U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21811
TORQUE ENGINEERING CORPORATION
(Name of small business issuer in its charter)
Delaware 83-0317306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2932 Thorne Drive, Elkhart, Indiana 46514
(Address of principal executive offices, including ZIP Code)
Issuer's telephone number: (219) 264-2628
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.00001 per share
------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year ended December 31,
2001 were $295,715.
The aggregate market value of the 8,290,795 shares of the issuer's
outstanding common stock held by non-affiliates of the issuer as of April 15,
2002, was $248,723.85 based on the closing bid price of $0.03 per share as
reported on the OTC Bulletin Board on that date.
The issuer had 12,748,965 shares of its common stock issued and
outstanding as of April 15, 2002.
TORQUE ENGINEERING CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FORWARD-LOOKING STATEMENTS....................................................3
PART I........................................................................3
Item 1. Description of Business....................................3
Item 2. Description of Property...................................11
Item 3. Legal Proceedings.........................................11
Item 4. Submission of Matters to a Vote of Security Holders.......11
PART II......................................................................12
Item 5. Market for Common Equity and Related Stockholder
Matters...................................................12
Item 6. Management's Discussion and Analysis......................14
Item 7. Financial Statements......................................17
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................17
PART III.....................................................................18
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.......................................................18
Item 10. Executive Compensation....................................19
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................20
Item 12. Certain Relationships and Related Transactions............21
Item 13. Exhibits and Reports on Form 8-K..........................22
SIGNATURES...................................................................25
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FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this filing may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. 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 filing contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our company's growth strategies, (c) our company's future financing plans and
(d) our company's anticipated needs for working capital. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results 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 filing generally. In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this filing will
in fact occur.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 Engineering's current management has 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 Engineering's
current president, Raymond B. Wedel, Jr., developed and sold after-market
performance-enhanced parts and equipment for marine racing and pleasure 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 where Lightning Performance, as an Indiana
corporation under the name Torque Engineering, continued operations. 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 Engineering 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 Engineering 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,
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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 Engineering 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 lesser
performance than what is available in smaller craft. Management believes 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 Engineering 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. Torque Engineering 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.
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. As of March 15, 2001 Torque Engineering
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. Torque Engineering will
display this boat at various marine industry trade shows throughout 2002.
Currently, Cigarette, Fountain, Hustler, Magnum Marine, NorTech, and Predator
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. In the event significant production of the Torque V-12 begins, Torque
Engineering 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. Torque Engineering has engaged in the past in
discussions with various third parties about adapting the Torque V-12 to other
marine uses outside of the luxury pleasure craft industry. These discussions
continued during the year ended December 31, 2001. However, these discussions
continue to be of an extremely broad and preliminary nature. There is no
assurance that Torque Engineering will adapt its 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.
Retail prices for the Torque V-12 range from $69,539 to $81,227 without
options. Torque Engineering offers a one-year limited warranty on all three
Torque V-12 models.
PRODUCT MARKET
Torque Engineering's products are designed for the marine pleasure craft
industry. That industry is divided primarily into the stern drive segment and
the outboard segment. The Torque V-12 is targeted toward the stern drive
segment.
More specifically, Torque Engineering'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
Engineering believes this niche market is generally characterized as having
consumers who are concerned primarily with:
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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.
INDUSTRY OVERVIEW
According to the National Marine Manufacturers' Association, the
recreational boating industry generated approximately $21.7, $25.0, and $25.6
billion in overall sales in 1999, 2000, and 2001 respectively.
There were 96,000 new sales of inboard and stern drive boats in 2001. Of
these, approximately 20,000 were 25' or more in length. Approximately 90% of
these boats would have two or more engines. Torque Engineering'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 Engineering will be able to do so.
Management 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 Engineering 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 Engineering believes that these
consumers are purchasing larger and more luxurious boats.
o Torque Engineering believes there is increasing interest in upgrading
existing boats through equipment-based accessories and repowerment.
Torque Engineering's research indicates that approximately 1% of the
existing boat engines in use are replaced on an annual basis.
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o Women are increasingly influencing or making purchasing decisions.
Torque Engineering 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
Engineering's Elkhart, Indiana manufacturing facility using computer-controlled
machining centers.
In November 1999, Torque Engineering 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 Engineering leased the machining centers from CNC
Associates, Inc.
The Torque V-12 engine is machined and also hand-assembled by Torque
Engineering'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.
Management believes that this manufacturing arrangement will be sufficient as
production begins to meet consumer demand for the Torque V-12.
RAW MATERIALS
Torque Engineering plans to produce internally as many of the necessary
components for the Torque V-12 as possible. Torque Engineering expects that the
computer-controlled manufacturing machines acquired in November 1999 will
facilitate the internal component production process. Additionally, Torque
Engineering 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 Engineering solicits competitive quotes for these components
whenever possible. Whenever the price of a component can be substantially
reduced by volume buying Torque Engineering plans to do so. Torque Engineering
believes that adequate sources of supply exist and will continue to exist, at
competitive prices, for all of Torque Engineering's raw material requirements.
MAJOR CUSTOMERS
For the year ended December 31, 2001, approximately 98.0% of Torque
Engineering's revenues were generated from sales to two customers, Cigarette
Racing Team, Inc and Douglas Marine Corp. For the year ended December 31, 2000,
approximately 97.5% of Torque Engineering's revenues were generated from sales
to one customer, Cigarette Racing Team, Inc. We cannot assure you that Cigarette
Racing Team or Douglas Marine Corp, Inc. will continue to be major customers.
MARKETING
Torque Engineering 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
Engineering 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 Engineering does not currently have a distribution network set up
for the Torque V-12. If Torque Engineering's sales increase substantially,
Torque Engineering may in the future establish Service Representatives in
various areas to service its products. Torque Engineering 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 Engineering anticipates that it will face intense competition in
the market in which Torque Engineering will produce and sell its Torque V-12
engines. The marine engine production market generally has high barriers to
entry due to the 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
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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
Engineering 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-8s
with enhanced aspiration such as turbo-chargers, or diesel fueled engines. As a
result, Torque Engineering does not believe that these engines are competing
with the Torque V-12 on an identical product line basis.
Nonetheless, Torque Engineering's competitors, including Brunswick and
Volvo Penta are large, vertically integrated companies that have greater
resources, including financial resources, than Torque Engineering. 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 Engineering'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 Engineering 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 Engineering
expects to rely on patented and other proprietary technology. In addition,
Torque Engineering 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 Engineering plans to file patent applications and to register its
trademarks.
Torque Engineering 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 Engineering as the
assignee of Raymond B. Wedel and Richard Moser. Torque Engineering cannot assure
you that any future patent applications it submits 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 Engineering's competitors may independently develop superior technology.
Torque Engineering also cannot assure you that any patents issued to or
licensed by Torque Engineering will not be infringed upon or designed around by
others, that others will not obtain patents that Torque Engineering will need to
license or design around or that Torque Engineering's products will not
inadvertently infringe upon the valid patents of others. In addition, Torque
Engineering cannot assure you that the Torque Engineering patent will not be
invalidated or that Torque Engineering will have adequate funds to finance the
high cost of defending or prosecuting patent validity or infringement issues.
RESEARCH AND DEVELOPMENT
Torque Engineering maintains an ongoing research & development program. In
September 1999, Torque Engineering completed a private placement of 461,540
shares of common stock to raise a total of $1,500,000 for working capital
purposes, including continued development of the Torque V-12 engine. A portion
of the proceeds of this private offering were used as a down payment to lease
the computer-controlled manufacturing equipment Torque Engineering uses in the
production of its Torque V-12 engines. In 2000, Torque Engineering completed
private placements of 578,359 shares of common stock to raise a total of
$913,000 of which a portion supported ongoing research & development with the
balance used for overhead and the purchase of raw materials. In 2001, Torque
Engineering continued advancing and refining the Torque V-12 engine design and
plan to offer a 1,450 horsepower version of the V-12.
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 that will be prorated over the
manufacturing cost of the V-12 engines in accordance with generally accepted
accounting principles.
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ENVIRONMENTAL AND REGULATORY MATTERS
Torque Engineering 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
Engineering's business, and these permits are subject to renewal, modification
and, in certain circumstances, revocation. Torque Engineering 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 Engineering does not believe that
compliance with these standards will have a material adverse effect on the cost
of its engine products or its 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
Engineering has not been able to fully assess the impact that these standards
will have on its business, Torque Engineering does not believe these more
stringent state requirements will have a material adverse effect on the cost of
its engine products or its future sales.
Torque Engineering 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 Engineering.
EMPLOYEES
As of April 15, 2002, Torque Engineering employed a total of 8 people, all
of which are employed full time.
CERTAIN BUSINESS RISKS
Torque Engineering is subject to various risks which may materially harm
its 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 Torque Engineering's
common stock. These are not the only risks and uncertainties that the Company
faces. If any of these risks or uncertainties actually occur, Torque
Engineering's business, financial condition or operating results could be
materially harmed. In that case, the trading price of Torque Engineering's
common stock could decline and you could lose all or part of your investment.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. In the year ended December 31, 2001 and
year ended December 31, 2000, we sustained losses from operations of $8.5
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
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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, 2001 and
December 31, 2000 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.
WE HAVE A LIMITED OPERATING HISTORY
Torque Engineering is a manufacturing business that has a limited
operating history. Limited production commenced in late 2000 with the first
Torque V-12 engines being shipped in the fourth quarter. Prior to May 1999 we
were an inactive public company originally formed for the purpose of purchasing,
developing and operating oil and gas leases. Our business strategy is to
continue to transition Torque Engineering away from the oil and gas business and
to manufacture an aluminum, gasoline-powered V-12 engine for use in the
performance pleasure boat marine industry. We expect to incur operating losses
and negative operating cash flows as we begin to increase our operations. We
cannot assure you that we will succeed in our transition or that we will have
sufficient funds to continue operations until we reach profitability.
WE CANNOT ASSURE YOU THAT THE MARKET FOR THE TORQUE V-12 WILL BE
SUFFICIENT TO COVER OUR OPERATING EXPENSES
Sales of the Torque V-12 are currently targeted toward owners of
performance pleasure craft. This market is a limited niche market in which the
price of the boats for which the Torque V-12 is designed range in price from
$250,000 to greater than $1,000,000. 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 MARINE ENGINE MARKET
Our current business strategy is to market and sell the Torque V-12 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 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 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 on a
production basis, as opposed to customizing the Torque V-12 per our customers'
requests. In 1999 and 2000 we continued the tooling, fixturing, programming and
installation of equipment in preparation for production. The initial production
engines we completed and shipped in the later part of 2000 and early part of
2001. Due to financing shortages throughout 2001, we have not yet begun to
implement quantity production of the Torque V-12 and cannot assure you that we
will not experience initial or recurring quality control or cost problems.
WE HAVE NOT YET ESTABLISHED A FULL DISTRIBUTION CHANNEL FOR THE TORQUE
V-12
We currently market the Torque V-12 through OEM 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 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 EXPECT INTENSE COMPETITION
Although we are not aware of any other gasoline-powered aluminum V-12
engine with performance characteristics similar to the Torque V-12. 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.
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 2001.
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 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.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE
OF SHARES UNDER THE EQUITY LINE OF CREDIT AND THE CONVERSION OF DEBENTURES
On November 9, 2001, we entered into an equity line of credit agreement
pursuant to which we may sell shares of our common stock to an investor for a
purchase price of up to $5,000,000. 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 our common stock is traded during the 5
days immediately following a notice date. In addition, on November 14, 2001, we
sold $300,000 of convertible debentures that are convertible into shares of our
common stock. The sale of shares pursuant to our equity line of credit and the
conversion of debentures into shares of our common stock 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 and
the more shares of common stock we will have to issue upon conversion of the
debentures. 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
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.
10
THE SELLING STOCKHOLDERS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY
CAUSE OUR STOCK PRICE TO DECLINE
On December 27, 2001, the Securities and Exchange Commission declared our
Registration Statement on Form SB-2 effective. The selling stockholders included
in that registration statement intend to sell in the public market the shares of
common stock registered in that offering. That means that up to 19,025,000
shares of common stock, the number of shares registered in that offering, may be
sold. Such sales may cause our stock price to decline.
ITEM 2. DESCRIPTION OF PROPERTY
Torque Engineering's business office and manufacturing facility is located
at 2932 Thorne Drive, Elkhart, Indiana 46514. Torque Engineering leases a 33,000
square foot industrial type metal building on approximately 4 1/2 acres in an
industrial park area in Elkhart, Indiana. The initial term of lease is for three
years. The lease provides Torque Engineering the option to renew the lease for
two successive three year terms. Torque Engineering also has an option to
acquire the property during the initial term of the lease. Torque Engineering
believes that the property is sufficient for its current operating plans.
ITEM 3. LEGAL PROCEEDINGS
On November 26, 2001, Torque Engineering was named in litigation with
Patrick Patel and Peter Hledin in the Superior Court of New Jersey, Hudson
County. Messrs. Patel and Hledin sued Torque Engineering for breach of warranty
and under New Jersey Fraud regarding alleged deficiencies in Torque
Engineering's engines and transmissions sold to the plaintiffs. On February 22,
2002, Torque Engineering filed a third party claim against Douglas Marine
Corporation, the vendor to whom the engines were sold, alleging, among other
things, that any damage resulting to the engines was caused by defective or
negligent "rigging." Due to the preliminary status of the lawsuit, it is not
possible to evaluate the likelihood of an unfavorable outcome or estimate the
extent of potential loss.
On March 2, 2002, Torque Engineering was named in litigation with Crown
Financial in the Texas court system. Crown Financial sued Torque Engineering
regarding alleged non-payment under a security agreement against Douglas Marine
Corporation and Torque Engineering. Due to the preliminary status of the
lawsuit, it is not possible to evaluate the likelihood of an unfavorable outcome
or estimate the extent of potential loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET OR MARKETS. Torque Engineering common stock is traded in
the over-the-counter market, and is presently quoted on the Over-the-Counter
Bulletin Board under the symbol "TORQ." Trading on the OTC Bulletin Board began
on May 14, 1998 and prior to October 22, 1999 the trading symbol was "QTSN". The
following table sets forth the high and low bid prices of the common stock on
the OTC Bulletin Board during each quarter from January 1, 2000 through December
31, 2001. These prices reflect interdealer quotations, without retail mark-up,
mark-down or commissions, and may not represent prices at which actual
transactions occurred.
BID
----------------------------
QUARTER ENDED HIGH LOW
--------------------- ------------- ------------
March 31, 2000 6.000 1.125
June 30, 2000 4.000 1.000
September 30, 2000 4.125 1.437
December 31, 2000 4.125 0.656
March 31, 2001 1.250 1.250
June 30, 2001 1.010 0.800
September 30, 2001 0.060 0.400
December 31, 2001 0.360 0.330
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of holders of
record of Torque Engineering common stock at April 15, 2002 was approximately
44, which does not include all beneficial shareholders. This includes 4,681,351
shares held by brokers.
DIVIDENDS. Holders of Torque Engineering common stock are entitled to
receive dividends if declared by the board of directors. No dividends on the
common stock have been paid by Torque Engineering since inception and Torque
Engineering does not anticipate paying dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES. During the past three years,
Torque Engineering has sold securities in the transactions described below
without registering the securities under the Securities Act of 1933. Unless
otherwise indicated, no underwriter, sales or placement agent was involved in
the transactions.
In March 1999, a total of 4,870,000 shares of common stock were issued to
fifteen individuals, including Torque Engineering'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, 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 Engineering issued options to purchase a total of
80,000 shares of common stock to various Torque Engineering employees under the
Torque Engineering 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 Engineering 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.
12
In November 1999, Torque Engineering 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. 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. Torque Engineering also granted I. Paul
Arcuri, its 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 Engineering also granted Donald
Christensen, an officer and a director, 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.
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 Engineering
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 Engineering issued an option to purchase 10,000
shares of common stock to an employee under the Torque Engineering 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 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 Engineering 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 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 May 2001, a total of 35,543 shares of common stock were issued to
Michael Bennett at a price of $1.16 per share or a total amount of $41,230 in
exchange for services rendered. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In May 2001, a total of 180,000 shares of common stock were issued to
NuMark Capital Corporation at a price of $1.07 per share or a total amount of
$192,600. These shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In November 2001, a total of 200,000 shares of common stock were issued to
Kenneth Hersh at a price of $0.25 per share or a total amount of $50,000. These
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
In November 2001, a total of 20,000 shares of common stock were issued to
Kenneth Hersh at a price of $0.25 per share or a total amount of $5,000 in
exchange for services rendered. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In November 2001, a total of 625,000 shares of common stock were issued to
Yorkville Advisors Management LLC at a price of $0.42 per share or a total
amount of $262,500 in exchange for services rendered. These shares were issued
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
13
In November 2001, Torque Engineering issued Convertible Debentures in the
original principal amount of $300,000. These Convertible Debentures are
convertible into shares of common stock at a price equal to 120% of the closing
bid price of the common stock as of the date of purchase or 80% of the average
of the 4 lowest closing bid prices of the common stock for the 5 trading days
immediately preceding the conversion date. These Convertible Debentures accrue
interest at 6% per year and are convertible at the holder's option. These
Convertible Debentures have a term of 5 years. At Torque Engineering's option,
these Convertible Debentures may be paid in cash or converted into shares of
common stock on the fifth anniversary unless earlier converted by the holder.
In January 2002, a total of 250,000 shares of common stock were issued to
V.T. Lincoln Financial Corporation at a price of $0.51 per share or a total
amount of $127,500 in exchange for services rendered. These shares were issued
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
In January 2002, a total of 5,000 shares of common stock were issued to
William R. A. Kleysteuber, III at a price of $0.30 per share or a total amount
of $1,500 in exchange for services rendered. These shares were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
In March, 2002, a total of 900,000 shares of common stock were issued to
Peter Cardillo at a price of $0.09 per share or a total amount of $81,000 in
exchange for services rendered. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In March, 2002, a total of 105,000 shares of common stock were issued to
Kenneth Hersh at a price of $0.08 per share or a total amount of $8,400 in
exchange for services rendered. These shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
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.
The facts relied on to make the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 available for the sale of securities
discussed in paragraphs 1 through 10 above were:
o the limited number of purchasers,
o the sophistication or accreditation of the purchasers,
o their access to material information about Torque Engineering,
o the information provided to Torque Engineering by them,
o the absence of any general solicitation or advertising, and
o restrictions on transfer of the securities issued to them as indicated
by a legend on the certificates representing such securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with our
consolidated financial statements and the notes thereto appearing elsewhere in
this filing.
Certain statements within this Item and throughout this Annual Report on
Form 10-KSB and the documents incorporated herein are "forward-looking
statements" as described in the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks and uncertainties and actual results could differ materially from those
projected.
14
OVERVIEW
Torque Engineering 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. Torque Engineering was a development stage company
through September 30, 2000, which has devoted most of its efforts toward
establishing its planned transition from an inoperative oil and gas company to a
manufacturer of a lightweight, high-powered marine engine built on a production
line basis for the luxury performance pleasure boat industry. During the year
ended December 31, 2000, we became an operating company. For the year ended
December 31, 2001 Torque Engineering had a net loss $8,534,825. We had negative
cash flows used in operating activities of $1,126,718 and an accumulated deficit
of $12,623,761 for the year ended December 31, 2001. These conditions raise
substantial doubt about our ability to continue as a going concern. Torque
Engineering's financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Torque Engineering'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 Engineering to continue as a going
concern. We cannot assure you, however, that we will be successful.
RESULTS OF OPERATIONS
SALES
We had sales, net of $295,715 for the year ended December 31, 2001
compared to sales, net of $718,801 for the year ended December 31, 2000, a
decrease of 58.9%. This decrease is substantially attributable to our sale of 3
Torque V-12 engines for the year ended December 31, 2001, as compared to our
sale of six Torque V-12 engines in the same period in 2000.
COST OF SALES
We had cost of sales of $1,482,593 for the year ended December 31, 2001,
as compared to $1,607,494 for the year ended December 31, 2000, a decrease of
7.8%. This decrease is primarily attributable to reduced operating levels, as
well as a reduction in materials, labor and overhead.
OPERATING EXPENSES
We had operating expenses of $7,076,205 for the year ended December 31,
2001, as compared to $1,863,434 for the year ended December 31, 2000, an
increase of 279.7%. This increase in our operating expenses for the year ended
December 31, 2001 is primarily attributable to a loss on impairment of fixed
assets in the amount of $4,764,258 and an increase in consulting and
professional fees.
NET LOSS
We had a net loss from operations and before extraordinary items of
$8,534,825 for the year ended December 31, 2001, as compared to $2,752,608 for
the year ended December 31, 2000, an increase of 210.1%. This is primarily
attributable to a loss on impairment of fixed assets in the amount of $4,764,259
taken in the year ended December 31, 2001, decreased sales, an increase in
consulting and professional fees, physical inventory loss, and financing costs
associated with our accounts receivable factoring arrangement.
We had depreciation expense of $1,124,641 for the year ended December 31,
2001, as compared to $1,118,079 for the year ended December 31, 2000 in
connection with property acquired as part of Torque Engineering's acquisition of
IPSL and used in connection with the Company's production-line manufacture of
the Torque V-12 engines.
15
MARKETABLE SECURITIES
We had net unrealized gain on marketable securities of $2,426 for the year
ended December 31, 2001, as compared to an unrealized loss on marketable
securities of $30,932 for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Management anticipates that the capital requirements to conduct Torque
Engineering's business plan will be significant and we cannot assure you that we
will be able to obtain those funds or obtain the required capital on terms
favorable to us. 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, financing from third parties, and funds generated from
the sale of the Torque V-12 engine. Management further anticipates that any
funds obtained will be used for working capital, administrative expenses, and
research and development of the Torque V-12 engine for other potential uses in
the marine industry, as well as other industries. If we are unable to sell
additional securities, obtain financing from third parties, or if our funds from
ongoing operations are insufficient, it is unlikely that we will continue as a
going concern.
As discussed in Note 3 to our 2001 financial statements, on May 2, 2001,
we entered into an accounts receivable financing agreement. Amounts received
were utilized for inventory and working capital.
As discussed in Note 9 to our 2001 financial statements, on November 14,
2001, we sold $300,000 of 6% Convertible Subordinated Debentures, due November
13, 2006 to Cornell Capital Partners, L.P. After expenses, we received
approximately $220,000 from such offering. We intend to use the proceeds of the
offering for working capital purposes and to pay certain administrative
expenses.
As discussed in Note 10 to our 2001 financial statements, on November 9,
2001, we entered into an equity line of credit agreement pursuant to which we
may sell shares of our common stock to an investor for a purchase price of up to
$5,000,000. 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 our common stock is traded during the 5 days immediately
following the notice date. Unless waived by the investor, the amount of each
advance is subject to a monthly maximum amount of $208,333.33. As of April 15,
2002, we have received $50,000 in gross proceeds ($42,000 in net proceeds) and
issued 806,452 shares of common stock pursuant to the agreement. We used these
funds for working capital and we anticipate using any additional funds that we
receive pursuant to the equity line of credit to 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.
CASH FLOWS
A total of $1,126,718 and $1,468,442 was used for operating activities for
the year ended December 31, 2001 and 2000, respectively. The decrease in cash
used in operating activities was primarily attributable to stock issued for
services and a decrease in operating assets. The cash used in operating
activities was primarily expended on costs and expenses related to the
production-line manufacturing of the Torque V-12 engines, administrative
expenses, and research and development of the Torque V-12 engine for other
potential uses in the marine industry, as well as other industries. For the year
ended December 31,2001, Torque Engineering raised net cash of $300,000 from
private placements of its common stock, $220,000 from a convertible debenture,
$219,586 from factoring receivables, and $115,000 from a note payable. In
addition, 2 stockholders, both of whom are officers and directors, provided
operating funds in the amount of $76,500. The proceeds from these activities
were used for working capital, administrative expenses, and research and
development of the Torque V-12 engine for other potential uses. For the year
ended December 31, 2000, Torque Engineering raised net cash of $913,000 from
private placements of our common stock. Of the net cash raised from private
placements during the year ended December 31, 2000, $900,000 was raised from a
director and significant shareholder. In addition, 2 stockholders, one of whom
is also an officer and director, provided operating funds in the amount of
$60,000. The proceeds from these private placements and from these stockholders
were used for working capital.
Torque Engineering believes it does not have sufficient cash to continue
operations and to manufacture the Torque V-12 on a production-line basis to
generate revenues for the next twelve months. However, Torque Engineering
intends to seek other sources of capital to continue operations and to increase
sales and revenues. Management is continuing to evaluate the company's projected
capital needs for the future development and manufacture of Torque V-12 engines.
16
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has recently issued new
accounting pronouncement, Statement of Financial Accounting Standards ("SFAS")
No. 133, as amended by SFAS No. 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.
Torque Engineering believes that the future adoption of this pronouncement
will not have a material effect on Torque Engineering's financial position or
results of operations.
ITEM 7. FINANCIAL STATEMENTS
The independent auditors' report and the financial statements listed on
the accompanying index at page F-1 of this report are filed as part of this
report and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) Directors and Executive Officers. The names and ages of the
directors and executive officers of Torque Engineering, as of April 15, 2001,
are as follows:
Name Age Position
--------------------- ---- --------------------------------------------
Raymond B. Wedel, Jr. 60 President and Director
Richard D. Wedel 54 Chairman, Chief Executive Officer and
Director
I. Paul Arcuri 47 Vice President, Chief Financial Officer and
Director
Each director serves until the next annual meeting of shareholders or
until his successor is elected and qualified.
The following sets forth information concerning the principal occupations
and business experience of the current officers and directors of Torque
Engineering:
Raymond B. Wedel, Jr.
---------------------
Raymond B. Wedel, Jr. has been the President, and Chief Operating Officer
of Torque Engineering since 1999. From 1992 until 1997, Mr. Wedel was the
President of Torque Engineering, a business of Glaval Corporation, which is the
predecessor to the current Torque Engineering. 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 Engineering. 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. Mr. Wedel has a Bachelor of Science
Degree in Business Administration from the University of Evansville in Indiana.
Richard D. Wedel
----------------
Mr. Richard D. Wedel has been the Chief Executive Officer and Chairman of
the Board of Directors of Torque Engineering since 1999. Mr. Wedel is a
financial consultant and since 1998, has been President of Wedel Consultants, a
firm involved in mergers and acquisitions. Since 1999, Mr. Wedel has been the
Chairman of the Board of Integrated Homes, Inc., (INHI), a publicly traded
company. Integrated Homes is a provider of bundled voice and data communication
systems and services for planned development communities. From 1997 through
1998, Mr. Wedel 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. Mr. Wedel is a past Chairman of the
American Petroleum Institute Eastern U.S. Advisory Board. Mr. Wedel has a degree
in Business Administration from the University of Evansville.
I. Paul Arcuri
--------------
Mr. I. Paul Arcuri was elected to Torque Engineering's Board of Directors
in December 1999. Mr. Arcuri has served as President and Financial Principal of
the Carney Group, Inc., an investment banking firm, member of N.A.S.D. since
1985. Mr. Arcuri has been a registered broker since 1978 and was an investment
advisor registered with the Securities Exchange Commission. Mr. Arcuri has
extensive background in financial management involving cash flow, cost and
budgeting analysis with an emphasis on operations management. Mr. Arcuri was a
Director and Chairman of Gibraltar Savings and Loan Association from 1987
through 1992. Mr. Arcuri has a Bachelor of Arts in Accounting from St. Thomas
University/Biscayne College in Miami, Florida.
18
Family Relationship:
--------------------
Raymond B. Wedel, Jr. and Richard D. Wedel are brothers.
Section 16(a) Beneficial Reporting Compliance
---------------------------------------------
Under U.S. securities laws, directors, executive officers and persons
holding more than 10% of Torque Engineering'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 Engineering. The SEC has
designated specific deadlines for these reports and Torque Engineering must
identify in this Form 10-KSB those persons who did not file these reports when
due.
Based upon information provided to Torque Engineering by its directors,
executive officers and persons holding more than 10% of Torque Engineering's
common stock, Torque Engineering is not aware of any failures to comply with
reporting requirements of Section 16(a) of the Securities Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the total compensation Torque Engineering
awarded or paid to Torque Engineering's Chief Executive Officer for the year
ended December 31, 2001. The current Chief Executive Officer was not employed by
Torque Engineering prior to March 1999. In addition, no other executive officer
of Torque Engineering had a total annual salary and bonus in excess of $100,000
for 2001.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Name and --------------------------- ------------- All Other
Principal Position Year Salary ($) Bonus($) Options (#) Compensation ($)
-------------------------- ---- --------- -------- ----------- ----------------
Richard D. Wedel, 2001 50,000 -0- 10,000(1) -0-
Chief Executive Officer 2000 50,000 -0- 10,000(1) -0-
1999 50,000 -0- 10,000(1) -0-
_____________________
(1) In 1999, 2000 and 2001, Mr. Wedel received options to purchase 10,000
shares of Torque Engineering 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
grant date.
2001 OPTION/SAR GRANTS
Number of
Securities Percent of Total
Underlying Options/SAR's
Options/SAR's Granted to Exercise or
Granted Employees Base Price Expiration
Name (#) in Fiscal Year ($ Per Share) Date
----------------------- -------------- ---------------- ------------- -----------
Richard D. Wedel 10,000 33.33% $3.25 November 12, 2011
Raymond B. Wedel, Jr. 10,000 33.33% $3.25 November 12, 2011
I. Paul Arcuri 10,000 33.33% $3.25 November 12, 2011
19
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES(1)
Value of
Unexercised
In-The-Money
Shares Number of Unexercised Options/SAR's
Acquired Value Options/SAR's at FY-End ($)
on Exercise Realized at FY-End (#) Exercisable/
Name (#) ($) Exercisable/Unexercisable Unexercisable
----------------------- ----------- -------- -------------------------- -------------
Richard D. Wedel -- -- Exercisable: 30,000 -0-(2)
Unexercisable: 0 -0-
Raymond B. Wedel, Jr. -- -- Exercisable: 30,000 -0-(2)
Unexercisable: 0 -0-
I. Paul Arcuri -- -- Exercisable: 86,666 -0-(2)
Unexercisable: 33,334 -0-(2)
(1) These grants represent options to purchase common stock. No SAR's have been
granted.
(2) The exercise price for the options exceeded the closing bid quotation for
Torque Engineering common stock on the OTC Bulletin Board as of December
31, 2000.
Other than the options to purchase 10,000 shares of Torque Engineering
common stock at an exercise price of $3.25 per share granted to Torque
Engineering's five directors in 2001, directors did not receive compensation for
their services in 2001.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
as of April 15, 2002 of Torque Engineering common stock by any person who Torque
Engineering knows to be the beneficial owner of more than five percent of Torque
Engineering's voting securities, and by each Torque Engineering director and
executive officer and by the directors and executive officers of Torque
Engineering as a group. As of April 15, 2002 there were 12,748,965 shares of
common stock issued and outstanding.
All beneficial owners listed below have sole voting and investment power
with respect to the shares shown, unless otherwise indicated.
20
BENEFICIAL OWNERS
--------------------------------------------------------------------------------------------------
TITLE OF
CLASS SHARES PERCENT OF CLASS
------------------------------------ ------------ ------------ ------------------
Officers and Directors
------------------------------------
Raymond B. Wedel, Jr. Common Stock 1,621,702(1) 12.7%
1415 Meadow Lane
Elkhart, IN 46514
Richard D. Wedel Common Stock 1,493,334(2) 11.7%
3900 Woodcastle
Evansville, IN 47711
I. Paul Arcuri Common Stock 186,666(3) 1.5%
c/o Torque Engineering Corporation
2432 Thorne Drive
Elkhart, IN 46674
All officers and directors as a group Common Stock 3,301,702(4) 25.5%
(3 persons)
------------------------------------
Other Beneficial Owners
------------------------------------
Michel Attias Common Stock 1,303,134 10.2%
4 Riviera Avenue
Costa De Caza, CA 92679
Clement Lange Common Stock 1,234,629 9.7%
4481 W. Holland Road, East
Huntingburg, IN 47532
----------------
(1) 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 30,000 shares Mr. Wedel is entitled to acquire within 60
days of April 15, 2002 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.
(2) 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 30,000
shares Mr. Wedel is entitled to acquire within 60 days of April 15, 2002
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 66,666 shares vested under an option to purchase 100,000 shares
granted to Mr. Arcuri as Vice-President and Chief Financial Officer. Also
includes 20,000 shares Mr. Arcuri is entitled to acquire within 60 days of
April 15, 2002 pursuant to an option granted to him as a member of the
board of directors
(4) Includes options to acquire 180,000 shares of Torque's common stock
exercisable within 60 days of April 15, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 28, 1999, Torque Engineering acquired the outstanding common
stock of IPSL, a Nevada corporation, in exchange for the issuance of 1,500,000
shares of Torque Engineering common stock to Michel Attias, then the sole
shareholder of IPSL and now a significant shareholder of Torque Engineering. The
principal reason for Torque Engineering'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 Engineering in April 1999.
21
During the year ended December 31, 1999, Torque Engineering 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 Engineering 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, Clement
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 Engineering received a
total of $60,000 in operating funds from two of its stockholders, Richard D.
Wedel and Michel Attias. Mr. Wedel is an officer and director of Torque
Engineering. In addition, $11,656 of reimbursable expenses were owed to Richard
D. Wedel as of December 31, 2000. Those loans were converted to non-interest
bearing promissory notes due June 30, 2001. Torque Engineering is currently in
default on these promissory notes.
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
Engineering 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 Wedel and Raymond Wedel are officers and
directors of Torque Engineering.
During March 2001, Torque Engineering received a total of $46,500 in
operating funds from one of its stockholders, Richard D. Wedel. Mr. Wedel is an
officer and director of Torque Engineering. Those loans were converted to
non-interest bearing promissory notes due June 30, 2001. Torque Engineering is
currently in default on these promissory notes.
During May 2001, Torque Engineering received a total of $115,000 in
operating funds from Patriot Manufacturing Corp. Michael Attias, a beneficial
owner of more than 5% of Torque Engineering's common stock is an officer of
Patriot Manufacturing Corp. Those loans were converted to non-interest bearing
promissory notes due August 31, 2001.
During December 2001, Torque Engineering received a total of $30,000 in
operating funds from two of its stockholders, Richard D. Wedel and Raymond B.
Wedel Jr. Richard D. Wedel and Raymond B. Wedel Jr. are officers and directors
of Torque Engineering. Those loans were converted to non-interest bearing
promissory notes due March 30, 2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are furnished as part of this report:
Exhibit No. Description Location
------------ ----------------------------------------- --------------------------------------
2.1 Form of Agreement and Plan of Merger by Incorporated by reference to Exhibit A
and among Quintessence Oil Company and to the Registrant's Definitive Proxy
Torque Statement file don September 24, 1999
2.2 Plan and Agreement of Reorganization Incorporated by reference to Exhibit
dated May 21, 1999 between IPSL, Inc. 2.2 to the Registrant's Annual Report
and Quintessence Oil Company on Form 10-KSB filed on May 25, 2000
2.3 Bill of Sale between IPSL, Inc. and Incorporated by reference to Exhibit
Torque 2.3 to the Registrant's Annual Report
on Form 10-KSB filed on May 25, 2000
3.1 Articles of Incorporation of Incorporated by reference to Exhibit
Quintessence Oil Company 3.1 to the 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
22
Exhibit No. Description Location
------------ ----------------------------------------- --------------------------------------
3.4 Bylaws of Torque Incorporated by reference to Exhibit C
of the Registrant's Definitive Proxy
Statement filed on September 24, 1999
10.1 Lease Rental Agreement dated October 6, Incorporated by reference to Exhibit
1999 between Quintessence Oil Company 10.1 of the Registrant's Amended Annual
and CNC Associates (Lease No. 99870001) Report on Form 10-KSB/A filed on August
10, 2000
10.2 Lease Rental Agreement dated October 6, Incorporated by reference to Exhibit
1999 between Quintessence Oil Company 10.2 of the Registrant's Amended Annual
and CNC Associates (Lease No. 9987002) Report on Form 10-KSB/A filed on August
10, 2000
10.3 Lease Rental Agreement dated October 6, Incorporated by reference to Exhibit
1999 between Quintessence Oil Company 10.3 of the Registrant's Amended Annual
and CNC Associates (Lease NO. 99870003) Report on Form 10-KSB/A filed on August
10, 2000
10.4 Lease Rental Agreement dated October 6, Incorporated by reference to Exhibit
1999 between Quintessence Oil Company 10.4 of the Registrant's Amended Annual
and CNC Associates (Lease No. 99870003) Report on Form 10-KSB/A filed on August
10, 2000
10.5 Real Estate Lease dated April 29, 1999 Incorporated by reference to Exhibit
by and between Richard W. Strefling 10.5 of the Registrant's Annual Report
Industries, Inc. and Quintessence Oil on Form 10-KSB filed on May 25, 2000
Company
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 Incorporated by reference to Exhibit
to Richard D. Wedel 10.7 of the Registrant's Annual Report
on Form 10-KSB filed on March 29, 2001
10.8 Corporate Note dated October 4, 2000 to Incorporated by reference to Exhibit
Richard D. Wedel 10.8 of the 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
Michael Attias 10.9 of the Registrant's Annual Report
on Form 10-KSB filed on March 29, 2001
10.10 Corporate Note dated December 31, 2000 Incorporated by reference to Exhibit
to Richard D. Wedel 10.11 of the Registrant's Annual Report
on Form 10-KSB filed on March 29, 2001
10.12 Account Purchase Agreement dated May 2, Incorporated by reference to Exhibit
2001 between Torque and Crown Financial, 10.1 to the Registrant's Quarterly
L.L.C. Report on Form 10-QSB filed on August
17, 2001
10.13 Securities Purchase Agreement dated as Incorporated by reference to Exhibit
of October 28, 2001 between Torque and 10.13 to the Registrant's Registration
Cornell Capital Partners, LP Statement on Form 10-SB-2 filed on
December 17, 2001
10.14 Investor Registration Rights Agreement Incorporated by reference to Exhibit
dated as of October 28, 2001 between 10.14 to the Registrant's Registration
Torque and Cornell Capital Partners, LP Statement on Form 10-SB-2 filed on
December 17, 2001
10.15 Escrow Agreement dated as of October 28, Incorporated by reference to Exhibit
2001 among Torque, Yorkville Advisors 10.15 to the Registrant's Registration
Management, LLC and First Union National Statement on Form 10-SB-2 filed on
Bank December 17, 2001
23
Exhibit No. Description Location
------------ ----------------------------------------- --------------------------------------
10.16 Transfer Agent Instructions dated as of Incorporated by reference to Exhibit
October 28, 2001 among Torque, Cornell 10.16 to the Registrant's Registration
Capital Partners, LP and Computer Share Statement on Form 10-SB-2 filed on
Trust Company, Inc. December 17, 2001
10.17 Equity Line of Credit Agreement dated Incorporated by reference to Exhibit
November 14, 2001 between Torque and 10.17 to the Registrant's Registration
Cornell Capital Partners, LP Statement on Form 10-SB-2 filed on
December 17, 2001
10.18 Registration Rights Agreement dated Incorporated by reference to Exhibit
November 14, 2001 between Torque and 10.18 to the Registrant's Registration
Cornell Capital Partners, LP Statement on Form 10-SB-2 filed on
December 17, 2001
10.19 Escrow Agreement dated November 14, 2001 Incorporated by reference to Exhibit
among Torque, Cornell Partners, LP and 10.19 to the Registrant's Registration
First Union National Bank Statement on Form 10-SB-2 filed on
December 17, 2001
10.20 Placement Agent Agreement dated November Incorporated by reference to Exhibit
14, 2001 between Torque and Westport 10.20 to the Registrant's Registration
Partners, Ltd. Statement on Form 10-SB-2 filed on
December 17, 2001
99.1 IPSL, Inc. Financial Statements as of Incorporated by reference to Exhibit
May 28, 1999 99.1 to the Registrant's Annual Report
on Form 10-KSB filed on May 25, 2000
(b) Reports on Form 8-K.
None.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 25, 2002 TORQUE ENGINEERING CORPORATION
By:/s/ Raymond B. Wedel, Jr.
-----------------------------------
Raymond B. Wedel, Jr., President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Raymond B. Wedel, Jr.
--------------------------------------------- Date: April 25, 2002
Raymond B. Wedel, Jr.
President and Director
/s/ Richard D. Wedel
--------------------------------------------- Date: April 25, 2002
Richard D. Wedel
Chairman, Chief Executive Officer
and Director
/s/ Paul Arcuri
--------------------------------------------- Date: April 25, 2002
I. Paul Arcuri
Vice President, Chief Financial Officer and
Director
TORQUE ENGINEERING CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONTENTS
PAGE F-2 INDEPENDENT AUDITORS' REPORT
PAGE F-3 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
PAGE F-4 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
PAGES F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 2001 AND 2000
PAGES F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
PAGES F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Torque Engineering Corporation
We have audited the accompanying consolidated balance sheets of Torque
Engineering Corporation and Subsidiary as of December 31, 2001 and 2000 and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for the years then ended. 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
audits provide 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, 2001 and 2000 and the results of
their operations and their cash flows for the years then ended, 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 18, the Company
has a loss from current operations of $8,534,825, a negative cash flow from
operating activities of $1,126,718 and a working capital deficiency of $725,507.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 18. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 9, 2002
F-2
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
------------------ ------------------
CURRENT ASSETS
Cash $ 12,757 $ 160,113
Marketable securities 3,639 1,213
Accounts receivable, net 156,104 311,159
Inventories 348,752 789,135
Prepaid expenses 22,448 50,008
Advances to suppliers 73,094 109,180
------------------ ------------------
Total Current Assets 616,794 1,420,808
PROPERTY & EQUIPMENT - NET 3,573,112 9,451,698
------------------ ------------------
TOTAL ASSETS $ 4,189,906 $ 10,872,506
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 642,180 $ 341,069
Due to factor 219,586 -
Obligations under capital leases - current portion 217,379 127,278
Notes payable - officers 148,156 71,656
Note payable 115,000 -
------------------ ------------------
Total Current Liabilities 1,342,301 540,003
------------------ ------------------
LONG-TERM LIABILITIES
Obligations under capital leases 342,851 454,363
Convertible debentures 280,000 -
------------------ ------------------
Total Long-Term Liabilities 622,851 -
------------------ ------------------
TOTAL LIABILITIES 1,965,152 994,366
------------------ ------------------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value, 50,000,000 shares
authorized, 9,597,112 and 8,411,299 shares issued,
respectively 96 84
Common stock to be issued, 121,942 shares 1 -
Additional paid in capital 15,202,320 14,243,709
Accumulated deficit (12,623,761) (4,088,936)
Accumulated other comprehensive loss (208,637) (211,063)
------------------ ------------------
2,370,019 9,943,794
Less Treasury Stock at cost (6,750 Shares) (56,970) (56,970)
Less Deferred compensation expense (88,295) (8,684)
------------------ ------------------
Total Stockholders' Equity 2,224,754 9,878,140
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,189,906 $ 10,872,506
================== ==================
See accompanying notes to consolidated financial statements.
F-3
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------------- -----------------
SALES, NET $ 295,715 $ 718,801
COST OF SALES 1,482,593 1,607,494
----------------- -----------------
GROSS LOSS (1,186,878) (888,693)
----------------- -----------------
OPERATING EXPENSES
Loss on impairment of property and equipment 4,764,259 -
Depreciation 1,124,641 1,118,079
Consulting 442,637 -
Professional fees 209,884 116,498
Officer compensation 141,230 155,655
Other selling, general and administrative 154,109 112,664
Rent 120,000 120,000
Payroll and other compensation 119,445 240,538
----------------- -----------------
Total Operating Expenses 7,076,205 1,863,434
----------------- -----------------
LOSS FROM OPERATIONS (8,263,083) (2,752,127)
----------------- -----------------
OTHER INCOME (EXPENSE)
Interest expense (157,032) (40,130)
Factoring expenses (116,813) -
Other expense - net (2,452) -
Other income 4,176 427
Interest income 379 10,514
----------------- -----------------
Total Other Income (Expense) (271,742) (29,189)
----------------- -----------------
NET LOSS BEFORE EXTRAORDINARY ITEM (8,534,825) (2,781,316)
EXTRAORDINARY ITEM
Gain on extinguishment of debt - 28,708
----------------- -----------------
NET LOSS (8,534,825) (2,752,608)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on marketable
securities - net 2,426 (30,932)
----------------- -----------------
COMPREHENSIVE LOSS $ (8,532,399) $ (2,783,540)
================= =================
Loss per share before extraordinary gain $ (.97) $ (.347)
extraordinary gain - .004
----------------- -----------------
Net loss per share - basic and diluted $ (.97) $ (.343)
================= =================
Weighted average number of shares outstanding
during the period -basic and diluted 8,764,579 8,012,677
================= =================
See accompanying notes to consolidated financial statements.
F-4
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000
Common Stock To Accumulated
Common Stock Be Issued Additional Other Deferred
--------------- --------------- Paid-in Accumulated Comprehensive Treasury Compensation
Shares Amount Shares Amount Capital Deficit Loss Stock Expense Totals
------ ------ ------ ------ ------- ------- ---- ----- ------- ------
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
Stock issued for cash 325,000 3 - - 299,997 - - - - 300,000
Stock issued for
services 860,813 9 - - 493,150 - - - (8,572) 484,587
Stock to be issued for
services - - 50,000 - 25,500 - - - (23,375) 2,125
Grant of stock options
for services - - - - 51,997 - - - (47,664) 4,333
Stock to be issued for
debt conversion - - 71,942 1 19,999 - - - - 20,000
Unrealized gain on
available-for-sale
securities - - - - - - 2,426 - - 2,426
Beneficial conversion
feature of convertible
debentures - - - - 67,968 - - - - 67,968
Net Loss, 2001 - - - (8,534,825) - - - (8,534,825)
---------- ------ ------- ------- ------------ ------------- ------------ ---------- ---------- -----------
BALANCE,
DECEMBER 31, 2001 9,597,112 $ 96 121,942 $ 1 15,202,320 $(12,623,761) $(208,637) $(56,970) $(88,295) $2,224,754
========== ====== ======= ======= ============ ============= ============ ========== ========== ===========
See accompanying notes to consolidated financial statements.
F-5
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,534,825) $ (2,752,608)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,124,641 1,118,079
Loss on impairment of property and equipment 4,764,259 -
Beneficial conversion feature of convertible debentures 67,968 -
Compensation expense incurred in exchange for stock options 4,333 11,536
Provision for bad debts 6,571 -
Stock issued for services 486,711 -
Gain on extinguishment of debt - (28,708)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 148,484 (308,870)
Prepaid expenses 27,560 (45,240)
Advances to suppliers 36,086 (109,180)
Inventories 440,383 375,875
Accounts payable and accrued liabilities 301,111 270,674
-------------- -------------------
Net Cash Used In Operating Activities (1,126,718) (1,468,442)
-------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,315) (103,607)
-------------- -------------------
Net Cash Used In Investing Activities (10,315) (103,607)
-------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 300,000 913,000
Principal repayments on capital lease obligations (21,409) (38,857)
Due to factor 219,586 -
Proceeds from notes payable - officers 76,500 60,000
Proceeds from note payable 115,000 -
Proceeds from convertible debenture 300,000 -
-------------- -------------------
Net Cash Provided By Financing Activities 989,677 934,143
-------------- -------------------
NET DECREASE IN CASH (147,356) (637,906)
CASH AT BEGINNING OF YEAR 160,113 798,019
-------------- -------------------
CASH AT END OF YEAR $ 12,757 $ 160,113
============== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 122,787 $ 4,278
============== ===================
See accompanying notes to consolidated financial statements.
F-6
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2001, the Company recorded 71,942 shares of common stock to be issued
under the terms of the convertible debenture agreement to convert $20,000 of
principal (See Notes 9 and 19(B)).
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.
See accompanying notes to consolidated financial statements.
F-7
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) ORGANIZATION
The Company designs and manufactures high performance offshore marine
engines.
The Company was in the development stage through December 31, 1999. The
year ended December 31, 2000 was the first year during which it was
considered an operating company.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. 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.
The Company maintains its cash in bank accounts, which, at times,
exceed federally insured limits. The Company has not experienced any
losses in such accounts as of December 31, 2001.
(E) 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 2)).
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) INVENTORY
Inventories are 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).
F-8
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(G) 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 8
years. Expenditures for maintenance and repairs are charged to expense
as incurred. Major improvements are capitalized (See Note 7).
(H) 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 12(C)).
(I) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products.
(J) ADVERTISING COSTS
Advertising is charged to operations as incurred. For the years ended
December 31, 2001 and 2000, the Company charged $95,376 and $74,461,
respectively.
(K) 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.
(L) 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.
(M) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several
new Statements of Financial Accounting Standards.
F-9
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
Statement No. 141, "Business Combinations" supersedes APB Opinion 16
and various related pronouncements. Pursuant to the new guidance in
Statement No. 141, all business combinations must be accounted for
under the purchase method of accounting; the pooling-of-interests
method is no longer permitted. SFAS 141 also establishes new rules
concerning the recognition of goodwill and other intangible assets
arising in a purchase business combination and requires disclosure of
more information concerning a business combination in the period in
which it is completed. This statement is generally effective for
business combinations initiated on or after July 1, 2001.
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes
APB Opinion 17 and related interpretations. Statement No. 142
establishes new rules on accounting for the acquisition of intangible
assets not acquired in a business combination and the manner in which
goodwill and all other intangibles should be accounted for subsequent
to their initial recognition in a business combination accounted for
under SFAS No. 141. Under SFAS No. 142, intangible assets should be
recorded at fair value. Intangible assets with finite useful lives
should be amortized over such period and those with indefinite lives
should not be amortized. All intangible assets being amortized as well
as those that are not, are both subject to review for potential
impairment under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS
No. 142 also requires that goodwill arising in a business combination
should not be amortized but is subject to impairment testing at the
reporting unit level to which the goodwill was assigned to at the date
of the business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and must be applied as of the beginning of such year to all
goodwill and other intangible assets that have already been recorded in
the balance sheet as of the first day in which SFAS No. 142 is
initially applied, regardless of when such assets were acquired.
Goodwill acquired in a business combination whose acquisition date is
on or after July 1, 2001, should not be amortized, but should be
reviewed for impairment pursuant to SFAS No. 121, even though SFAS No.
142 has not yet been adopted. However, previously acquired goodwill
should continue to be amortized until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations"
establishes standards for the initial measurement and subsequent
accounting for obligations associated with the sale, abandonment, or
other type of disposal of long-lived tangible assets arising from the
acquisition, construction, or development and/or normal operation of
such assets. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged.
The adoption of these pronouncements is not expected to have a material
effect on the Company's financial position or results of operations.
(N) LOSS PER SHARE
Basic and diluted net loss per common share for the years ended
December 31, 2001 and 2000 is computed based upon the weighted average
common shares outstanding. Common stock equivalents have not been
included in the computation of diluted loss per share since the effect
would be anti-dilutive.
(O) BUSINESS SEGMENTS
The Company operates in one segment and therefore segment information
is not presented.
(P) 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
F-10
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, advances to
suppliers, marketable securities, accounts payable and accrued
liabilities, notes payable - officer, notes payable, and due to factor
approximates fair value due to the relatively short period to maturity
for these instruments.
(Q) 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 undiscounted 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.
During the year ended December 31, 2001, the Company recognized an
impairment loss of $4,764,259 (See Note 7(B)).
(R) RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2000
financial statements to conform to the December 31, 2001 financial
statement presentation.
NOTE 2 MARKETABLE SECURITIES
The Company's marketable securities are classified as
available-for-sale and are reported at fair value based upon the quoted
market prices of those investments at December 31, with unrealized
gains (losses) reported as other comprehensive income (loss) in a
separate component of stockholders' equity until they are sold. Any
realized gains or losses are included in net earnings (loss) at the
time of sale (See Note 1(E)).
The composition of marketable securities at December 31, 2001 is as
follows:
COST FAIR VALUE
------------------- ------------------
Common stock $ 212,276 $ 3,639
=================== ==================
There was no investment income or expense for the years ended December
31, 2001 and 2000.
Unrealized gains (losses) included in other comprehensive loss for the
years ended December 31, 2001 and 2000 consisted of the following:
2001 2000
------------------- ------------------
$ 2,426 $ (30,932)
=================== ==================
F-11
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 3 ACCOUNTS RECEIVABLE, CONCENTRATIONS AND FACTOR AGREEMENTS
(A) ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2001 and 2000 were as follows:
2001 2000
------------- -----------
Accounts receivable $ 162,675 $ 311,159
Less: allowance for doubtful accounts (6,571) -
------------- -----------
Accounts receivable, net $ 156,104 $ 311,159
============= ===========
In March 2002, the Company regained possession of two engines
previously sold for $219,586 (See Note 3(C)). The engines were
recovered in connection with ongoing litigation surrounding a factoring
agreement (See Note 11(D)). At December 31, 2001, the portion of the
original sale, in the amount $94,437, representing the gross margin,
was recorded as a sales allowance and as a reduction in accounts
receivable. The remaining $125,149 will be recorded as an increase in
inventory in 2002 and a corresponding reduction of receivables upon
receipt of the two engines (See Note 18(F)).
(B) CONCENTRATIONS
As of December 31, 2001 and 2000, approximately 98% and 98%,
respectively, of accounts receivable were due from two customers. Sales
during 2001 and 2000 primarily related to three engine sales and six
engine sales, respectively, to the above customers.
(C) 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 subject to a provision that could require the Company
to repurchase the receivables. 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 year ended December 31, 2001 the Company has financed $219,586
in accounts receivable (See Note 3(A)). As of December 31, 2001, no
collections had been made by the factor and the period in which all
collections would be due had passed. As of the date of this report, the
entire $219,586 remains unpaid and continues to accrue interest at 12%.
Additionally, the account has been submitted for litigation (See Note
11(D)).
NOTE 4 PREPAID EXPENSES
During 2001, prepaid expenses primarily included the cost of
promotional and marketing services totaling $39,506. As of December 31,
2001, $19,753 had been charged to operations. The remaining $19,753
will be expensed in 2002.
F-12
During 2000, prepaid expenses primarily included the value of a boat
engine exchanged for promotional and marketing services for one year.
The value of the engine exchanged was $64,759, and as of December 31,
2000, $16,190 had been charged to operations. During 2001, the
remaining $48,569 was charged to operations. Due to the cost and fair
value of the engine exchanged being equivalent to marketing services,
no gain or loss was recognized on the exchange.
NOTE 5 ADVANCES TO SUPPLIERS
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 against which goods are shipped.
NOTE 6 INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000
------------------ ------------------
Parts $ 258,459 $ 376,532
Engines in process 51,549 184,405
Completed engines 38,744 228,198
------------------ ------------------
$ 348,752 $ 789,135
================== ==================
During 2001, management identified certain inventory that was no longer
used in production and charged $129,896 to cost of goods sold to
write-down these inventories to their net realizable values.
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.
NOTE 7 PROPERTY AND EQUIPMENT
(A) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 consisted of the
following:
2001 2000
------------------ ------------------
Special tooling $ 3,991,069 $ 9,309,965
Machinery and equipment 498,398 1,155,278
Equipment under capital leases 276,985 646,307
Vehicles 3,731 8,706
Computer equipment 5,854 13,660
Furniture and fixtures 34,145 79,673
------------------ ------------------
4,810,182 11,213,589
Less: Accumulated depreciation (1,237,070) (1,761,891)
------------------ ------------------
Property and equipment - net $ 3,573,112 $ 9,451,698
================== ==================
F-13
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(B) LOSS ON IMPAIRMENT
During 2001, the property and equipment of the Company were deemed to
be impaired and written down to their fair value. Fair value, which was
determined by reference to the present value of the estimated future
cash inflows of such assets, exceeded their carrying value by
$4,764,259.
NOTE 8 NOTES PAYABLE
(A) Note Payable - Officers
(i) During 2000, the Company received $71,656 in operating funds
from an officer. The unsecured note bears interest at 10% and
the maturity date was June 30, 2001. As of December 31, 2001,
the note was in default. According to the provisions of the
note, the Company will accrue interest of $7,166. As of
December 31, 2001, the entire $78,822 of principal and
interest remain outstanding.
(ii) During 2001, the Company received $46,500 in operating funds
from an officer. The unsecured note bears interest at 10% and
the maturity date was December 31, 2001. As of December 31,
2001, the note was in default. According to the provisions of
the note, the Company will accrue interest $4,650. As of
December 31, 2001, the entire $51,150 of principal and
corresponding interest remain outstanding.
(iii) During 2001, the Company received $30,000 in operating funds
from an officer. Under the terms of the note the principal is
due in June 2002. The note is non-interest bearing, due on
demand and unsecured. However, upon the maturity date of the
note, if the principal is not paid in full, a 10% interest
payment, in addition to principal, will become due and payable
immediately.
(B) NOTE PAYABLE
During 2001, the Company received $115,000 in operating funds from an
unrelated party. The unsecured note bears interest at 10% and the
maturity date was August 31, 2001. As of December 31, 2001, the note
was in default. According to the provisions of the note, the Company
will accrue interest at $1,500. As of December 31, 2001, the entire
$116,500 of principal and interest remain outstanding.
NOTE 9 CONVERTIBLE DEBENTURES
(A) DEBENTURE OFFERING
On November 14, 2001, in order to provide working capital, the Company
entered into an agreement whereby the Purchaser acquired $300,000 of 6%
Convertible Subordinated Debentures, due November 13, 2006.
Upon recording the convertible debenture, the Company recognized and
charged to interest expense, and credited additional paid in capital, a
beneficial conversion feature of $62,069. The charge represents the
amount by which the market price of the Company's common stock on the
commitment date exceeds the conversion price times the number of
equivalent shares, which amount to 1,034,483 shares.
The Purchaser is entitled, at its option, to convert any part of the
principal amount of the Debenture, plus accrued interest, into shares
(the "Conversion Shares") of the Company's 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"), 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-14
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
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.
(B) CONVERSION
On December 28, 2001, the Holder converted $20,000 of principal into
71,942 shares (See Note 13(A)). Upon conversion, the Company also
recorded a beneficial conversion feature by charging to interest
expense, and crediting additional paid-in capital, $5,899. The amount
represents the amount by which the market price of the Company's common
stock on the commitment date exceeds the conversion price times the
number of equivalent shares (See Note 18(B)(ii)).
NOTE 10 EQUITY LINE OF CREDIT
On November 9, 2001, the Company entered into an equity line of credit
under which the Company may sell to the investor shares of common stock
for a total purchase price of up to $5,000,000. 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 monthly maximum advance amount of
$208,333.33. The investor is entitled to retain 5% of each advance
under the equity line of credit.
As of December 31, 2001 the Company had not drawn against this equity
line of credit.
For additional activity see Notes 12(A) and 18(C).
NOTE 11 COMMITMENTS AND CONTINGENCIES
(A) CAPITAL LEASES
As of December 31, 2001 and 2000 the Company had non-cancelable capital
lease agreements. Also see Note 7(B) for loss on impairment.
Future minimum lease payments under the capital lease are as follows at
December 31, 2001:
Total future minimum lease payments $ 656,158
Less: interest (95,928)
----------------
560,230
Less: current portion (217,379)
----------------
Long-term obligation under capital leases $ 342,851
================
Future minimum lease payments for the capital leases as of December 31,
2001 are as follows:
2002 $ 217,379
2003 133,892
2004 144,553
2005 64,406
2006 -
-----------------
$ 560,230
=================
F-15
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(B) OPERATING LEASE
The Company leases its facilities under an operating lease through
2002.
Future minimum lease payments for the operating lease as of December
31, 2001 are as follows:
2002 $ 40,000
-------------------
$ 40,000
===================
Provided for in the agreement is an option to renew the lease for two
periods of three years each. Subsequent to December 2001, the Company
elected to renew the lease under the provisions of the current
operating lease agreement and will continue to pay a monthly rent of
$10,000 as adjusted using the price index from 2001.
(C) CONSULTING AGREEMENT
In November 2001, the Company entered into an investor relations
services agreement. Under the terms of the agreement, the consultant
will receive 50,000 shares of common stock and 200,000 stock options,
at a price of $.75 per share, exercisable for two years (See Note
12(A)).
The 50,000 shares were valued at $.51 per share for a total of $25,500.
As of December 31, 2001, the Company recorded a consulting fee of
$2,125 and deferred consulting fees of $23,375. These shares were
issued in January 2002 (See Note 12(A)).
For financial statement purposes, the fair market value of the 200,000
stock options granted was estimated on the date of grant using the
Black-Scholes option pricing model in accordance with SFAS No. 123
using the following weighted average assumptions: expected dividend
yield 0%, risk-free interest rate of 2%, volatility of 164% and
expected term of one year. Based on the preceding assumptions, a total
value of $51,997 was computed and credited to additional paid-in
capital. Additionally, $4,333 was charged to operations and $47,664 was
recorded as deferred compensation.
Also see additional activity in Note 18(D).
(D) LITIGATION
In November 2001, an action was filed against the Company regarding
alleged deficiencies in the Company's engines and transmissions sold to
them. In February 2002, the Company filed a counter claim against the
plaintiffs alleging that any damage resulting to the engines was caused
by defective or negligent rigging. As of the date of this report, no
discovery has been taken and at this time the ultimate resolution to
this matter is indeterminable (See Note 3(A)).
In March 2002, the Company's factor filed an action alleging
non-payment under its security agreement against the plaintiff referred
to in the preceding paragraph and the Company. The claim against the
Company is based upon its execution of recourse commercial paper upon
which the Company is secondarily liable. As of the date of this report,
no answer has yet been filed in this matter and the ultimate resolution
to this matter is indeterminable. As of December 31, 2001, the
liability to the factor, in the amount of $219,586 is already reflected
on the Company's balance sheet (See Notes 3(A) and (C) and 18(F)).
F-16
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 12 STOCKHOLDERS' EQUITY
(A) ISSUANCE OF COMMON STOCK AND COMMON STOCK TO BE ISSUED
On December 28, 2001, the Holder converted $20,000 of convertible
debentures to 71,492 shares having a fair value of $20,000. The shares
were issued on January 2, 2002 and are classified as common stock to be
issued (See Notes 9(A) and 18(B)).
In November 2001, 200,000 shares of Rule 144 restricted common stock
were issued, for $50,000, to a consultant for cash.
In November 2001, 625,000 shares of common stock were issued as
compensation to Yorkville Advisors Management LLC to induce the
transaction. The shares were valued at $.42 per share for a total
amount of $262,500 (See Note 10).
In November 2001, 20,000 shares of common stock were issued to a
consultant for business consulting services at $1.05 per share for a
total of $21,000. As of December 31, 2001 the Company recorded a
consulting fee of $5,250 and deferred consulting fees of $15,750.
In November 2001, the Company entered into a consulting agreement to
issue 50,000 shares of common stock. The shares were issued in January
2002 and are classified as common stock to be issued (See Note 11(C)).
In July 2001, 180,000 shares of common stock were issued as a
consulting fee at $.63 per share for a total of $113,400.
On May 15, 2001 35,543 shares of common stock were issued as
compensation to an employee $1.16 per share for a total of $41,230.
These shares were issued upon the filing of a form S-8 registration
statement under the Securities Act of 1933.
On May 2, 2001, 180,000 restricted shares of common stock were issued
as a consulting fee at $1.07 per share for a total of $192,600. Under
the terms of the agreement, the consultant would have performed
services over a period of seven months. As of June 30, 2001, the
Company had recorded a consulting fee expense of $55,028. Effective
July 1, 2001, the Company rescinded the consulting contract for
nonperformance and as a result, the 180,000 shares of common stock were
cancelled and returned to the Company and no additional expense was
recorded.
In February 2001, 125,000 shares of Rule 144 restricted common stock
were issued at $2.00 per share, for a total of $250,000, to two
officers and one stockholder. These shares were issued in reliance on
the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
(B) PRIVATE PLACEMENT
As of December 31, 2000 proceeds of $913,000 for 578,359 shares were
received from a private placement pursuant to Rule 506 of Regulation D
Section 4(2) of the Securities Act of 1933.
(C) 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.
F-17
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
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. During 2001, the
Company granted 30,000 options under the Plan to employees and
directors. Also, the Company cancelled 42,000 options under the plan to
employees.
In accordance with SFAS No. 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
$7,178 and $11,536 and deferred compensation expense of $1,507 and
$8,684 respectively, were recognized as of December 31, 2001 and 2000,
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 No. 123, the Company's net loss for the year ended December 31,
2001 and 2000 would have been increased to the pro-forma amounts
indicated below.
2001 2000
------------------ -------------------
Net loss As reported $ (8,534,825) $ (2,752,608)
Pro forma $ (8,684,259) $ (3,045,648)
Net loss per share As reported $ (.97) $ (.343)
Pro forma $ (.99) $ (.380)
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 No. 123
using the following weighted-average assumptions: expected dividend
yield 0%, risk-free interest rate of 3.44% in 2001 and 5.125% in 2000,
volatility of 164% in 2001 and 229% in 2000 and expected term of three
years in both 2001 and 2000.
F-18
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
A summary of the options issued to employees and Board of Director
members as of December 31, 2001 and 2000 is presented below:
2001 2000
---- ----
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
------------- ------------ ------------- -----------
STOCK OPTIONS
Balance at beginning of period 290,000 $ 2.67 240,000 $ 2.77
Granted 30,000 3.25 60,000 3.01
Cancelled (42,000) (2.15) (10,000) (1.81)
Exercised - - - -
Forfeited/expired - - - -
------------- ------------ ------------- -----------
Balance at end of period 278,000 $ 2.16 290,000 $ 2.67
------------- ------------ ------------- -----------
Options exercisable at end of period 274,100 3.02 250,626 2.93
------------- ------------ ------------- -----------
Weighted average fair value of options
granted during the period $ 3.25 $ 3.01
The following table summarizes information about stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ---------------------------------
Weighted
Number Average Weighted Number Weighted
Range Of Outstanding At Remaining Average Exercisable At Average
Exercise December 31, Contractual Exercise December, 31, Exercise
Price 2001 Life Price 2001 Price
----------- ----------------- ------------- ------------ ---------------- ------------
$ 1.81 48,000 7 1.81 44,000 1.81
$ 3.25 230,000 3 3.25 230,000 3.25
----------------- ------------- ------------ ---------------- ------------
278,000 5 3.00 274,100 3.02
================= ============= ============ ================ ============
NOTE 13 INCOME TAXES
The Company and its subsidiary have elected to file separate tax
returns. Income tax expense (benefit) for the years ended December 31,
2001 and 2000 for the parent company is summarized as follows:
2001 2000
------------------ ------------------
Current:
Federal $ - $ -
State - -
Deferred-Federal and State (2,900,200) (934,900)
Change in Valuation Allowance 2,900,200 934,900
------------------ ------------------
Income tax expense (benefit) $ - $ -
================== ==================
F-19
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
The Company's tax expense differs from the "expected" tax expense for
the years ended December 31, 2001 and 2000, as follows:
2001 2000
------------------ ------------------
U.S. Federal income tax provision (benefit) $ (2,900,200) $ (934,900)
Effect of unused net operating loss carryforward 2,900,200 934,900
------------------ ------------------
$ - $ -
================== ==================
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets and liabilities at December 31 are as
follows:
2001 2000
------------------ ------------------
Deferred tax assets:
Net operating loss carryforward $ 4,065,100 $ 1,164,900
Less valuation allowance (4,065,100) (1,164,900)
------------------ ------------------
Net deferred tax assets $ - $ -
================== ==================
At December 31, 2001, the Company has net operating loss carryforwards
of approximately $11,955,700 for U.S. Federal income tax purposes
available to offset future taxable income expiring on various dates
through 2021.
The valuation allowance at January 1, 2001 was $1,164,900. The net
change in the valuation allowance during the year ended December 31,
2001 was an increase of approximately $2,900,200.
NOTE 14 EXTRAORDINARY ITEM
In June 2000, the Company's subsidiary confirmed the extinguishment of
debts from certain affiliates and a former shareholder, totaling
$28,708. As a result, an extraordinary gain was realized during the
year ended December 31, 2000 (See Note 16).
NOTE 15 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 (See Note 7(B)) 9,256,014
Machinery and equipment (See Note 7(B)) 1,122,509
Furniture, fixtures, and other (See Note 7(B)) 34,363
Loan fee payable (200,875)
Loan to stockholder (107,864)
------------------
$ 11,760,000
==================
F-20
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 16 OTHER RELATED PARTY TRANSACTIONS
As of December 31, 2000 the Company owed two principal stockholders
$28,708. Pursuant to an agreement entered into between IPSL and
affiliates of a principal stockholder of IPSL prior to the acquisition
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 (See Note 14).
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 (See Note 8(A)(i)).
NOTE 17 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 $8,534,825, a negative cash flow from
operating activities of $1,126,718 and a working capital deficiency of
$725,507 at December 31, 2001. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
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 18 OTHER SUBSEQUENT EVENTS
(A) NOTE PAYABLE - OFFICER
During March 2002, the Company received $10,000 in operating funds from
an officer. Under the terms of the note, the principal is due in June
2002. The note is non-interest bearing, due on demand and unsecured.
However, upon the maturity date of the note, 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. In
addition, the Company will also issue 42,000 shares of restricted
common stock at a time yet to be determined for the working capital
funds.
(B) CONVERTIBLE DEBENTURES
(i) On January 2, 2002, the Company issued 71,942 shares of common
stock in connection with the conversion of $20,000 in
principal (See Note 9).
(ii) During January, February and March 2002, an additional
1,013,462 shares of common stock were issued in connection
with the conversion of $130,000 in principal (See Note 9).
(C) EQUITY LINE OF CREDIT
In January 2002, the Company obtained $50,000 of working capital from
its equity line of credit and issued 806,452 shares of common stock
(See Note 10).
F-21
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(D) CONSULTING AGREEMENT
In February 2002, the Company entered into a consulting agreement with
an individual to provide business advisory services. Under the Terms of
the agreement, the consultant will receive 900,000 shares of common
stock, valued at $.09 per share, for a total of $81,000. The term of
the agreement is for one year.
(E) LOANS
In February 2002, the Company received $25,000 in operating funds from
an unrelated individual. In exchange for the loan, the Company issued
105,000 shares of common stock valued at $.08 per share for a total of
$8,400. The loan is payable contingent upon the future sales of two
manufactured engines.
(F) FACTOR AGREEMENT
During March 2002, the two engines previously sold for $219,586 and
factored during 2001, which are included in accounts receivable for
$125,149, were returned to the Company by the customer (See Notes 3(C)
and 11(D)).
(G) ENGINE SALES
In February 2002, the Company entered into a sales agreement with a
customer to sell two engines for an aggregate of $209,910.
F-22