ ========== ============ ============
Loss before Extraordinary Gain ($ 0.093) ($ 0.072) ($ 0.163) ($ .233)
------------ ------------ ------------ ------------
Extraordinary gain $ -0- $ -0- $ -0- $ 0.004
------------ ------------ ------------ ------------
Net loss per share - basic & diluted ($ 0.093) ($ 0.072) ($ 0.163) ($ 0.229)
============ ============ ============ ============
Weighted average number shares outstanding 8,573,799 8,099,607 13,036,418 7,947,266
during the period - basic & diluted ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-2
[Enlarge/Download Table]
TORQUE ENGINEERING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net Loss $ (2,130,989) $ (1,821,837)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 843,732 818,960
Recognized deferred compensation -0- 7,776
Stock based compensation 44,826 -0-
Common stock issued for future services 55,028 -0-
Provision for inventory obsolescence 184,273 -0-
Gain on extinguishments of debt -0- (28,708)
Changes in operating assets & liabilities:
(Increase) Decrease in:
Cash Overdraft 36,163 -0-
Accounts receivable 77,752 (3,652)
Prepaid expenses 12,884 (624)
Advances to suppliers 24,426 (82,314)
Inventory (77,232) (262,500)
Increase (Decrease) in:
Accounts payable & other liabilities 230,743 271,736
Accrued factor fees 16,810 -0-
------------- ------------
Net cash used in operating activities (681,584) (1,101,163)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (10,315) (97,649)
Net cash used in investing activities (10,315) (97,649)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on capital lease obligations (28,445) (21,007)
Due to factor, net 142,731 -0-
Proceeds from notes payable - related parties 161,500 30,000
Loan payable - officer 6,000 -0-
Proceeds from issuance of common stock 250,000 400,000
Net cash provided by financing activities 531,786 408,993
------------- ------------
NET INCREASE (DECREASE) IN CASH (160,113) (789,819)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 160,113 798,019
------------- ------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ -0- $ 8,200
------------- ------------
See accompanying notes to consolidated financial statements.
F-3
TORQUE ENGINEERING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and have been condensed pursuant to the rules and regulations of the
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information and footnotes necessary for
a comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's Form 10-KSB for the year ended December 31,
2000.
2. ACCOUNTS RECEIVABLE CONCENTRATIONS
The Company has a concentration of its accounts receivable with one customer
totaling 96%. As of September 30, 2001 accounts receivable are deemed fully
collectible.
3. ACCOUNTS RECEIVABLE AND FACTOR AGREEMENTS
On May 2, 2001, the Company entered into an accounts receivable financing
agreement with a factor. The receivables were transferred with recourse and due
to a provision that could require the Company to repurchase the receivables, the
transaction is accounted for as a financing arrangement. Under the terms of the
agreement, the factor advances 65% of the face value of the receivables sold by
the Company. The Company is charged a variable percentage fee based upon the
length of the collection period. After 180 days, if the customer's accounts
receivable is not paid, the factor is entitled to keep and assess the remaining
35% holdback reserve as a fee for service. All of the Company's accounts
receivable, equipment, furniture and fixtures are pledged as collateral under
this agreement.
For the three months ended September 30, 2001 the Company has financed $219,586
in accounts receivable. At September 30, 2001, the Company has $76,855 due from
the factor, which represents net advances made to the Company by the factor,
less cash rebates received from the holdback reserve. The Company has $219,586
due to the factor, which represents the gross receivables financed that have yet
to be paid by the Company's customer. For the three months ended September 30,
2001, the Company incurred $26,442 in factoring fees.
4. INVENTORIES
Inventory at September 30, 2001 (unaudited) and December 31, 2000 (Audited)
consisted of the following:
2001 2000
Purchased Parts, net $314,931 $376,532
Engines in Process 135,339 184,405
Completed Engines 231,824 228,198
-------- --------
$682,094 $789,135
During the nine months ended September 30, 2001, the company recorded a
provision for inventory obsolescence of $184,273.
F-4
5. LOAN PAYABLE OFFICER
During the three months ended Sept 30, 2001, the Company received $6,000 in
operating funds from an officer. The note is non-interest bearing, however, upon
the maturity date of the loan if the principal is not paid in full and the note
is in default, a 10% interest payment in addition to principal will become due
and payable immediately.
6. SHAREHOLDER LOANS
During the three months ended September 30, 2000 shareholders of the Company
made advances of $30,000 for operating funds.
7. STOCKHOLDERS' EQUITY
Effective July 1, 2001, the company rescinded a consulting contract initially
entered into on May 2, 20001. As a result, 180,000 shares of Common Stock were
cancelled and returned to the company.
On June 5, 2000 a total of 266,667 shares of common stock were issued at a price
of $1.50 per share or a total amount of $400,000. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
Subsequent to September 30, 2000, the Company issued 4,000 shares of its common
stock in exchange for $13,000.
8. COST OF SALES
For the three months ended September 30, 2001 and 2000 (unaudited) the Company
charged to cost of goods sold $278,086 and $295,828 respectively.
9. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a working capital
deficiency of $162,180, a net loss from operations of $2,130,989, negative cash
flows from operating activities of $681,584 and had an accumulated deficit of
$6,219,924 at September 30, 2001.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
working capital requirements, and the success of its future operations.
Management believes that action presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern.
10. SUBSEQUENT EVENTS
DEBENTURE OFFERING
In order to provide working capital and financing for the Company's expansion,
the Company entered into an agreement with Cornell Capital Partners, L.P. ("the
Purchaser") whereby the Purchaser acquired $300,000 of the Company's 6%
Convertible Subordinated Debentures, due November 13, 2006.
The Holder is entitled, at its option, to convert, and sell all or any part of
the principal amount of the Debenture, plus accrued interest, into shares (the
"Conversion Shares") of the Company's common stock, par value $.00001 per share
("Common Stock"), at the price per share (the "Conversion Price") equal to
either (a) an amount equal to 120% of the closing bid price of the Common Stock
as listed on a Principal Market, as quoted by Bloomberg L.P. (the "Closing Bid
Price") as of the date hereof, or (b) an amount equal to 80% of the average of
the four lowest Closing Bid Prices of the Common Stock for the five trading days
immediately preceding the Conversion Date.
F-5
Interest will be paid at the time of maturity or conversion. The Company may
elect to pay interest in cash or in the form of Common Stock.
The Company shall reserve and keep available out of its authorized but unissued
shares of Common Stock such number of shares of Common Stock sufficient to
effect such conversion, based upon the Conversion Price.
This Debenture may be converted at any time following the date of closing, into
shares of Common Stock at a price equal to the Conversion Price.
EQUITY LINE OF CREDIT
On November 9, 2001, the Company entered into an equity line of credit pursuant
to which the Company may, at its discretion, periodically sell to the investor
shares of common stock for a total purchase price of up to $5 million. For each
share of common stock purchased under the Equity Line of Credit, the investor
will pay 91% of the average of the 2 lowest closing bid prices on which the
common stock is traded for during the five days immediately following the notice
date. Unless waived by the investor, the amount of each advance is subject to a
maximum advance amount based on an average daily volume of the Company's common
stock. A consulting fee of 10% of each advance will be paid upon closing each of
the sales under this agreement.
F-6
TORQUE ENGINEERING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
-----
Page
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE
YEARS ENDED DECEMBER 31, 2000 AND 1999 F-3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR
ENDED DECEMBER 31, 2000 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2000 AND 1999 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Torque Engineering Corporation
We have audited the accompanying balance sheets of Torque Engineering
Corporation and Subsidiary as of December 31, 2000 and 1999 and the related
statements of operations and comprehensive loss, changes in stockholders' equity
and cash flows for the years ended December 31, 2000 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Torque Engineering
Corporation and Subsidiary as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for the years ended December 31, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has a loss from current operations of
$2,752,608 and has negative cash flows from operating activities of $1,468,442
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 15. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
February 21, 2001
F-1
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
Current assets
Cash and cash equivalents $ 160,113 $ 798,019
Accounts receivable 311,159 2,289
Advances to suppliers 109,180 -
Inventory 789,135 1,165,010
Marketable securities 1,213 32,145
Prepaid expenses 50,008 4,768
---------------- --------------
Total Current Assets 1,420,808 2,002,231
PROPERTY & EQUIPMENT - NET 9,451,698 10,454,045
---------------- --------------
TOTAL ASSETS $ 10,872,506 $ 12,456,276
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 341,069 $ 82,051
Obligations under capital leases - current
portion 127,278 32,837
Due to related parties 71,656 28,708
-------------- -----------
Total Current Liabilities 540,003 143,596
LONG-TERM LIABILITIES
Obligations under capital leases 454,363 575,536
-------------- -----------
Total Liabilities 994,366 719,132
-------------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value, 50,000,000
shares authorized, 8,411,299 and 7,832,940
shares issued and outstanding,
respectively 84 78
Additional paid in capital 14,243,709 13,330,715
Accumulated deficit (4,088,936) (1,336,328)
Accumulated other comprehensive loss (211,063) (180,131)
-------------- --------------
9,943,794 11,814,334
Less Treasury Stock at cost (6,750 Shares) (56,970) (56,970)
Less Deferred compensation expense (8,684) (20,220)
-------------- --------------
Total Stockholders' Equity 9,878,140 11,737,144
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,872,506 $ 12,456,276
============== ==============
See accompanying notes to consolidated financial statements.
F-2
[Enlarge/Download Table]
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
---------------------- ----------------------
SALES $ 718,801 $ 91,300
COST OF SALES 1,607,494 72,726
-------------------
--------------------
GROSS PROFIT (LOSS) (888,693) 18,574
-------------------- -------------------
OPERATING EXPENSES
Payroll and other compensation 240,538 392,795
Depreciation 1,118,079 643,703
Rent 120,000 70,168
Other selling, general and administrative 384,817 321,016
-------------------- -------------------
Total Operating Expenses 1,863,434 1,427,682
-------------------- -------------------
LOSS FROM OPERATIONS (2,752,127) (1,409,108)
-------------------- -------------------
OTHER INCOME (EXPENSE)
Interest income 10,514 14,506
Interest expense (40,130) -
Consulting - 120,500
Loss on marketable securities - (51,642)
Other 427 -
-------------------- -------------------
Total Other Income (Expense) (29,189) 83,364
-------------------- -------------------
NET LOSS BEFORE EXTRAORDINARY ITEMS (2,781,316) (1,325,744)
EXTRAORDINARY ITEMS
Gain on ~xtinguishments of debt 28,708 -
-------------------- -------------------
NET LOSS (2,752,608) (1,325,744)
OTHER COMPREHENSIVE LOSS
Unrealized loss on marketable securities - net (30,932) (180,131)
-------------------- -------------------
COMPREHENSIVE LOSS $ (2,783,540) $ (1,505,875)
==================== ===================
Loss per share before extraordinary gain $ (.347) $ (0.232)
Extraordinary gain .004 -
-------------------- -------------------
Net loss per share - basic and diluted $ (.343) $ (0.232)
==================== ===================
Weighted average number of shares outstanding
during the period -basic and diluted 8,012,677 5,717,440
==================== ===================
See accompanying notes to consolidated financial statements.
F-3
[Enlarge/Download Table]
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Deferred
Common Stock Paid-in Accumulated Comprehensive Treasury Compensation
Shares Amount Capital Deficit Loss Stock Expense Totals
---------- -------- ----------- ----------- ------------- --------- ------------- ---------
Balance
December 31,
1998 1,000,000 10 42,490 (10,584) - - - 31,916
Recapitalization 4,870,000 48 (48) - - - - -
Stock issued for
acquisition of
IPSL 1,500,000 15 11,759,985 - - - - 11,760,000
Acquired treasury
stock, net - - - - - (56,970) - (56,970)
Stock issued for
cash 461,540 5 1,500,000 - - - - 1,500,005
Stock issued for
marketing
services 1,400 - 2,688 - - - - 2,688
Stock options
issued - - 25,600 - - - (20,220) 5,380
Unrealized
losses on
available-for-
sale securities - - - (180,131) - - (180,131)
Net Loss, 1999 - - - (1,325,744) - - - (1,325,744)
---------- -------- ----------- ----------- ------------ --------- ------------- -----------
BALANCE,
DECEMBER 31,
1999 7,832,940 $ 78 $13,330,715 $ (1,336,328) $ (180,131) $ (56,970) $ (20,220) $ 11,737,144
Stock issued for
cash 578,359 6 912,994 - 913,000
Deferred
compensation
expensed - - - - - - 11,536 11,536
Unrealized loss
on available for
sale securities - - (30,932) - - (30,932)
Net Loss, 2000 - - (2,752,608) - - - (2,752,608)
---------- -------- ----------- ----------- ------------- --------- ------------- ------------
BALANCE,
DECEMBER 31,
2000 8,411,299 $ 84 $ 14,243,709 $ (4,088,936) $ (211,063) $ (56,970) $ (8,684) $ 9,878,140
========== ======== =========== =========== ============= ========= ============= ============
See accompanying notes to consolidated financial statements.
F-4
[Enlarge/Download Table]
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,752,608) $ (1,325,744)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,118,079 643,703
Compensation expense incurred in exchange for stock options 11,536 5,380
Gain on ~xtinguishments of debt (28,708) -
Marketing expense incurred in exchange for common stock - 2,688
Write-off of investment - 2,000
Write-off of organization costs - 4,125
Loss on marketable securities - 51,642
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (308,870) (2,289)
Advances to suppliers (109,180) -
Prepaid expenses (45,240) (4,768)
Inventories 375,875 (146,202)
Increase (decrease) in:
Accounts payable and accrued expenses 270,674 82,051
------------------ -------------------
Net cash used in operating activities (1,468,442) (687,414)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (103,607) (50,681)
Proceeds from sale of available-for-sale-securities - 316,158
------------------ -------------------
Net cash (used in) provided by investing activities (103,607) 265,477
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 913,000 1,500,005
Payments on capital lease obligations (38,857) (25,809)
Repayment of loans - (280,031)
Proceeds from loans 60,000 -
------------------ -------------------
Net cash provided by financing activities 934,143 1,194,165
------------------ -------------------
NET INCREASE (DECREASE) IN CASH (637,906) 772,228
Cash and cash equivalents at beginning of YEAR 798,019 25,791
------------------ -------------------
Cash and cash equivalents at end of YEAR $ 160,113 $ 798,019
================== ===================
Cash paid for interest $ 4,278 $ -
================== ===================
See accompanying notes to consolidated financial statements.
F-5
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Supplemental Disclosure Of Non-Cash Investing And Financing Activities:
During 2000, the Company acquired equipment totaling $12,125 under capital lease
obligations.
During 2000, the Company converted accounts payable with a shareholder to a
related party note payable in the amount of $11,656.
During May 1999, the Company acquired IPSL in exchange for 1,500,000 shares of
its common stock having a fair value of $11,760,000.
During 1999, the Company acquired equipment totaling $634,182 under capital
lease obligations.
See accompanying notes to consolidated financial statements.
F-6
TORQUE ENGINEERING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
------ -----------------------------------------------------------
(A) ORGANIZATION
On June 26, 1996, Quintessence Oil Co. ("Quintessence") was
incorporated in Wyoming to engage in oil and gas activities.
Quintessence never commenced substantial operations, and in
March 1999 common stock was issued to a new management group
and an acquisition of IPSL, Inc. ("IPSL") was consummated in
May 1999 (See Note 13).
On November 17, 1999, Torque Engineering Corporation ("Torque"
or the "Company") was incorporated in Delaware and
Quintessence was merged into Torque to effect a domicile and
name change. The transaction was treated as a recapitalization
and the effect is shown retroactively in the accompanying
consolidated financial statements.
The Company designs and manufactures high performance offshore
marine performance production engines.
The Company was in the development stage through December 31,
1999. The year ended December 31, 2000 is the first year
during which it is considered an operating company.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, IPSL. All
intercompany balances and transactions have been eliminated in
consolidation.
(C) USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual
results could differ from those estimates.
(D) CASH AND CASH EQUIVALENTS
For purposes of the cash flow statements, the Company
considers all highly liquid investments with original
maturities of three months or less at the time of purchase to
be cash equivalents.
(E) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts,
which, at times, exceed federally insured limits. At December
31, 2000, the Company had $51,438 in deposits which exceeded
federally insured limits. The Company has not experienced any
losses in such accounts as of December 31, 2000.
(F) MARKETABLE SECURITIES
The Company invests in various marketable equity instruments.
The Company accounts for such investments in accordance with
Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") (See Notes 1(M) and 4)).
Management determines the appropriate classification of its
investments at the time of acquisition and reevaluates such
determination at each balance sheet date. Available-for-sale
securities are carried at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of
stockholders' equity. Investments classified as
held-to-maturity are carried at amortized cost. In determining
realized gains and losses, the cost of the securities sold is
based on the specific identification method.
F-7
(G) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out)
or net realizable value, and consists of purchased parts,
engines-in-process and completed engines (See Note 6).
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated economic
useful lives of 3 to 10 years. Expenditures for maintenance
and repairs are charged to expense as incurred. Major
improvements are capitalized (See Note 7).
(I) STOCK OPTIONS
In accordance with Statement of Financial Accounting Standards
No. 123, ("SFAS 123") the Company has elected to account for
Stock Options issued to employees under Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25") and related
interpretations. The Company accounts for stock options issued
to non-employees under the fair value method of SFAS 123 (See
Note 9(B)).
(J) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products.
(K) ADVERTISING COSTS
In accordance with the Accounting Standards Executive
Committee Statement of Position 93-7 ("SOP 93-7"), costs
incurred for producing and communicating advertising of the
Company are charged to operations. For the years ended
December 31, 2000 and 1999, the company charged $74,461 and
$25,986, respectively.
(L) INCOME TAXES
The Company accounts for income taxes under the Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(M) COMPREHENSIVE INCOME (LOSS)
The Company accounts for Comprehensive Income (Loss) under the
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement No. 130").
Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components, and is
effective for fiscal years beginning after December 15, 1997.
The unrealized gains and losses, net of tax, resulting from
the valuation of available-for-sale securities at their fair
market value at year end (see Note 1 (F)) are reported as
Other Comprehensive Income (Loss) in the Statement of
Operations and as Accumulated Other Comprehensive Income
(Loss) in Stockholders' Equity and in the Statement of
Stockholders' Equity.
(N) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued
accounting pronouncements, Statement No. 133 as amended by
Statement Nos. 137 and 138 "Accounting for Derivative
Instruments and Hedging Activities," that establishes
accounting and reporting standards for derivative instruments
and related contracts and hedging activities. This statement
is effective for all fiscal quarters and fiscal years
beginning after June 15, 2000.
F-8
The Company believes that its adoption of these pronouncements
will not have a material effect on the Company's financial
position or results of operations.
(O) LOSS PER SHARE
Basic and diluted net loss per common share for the years
ended December 31, 2000 and 1999 and for the period from June
26, 1996 (inception) to December 31, 2000 is computed based
upon the weighted average common shares outstanding as defined
by Financial Accounting Standards No. 128, "Earnings Per
Share". Common stock equivalents have not been included in the
computation of diluted loss per share since the effect would
be anti-dilutive. At December 31, 2000 and 1999 there were
240,000 common stock options issued and outstanding that could
potentially dilute earnings per share in future periods.
(P) BUSINESS SEGMENTS
The Company applies Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information". The Company operates in one segment
and therefore segment information is not presented.
(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments",
requires disclosures of information about the fair value of
certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair
value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's accounts receivable,
accounts payable, accrued liabilities, and current loans
payable approximates fair value due to the relatively short
period to maturity for these instruments.
(R) IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Under the provisions of this statement, the Company has
evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in
circumstances indicated that the carrying amount of such
assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets
not held for sale by measuring the carrying amount of the
assets against the estimated undisclosed future cash flows
associated with them. At the time such cash flows of certain
long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair
values.
NOTE 2 ACCOUNTS RECEIVABLE AND CONCENTRATIONS
------ --------------------------------------
Accounts receivable at December 31, 2000 and 1999 were
$311,159 and $2,289, respectively, and are deemed fully
collectable.
At December 31, 2000 and 1999, approximately 97.5% and 90%,
respectively, of accounts receivable were due from one
customer. Sales during 2000 and 1999 primarily related to six
engine sales and one engine sale, respectively, to the above
customer (See Note 16).
NOTE 3 ADVANCES TO SUPPLIERS
------ ---------------------
Beginning in 2000, the Company maintains deposits on account
with various vendors. The Company, upon executing a purchase
order with these vendors, is required to provide a deposit for
which goods are shipped against. As of December 31, 2000, the
Company had a balance with these vendors of $109,180. Included
in the advances to suppliers balance at December 31, 2000 is
an amount of $34,750 which represents deposits on purchase
orders with two vendors aggregating $335,820 (See Note 8(C)).
F-9
NOTE 4 MARKETABLE SECURITIES
------ ---------------------
The Company's marketable securities, purchased principally for
the purpose of selling them in the near future, as defined
under SFAS 115, are comprised of equity securities, all
classified as available-for-sale securities, which are
reported at their fair value based upon the quoted market
prices of those investments at the year ended December 31,
with unrealized losses reported as other comprehensive loss in
a separate component of stockholders' equity until they are
sold. Any realized gains or losses are included in net
earnings at the time of sale (See Note 1(F)).
The composition of marketable securities at December 31, 2000
is as follows:
COST FAIR VALUE
----------------- ----------------
Common stock $ 212,276 $ 1,213
================= ================
Investment expenses for the year ended December 31, 2000 and
1999 consisted of the following:
2000 1999
------------------- ----------------
Net realized loss on the
sale of marketable
securities $ - $ (51,642)
=================== ================
Unrealized losses included in other comprehensive loss for the
years ended December 31, 2000 and 1999 consisted of the
following:
2000 1999
------------------- ----------------
$ (30,932) $ (180,131)
=================== ================
NOTE 5 PREPAID EXPENSES
------ ----------------
During 2000, prepaid expenses primarily included the value of
a boat engine exchanged for promotional and marketing
services. The value of the engine exchanged was $64,759, and
as of December 31, 2000, $16,190 had been charged to
operations. Due to the cost and fair value of the engine
exchanged being equivalent to marketing services, no gain or
loss is recognized on the exchange.
NOTE 6 INVENTORY
------ ---------
Inventory at December 31, 2000 and 1999 consisted of the
following:
2000 1999
------------------ ----------------
Purchased parts $ 376,532 $ 307,067
Engines in process 184,405 367,943
Completed engines 228,198 490,000
------------------ ----------------
$ 789,135 $ 1,165,010
================== ================
During 2000, management specifically identified two engines
that were no longer held for commercial sale and their
carrying value of $104,008 was charged to selling, general and
other administrative expenses for the year ended December 31,
2000. The Company is maintaining these two engines for product
testing and marketing.
F-10
NOTE 7 PROPERTY AND EQUIPMENT
------ ----------------------
Property and equipment at December 31, 2000 and 1999 consisted
of the following:
2000 1999
----------- -----------
Special tooling $ 9,309,965 $ 9,269,944
Machinery and equipment 1,155,278 1,146,664
Equipment under capital leases 646,307 634,182
Vehicles 8,706 5,206
Computer equipment 13,660 12,596
Furniture and fixtures 79,673 29,156
------------ -----------
11,213,589 11,097,748
Less: Accumulated depreciation (1,761,891) (643,703)
------------ -----------
Property and equipment - net $ 9,451,698 $10,454,045
============ ===========
Depreciation expense for the years ended December 31, 2000 and
1999 was $1,118,079 and $643,703, respectively.
NOTE 8 COMMITMENTS AND CONTINGENCIES
(A) CAPITAL LEASES
As of December 31, 2000 the Company had an aggregate of six
machines under non-cancelable capital lease agreements. As of
December 31, 1999 the Company had an aggregate of four
machines under non-cancelable capital lease agreements.
Future minimum lease payments under the capital lease are as
follows at December 31, 2000 and 1999:
2000 1999
----------- -----------
Total future minimum lease payments $ 708,398 $ 748,464
Less: interest (126,757) (140,091)
---------- ---------
581,641 608,373
Less: current portion (127,278) (32,837)
---------- ---------
Long-term obligation under capital
leases $ 454,363 $ 575,536
========== =========
Future minimum lease payments for the capital leases as of
December 31, 2000 are as follows:
2001 $ 127,278
2002 128,372
2003 134,911
2004 144,932
2005 46,148
------------
$ 581,641
============
(B) OPERATING LEASE AGREEMENT
The Company leases corporate office space under an operating
lease. The lease has a remaining term through 2002.
Future minimum lease payments for the operating lease as of
December 31, 2000 are as follows:
2001 $ 120,000
2002 40,000
--------------
$ 160,000
==============
F-11
Rent expense for the years ended December 31, 2000 and 1999
amounted to $120,000 and $70,168, respectively.
(C) PURCHASE COMMITMENTS
During December 2000, the Company entered into commitments
with two vendors to purchase inventory aggregating $335,820
(See Note 3).
NOTE 9 STOCKHOLDERS' EQUITY
------ --------------------
(A) PRIVATE PLACEMENT
In September 1999, the Company offered common stock
subscriptions pursuant to Rule 506 of Regulation D section 4
(2) of the Securities Act of 1933, as amended. The purchase
price was $3.25 per share.
As of December 31, 2000 and 1999, cash of $913,000 for 578,359
shares and cash of $1,500,005, for 461,540 shares was
received, respectively.
(B) STOCK OPTIONS
On October 7, 1999, the 1999 Stock Option Plan (the "Plan")
was adopted by the Board of Directors of the Company and
approved by the Company's stockholders. The Plan was developed
to provide a means whereby directors, officers, employees of,
and certain persons rendering services to the Company or any
subsidiary may be granted stock to purchase common stock of
the Company.
The Plan authorizes options up to 500,000 shares of the
Company's common stock and is administered by the Board of
Directors of the Company or a committee of two or more members
of the Board of Directors (the "Plan Committee"). The Company
grants incentive and nonqualified stock options. Incentive
stock options are only granted to employees of the Company or
any subsidiary thereof. The exercise price which is
established by the Plan Committee may not be less than 85% of
the fair market value of the common stock at the time of grant
for nonqualified stock options, may not be less than 100% of
the fair market value of the common stock at the time of grant
for incentive stock options and may not be less than 110% of
the fair market value of the common stock at the time of grant
if incentive stock options are granted to employees owning
more than ten percent of the total voting power or value of
all classes of stock of the Company. The term of the stock
options is determined by the Plan Committee and shall not
exceed ten years from the date of grant. In the case of
incentive stock options which are granted to employees owning
more than ten percent of the total voting power or value of
all classes of stock of the Company, the term may not exceed
five years. During the year ended December 31, 1999, the
Company issued 240,000 stock options under the plan to
employees and Board of Director members. The Company cancelled
10,000 options under the plan to employees during the year
ended December 31, 2000 and also granted 60,000 options under
the plan to employees and directors during the year ended
December 31, 2000.
In accordance with SFAS 123, for options issued to employees,
the Company applies APB Options No. 25 and related
interpretations in accounting for the options issued.
Accordingly, compensation costs of $11,536 and $5,380 and
deferred compensation expense of $8,684 and $20,220
respectively, were recognized as of December 31, 2000 and
1999, computed in accordance with the intrinsic value method.
Had compensation cost for the Company's options been
determined based on the fair market value of the options at
the grant date, consistent with SFAS 123, the Company's net
loss for the year ended December 31, 2000 and 1999 would have
been increased to the pro-forma amounts indicated below.
2000 1999
----------- ----------
Net loss As reported $ (2,752,608) $(1,325,744)
Pro forma $ (3,045,648) $(1,463,953)
Net loss per share As reported $ (.344) $ (.232)
Pro forma $ (.380) $ (.256)
F-13
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net income for
future years due to, among other things, the effects of
vesting. For financial statement disclosure purposes the fair
market value of each stock option granted was estimated on the
date of grant using the Black-Scholes Option-Pricing Model in
accordance with SFAS 123 using the following weighted-average
assumptions: expected dividend yield 0%, risk-free interest
rate of 5.125% in 2000 and 5.86% in 1999, volatility 229% in
2000 and 118% in 1999 and expected term of three years.
A summary of the options issued to employees and Board of
Director members as of December 31, 2000 is presented below:
Weighted
Average
Number of Exercise
Options Price
---------- ----------
STOCK OPTIONS
Balance at beginning of period 240,000 $ 2.77
Granted 60,000 $ 3.01
Exercised - -
Cancelled (10,000) (1.81)
Forfeited - $ -
----------- ---------
Balance at end of period 290,000 $ 2.67
----------- ---------
Options exercisable at end of period 250,626 $ 2.93
----------- ---------
Weighted average fair value of
options granted during the period - $ 3.01
The following table summarizes information about stock options
outstanding at December 31, 2000:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ---------------------------------
Range Of Number Weighted Weighted Number Weighted
Average
Outstanding At Remaining Average Exercisable At Average
Exercise December 31, Contractual Exercise December, 31, Exercise
Price 2000 Life Price 2000 Price
----------- ---------------- --------------- ------------ ----------------- ------------
$ 1.81 80,000 7.5 1.81 55,360 1.81
$ 3.25 210,000 3.5 3.25 195,266 3.25
---------------- --------------- ------------ ----------------- ------------
290,000 5.5 2.77 250,626 1.55
================ =============== ============ ================= ============
NOTE 10 INCOME TAXES
The Company and its subsidiary have elected to file separate
tax returns. Income tax expense (benefit) for the years ended
December 31, 2000 and 1999 for the parent company is
summarized as follows:
2000 1999
-------------- --------------
Current:
Federal $ - $ -
State - -
Deferred-Federal and State (934,900) (226,400)
Change in Valuation Allowance 934,900 226,400
-------------- --------------
Income tax expense (benefit) $ - $ -
============== ==============
The Company's tax expense differs from the "expected" tax
expense for the years ended December 31, 2000 and 1999, as
follows:
2000 1999
------------- -----------
U.S. Federal income tax provision
(benefit) $ (934,900) $ (226,400)
Effect of net operating loss
carryforward 934,900 226,400
------------- -----------
$ - $ -
============= ===========
F-13
The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities at
December 31 are as follows:
2000 1999
----------- ---------
Deferred tax assets:
Net operating loss carryforward $ 1,164,900 $ 230,000
----------- ---------
Total gross deferred tax assets 1,164,900 230,000
Less valuation allowance (1,164,900) (230,000)
----------- ---------
Net deferred tax assets $ - $ -
=========== =========
At December 31, 2000, the Company has net operating loss
carryforwards of approximately $3,426,000 for U.S. Federal
income tax purposes available to offset future taxable income
expiring on various dates through 2020.
The valuation allowance at January 1, 2000 was $230,000. The
net change in the valuation allowance during the year ended
December 31, 2000 was an increase of approximately $934,900.
NOTE 11 EXTRAORDINARY ITEM
------- ------------------
In June 2000, Torque Engineering's subsidiary IPSL, Inc.
confirmed the extinguishment of debts from certain affiliates
and a principal shareholder of IPSL, Inc., totaling $28,708.
As a result, an extraordinary gain was realized during the
year ended December 31, 2000 (See Note 14).
NOTE 12 RECAPITALIZATION
------- ----------------
In March 1999, the Company issued 4,870,000 common shares to a
new management group in consideration of the new management
group seeking an acquisition candidate. This issuance was
treated as a recapitalization of the Company with the par
value of the stock charged to additional paid-in capital.
NOTE 13 ACQUISITION
------- -----------
Effective May 28, 1999, the Company acquired the outstanding
common stock of IPSL, a Nevada corporation, incorporated on
April 27, 1998, in exchange for 1,500,000 shares of the
Company's common stock. The acquisition was accounted for
under the purchase method of accounting and the stock was
valued at $7.84 per share, based on the average quoted trading
price before and after the purchase was determined and the
announcement was made. The resulting purchase price was
$11,760,000 and was allocated, based upon an independent
appraisal performed for allocation purposes, to the assets
acquired and liabilities assumed as follows:
Marketable securities $ 637,045
Inventory 1,018,808
Special tooling 9,256,014
Machinery and equipment 1,122,509
Furniture, fixtures, and other 34,363
Loan fee payable (200,875)
Loan to stockholder (107,864)
-----------------
$ 11,760,000
=================
The table below reflects the pro forma combined results of the
Company as if the acquisition had taken place at January 1,
1998:
Net Sales $ 91,300
Net Loss $ (1,928,287)
Loss per share $ (0.337)
F-14
NOTE 14 RELATED PARTIES
------- ---------------
As of December 31, 2000 and 1999 the Company owed two
principal stockholders $71,656 and $28,708, respectively.
Pursuant to an agreement entered into between IPSL and
affiliates of a principal stockholder of IPSL prior to the
acquisition (see Note 13), the Company owed the affiliates
$28,708 at December 31, 1999 relating to prior loans made to
the Company. During 2000 the debt was cancelled and recorded
as a gain on extinguishment of debt.
During 2000, the Company received $60,000 in operating funds
from two stockholders. In addition, $11,656 of reimbursable
expenses was owed to one of the stockholders as of December
31, 2000. All loans from the stockholders were converted to
non-interest bearing notes payable due June 30, 2001.
Consulting income as of December 31, 1999 included $118,500,
received from a principal stockholder. There was no consulting
income received from related parties during the year ended
December 31, 2000.
NOTE 15 GOING CONCERN
------- -------------
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
The Company has a loss from current operations of $2,752,608
and negative cash flows from operating activities of
$1,468,442 at December 31, 2000. These conditions raise
substantial doubt about the Company's ability to continue as a
going concern.
In view of these matters, realization of a major portion of
the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its working
capital requirements, and the success of its future
operations. Management believes that action presently being
taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to
continue as a going concern.
NOTE 16 SUBSEQUENT EVENTS
------- -----------------
During January 2001, the Company sold one engine for $102,035
to its major customer (See Note 2).
In February 2001, the Company sold $125,000 shares of Rule 144
restricted common stock valued at $2.00 per share for $250,000
to three stockholders.
F-15
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS
ABOUT TORQUE ENGINEERING CORPORATION EXCEPT
THE INFORMATION OR REPRESENTATIONS
CONTAINED IN THIS PROSPECTUS. YOU SHOULD
NOT RELY ON ANY ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an -------------------
offer to sell, or a solicitation of an PROSPECTUS
offer to buy any securities: -------------------
o except the common stock offered by
this prospectus;
o in any jurisdiction in which the
offer or solicitation is not authorized;
o in any jurisdiction where the 19,025,000 Shares of Common Stock
dealer or other salesperson is not
qualified to make the offer or
solicitation;
TORQUE ENGINEERING CORPORATION
o to any person to whom it is
unlawful to make the offer or solicitation;
or
o to any person who is not a United
States resident or who is outside the
jurisdiction of the United States.
The delivery of this prospectus or any
accompanying sale does not imply that:
o there have been no changes in the ____________ __, 2001
affairs of Torque Engineering Corporation
after the date of this prospectus; or
o the information contained in this
prospectus is correct after the date of
this prospectus.
-----------------------
Until __________, 2002, all dealers
effecting transactions in the registered
securities, whether or not participating in
this distribution, may be required to
deliver a prospectus. This is in addition
to the obligation of dealers to deliver a
prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
INDEMNIFICATION
Our Certificate of Incorporation provides that we will indemnify its
officers, directors, employees and agents to the fullest extent permitted by
Delaware law. Any indemnitee is entitled to such indemnification in advance of
any final proceeding. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "1933 Act") may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered.
Securities and Exchange Commission Registration Fee $ 2,500
Printing and Engraving Expenses $ 10,000
Accounting Fees and Expenses $ 15,000
Legal Fees and Expenses $ 50,000
Blue Sky Qualification Fees and Expenses $ 2,500
Miscellaneous $ 5,000
--------------
TOTAL $ 85,000
==============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
In March 1999, a total of 4,870,000 shares of common stock were issued
to fifteen individuals, including Torque's current President, Raymond B. Wedel,
Jr., current Chief Executive Officer, Richard D. Wedel, current Vice-President
and Chief Financial Officer, I. Paul Arcuri, and current Secretary, Donald
Christensen. Those shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In May 1999, 1,500,000 shares of common stock were issued to Michel
Attias, the sole shareholder of IPSL, Inc., in exchange for all of the issued
and outstanding shares of IPSL capital stock. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
In September 1999, a total of 461,540 shares of common stock were
issued to Clement M. Lange, a former Director of Torque, Glen A. Lange, Joey
Lange and Sheila Wendholt at a price of $3.25 per share or a total amount of
$1,500,005. These shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In November 1999, Torque issued options to purchase a total of 80,000
shares of common stock to various Torque employees under the Torque 1999 stock
option plan. These stock options vest at a rate of 20% per year beginning one
year after the grant of the options. On November 12, 1999, the Board of
Directors approved the immediate vesting of 20% of those stock options issued to
all but one of the Torque employees who were granted an option. That employee's
option vests 20% on the one year anniversary of the option grant. The exercise
price of these stock options is $1.80625 per share.
In November 1999, Torque issued options to purchase 10,000 shares of
common stock to the following members of the Board of Directors:
Richard D. Wedel, Raymond B. Wedel, Jr., and Donald Christensen. Mr.
Christensen resigned as a member of the Board of Directors of Torque on . These
options are immediately exercisable at a October 16, 2001 price of $3.25 per
share for a period of five years from the date of the option grant. Torque also
II-1
granted I. Paul Arcuri, our Chief Financial Officer, an option to purchase
100,000 shares of common stock at an exercise price of $3.25 per share. Mr.
Arcuri's option vested one-third at the time of the option grant, and the
remainder vests one-third twelve months from the date of the option grant, and
one-third twenty-four months from the date of the option grant. Torque also
granted Donald Christensen, an officer and a former Director of Torque, an
option to purchase 30,000 shares of common stock at an exercise price of $3.25
per share with the same vesting provisions as for Mr. Arcuri's option.
The stock options described above were granted in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In December 1999, a total of 1,400 shares were issued to Mark Sorg and
Eugene Sobczak in exchange for marketing services provided to Torque in the
amount of $2,688. These shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In February 2000, Torque issued an option to purchase 10,000 shares of
common stock to an employee under the Torque 1999 stock option plan. This stock
option was immediately 20% vested and vests at a rate of 20% per year
thereafter. The exercise price of the stock option is $1.80625 per share.
In June 2000, a total of 266,667 shares of common stock were issued to
Clement M. Lange, a former Director of Torque, at a price of $1.50 per share or
a total amount of $400,000. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In October 2000, a total of 4,000 shares of common stock were issued to
Glen S. Graber at a price of $3.25 per share or a total amount of $13,000. These
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
In November 2000, Torque issued options to purchase 10,000 shares of
common stock to the following members of the Board of Directors: Richard D.
Wedel, Raymond B. Wedel, Jr., Donald Christensen, I. Paul Arcuri and Clement M.
Lange. These options are immediately exercisable at a price of $3.25 per share
for a period of five years from the date of the option grant.
In November 2000, a total of 307,692 shares of common stock were issued
to Clement M. Lange, a former Director of Torque, at a price of $1.625 per share
or a total amount of $500,000. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In February 2001, a total of 125,000 shares of common stock were issued
to Messrs. Richard D. Wedel, Raymond B. Wedel, Jr., and Michel Attias at a price
of $2.00 per share or a total amount of $250,000. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
In October 2001, we issued 300,000 of convertible debentures, from
which we received net proceeds of approximately $270,000. These debentures
accrued interest at 6% per year and are convertible into shares of common stock
at a conversion price equal to 75% of the average closing bid price of Torque's
common stock for the 5 days prior to conversion. At Torque's option, these
debentures may be paid in cash or converted into shares of common stock on the
fifth anniversary unless concerted earlier by the holder. Torque paid fees of
$30,000 to Cornell Capital Partners, L.P. in connection with this offering.
In November 2001, we entered into an Equity Line of Credit pursuant to
which Cornell Capital Partners, L.P. has agreed to purchase up to $5.0 million
of common stock. We have registered up to 18,125,000 shares in this registration
statement for issuance to the investor under the Equity Line of Credit and
convertible debentures.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
1933 Act, and Regulation D promulgated under the 1933 Act. In each instance, the
purchaser had access to sufficient information regarding us so as to make an
informed investment decision. More specifically, each purchaser signed a written
subscription agreement with respect to their financial status and investment
sophistication in which they represented and warranted, among other things, that
they had:
o the ability to bear the economic risks of an investment in the shares
of our common stock;
o a certain net worth sufficient to meet our suitability standards; and
II-2
o been provided with all material information requested by the purchaser
or his or her representatives, and been provided an opportunity to ask
questions of and receive answers from us concerning our business and
the terms of the offering.
II-3
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
[Enlarge/Download Table]
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
2.1 Form of Agreement and Plan of Merger by and Incorporated by reference to Exhibit A to the
among Quintessence Oil Company and Torque Registrant's Definitive Proxy Statement filed on
September 24, 1999
2.2 Plan and Agreement of Reorganization dated Incorporated by reference to Exhibit 2.2 to the
May 21, 1999 between IPSL, Inc. and Registrant's Annual Report on Form 10-KSB filed
Quintessence Oil Company on May 25, 2000
2.3 Bill of Sale between IPSL, Inc. and Torque Incorporated by reference to Exhibit 2.3 to the
Registrant's Annual Report on Form 10-KSB filed
on May 25, 2000
3.1 Articles of Incorporation of Quintessence Incorporated by reference to Exhibit 3.1 to the
Oil Company Registrant's Form 10 filed on December 3, 1996
3.2 Certificate of Incorporation of Torque Incorporated by reference to Exhibit B to the
Registrant's Definitive Proxy Statement filed on
September 24, 1999
3.3 Bylaws of Quintessence Oil Company Incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form 10
filed on December 3, 1996
3.4 Bylaws of Torque Incorporated by reference to Exhibit C of the
Registrant's Definitive Proxy Statement filed on
September 2,4 1999
5.1 Opinion Re: Legality Provided herewith
10.1 Lease Rental Agreement dated October 6, 1999 Incorporated by reference to Exhibit 10.1 of the
between Quintessence Oil Company and CNC Registrant's Amended Annual Report on Form
Associates (Lease No. 99870001) 10-KSB/A filed on August 10, 2000
10.2 Lease Rental Agreement dated October 6, 1999 Incorporated by reference to Exhibit 10.2 of the
between Quintessence Oil Company and CNC Registrant's Amended Annual Report on Form
Associates (Lease No. 9987002) 10-KSB/A filed on August 10, 2000
10.3 Lease Rental Agreement dated October 6, 1999 Incorporated by reference to Exhibit 10.3 of the
between Quintessence Oil Company and CNC Registrant's Amended Annual Report on Form
Associates (Lease NO. 99870003) 10-KSB/A filed on August 10, 2000
10.4 Lease Rental Agreement dated October 6, 1999 Incorporated by reference to Exhibit 10.4 of the
between Quintessence Oil Company and CNC Registrant's Amended Annual Report on Form
Associates (Lease No. 99870003) 10-KSB/A filed on August 10, 2000
10.5 Real Estate Lease dated April 29, 1999 by and Incorporated by reference to Exhibit 10.5 of the
between Richard W. Strefling Industries, Inc. Registrant's Annual Report on Form 10-KSB filed
and Quintessence Oil Company on May 25, 2000
10.6 Torque 1999 Stock Option Plan Incorporated by reference to Exhibit E to the
Registrant's Definitive Proxy Statement filed on
September 24, 1999
10.7 Corporate Note dated September 28, 2000 to Incorporated by reference to Exhibit 10.7 of the
Richard D. Wedel Registrant's Annual Report on Form 10-KSB filed
on March 29, 2001
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10.8 Corporate Note dated October 4, 2000 to Incorporated by reference to Exhibit 10.8 of the
Richard D. Wedel Registrant's Annual Report on Form 10-KSB filed
on March 29, 2001
10.9 Corporate Note dated October 12, 2000 to Incorporated by reference to Exhibit 10.9 of the
Michael Attias Registrant's Annual Report on Form 10-KSB filed
on March 29, 2001
10.10 Corporate Note dated December 31, 1000 to Incorporated by reference to Exhibit 10.11 of
Richard D. Wedel the Registrant's Annual Report on Form 10-KSB
filed on March 29, 2001
10.12 Account Purchase Agreement dated May 2, 2001 Incorporated by reference to Exhibit 10.1 to the
between Torque and Crown Financial, L.L.C. Registrant's Quarterly Report on Form 10-QSB
filed on August 17, 2001
10.13 Securities Purchase Agreement dated as of Provided herewith
October 28, 2001 between Torque and Cornell
Capital Partners, LP
10.14 Investor Registration Rights Agreement dated Provided herewith
as of October 28, 2001 between Torque and
Cornell Capital Partners, LP
10.15 Escrow Agreement dated as of October 28, 2001 Provided herewith
among Torque, Yorkville Advisors Management,
LCC and First Union National Bank
10.16 Transfer Agent Instructions dated as of Provided herewith
October 28, 2001 among Torque, Cornell
Capital Partners, LP and Computer Share Trust
Company, Inc.
10.17 Equity Line of Credit Agreement dated November Provided herewith
14, 2001 between Torque and Cornell Capital
Partners, LP
10.18 Registration Rights Agreement dated November Provided herewith
14, 2001 between Torque and Cornell Capital
Partners, LP
10.19 Escrow Agreement dated November 14, 2001 among Provided herewith
Torque, Cornell Partners, LP and First Union
National Bank
10.20 Placement Agent Agreement dated November 14 Provided herewith
2001 between Torque and Westport Partners,
Ltd.
23.1 Consent of Weinberg & Company, P.A. Provided herewith
23.2 Consent of Kirkpatrick & Lockhart LLP Provided herewith
24.1 Power of Attorney Included on Signature Page
27.1 Financial Data Schedule Not applicable
99.1 IPSL, Inc. Financial Statements as of May 28, Incorporated by reference to Exhibit 99.1 to the
1999 Registrant's Annual Report on Form 10-KSB filed
on May 25, 2000
II-5
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3)
of the 1933 Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under
the 1933 Act may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
(5) For purposes of determining any liability under the 1933
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Torque pursuant to Rule 424(b)(1) or (4) or 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in Elkhart, Indiana,
December 13, 2001.
TORQUE ENGINEERING CORPORATION
By: /s/ Richard D. Wedel
-----------------------------------
Name: Richard D. Wedel
Title: Chief Executive Officer and Chairman
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard D. Wedel his true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
him and in his name, place and stead, in any and all capacities (until revoked
in writing), to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully for all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or is substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard A. Wedel Chief Executive Officer and December 13, 2001
---------------------- Chairman of the Board of Directors
Richard A. Wedel
/s/ Raymond B. Wedel, Jr. President and Director December 13, 2001
----------------------
Raymond B. Wedel, Jr.
/s/ I. Paul Arcuri Chief Financial Officer and December 13, 2001
---------------------- Director
I. Paul Arcuri
Dates Referenced Herein and Documents Incorporated by Reference
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