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, 2000
[] 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
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, 2000 were $718,801.
The aggregate market value of the 2,833,500 shares of the issuer's
outstanding common stock held by non-affiliates of the issuer was $3,541,875 as
of March 15, 2001, based on the closing bid price of $1.25 per share as reported
on the OTC Bulletin Board on that date.
The issuer had 8,536,299 shares of its common stock issued and
outstanding as of March 15, 2001, the latest practicable date before the filing
of this report.
TORQUE ENGINEERING CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-KSB
Page
PART I.........................................................................3
Item 1. Description of Business......................................3
Item 2. Description of Property......................................3
Item 3. Legal Proceedings............................................3
Item 4. Submission of Matters to a Vote of Security Holders..........3
PART II........................................................................4
Item 5. Market for Common Equity and Related Stockholder Matters.....4
Item 6. Management's Discussion and Analysis.........................7
Item 7. Financial Statements.........................................0
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.........................20
PART III......................................................................21
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act........................................ 21
Item 10. Executive Compensation......................................24
Item 11. Security Ownership of Certain Beneficial Owners and
Management..................................................25
Item 12. Certain Relationships and Related Transactions..............27
Item 13. Exhibits and Reports on Form 8-K............................28
2
PART I
The matters addressed in this report on Form 10-KSB, with the exception
of the historical information presented, contain forward-looking statements
involving risks and uncertainties. Torque Engineering's actual results could
differ materially from those expressed or implied in these forward-looking
statements as a result of certain factors, including those factors set forth in
the Description of Business, Risk Factors and Disclosure Regarding Forward
Looking Statements section and elsewhere in this report.
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.
3
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,
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.
4
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 2001.
Currently, Magnum, Cigarette, NorTech, Predator, Advantage and Skater boats also
list the Torque V-12 as a power plant selection for some of their current
models.
The Torque V-12 is designed for installation in luxury marine pleasure
craft. After 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, 2000. 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 $91,159 to $112,838.
Torque Engineering offers a one-year limited warranty on all three Torque V-12
models. Each warranty limits the total number of hours a purchaser may use the
Torque V-12 during the one-year warranty period and still remain eligible for
warranty protection. The warranty period for the TORQ 1000 covers 75 hours of
total use and for the TORQ 1100 and TORQ 1200 covers 50 hours of total use.
Product Market
Torque Engineering's products are designed for the marine pleasure
craft industry. That industry is divided primarily into the high-end stern drive
segment and the outboard segment. The Torque V-12 is targeted toward the stern
drive segment.
More specifically, Torque 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:
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.
5
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 $22.2 billion in overall
sales in 1999 and $25.6 billion in 2000.
There were 99,000 new sales of inboard and stern drive boats in 2000.
Of these, approximately 20,000 were 25' or more in length. Approximately 90% of
these boats would have two or more engines. Torque 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.
6
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.
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.
7
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, 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, Inc. will
continue to be a major customer.
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
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.
8
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.
9
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 $1,500,005 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.
Management believes that Glaval Corporation spent significant funds on
research and development prior to IPSL's acquisition of the assets and
proprietary rights to develop and manufacture the Torque V-12. These
expenditures were included as part of the acquisition price and will not be
passed on to customers. The portion of funds spent after May 1, 1999 to convert
to a production line is considered overhead which will be prorated over the
manufacturing cost of the V-12 engines in accordance with generally accepted
accounting principles.
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.
10
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 March 15, 2001, Torque Engineering employed a total of 17 people,
all of which are employed full time.
Risk Factors and Disclosure Regarding Forward Looking Statements
The above description of our business should be read together with the
financial statements and the related notes included in another part of this
report and which are deemed to be incorporated into this section. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in those forward-looking statements. All statements, other than statements of
historical facts, included in this report that address activities, events or
developments that we expect, believe or anticipate will or may occur in the
future, including the following matters are forward looking statements:
o our ability to manufacture the Torque V-12 on a production-line basis,
o the size of the limited niche market in which we plan to sell the Torque
V-12,
o business strategies, and
o expansion and growth of our operations.
The statements are based on assumptions and analyses made by us in
light of our experience and our perception of:
o historical trends,
o current conditions,
o expected future developments, and
o other factors we believe are appropriate in the circumstances.
Those statements are affected by a number of assumptions including:
11
o risks and uncertainties,
o general economic and business conditions,
o the business opportunities that may be presented to and pursued by us,
o changes in laws or regulations and other factors, many of
which are beyond our control, and
o availability to obtain additional financing on favorable conditions.
Torque Engineering's actual results could differ materially from those
expressed or implied in these forward-looking statements as a result of certain
factors, including the following risk factors:
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 in many cases exceeds
$500,000. We cannot assure you that sales of engines in this market will be
sufficient to allow us to become profitable in the future.
We cannot assure you that we will be able to adapt the Torque V-12 to any other
use outside of the luxury marine engine market.
Our current business strategy is to market and sell the Torque V-12 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.
12
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. We have begun to
implement quantity production of the Torque V-12 but cannot assure you that we
will not experience initial or recurring quality control or cost problems.
We have not yet established a distribution channel for the Torque V-12.
We currently market the Torque V-12 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.
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.
Our success is dependent on our key personnel.
We believe that our success will depend on the continued employment of
and active efforts of our senior management team, including Raymond B. Wedel,
Jr. and Richard D. Wedel. None of our senior management team currently has an
employment agreement. If one or more members of our senior management team were
unable or unwilling to continue in their present positions, our business could
be materially adversely affected.
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.
13
Item 3. Legal Proceedings.
As of March 15, 2001, Torque Engineering is not a party to any pending
legal proceeding and none of its property is subject to any legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no items submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Principal Market or Markets. Torque Engineering common stock
is traded in the over-the-counter market, and is presently quoted on the OTC
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, 1999 through December
31, 2000. 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, 1999 .010 .010
June 30, 1999 9.875 .010
September 30, 1999 6.250 2.125
December 31, 1999 3.250 1.125
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 .656
(b) Approximate Number of Holders of Common Stock. The number of
holders of record of Torque Engineering common stock at March 15, 2001 was
approximately 400. This includes 1,191,540 shares held by brokers.
(c) 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.
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(d) 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.
1. 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.
2. 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.
3. 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.
4. 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.
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.
15
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
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,
16
o the sophistication or accreditation of the purchasers,
o their access to material information about Torque Engineering,
o the information furnished to them by Torque Engineering,
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 discussion of the financial condition and results of
operations of Torque Engineering should be read together with the financial
statements included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those expressed or implied in those forward-looking statements
as a result of factors discussed in various cautionary statements in this
report, including those discussed in the Risk Factors and Disclosure Regarding
Forward-Looking Statements section.
Overview
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. Torque Engineering had a net loss of
$2,752,608 and negative cash flows from operating activities of $1,468,442 for
the year ended December 31, 2000, and an accumulated deficit of $4,088,936 as of
December 31, 2000. These conditions raise substantial doubt about Torque
Engineering's 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 on management's ability to:
o Increase production-line manufacturing of the Torque V-12,
o increase sales of the Torque V-12, and
o obtain adequate levels of additional financing from new investors or
existing shareholders.
17
Management is endeavoring to obtain new sources of financing and to generate a
sufficient market for the Torque V-12 such that the full scale production can
begin. We can not assure you, however, that adequate levels of additional
financing can be obtained or that full scale production of the Torque V-12 will
begin.
Effective May 28, 1999, Torque Engineering acquired IPSL, a Nevada
corporation, in exchange for the issuance of 1,500,000 shares of Torque
Engineering common stock. IPSL owns property and equipment which Torque
Engineering is using in the manufacture of Torque V-12 engines.
Results of Operations
Revenues
For the year ended December 31, 2000, Torque Engineering had revenues
of $718,801 substantially attributable to the sale of six (6) Torque V-12
engines and other parts. Cost of sales for the manufacture of the products sold
during 2000 were $1,607,494 representing a gross loss of $888,693. The high cost
of goods sold for the year ended December 31, 2000 is primarily attributable to
a noncash charge incurred for depreciation. In addition, a large part of the
increased cost of sales is comprised of salary for labor incurred in the
production of Torque V-12 engines, building rent and other manufacturing
overhead costs. For the year ended December 31, 1999, Torque Engineering had
revenues of $91,300 attributable to the sale of one Torque V-12. Cost of sales
for the manufacture of the Torque V-12 sold during 1999 were $72,726,
representing a gross profit of $18,574.
Operating Expenses
Payroll and other compensation decreased to $240,538 for the year ended
December 31, 2000 from $392,795 for the year ended December 31, 1999. This
decrease is primarily attributable to the reclassification of certain salary
expense of employees directly involved in the production of Torque V-12 engines
to cost of goods sold. Depreciation increased to $1,118,079 for the year ended
December 31, 2000, from $643,703 for the year ended December 31, 1999. This
increase is primarily attributable to the fact that Torque Engineering took
depreciation for the entire year ended December 31, 2000. Torque Engineering
began taking depreciation during the year ended December 31, 1999 only after the
acquisition of IPSL, Inc. in May 1999. The increase in rental expense from
$70,168 for the year ended December 31, 1999 to $120,000 for the year ended
December 31, 2000 is also attributable to the payment of rent on Torque
Engineering's manufacturing facility for the entire year ended December 31,
2000. General and administrative expenses increased to $384,817 for the year
ended December 31, 2000 from $321,016 for the year ended December 31, 1999. The
increase was primarily attributable to marketing and related travel expenses in
connection with the establishment and execution of Torque Engineering's business
plan.
18
Net Loss
Net loss increased to $2,752,608 for the year ended December 31, 2000
from $1,325,744 for the year ended December 31, 1999. This increase was
primarily attributable to the increase in general and administrative expenses
discussed above, and $1,118,079 of depreciation of property and equipment
acquired through the IPSL acquisition in order to establish and execute Torque
Engineering's business plan. Net unrealized losses on marketable securities for
the years ended December 31, 2000 and December 31, 1999 were $30,932 and
$180,131, respectively.
Liquidity and Capital Resources
Future Capital Requirements
Management anticipates that the capital requirements to conduct Torque
Engineering's business plan may 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 plan to satisfy our capital requirements for the next twelve
months by selling our securities, obtaining financing from third parties and
from funds from the ongoing manufacture and sale of Torque V-12 engines.
Management further anticipates that any funds obtained will be used for working
capital, administrative expenses, and towards the research and development of
the Torque V-12 for other potential uses in the marine and other industries. If
we are unable to obtain financing from third parties, the sale of our securities
or some other source, or if our funds from ongoing operations are insufficient,
it is unlikely that we will continue as a going concern.
Cash Flows
For the year ended December 31, 2000, Torque Engineering raised net
cash of $913,000 from private placements of its common stock. For the year ended
December 31, 1999, Torque Engineering raised net cash of $1,500,005 from private
placements of its 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, two 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. Marketable securities through the IPSL acquisition were written
down to $1,213, resulting in net unrealized losses on marketable securities for
2000 of $30,932.
A total of $1,468,442 was used for operating activities during the year
ended December 31, 2000 as compared to $687,414 used during the year ended
December 31, 1999. The increase in cash used in operating activities was
primarily attributable to increased general and administrative expenses,
production and overhead expenses and the purchase of raw materials related to
the implementation of management's business plan. As a result, cash and cash
equivalents decreased to $160,113 for the year ended December 31, 2000 from
$798,019 for the year ended December 31, 1999.
19
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 identify other sources of capital and to aggressively
seek out additional capital if available on favorable terms and as necessary 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. Although management believes the current
cash, revenues to be generated from sales and financing will be sufficient for
the next twelve months, we cannot assure you that Torque Engineering will not
need additional funds to implement management's business plan.
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.
On April 25, 2000, the management of Torque Engineering reported under
Items 4 and 5 on Form 8-K that it had engaged Weinberg & Co., P.A., to audit its
consolidated financial statements for the year ended December 31, 1999. In
addition, management reported that between April 17th and 19th, 2000, it had
learned that no audit of Quintessence Oil's financial statements had been
performed for the years ended December 31, 1997 or 1998. On May 19, 2000, Torque
Engineering's new management filed an amended Form 8-K reporting that it had
learned that no audit had ever been performed on Quintessence Oil's financial
statements.
20
Current management, engaged Weinberg & Co., P.A., to audit Quintessence
Oil's financial statements for the year ended December 31, 1996 as well. Audited
financial statements for the years ended December 31, 1996, 1997, and 1998
respectively, were filed as part of this report on Form 10-KSB, December 31,
1999. Current management devoted substantial effort to correct that reporting
deficiency. As a consequence of its efforts to provide audited financial
information for the years ended December 31, 1996, 1997, and 1998, Torque
Engineering's quarterly report on Form 10-QSB for the period ending March 31,
2000 was filed on June 1, 2000.
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 are as follows:
Name Age Position Since
Raymond B. Wedel, Jr. 59 President and Director 1999
Donald A. Christensen 70 Secretary and Director 1999
Richard D. Wedel 53 Chairman, Chief Executive Officer
and Director 1999
I. Paul Arcuri 46 Vice President, Chief Financial Officer
and Director 1999
Clement Lange 65 Director 1999
Michael Bennett 53 Chief Operating Officer 2000
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 he was the
President of Torque Engineering,
21
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. He has a B.S. degree in Business Administration from the University of
Evansville in Indiana.
Michael Bennett
From 1997 until 2000, Michael Bennett served as Business Unit Vice
President and General Manager of Dayco Industries a Division of Mark IV. Dayco
is a $600,000,000 per year supplier of power transmission parts, hydraulic
hoses, and fluid transfer hose. While there he directed seven (7) manufacturing
facilities and 1,800 employees, including Operations Research and Development
Applications and Product Development. He is a native of the U.K., and in 1970 he
graduated in Mechanical Engineering from Coventry College, England. He then
served approximately six years as an industrial engineer for Chrysler, U.K.
Subsequently, he served for approximately twenty years at various locations as
Facilities Manager, and later as Vice President and Director of Operations for
Purolator Products, a $350,000,000 per year major supplier of automotive
(OEM/aftermarket) and heavy-duty filtration products. Mr. Bennett has also
studied at Carnegie Mellon University, completing their Program for Executives.
Donald A. Christensen
Mr. Donald A. Christensen has been the secretary and a director of
Torque Engineering since March 1999. He is a business, financial and
international trade consultant with an engineering degree and extensive large
corporate management experience. He currently serves as president of European
Whitestone Company and has served in that capacity since 1992. From August 1997
to July 1998 Mr. Christensen was a director of Horizontal Ventures, Inc., a
public company specializing in horizontal drilling sources for the oil and gas
industry which is now known as GREKA Energy Corporation. He has a degree in
Engineering from the University of Missouri.
Richard D. Wedel
Mr. Richard D. Wedel has been the chief executive officer and chairman
of the board of directors since 1999. He is a financial consultant and since
1998, has been president of Wedel Consultants, a firm involved in mergers and
acquisitions. Since 1999 he has been the Chairman of the Board of Integrated
Homes, Inc., (INHI), a publicly traded company. Integrated Homes is a provider
of bundled voice & data communication systems and services for planned
development communities. From 1997 through 1998, he was chief operating officer
and a director of Horizontal Ventures, Inc. From 1982 through 1997 Mr. Wedel was
president and a director of Petro Union Inc., an energy resource exploration and
production company which merged with Horizontal Ventures, Inc. He is a past
chairman of the American Petroleum Institute Eastern U.S. Advisory Board. He has
a degree in Business Administration from the University of Evansville.
22
I. Paul Arcuri
Mr. I. Paul Arcuri was elected to Torque Engineering's board of
directors in December 1999. He has served as president and financial principal
of the Carney Group, Inc., an investment banking firm, member of N.A.S.D. since
1985. He has been a registered Broker since 1978 and was an Investment Advisor
registered with the Securities Exchange commission. He has extensive background
in financial management involving cash flow, cost and budgeting analysis with
emphasis on operations management. He was a Director and Chairman of Gibraltar
Savings and Loan Association from 1987 through 1992. He has a B.A. in Accounting
from St. Thomas University/Biscayne College in Miami, Florida.
Clement Lange
Mr. Clement Lange was elected to Torque Engineering's board of
directors in December 1999. He is the chairman and chief executive officer of
Best Chairs Incorporated, a large, privately owned manufacturing company located
in Ferdinand, Indiana. Mr. Lange is the co-founder of Best Chairs and has been
its chairman and chief executive officer since 1993. Best Chairs specializes in
residential upholstered occasional seating.
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 believes that Michel Attias filed one late Form
4 to report six (6) transactions, Michael Bennett inadvertently failed to file a
Form 3 and Clement Lange indadvertently failed to file a Form 4 to report one
transaction. Torque Engineering also believes Raymond B. Wedel, Jr., Richard D.
Wedel, Donald Christensen, I. Paul Arcuri and Clement Lange inadvertently failed
to file their respective Form 5s in connection with Torque Engineering's grant
of stock options to these officers and directors.
23
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, 2000. 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 $100,000 for 2000. Accordingly, Torque Engineering's chief executive
officer is the only executive officer of Torque Engineering named in the table
under SEC rules.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Name and Principal All Other
Position Year Salary ($) Bonus($) Options (#) Compensation ($)
-------- ---- ---------- -------- ----------- ----------------
Richard D. Wedel, 2000 50,000 (1) -0- 10,000(2) -0-
Chief Executive Officer
1999 50,000 -0- 10.000(2) -0-
---------------------------------
(1) Mr. Wedel's annual salary for 2001 is $50,000.
(2) In 1999 and 2000 Mr. Wedel received, as a member of the board of
directors, options to purchase 10,000 shares of Torque Engineering common
stock. These options are immediately vested and are exercisable for a
period of five years from the grant date.
2000 OPTION/SAR GRANTS
(Individual Grants)
Percent of total
Number of Securities Percent of total
Underlying options/SARS Exercise or
Options/SARS granted to employees base price Expiration
Name granted(#) in fiscal year ($/Sh) date
---- ---------- ------------- ------ ----
Richard D. Wedel 10,000 16% $3.25/Sh 11-12-05
24
AGGREGATED OPTION/SAR EXERCISES IN 2000 OPTION/SAR VALUES
Value of
unexercised in-
Number of unexercised the- money
options/ SARS at options/SARS at
Shares FY-end (#) FY-end ($)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) unexercisable unexercisable
---- ------------ ------------ ------------- -------------
Richard D. Wedel -- --- 20,000/0 0/$0(1)
------------------------ --------------- -------------- ---------------------- -------------------
(1) The exercise price for Mr. Wedel's 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 2000, directors did not receive compensation for
their services in 2000. Non-employee directors are reimbursed for their expenses
incurred to attend meetings.
Michael Bennett was employed as chief operating officer beginning
November 1, 2000. In January 2001, the board of directors authorized Torque
Engineering's officers to negotiate the terms of a written employment agreement
with Mr. Bennett. The parties are currently in the process of negotiating the
terms of such agreement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding beneficial
ownership as of March 15, 2001 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 March 15, 2001 there were
8,536,299 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.
25
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT OF CLASS
------------------------------------ ------ ----------------
Officers and Directors
Raymond B. Wedel, Jr.
1415 Meadow Lane 1,611,702(1) 18.8%
Elkhart, IN 46514
Richard D. Wedel 1,483,334(2) 17.3%
3900 Woodcastle
Evansville, IN 47711
Clement Lange 1,234,629(3) 14.4%
4481 W. Holland Road, East
Huntingburg, IN 47532
Donald Christensen 50,000(4) less than 1%
48 South Evanston Way
Aurora, CO 80012
I. Paul Arcuri 176,666(5) 2.1%
c/o Torque Engineering Corporation
2432 Thorne Drive
Elkhart, IN 46674
Michael Bennett 0 0%
c/o Torque Engineering Corporation
2432 Thorne Drive
Elkhart, IN 46674
All officers and directors as a group 4,556,331(6) 52.4%
(6 persons)
Other Beneficial Owners
Michel Attias 1,303,134 15.3%
4 Riviera Avenue
Costa De Caza, CA 92679
-------------------
(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 20,000 shares Mr. Wedel is entitled to
acquire within 60 days pursuant to options granted to him as a member
of the board of directors. Excludes 10,000 shares owned by Wanda Pride
and 10,000 shares owned by Blanche Wedel. Ms. Pride and Ms. Wedel are
Mr. Wedel's sisters. Mr. Wedel disclaims beneficial ownership of such
shares.
(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 20,000
shares Mr. Wedel is entitled to acquire within 60 days pursuant to
options granted to him as a member of the board of directors. Excludes
10,000 shares owned by Wanda Pride and 10,000 shares owned by Blanche
Wedel. Ms. Pride and Ms. Wedel are Mr. Wedel's sisters. Mr. Wedel
disclaims beneficial ownership of such shares.
26
(3) Excludes 61,540 shares owned by Mr. Lange's adult children, all of whom
maintain separate residences from Mr. Lange. Includes 10,000 shares Mr.
Lange is entitled to acquire within 60 days pursuant to an option
granted to him as a member of the board of directors
(4) Includes 20,000 shares Mr. Christensen is entitled to acquire within 60
days pursuant to options to purchase 20,000 shares granted to him as a
member of the board of directors and 20,000 shares vested under an
option to purchase 30,000 shares granted to him as secretary.
(5) Includes 66,666 shares vested under an option to purchase 100,000
shares granted to him as vice-president and chief financial officer.
Also includes 10,000 shares Mr. Arcuri is entitled to acquire within 60
days pursuant to an option granted to him as a member of the board of
directors
(6) Includes options to acquire 156,666 shares of Torque's common stock
exercisable within 60 days.
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.
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 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.
During February 2001, Clement Lange, a 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.
Item 13. Exhibits and Reports on Form 8-K.
27
(a) The following exhibits are furnished as part of this report:
Exhibit No. Description
2.1 Form of Agreement and Plan of Merger by and among Quintessence Oil
Company and Torque Engineering Corporation (Filed as Exhibit A to the
Registrants Definitive Proxy Statement filed with the Securities and
Exchange Commission on September 24, 1999).
2.2 Plan and Agreement of Reorganization dated May 21, 1999 between IPSL,
Inc. and Quintessence Oil Company.(Filed as exhibit 2.2 to the
registrants annual report on Form 10-KSB filed on May 25, 2000 (file
no. 000-21811)
2.3 Bill of Sale between IPSL and Torque Engineering Corporation, an
Indiana corporation, dated as of April 29, 1999(Filed as exhibit 2.3 to
the registrants amended annual report on Form 10-KSB filed on August
10, 2000 (file no. 000-21811).
3.1 Articles of Incorporation of Quintessence Oil Company (filed on
December 3, 1996 as exhibit 3.1 to the registrant's Registration
Statement on Form 10 (File No. 0-21811) and incorporated herein by
reference).
3.2 Certificate of Incorporation of Torque Engineering Corporation.(Filed
as Exhibit B to the Registrants Definitive Proxy Statement filed with
the Securities and Exchange Commission on September 24, 1999).
3.3 Bylaws of Quintessence Oil Company (filed on December 3, 1996 as
exhibit 3.2 to the registrant's Registration Statement on Form 10 (File
No. 0-21811) and incorporated herein by reference).
3.4 Bylaws of Torque Engineering Corporation as amended (Filed as Exhibit C
to the Registrants Definitive Proxy Statement filed with the Securities
and Exchange Commission on September 24, 1999).
10.1 Lease Rental Agreement between Quintessence and CNC Associates dated
October 6, 1999, Lease No. 99870001(Filed as exhibit 10.1 to the
registrants amended annual report on Form 10-KSB filed on August 10,
2000 (file no. 000-21811).
28
10.2 Lease Rental Agreement between Quintessence and CNC Associates dated
October 6, 1999, Lease No. 99870002 (Filed as exhibit 10.2 to the
registrants amended annual report on Form 10-KSB filed on August 10,
2000 (file no. 000-21811).
10.3 Lease Rental Agreement between Quintessence and CNC Associates dated
October 6, 1999, Lease No. 99870003(Filed as exhibit 10.3 to the
registrants amended annual report on Form 10-KSB filed on August 10,
2000 (file no. 000-21811).
10.4 Lease Rental Agreement between Quintessence and CNC Associates dated
October 6, 1999, Lease No. 99870004(Filed as exhibit 10.4 to the
registrants amended annual report on Form 10-KSB filed on August 10,
2000 (file no. 000-21811).
10.5 Real Estate Lease for Torque Engineering by and between Richard W.
Strefling Industries, Inc. and Quintessence Oil Company dates April 29,
1999. (Filed as exhibit 10.5 to the registrants annual report on Form
10-KSB filed on May 25, 2000 (file no. 000-21811)
10.6 Torque Engineering Corporation 1999 Stock Option Plan (Filed as Exhibit
E to the Registrants Definitive Proxy Statement filed with the
Securities and Exchange Commission on September 24, 1999).
10.7 Corporate Note dated September 28, 2000 for $30,000 to Richard D.
Wedel.*
10.8 Corporate Note dated October 4, 2000 for $15,000 to Richard D. Wedel.*
10.9 Corporate Note dated October 12, 2000 for $15,000 to Michel Attias.*
10.10 Corporate Note dated December 31, 2000 for $11,656 to Richard D.
Wedel.*
99.1 IPSL, Inc. (A Development Stage Company) Financial Statements as of May
28, 1999. (Filed as exhibit 99.1 to the registrants annual report on
Form 10-KSB filed on May 25, 2000 (file no. 000-21811)
------------------
* Filed herewith
(b) Reports on Form 8-K. Torque Engineering did file a report on Form 8-K during
April 2000 and an amended Form 8-K on May 19, 2000.
29
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999
PAGE 3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
PAGES 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
PAGES 5 - 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999
PAGES 7 - 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Torque Engineering Corporation
We have audited the accompanying balance sheets of Torque Engineering
Corporation and Subsidiary as of December 31, 2000 and 1999 and the related
statements of operations and comprehensive loss, changes in stockholders' equity
and cash flows for the years ended December 31, 2000 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Torque Engineering
Corporation and Subsidiary as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for the years ended December 31, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has a loss from current operations of
$2,752,608 and has negative cash flows from operating activities of $1,468,442
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 15. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
February 21, 2001
See accompanying notes to consolidated financial
statements.
F-1
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
----- -----
Current assets
Cash and cash equivalents $ 160,113 $ 798,019
Accounts receivable 311,159 2,289
Advances to suppliers 109,180 -
Inventory 789,135 1,165,010
Marketable securities 1,213 32,145
Prepaid expenses 50,008 4,768
--------- ----------
Total Current Assets 1,420,808 2,002,231
PROPERTY & EQUIPMENT - NET 9,451,698 10,454,045
--------- ----------
TOTAL ASSETS $ 10,872,506 $ 12,456,276
------------ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 341,069 $ 82,051
Obligations under capital leases - current portion 127,278 32,837
Due to related parties 71,656 28,708
------------ --------------
Total Current Liabilities 540,003 143,596
LONG-TERM LIABILITIES
Obligations under capital leases 454,363 575,536
------------ --------------
Total Liabilities 994,366 719,132
------------ --------------
STOCKHOLDERS' EQUITY
Common stock, $.00001 par value, 50,000,000 shares
authorized, 8,411,299 and 7,832,940 shares issued
and outstanding, respectively 84 78
Additional paid in capital 14,243,709 13,330,715
Accumulated deficit (4,088,936) (1,336,328)
Accumulated other comprehensive loss (211,063) (180,131)
------------ --------------
9,943,794 11,814,334
Less Treasury Stock at cost (6,750 Shares) (56,970) (56,970)
Less Deferred compensation expense (8,684) (20,220)
------------ --------------
Total Stockholders' Equity 9,878,140 11,737,144
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,872,506 $ 12,456,276
============ ==============
See accompanying notes to consolidated financial
statements.
F-2
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
------------------- ------------------
SALES $ 718,801 $ 91,300
COST OF SALES 1,607,494 72,726
-------------- ---------------
GROSS PROFIT (LOSS) (888,693) 18,574
-------------- ---------------
OPERATING EXPENSES
Payroll and other compensation 240,538 392,795
Depreciation 1,118,079 643,703
Rent 120,000 70,168
Other selling, general and administrative 384,817 321,016
-------------- ---------------
Total Operating Expenses 1,863,434 1,427,682
-------------- ---------------
LOSS FROM OPERATIONS (2,752,127) (1,409,108)
-------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 10,514 14,506
Interest expense (40,130) -
Consulting - 120,500
Loss on marketable securities - (51,642)
Other 427 -
-------------- ---------------
Total Other Income (Expense) (29,189) 83,364
-------------- ---------------
NET LOSS BEFORE EXTRAORDINARY ITEMS (2,781,316) (1,325,744)
EXTRAORDINARY ITEMS
Gain on extinguishment of debt 28,708 -
-------------- ---------------
NET LOSS (2,752,608) (1,325,744)
OTHER COMPREHENSIVE LOSS
Unrealized loss on marketable securities - net (30,932) (180,131)
-------------- ---------------
COMPREHENSIVE LOSS $ (2,783,540) $ (1,505,875)
------------------
============== ===============
Loss per share before extraordinary gain $ (.347) $ (0.232)
Extraordinary gain .004 -
-------------- ---------------
Net loss per share - basic and diluted $ (.343) $ (0.232)
============== ===============
Weighted average number of shares outstanding during the period
-basic and diluted 8,012,677 5,717,440
============== ===============
See accompanying notes to consolidated financial
statements.
F-3
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Deferred
Common Stock Paid-in Accumulated Comprehensive Treasury Compensation
Shares Amount Capital Deficit Loss Stock Expense Totals
------ ------- ----------- -------- -------- ------ ------- -------
Balance December 31, 1998 1,000,000 10 42,490 (10,584) - - - 31,916
Recapitalization 4,870,000 48 (48) - - - - -
Stock issued for acquisition of IPSL 1,500,000 15 11,759,985 - - - - 11,760,000
Acquired treasury stock, net - - - - - (56,970) - (56,970)
Stock issued for cash 461,540 5 1,500,000 - - - - 1,500,005
Stock issued for marketing services 1,400 - 2,688 - - - - 2,688
Stock options issued - - 25,600 - - - (20,220) 5,380
Unrealized losses on available-for-sale
securities - - - - (180,131) - - (180,131)
Net Loss, 1999 - - - (1,325,744) - - - (1,325,744)
----------- ---- ------------ ---------- -------- ------- ------- ----------
BALANCE, DECEMBER 31, 1999 7,832,940 $78 $13,330,715 $(1,336,328) $(180,131) $(56,970) $(20,220) $11,737,144
Stock issued for cash 578,359 6 912,994 - 913,000
Deferred compensation expensed - - - - - - 11,536 11,536
Unrealized loss on available for sale
securities - - (30,932) - - (30,932)
Net Loss, 2000 - - (2,752,608) - - - (2,752,608)
----------- ---- ------------ ---------- -------- ------- ------- ----------
BALANCE, DECEMBER 31, 2000 8,411,299 $84 $14,243,709 $(4,088,936) $(211,063) $(56,970) $ (8,684) $ 9,878,140
=========== ==== ============ ========== ======== ======= ======= ==========
See accompanying notes to consolidated financial
statements.
F-4
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
------------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,752,608) $ (1,325,744)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,118,079 643,703
Compensation expense incurred in exchange for stock options 11,536 5,380
Gain on extinguishment of debt (28,708) -
Marketing expense incurred in exchange for common stock - 2,688
Write-off of investment - 2,000
Write-off of organization costs - 4,125
Loss on marketable securities - 51,642
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (308,870) (2,289)
Advances to suppliers (109,180) -
Prepaid expenses (45,240) (4,768)
Inventories 375,875 (146,202)
Increase (decrease) in:
Accounts payable and accrued expenses 270,674 82,051
------------------------- ------------------------
Net cash used in operating activities (1,468,442) (687,414)
------------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (103,607) (50,681)
Proceeds from sale of available-for-sale-securities - 316,158
------------------------- ------------------------
Net cash (used in) provided by investing activities (103,607) 265,477
------------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 913,000 1,500,005
Payments on capital lease obligations (38,857) (25,809)
Repayment of loans - (280,031)
Proceeds from loans 60,000 -
------------------------- ------------------------
Net cash provided by financing activities 934,143 1,194,165
------------------------- ------------------------
NET INCREASE (DECREASE) IN CASH (637,906) 772,228
Cash and cash equivalents at beginning of YEAR 798,019 25,791
------------------------- ------------------------
Cash and cash equivalents at end of YEAR $ 160,113 $ 798,019
========================= ========================
Cash paid for interest $ 4,278 $ -
========================= ========================
See accompanying notes to consolidated financial
statements.
F-5
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing activities:
During 2000, the Company acquired equipment totaling $12,125 under capital lease
obligations.
During 2000, the Company converted accounts payable with a shareholder to a
related party note payable in the amount of $11,656.
During May 1999, the Company acquired IPSL in exchange for 1,500,000 shares of
its common stock having a fair value of $11,760,000.
During 1999, the Company acquired equipment totaling $634,182 under capital
lease obligations.
See accompanying notes to consolidated financial
statements.
F-6
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
------- -----------------------------------------------------------
(A) Organization
On June 26, 1996, Quintessence Oil Co. ("Quintessence") was
incorporated in Wyoming to engage in oil and gas activities.
Quintessence never commenced substantial operations, and in
March 1999 common stock was issued to a new management group
and an acquisition of IPSL, Inc. ("IPSL") was consummated in
May 1999 (See Note 13).
On November 17, 1999, Torque Engineering Corporation ("Torque"
or the "Company") was incorporated in Delaware and
Quintessence was merged into Torque to effect a domicile and
name change. The transaction was treated as a recapitalization
and the effect is shown retroactively in the accompanying
consolidated financial statements.
The Company designs and manufactures high performance offshore
marine performance production engines.
The Company was in the development stage through December 31,
1999. The year ended December 31, 2000 is the first year
during which it is considered an operating company.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, IPSL. All
intercompany balances and transactions have been eliminated in
consolidation.
(C) Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual
results could differ from those estimates.
(D) Cash and Cash Equivalents
For purposes of the cash flow statements, the Company
considers all highly liquid investments with original
maturities of three months or less at the time of purchase to
be cash equivalents.
F-7
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
(E) Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts,
which, at times, exceed federally insured limits. At December
31, 2000, the Company had $51,438 in deposits which exceeded
federally insured limits. The Company has not experienced any
losses in such accounts as of December 31, 2000.
(F) Marketable Securities
The Company invests in various marketable equity instruments.
The Company accounts for such investments in accordance with
Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") (See Notes 1(M) and 4)).
Management determines the appropriate classification of its
investments at the time of acquisition and reevaluates such
determination at each balance sheet date. Available-for-sale
securities are carried at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of
stockholders' equity. Investments classified as
held-to-maturity are carried at amortized cost. In determining
realized gains and losses, the cost of the securities sold is
based on the specific identification method.
(G) Inventory
Inventory is stated at the lower of cost (first-in, first-out)
or net realizable value, and consists of purchased parts,
engines-in-process and completed engines (See Note 6).
(H) Property and Equipment
Property and equipment are stated at cost and depreciated
using the straight-line method over the estimated economic
useful lives of 3 to 10 years. Expenditures for maintenance
and repairs are charged to expense as incurred. Major
improvements are capitalized (See Note 7).
(I) Stock Options
In accordance with Statement of Financial Accounting Standards
No. 123, ("SFAS 123") the Company has elected to account for
Stock Options issued to employees under Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25") and related
interpretations. The Company accounts for stock options issued
to non-employees under the fair value method of SFAS 123 (See
Note 9(B)).
F-8
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
(J) Revenue Recognition
The Company recognizes revenue upon shipment of products.
(K) Advertising Costs
In accordance with the Accounting Standards Executive
Committee Statement of Position 93-7 ("SOP 93-7"), costs
incurred for producing and communicating advertising of the
Company are charged to operations. For the years ended
December 31, 2000 and 1999, the company charged $74,461 and
$25,986, respectively.
(L) Income Taxes
The Company accounts for income taxes under the Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(M) Comprehensive Income (Loss)
The Company accounts for Comprehensive Income (Loss) under the
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement No. 130").
Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components, and is
effective for fiscal years beginning after December 15, 1997.
The unrealized gains and losses, net of tax, resulting from
the valuation of available-for-sale securities at their fair
market value at year end (see Note 1 (F)) are reported as
Other Comprehensive Income (Loss) in the Statement of
Operations and as Accumulated Other Comprehensive Income
(Loss) in Stockholders' Equity and in the Statement of
Stockholders' Equity.
(N) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued
accounting pronouncements, Statement No. 133 as amended by
Statement Nos. 137 and 138 "Accounting for Derivative
Instruments and Hedging Activities," that establishes
accounting and reporting standards for derivative instruments
and related contracts and hedging activities. This statement
is effective for all fiscal quarters and fiscal years
beginning after June 15, 2000.
F-9
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
The Company believes that its adoption of these pronouncements
will not have a material effect on the Company's financial
position or results of operations.
(O) Loss Per Share
Basic and diluted net loss per common share for the years
ended December 31, 2000 and 1999 and for the period from June
26, 1996 (inception) to December 31, 2000 is computed based
upon the weighted average common shares outstanding as defined
by Financial Accounting Standards No. 128, "Earnings Per
Share". Common stock equivalents have not been included in the
computation of diluted loss per share since the effect would
be anti-dilutive. At December 31, 2000 and 1999 there were
240,000 common stock options issued and outstanding that could
potentially dilute earnings per share in future periods.
(P) Business Segments
The Company applies Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information". The Company operates in one segment
and therefore segment information is not presented.
(Q) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments",
requires disclosures of information about the fair value of
certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair
value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's accounts receivable,
accounts payable, accrued liabilities, and current loans
payable approximates fair value due to the relatively short
period to maturity for these instruments.
(R) Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Under the provisions of this statement, the Company has
evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in
circumstances indicated that the carrying amount of such
assets may not be fully recoverable.
F-10
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
The Company evaluates the recoverability of long-lived assets
not held for sale by measuring the carrying amount of the
assets against the estimated undisclosed future cash flows
associated with them. At the time such cash flows of certain
long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair
values.
NOTE 2 ACCOUNTS RECEIVABLE AND CONCENTRATIONS
Accounts receivable at December 31, 2000 and 1999 were
$311,159 and $2,289, respectively, and are deemed fully
collectable.
At December 31, 2000 and 1999, approximately 97.5% and 90%,
respectively, of accounts receivable were due from one
customer. Sales during 2000 and 1999 primarily related to six
engine sales and one engine sale, respectively, to the above
customer (See Note 16).
NOTE 3 ADVANCES TO SUPPLIERS
Beginning in 2000, the Company maintains deposits on account
with various vendors. The Company, upon executing a purchase
order with these vendors, is required to provide a deposit for
which goods are shipped against. As of December 31, 2000, the
Company had a balance with these vendors of $109,180. Included
in the advances to suppliers balance at December 31, 2000 is
an amount of $34,750 which represents deposits on purchase
orders with two vendors aggregating $335,820 (See Note 8(C)).
NOTE 4 MARKETABLE SECURITIES
The Company's marketable securities, purchased principally for
the purpose of selling them in the near future, as defined
under SFAS 115, are comprised of equity securities, all
classified as available-for-sale securities, which are
reported at their fair value based upon the quoted market
prices of those investments at the year ended December 31,
with unrealized losses reported as other comprehensive loss in
a separate component of stockholders' equity until they are
sold. Any realized gains or losses are included in net
earnings at the time of sale (See Note 1(F)).
The composition of marketable securities at December 31, 2000
is as follows:
F-11
Cost Fair Value
------------------- -----------------
Common stock $ 212,276 $ 1,213
=================== =================
Investment expenses for the year ended December 31, 2000 and
1999 consisted of the following:
2000 1999
------------------- -----------------
Net realized loss on the sale of marketable
securities $ - $ (51,642)
=================== =================
Unrealized losses included in other comprehensive loss for the
years ended December 31, 2000 and 1999 consisted of the
following:
2000 1999
------------------- -----------------
$ (30,932) $ (180,131)
=================== =================
NOTE 5 PREPAID EXPENSES
During 2000, prepaid expenses primarily included the value of
a boat engine exchanged for promotional and marketing
services. The value of the engine exchanged was $64,759, and
as of December 31, 2000, $16,190 had been charged to
operations. Due to the cost and fair value of the engine
exchanged being equivalent to marketing services, no gain or
loss is recognized on the exchange.
NOTE 6 INVENTORY
Inventory at December 31, 2000 and 1999 consisted of
the following:
2000 1999
------------------- -----------------
Purchased parts $ 376,532 $ 307,067
Engines in process 184,405 367,943
Completed engines 228,198 490,000
------------------- -----------------
$ 789,135 $ 1,165,010
=================== =================
During 2000, management specifically identified two engines
that were no longer held for commercial sale and their
carrying value of $104,008 was charged to selling, general and
other administrative expenses for the year ended December 31,
2000. The Company is maintaining these two engines for product
testing and marketing.
F-12
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 7 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consisted
of the following:
2000 1999
------------------- -----------------
Special tooling $ 9,309,965 $ 9,269,944
Machinery and equipment 1,155,278 1,146,664
Equipment under capital leases 646,307 634,182
Vehicles 8,706 5,206
Computer equipment 13,660 12,596
Furniture and fixtures 79,673 29,156
------------------- -----------------
11,213,589 11,097,748
Less: Accumulated depreciation (1,761,891) (643,703)
------------------- -----------------
Property and equipment - net $ 9,451,698 $ 10,454,045
=================== =================
Depreciation expense for the years ended December 31, 2000 and
1999 was $1,118,079 and $643,703, respectively.
NOTE 8 COMMITMENTS AND CONTINGENCIES
(A) Capital Leases
As of December 31, 2000 the Company had an aggregate of six
machines under non-cancelable capital lease agreements. As of
December 31, 1999 the Company had an aggregate of four
machines under non-cancelable capital lease agreements.
Future minimum lease payments under the capital lease are as
follows at December 31, 2000 and 1999:
2000 1999
------------------ -----------------
Total future minimum lease payments $ 708,398 $ 748,464
Less: interest (126,757) (140,091)
------------------ -----------------
581,641 608,373
Less: current portion (127,278) (32,837)
-----------------
------------------
Long-term obligation under capital leases $ 454,363 $ 575,536
================== =================
Future minimum lease payments for the capital leases as of
December 31, 2000 are as follows:
2001 $ 127,278
2002 128,372
2003 134,911
2004 144,932
2005 46,148
--------------
$ 581,641
==============
F-13
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
(B) Operating Lease Agreement
The Company leases corporate office space under an operating
lease. The lease has a remaining term through 2002.
Future minimum lease payments for the operating lease as of
December 31, 2000 are as follows:
2001 $ 120,000
2002 40,000
--------------
$ 160,000
==============
Rent expense for the years ended December 31, 2000 and 1999
amounted to $120,000 and $70,168, respectively.
(C) Purchase Commitments
During December 2000, the Company entered into commitments
with two vendors to purchase inventory aggregating $335,820
(See Note 3).
NOTE 9 STOCKHOLDERS' EQUITY
(A) Private Placement
In September 1999, the Company offered common stock
subscriptions pursuant to Rule 506 of Regulation D section 4
(2) of the Securities Act of 1933, as amended. The purchase
price was $3.25 per share.
As of December 31, 2000 and 1999, cash of $913,000 for 578,359
shares and cash of $1,500,005, for 461,540 shares was
received, respectively.
(B) Stock Options
On October 7, 1999, the 1999 Stock Option Plan (the "Plan")
was adopted by the Board of Directors of the Company and
approved by the Company's stockholders. The Plan was developed
to provide a means whereby directors, officers, employees of,
and certain persons rendering services to the Company or any
subsidiary may be granted stock to purchase common stock of
the Company.
F-14
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
The Plan authorizes options up to 500,000 shares of the
Company's common stock and is administered by the Board of
Directors of the Company or a committee of two or more members
of the Board of Directors (the "Plan Committee"). The Company
grants incentive and nonqualified stock options. Incentive
stock options are only granted to employees of the Company or
any subsidiary thereof. The exercise price which is
established by the Plan Committee may not be less than 85% of
the fair market value of the common stock at the time of grant
for nonqualified stock options, may not be less than 100% of
the fair market value of the common stock at the time of grant
for incentive stock options and may not be less than 110% of
the fair market value of the common stock at the time of grant
if incentive stock options are granted to employees owning
more than ten percent of the total voting power or value of
all classes of stock of the Company. The term of the stock
options is determined by the Plan Committee and shall not
exceed ten years from the date of grant. In the case of
incentive stock options which are granted to employees owning
more than ten percent of the total voting power or value of
all classes of stock of the Company, the term may not exceed
five years. During the year ended December 31, 1999, the
Company issued 240,000 stock options under the plan to
employees and Board of Director members. The Company cancelled
10,000 options under the plan to employees during the year
ended December 31, 2000 and also granted 60,000 options under
the plan to employees and directors during the year ended
December 31, 2000.
In accordance with SFAS 123, for options issued to employees,
the Company applies APB Options No. 25 and related
interpretations in accounting for the options issued.
Accordingly, compensation costs of $11,536 and $5,380 and
deferred compensation expense of $8,684 and $20,220
respectively, were recognized as of December 31, 2000 and
1999, computed in accordance with the intrinsic value method.
Had compensation cost for the Company's options been
determined based on the fair market value of the options at
the grant date, consistent with SFAS 123, the Company's net
loss for the year ended December 31, 2000 and 1999 would have
been increased to the pro-forma amounts indicated below.
2000 1999
-------- ---------
Net loss As reported $ (2,752,608) $ (1,325,744)
Pro forma $ (3,045,648) $ (1,463,953)
Net loss per share As reported $ (.344) $ (.232)
Pro forma $ (.380) $ (.256)
F-15
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net income for
future years due to, among other things, the effects of
vesting.
For financial statement disclosure purposes the fair market
value of each stock option granted was estimated on the date
of grant using the Black-Scholes Option-Pricing Model in
accordance with SFAS 123 using the following weighted-average
assumptions: expected dividend yield 0%, risk-free interest
rate of 5.125% in 2000 and 5.86% in 1999, volatility 229% in
2000 and 118% in 1999 and expected term of three years.
A summary of the options issued to employees and Board of
Director members as of December 31, 2000 is presented below:
Weighted
Number of Average
Options Exercise Price
Stock Options
Balance at beginning of period 240,000 $ 2.77
Granted 60,000 $ 3.01
Exercised - -
Cancelled (10,000) (1.81)
Forfeited - $ -
----------------- ----------------
Balance at end of period 290,000 $ 2.67
----------------- ----------------
Options exercisable at end of period 250,626 $ 2.93
----------------- ----------------
Weighted average fair value of options granted
during the period - $ 3.01
The following table summarizes information about stock options
outstanding at December 31, 2000:
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 2000 Life Price 2000 Price
----------- ---------------- --------------- ------------ ----------------- ------------
$ 1.81 80,000 7.5 1.81 55,360 1.81
$ 3.25 210,000 3.5 3.25 195,266 3.25
---------------- --------------- ------------ ----------------- ------------
290,000 5.5 2.77 250,626 1.55
================ =============== ============ ================= ============
F-16
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 10 INCOME TAXES
The Company and its subsidiary have elected to file separate
tax returns. Income tax expense (benefit) for the years ended
December 31, 2000 and 1999 for the parent company is
summarized as follows:
2000 1999
------------------ ------------------
Current:
Federal $ - $ -
State - -
Deferred-Federal and State (934,900) (226,400)
Change in Valuation Allowance 934,900 226,400
------------------ ------------------
Income tax expense (benefit) $ - $ -
================== ==================
The Company's tax expense differs from the "expected" tax
expense for the years ended December 31, 2000 and 1999, as
follows:
2000 1999
------------------ ------------------
U.S. Federal income tax provision (benefit) $ (934,900) $ (226,400)
Effect of net operating loss carryforward 934,900 226,400
------------------ ------------------
$ - $ -
================== ==================
The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities at
December 31 are as follows:
2000 1999
------------------ ------------------
Deferred tax assets:
Net operating loss carryforward $ 1,164,900 $ 230,000
------------------ ------------------
Total gross deferred tax assets 1,164,900 230,000
Less valuation allowance (1,164,900) (230,000)
------------------ ------------------
Net deferred tax assets $ - $ -
================== ==================
At December 31, 2000, the Company has net operating loss
carryforwards of approximately $3,426,000 for U.S. Federal
income tax purposes available to offset future taxable income
expiring on various dates through 2020.
The valuation allowance at January 1, 2000 was $230,000. The
net change in the valuation allowance during the year ended
December 31, 2000 was an increase of approximately $934,900.
F-17
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 11 EXTRAORDINARY ITEM
In June 2000, Torque Engineering's subsidiary IPSL, Inc.
confirmed the extinguishment of debts from certain affiliates
and a principal shareholder of IPSL, Inc., totaling $28,708.
As a result, an extraordinary gain was realized during the
year ended December 31, 2000 (See Note 14).
NOTE 12 RECAPITALIZATION
In March 1999, the Company issued 4,870,000 common shares to a
new management group in consideration of the new management
group seeking an acquisition candidate. This issuance was
treated as a recapitalization of the Company with the par
value of the stock charged to additional paid-in capital.
NOTE 13 ACQUISITION
Effective May 28, 1999, the Company acquired the outstanding
common stock of IPSL, a Nevada corporation, incorporated on
April 27, 1998, in exchange for 1,500,000 shares of the
Company's common stock. The acquisition was accounted for
under the purchase method of accounting and the stock was
valued at $7.84 per share, based on the average quoted trading
price before and after the purchase was determined and the
announcement was made. The resulting purchase price was
$11,760,000 and was allocated, based upon an independent
appraisal performed for allocation purposes, to the assets
acquired and liabilities assumed as follows:
Marketable securities $ 637,045
Inventory 1,018,808
Special tooling 9,256,014
Machinery and equipment 1,122,509
Furniture, fixtures, and other 34,363
Loan fee payable (200,875)
Loan to stockholder (107,864)
------------------
$ 11,760,000
==================
The table below reflects the pro forma combined results of the
Company as if the acquisition had taken place at January 1,
1998:
Net Sales $ 91,300
Net Loss $ (1,928,287)
Loss per share $ (0.337)
F-18
TORQUE ENGINEERING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NOTE 14 RELATED PARTIES
As of December 31, 2000 and 1999 the Company owed two
principal stockholders $71,656 and $28,708, respectively.
Pursuant to an agreement entered into between IPSL and
affiliates of a principal stockholder of IPSL prior to the
acquisition (see Note 13), the Company owed the affiliates
$28,708 at December 31, 1999 relating to prior loans made to
the Company. During 2000 the debt was cancelled and recorded
as a gain on extinguishment of debt.
During 2000, the Company received $60,000 in operating funds
from two stockholders. In addition, $11,656 of reimbursable
expenses was owed to one of the stockholders as of December
31, 2000. All loans from the stockholders were converted to
non-interest bearing notes payable due June 30, 2001.
Consulting income as of December 31, 1999 included $118,500,
received from a principal stockholder. There was no consulting
income received from related parties during the year ended
December 31, 2000.
NOTE 15 GOING CONCERN
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
The Company has a loss from current operations of $2,752,608
and negative cash flows from operating activities of
$1,468,442 at December 31, 2000. These conditions raise
substantial doubt about the Company's ability to continue as a
going concern.
In view of these matters, realization of a major portion of
the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its working
capital requirements, and the success of its future
operations. Management believes that action presently being
taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to
continue as a going concern.
NOTE 16 SUBSEQUENT EVENTS
During January 2001, the Company sold one engine for $102,035
to its major customer (See Note 2).
In February 2001, the Company sold $125,000 shares of Rule 144
restricted common stock valued at $2.00 per share for $250,000
to three stockholders.
F-19
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.
TORQUE ENGINEERING CORPORATION
Date: March 28, 2001 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: March 28, 2001
------------------------
Raymond B. Wedel, Jr.
President and Director
Date: March _____, 2001
----------------------------------
Donald A. Christensen
Director
/s/ Richard D. Wedel Date: March 28, 2001
--------------------
Richard D. Wedel
Chairman, Chief Executive Officer
and Director
/s/ I. Paul Arcuri Date: March 28, 2001
------------------
I. Paul Arcuri
Vice President, Chief Financial
Officer and Director
Date: March _____, 2001
----------------------------------
Clement Lange
Director