MAY 4, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
TORVEC, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<C> <C> 16-1509512
NEW YORK
(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.
INCORPORATION OR ORGANIZATION)
3740 ROUTE 104
WILLIAMSON, NEW YORK 14587
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (ZIP CODE)
</TABLE>
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (716) 248-8549
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THEEXCHANGE ACT
$.01 PAR VALUE COMMON VOTING STOCK
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PAGE 1 OF ______ PAGES CONTAINED IN THE SEQUENTIAL NUMBERING SYSTEM. THE
EXHIBIT INDEX MAY BE FOUND ON PAGE 42 OF THE SEQUENTIAL NUMBER SYSTEM.
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TABLE OF CONTENTS
<C> <C> <C> <C>PAGE
NUMBER
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 13
OF OPERATION
ITEM 3. DESCRIPTION OF PROPERTY 16
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 17
OWNERS AND MANAGEMENT
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND 18
CONTROL PERSONS
ITEM 6. EXECUTIVE COMPENSATION 20
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
ITEM 8. DESCRIPTION OF SECURITIES 24
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S 25
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
ITEM 2. LEGAL PROCEEDINGS 25
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 25
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES 25
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS 29
PART F/S FINANCIAL STATEMENTS F-1
PART III
ITEM 1. INDEX TO EXHIBITS 42
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) BUSINESS DEVELOPMENT AND SUMMARY
Upon its creation in September, 1996, TORVEC, Inc. ("the Company")
acquired numerous patents, inventions and know-how developed for more than ten
years by Vernon E. Gleasman and members of his family. The Company presently is
a development company specializing in automotive technology. The Company owns
many U.S. and international patent properties developed by the Gleasmans
protecting important inventions relating to five different areas of automotive
technology, i.e., (i) steering drive for tracked vehicles, (ii) infinitely-
variable transmission (IVT), (iii) hydraulic pump and motor, (iv) CV (constant
velocity) joint and (v) spherical gearing. Its new type of automotive
transmission (IVT) is less complicated and is manufactured at a lower cost than
automatic transmissions. It will be used to significantly increase fuel mileage
and, at the same time, reduce one of the world's more serious air pollution
problems (all as described below). The primary inventor and the management team
of the Company have the pertinent business experience outlined below:
VERNON E. GLEASMAN _ INVENTOR
Mr. Gleasman is considered a world's leading authority on gear technology. He is
co-inventor (with sons, James A. and Keith E. Gleasman) of the all-gear GSD-10
(a hydro-mechanical steering system for track vehicles); conceived and
engineered the FasTrack_ vehicle (discussed below); and is inventor of the
TorsenR differential now used in many passenger automobiles around the world
such as: Porsche, Audi Quattro's, 8 car lines of Toyota (i.e., Lexus, Supra and
RAV4), Mazda Miata and RX7, Chevrolet Camero, Pontiac Firebird, Oldsmobile
Achieva, Suzuki, and the U.S. Army HMMWV (Hummer). Mr. Gleasman was the winner
of the Society of Automotive Engineers' 1983 Schwitzer Award for Most Innovative
New Product at the Indianapolis 500; is listed in Who's Who in American
Inventors 1990 Edition; and he has been nominated to the National Inventors Hall
of Fame. His work is featured in the Theory of Machines and Mechanisms, McGraw-
Hill, 1995 (Mr. Gleasman's TorsenR Differential is pictured on the jacket
cover). He has been granted over 20 patents on gearing, differentials, and
machine tools over the past 30 years, and he is the principal inventor on over
100 U.S. patents (as well as corresponding foreign patents), primarily
automotive-related. Examples (U.S. patent numbers in parenthesis): hydraulic
clutch transmission (2177213); hydraulic clutch for transmission (2226309);
Bendix fuel direct engine injector valve and Bendix diesel engine starter
(2450129); hydraulic variable-speed hydrostatic transmission (2471031); Vane-
type fluid drive (2552167), hypoid differential (2628508); fluid transmission
(2668417); White Motor Co. tilting cab (2838126), assigned to White Motor;
hydro-vector fuel-injector advance mechanism; catalytic converter for diesel
trucks. He is also the inventor of non-freeze water meter, machine tools and
other products. Early career: engineer at Bendix; and vice president
manufacturing at White Motor, where engineering and management experience
included designing and planning White's plant for manufacture of White 9000
heavy truck and organizing manufacturing and production of aircraft components
for White's Aircraft division. Later, Mr. Gleasman founded his own companies,
including Triple-D, Inc., sold to Gleason Corporation, Rochester, New York.
DR. HERBERT H. DOBBS _ CHAIRMAN OF THE BOARD OF DIRECTORS
Dr. Dobbs, Ph.D., P.E., has worked at every level from design engineer to
technical director of an Army Major Commodity Command at the two-star level. He
has worked as a hands-on engineer and scientist in industry and government,
commanded field units, managed Army R & D programs and laboratories and
currently has his own practice as a consultant engineer. He has the broad
background needed to guide the Company's growth and development.
During his career he has:
. Worked as a manufacturing engineer.
. Worked as a design engineer in the aircraft and missile industry.
. Managed Army laboratories as a captain, lieutenant colonel and colonel.
. Organized, implemented and operated the theater-wide "Red Ball Express"
quick response supply system in Vietnam to get disabled weapons and
other critical equipment repaired and back into combat as rapidly as
possible.
. Done basic research on multi-phase turbulent fluid dynamics supporting
development of the gas turbine primary power system now used in the M1
Abrams Main Battle Tank (MBT).
. Managed advanced development of the laser guided 155mm-artillery shell
now known as the "Copperhead".
. Served in Taiwan as a member of the U.S. Military Assistance Advisory
Group (MAAG) working with the Republic of China Army General Staff.
. Served as liaison officer between the Army and Air Force for development
of the laser seeker for the Hellfire missile.
. Guided development of a new family of tactical vehicles for the Army,
including the High Mobility Multipurpose Wheeled Vehicle (HMMWV) now
known as the "Hummer", which uses Vernon Gleasman's TorsenR
differential.
. Served as Technical Director of U.S. Army Tank-Automotive Command
(TACOM), which employs some 6,400 people and is responsible for all
support of U.S. military ground vehicles (a fleet of 440,000) from
development to ultimate disposal with a budget of nearly $10 billion a
year. He was also responsible for negotiation and management of military
automotive R&D agreements with the French and German Ministries of
Defense.
At the end of 1985, Herbert H. Dobbs left government service and started his own
consulting practice and began working with the Gleasmans to develop and market
Vernon Gleasman's inventions. Herbert H. Dobbs holds a Ph.D. in Mechanical
Engineering from the University of Michigan and is a registered professional
engineer in Michigan. He holds several patents of his own and, among many
affiliations, is a member of SAE, ASME, NSPE, AAAS, Sigma XI, AUSA, ADPA and the
U.S. Army Science Board. The last named organization is a small group of senior
technical and managerial people chosen from industry and academia to provide
direct advice to the Secretary of the Army, the Chief of Staff, and the
Department of the Army concerning issues of policy, budgets, doctrine,
organization, training and technology. Its advice rarely is ignored and usually
is acted on.
LEE E. SAWYER _ DIRECTOR
Over a 30-year career Mr. Sawyer has worked on the wholesale side of the
automotive industry for Ford in technical training and Toyota in sales,
marketing, motorsports and service. During the last ten years, he was part of
the start-up teams that successfully launched Hyundai and Kia Motors America
focusing on parts, service, quality assurance, fleet sales, public relations and
consumer affairs policy, procedures and systems. During his career he has
worked with these automakers as follows:
Ford Motor Company:
. As Ford's first field service engineer.
. Managed expanded Training Center with Ford, Lincoln-Mercury car and heavy
truck classrooms, and taught Ford Shelby high performance curriculum.
Toyota Motor Sales USA:
. Established 12 service Training Centers.
. Computerized the national warranty system and established an expense
control audit program.
. Managed sales, parts and service field force during a period in which
sales increased 300%
. In 1979, introduced the TorsenR differential to Toyota
. Started Motorsports - hired factory race teams, coordinated race engine
development, and conducted Long Beach Grand Prix and Pro-Celebrity Match
Race. Results: 14 national championships.
Hyundai Motor America:
. Started national Service Department: warranty, quality assurance, consumer
affairs, technical and management training.
. Managed public relation's activities, product introduction press previews,
press releases and media interviews.
Kia Motors America:
. Consulted with Kia Korea re: establishing a car company in the USA.
. Started service department: warranty, quality assurance, consumer affairs,
service training and publication.
Mr. Sawyer is a start-up specialist with the operations, management,
communications and problem solving skills required to launch the Company
successfully. He holds a B.A. in Industrial Technology and attended USC School
of Business-International Relations, Ford Marketing Institute, Toyota Management
Training, American Management Association Training, Interpersonal skills
training, and U.S. Coast Guard Leadership and Diesel Engine schools.
MORTON A. POLSTER _ DIRECTOR; SECRETARY
Partner in the intellectual property law firm of Eugene Stephens & Associates.
Formerly, General Patent Counsel and, thereafter, Secretary and Corporate
Counsel for Gleason Corporation (1969 - 1989) and prior to that, Patent Counsel
for Eastman Kodak Corporation (1960 _1969). While with Gleason Corporation, Mr.
Polster represented Gleason when the latter purchased the Gleasman's Triple D,
Inc., and exclusive rights to the Gleasman patents relating to the design and
manufacture of the Torsen differential. He was part of the management team
overseeing the operation of the Gleason Power Systems Division, which was
created to manufacture and sell the Torsen differential. Also, he represented
Gleason when the latter sold its Power Systems Division and its rights to the
Torsen Differential to Diesel Kiki, Ltd. of Japan (now Zexel Corporation).
While in private practice, since 1989, Mr. Polster represented Zexel Torsen,
Inc., (subsidiary of Zexel Corp.), which was created to manage the manufacture
and sale of Torsen Differentials. Mr. Polster has been patent counsel to the
Gleasmans since 1989 and has been in charge of the preparation and execution of
their U.S. and international patent protection.
TORVEC'S TRACKED VEHICLE
BACKGROUND
The infrastructure of most of Asia, Africa, South and Central America is
very similar to the U.S. in the early 1900's. At that time U.S. demographics
were as follows: eighty percent of the population lived in rural areas; income
was low; and transportation was limited to walking, bicycles, push carts and
animal pulled vehicles. Roads, when they existed, were dirt and at times
impassable due to terrain or inclement weather. Even with the advent of
automobiles, commerce remained inhibited because paved roads were only found in
the cities. Similarly, the wheeled vehicles of the developing country today can
only traverse the rural dirt roads during certain seasons of the year. When
roads are in rough condition (e.g., muddy, blocked by snow or ice, etc.), there
is little difference in travel time between an animal drawn cart; a man on foot
or bicycle; or a wheeled car. If they are able to travel at all, even four-
wheeled drive vehicles are usually limited to 4_5 mph under these conditions.
The idealized vehicle would be a vehicle that could travel at higher speeds (25-
50 mph.), regardless of the terrain, significantly shortening the travel time
between rural areas and the primary marketplaces in the city. A tracked
vehicle, in effect, "brings its own road with it".
TORVEC'S FASTRACK VEHICLE
The Company's FasTrack prototype vehicle (see cover) is a new type of
vehicle, that steers as easily as a car (using a steering wheel), has rubber
tracks and bridges an important gap between wheeled and tracked vehicles that
manufacturers have been trying to span for decades. This new vehicle combines
the high-speed capabilities of trucks and cars with the high-traction
capabilities of tracked vehicles. Unlike most "new generation" vehicles (e.g.,
the Model T, for which Henry Ford had to design and build almost every part),
the FasTrack can be made from existing automotive components, and lends itself
to formation of joint ventures for assembly in the developing country. FasTrack
vehicles are rubber-tracked vehicles which, by design, are environmentally
sensitive since their low ground pressure (less than 2 lbs. per sq. in.) does
not damage paved road surfaces or leave ruts or cause potholes on unpaved
surfaces. This tracked vehicle can traverse almost any terrain at higher speeds.
The tracks could be made by Goodyear; a corporation dedicated to supporting
original equipment manufacturers (OEMs). Goodyear states, "Based on product
testing and feedback from our customers, in most situations, Goodyear rubber
track has been seen to last 3 to 5 times longer than a set of standard utility
tires used in the same application." An additional feature of the FasTrack
vehicle is its alternator, which will be modified to permit the vehicle to also
serve as a mobile power plant with a 2 HP (approximately 1400 watts) electrical
generator for running a myriad of electrical items, which can contribute to
rural electrification. FasTrack vehicles perform as they do because of their
unique steering mechanism, which is protected by several patents in Europe and
Japan as well as the following U.S. patents: Multi-Axle Vehicle Steer Drive
system (4732053), No-slip imposed Differential Reduction Drive (4776235), No-
slip imposed differential (4776236), Steer-Driven Reduction Drive System
(4895052). The FasTrack also uses TORVEC's Orbital Transmission (U.S. patent
5186692), an infinitely-variable transmission (IVT). Different from the multi-
shifting automatic transmission used on passenger vehicles, TORVEC's IVT
contributes to increased fuel mileage and significantly lower emissions (see
next section below).
TORVEC'S TRANSMISSION
BACKGROUND
Environmental scientists agree that "global warming" is one of the world's
primary concerns, and the President of the United States has assured an
international environmental conference that our country acknowledges the
importance of this problem. In addition, the President has recently stated "The
answer lies in promoting new energy-efficient technologies and not imposing
steep energy price increases to encourage efficiency" (Associated Press-
10/7/97). It is well recognized that carbon dioxide (C02) emissions from
automotive vehicles are presently a major contributor to this world problem and,
further, that the use of automotive vehicles is projected to increase more than
400% over the next few decades. The Society of Automotive Engineers (SAE paper
#930941) notes that the 1992 RIO conference targeted pollution as one of the
three major challenges which must be met by the International Community and it
states: "The forecast demographic and economic changes will lead to the
production of 250 million vehicles per year and a world motor vehicle fleet of
2.5 billion vehicles within the next 50 years as compared with today's
production of 50 million vehicles per year and a fleet of 550 million vehicles."
It is also well recognized that diesel engines emit much less CO2.
Unfortunately, as presently used in trucks, busses and cars, diesel engines emit
other undesirable pollutants (e.g., NOx , hydrocarbons, and particulates). In
addition, (SAE paper #930126) "The World Health Organization has concluded that
diesel particulate is a probable human carcinogen."
Such undesirable pollutants are emitted by diesel engines primarily during
those periods of operation when the speed of the diesel engine is being changed
significantly (e.g., during start-up, acceleration from gear to gear, and rapid
slow down). However, when diesel engines run at steady-state speeds, their
emission levels are very low. Further, diesel engines can exhibit approximately
30% improvement in fuel economy over gasoline engines, diesel fuel is cheaper to
produce and its manufacture results in less air pollution than does the
manufacture of gasoline.
Therefore, during the past several years, the world's vehicle manufacturers
and their suppliers have been engaged in major efforts to reduce the pollutants
from operating diesel engines. In recent years, punitive fines have been imposed
upon manufacturers and end-users throughout the world with the intent of
creating special incentives for such efforts to reduce diesel pollution. [NOTE:
Especially restrictive diesel regulations are scheduled to go into effect in the
U.S. in California and eleven other states sometime in 1998.] An example of such
an incentive is a recently proposed EPA fine to be imposed on bus companies for
any bus emitting pollutants that don't meet the standards. As quoted from Clean
Air Today (July 7, 1997), "Under the EPA program, transit agencies that do not
install a [filter] retrofit kit designed to meet strict particulate matter
standards are subject to a noncompliance penalty of $25,000 per bus. According
to EPA, the kit will cost about $7,940 for an urban bus. More than 110,000
urban buses are located in various metropolitan areas throughout the United
States." (This indicates an estimated cost of $880,000,000 for the retrofit kits
alone, not including installation and maintenance costs.)
The filter (catalytic purifier) just referred to above, is one of many
recent attempts to help solve the diesel problem, most of which are directed
primarily to "engine management" remedies such as fuel and exhaust filters,
controls relating to turbo compression of the air being delivered to the
engine's cylinders, etc. As indicated by the example above, government
environmental regulators, such as the EPA, indicate that they intend to enforce
stricter air standards as soon as proven technology permits vehicles to meet
such desired safer air standards (refer to SAE paper #920142). According to
Monetary & Economic Review, (September, 1997):
"Ford Motor Company, in a June 5 letter to all of its local dealers, warned
of 'a major policy issue that will greatly affect the auto business,' impacting
the kinds of vehicles that can be sold, the costs of driving and overall vehicle
affordability. The letter cited legally binding caps and cuts on energy use for
developed countries that would be enforced by a UN agency. 'These caps and cuts
are expected to be finalized in December of this year in Kyoto [Japan],' the
letter stated.
Continuing, the letter read, 'Such a treaty would necessitate major
gasoline price increases and likely would lead to other measures, including
higher CAFE and restrictions on vehicle use. Many countries in Europe already
are implementing such measures in anticipation of the agreement... and the UN
would be in charge of monitoring compliance."
THE TORVEC_ IVT
The TORVEC prototype transmission is an infinitely variable transmission
(IVT), meaning it provides an uninterrupted drive through an infinite number of
geared speed ratios, allowing ideal torque flow to propel the vehicle while
permitting the engine to run at optimum efficiency. In sharp contrast to other
work being done in relation to diesel/gasoline engine management, the Company's
new TORVEC transmission does not require any change, costly or otherwise, to the
manufacture or operation of existing diesel/gasoline engines. Instead, it
permits present automotive diesel/gasoline engines to operate in a steady-state
mode, with dramatically reduced pollution, at most times during normal
operation, i.e., under the starting, stopping, acceleration and deceleration of
normal urban traffic. For instance, such a steady-state optimum condition may
match the usual engine setting when the vehicle is being driven at its top urban
speed (e.g., 35-45 miles per hour). It should be noted that this optimum urban
cruising speed may be only approximately twice the normal idling speed of the
engine, and that this steady-state setting is relatively low in comparison to
the normally required engine speed of three, four or five times idling speed
that must be attained by the same diesel/gasoline engine each time the vehicle
accelerates between each of the conventional forward gears (e.g., when shifting
from first gear to second gear, then from second to third, etc.). [NOTE: Because
it is an infinitely variable transmission and changes its ratios extremely
quickly, the TORVEC IVT can accelerate a diesel-powered vehicle as quickly as a
gasoline-powered vehicle. The Torvec IVT also may be able to significantly
improve the performance of electric drive vehicles. There are a number of kinds
of electric motors that can be chosen to drive a vehicle. Their performance and
physical characteristics vary considerably. Weight (for a given power level),
zero-speed torque, useful speed range, efficiency-vs.-motor-speed, and control
characteristics are among these, and there are conflicts in making the best
choice for a given vehicle application. A transmission of some sort commonly is
needed to resolve these. The performance characteristics of the Torvec IVT make
it a promising candidate for such applications.]
In addition to having the potential of remarkably reducing particulates,
the TORVEC transmission is less complicated and has approximately 1/3 fewer
parts when compared to a conventional four or five speed automatic transmission,
making it smaller in size, lighter in weight and, therefore, further improving
fuel economy. The TORVEC transmission, which will be simpler and less expensive
to manufacture, should provide the automotive industry with a higher performing
product at a lower cost.
In view of the above, and because all vehicles currently have
transmissions, the Company believes that the TORVEC transmission will permit
substantial reductions in diesel/gasoline engine pollutants and that such
significant environmental benefits will be achieved without an economic penalty.
Further, it is believed that the TORVEC transmission will not be in direct
competition with companies who provide other diesel/gasoline engine pollution
remedies and that the latter may even be interested in working with the Company
to explore possible synergistic effects with the TORVEC transmission.
ADDITIONAL TORVEC PRODUCTS
HYDRAULIC PUMP/MOTOR, CV JOINT, AND SPHERICAL GEARING
The Company's patented TORVEC transmission incorporates a hydraulic
pump/motor machine and, although it can be operated with commercially-available
pump/motors, it is most effectively used in combination with the Company's
patented TORVEC hydraulic pump/motors (5,513,553) which, like the TORVEC
transmission, are significantly simpler, smaller and lighter than other
commercially available pump/motors having comparable performance specifications.
The key feature of the TORVEC pump/motors is their swash-plate mounting
arrangements that utilize a new form of spherical gearing which is also
proprietary to the Company (5,647,802). Further, this spherical gearing has
been incorporated in yet another TORVEC product, which has been developed to
replace CV (constant velocity) joints used, among other places, in all front-
wheel drive vehicles. The TORVEC CV Joint (5,613,914) is a remarkable departure
from known designs, and its efficiency and weight savings should provide a
significant competitive advantage in the annual CV-joint market of 180,000,000
units per year.
BUSINESS PLAN
The Company's present business strategy relating to its TORVEC products is
(1) to provide developing country FasTrack vehicle models for marketing to
potential Asian, African, South and Central American joint venture partners; (2)
to complete the installation of TORVEC transmissions into diesel-powered trucks
for appropriate testing by national and state environmental agencies in the U.S.
and other countries to quantify exact fuel savings and emissions levels and to
determine its potential effect on the worldwide problem of diesel engine
pollutants; (3) to complete the installation of the TORVEC transmission into the
best selling automobile of a major U.S automaker that has an agreement with the
Company for an exclusive "first look" at the TORVEC transmission for gasoline
engine passenger cars, providing data on gasoline engine fuel mileage and
emission levels, and the Company expects these results will create joint-
venture/licensing opportunities; (4) to promote worldwide use of TORVEC
transmissions for reducing diesel/gasoline engine pollution; (5) to enter into
appropriate licensing/joint working arrangements for all TORVEC products (the
FasTrack vehicle, IVT Transmission, Hydraulic Pump/Motor, CV Joint, and
Spherical Gearing); (6) to obtain a Website for marketing, sales, education and
information relating to the TORVEC products; 7) to obtain patent protection on
at least four new developments and improvements related to the Torvec products
described above.
(B) BUSINESS OF ISSUER
GENERAL
Preceding the formation of the Company, its principal shareholders, Vernon
E. Gleasman, James A. Gleasman and Keith E. Gleasman started a research program
that required more than 10 years of time and capital of approximately $3
million. As a family, the Gleasmans have operated and sold their own innovative
products and companies over the last 30 years. It is this knowledge base (of
the automotive industry and its trends), that was the basis of the various
research projects that are now the properties of the Company. A review of
Vernon Gleasman's first 100 plus inventions indicates that almost all of them
are improvements of other companies' technology, and most of Vernon Gleasman's
inventions were created either while he was employed by various companies, or
while he was acting as a consultant to these other companies. Therefore, the
past income of Vernon Gleasman and family does not reflect a remuneration
proportionate to the economic impact of the products he invented (e.g., the
hydraulic multi-disc clutch patent which was invented by Vernon Gleasman in the
late 30's and has been used in most automatic transmissions produced over the
last 60 years).
Unlike Vernon Gleasman's earlier inventions, the Torsena differential
produced more revenue for the Gleasman family, because the Gleasmans themselves
manufactured and produced these differentials (from the mid 1960's - 1982)
through a family-owned corporation. Their primary customers were the U.S. Air
Force and U.S. Army, with some further sales for after-market, high-performance
vehicles. In 1982, as a result of the expanding need for larger production
facilities to meet orders for Toyota and the U.S. Army HMMWV vehicle, the
company was sold to Gleason Corp., Rochester, New York for cash, stock and a
royalty package.
Historically, the major impediments to the incorporation of Gleasman
products into other companies' vehicles has been the "not invented here"
syndrome and the problems relating to enforcement of licensing agreements by an
independent inventor. It is next to impossible to sell an idea that is merely
on paper. Therefore, it is necessary to fully engineer and develop a highly
refined prototype. Thousands of hours and millions of dollars have to be
invested before a new product can be sold to an OEM (original equipment
manufacturer). A highly refined prototype of the FasTrack_ vehicle (described
immediately below) has been engineered and the Company will use a portion of the
net proceeds of this Offering to explore joint ventures to produce this vehicle.
In addition, the Company will use a portion of the net proceeds of this Offering
to engineer and develop highly refined prototypes of the infinitely variable
transmission (IVT), the hydraulic pump/motor, spherical gearing and CV Joint
(also described below) to serve as critical components of the FasTrack vehicle
as well as for direct commercialization.
TRACKED VEHICLE STEERING (GSD-10) AND HYDRAULIC PUMP/MOTOR
In response to requests from the David Taylor Marine Research Department of
the U.S. Navy for a new generation of assault vehicles using off-the-shelf
componentry, the Gleasman steering mechanism for tracked vehicles (GSD-10) was
conceived and developed. For over 60 years an adequate, economical mechanism
for steering tracked vehicles has been sought. Because they are difficult to
steer precisely, tracked vehicles generally have been cumbersome and limited to
low speed. While wheeled trucks and cars have been able to travel at higher
speed on prepared roads, they have lacked the ability to traverse truly
difficult terrain. Having developed the GSD-10 steer drive, and seeking the
best way to market it, led the Company to a new direction for commercializing
the Gleasman inventions. In contrast to the Gleasmans' past procedures of
selling their products for another company's use, the decision was made to
incorporate the new steer drive into a new type of vehicle designed as a
specific product that could be sold directly to the consumer, thereby providing
a foundation upon which the Company can propose joint ventures with countries,
automobile producers, and/or component manufacturers for producing this vehicle.
Rather than hiring a design studio in California or Michigan, costing in excess
of tens of millions of dollars, the Gleasmans designed and fully engineered a
vehicle manufactured from high-volume purchased parts. That major investment of
time, know-how and capital has resulted in the prototype FasTrack vehicle
illustrated on the cover and described in the Registration Statement Summary.
The GSD-10 steer drive can best be described in engineering terms as a
hydro-mechanical steering mechanism. The "mechanical" portion is manufactured
from conventional, high-volume gearing, while the "hydro" portion is the
Company's patented hydraulic pump and motor. Conventional hydraulic pumps and
motors are large, noisy, and inefficient at low RPM. For over 100 years, as
reflected in SAE papers and a large number of issued patents, engineers and
companies have sought a solution to these problems which have continued to be
inherent in automotive hydraulic pump and motor designs. Therefore, because
tests have indicated that the recently patented Torveca hydraulic pump/motors
have substantially solved these heretofore inherent problems, the Company
believes the GSD-10 steer drive is most effective when used with these novel
Torveca pump/motors.
INFINITELY VARIABLE TRANSMISSION (IVT)
The long quest for a perfect automotive transmission, which began almost
simultaneously with the invention of the automobile, is described in a 1987 Ford
News Release (paper 87/45) entitled A History of Automatics (Car transmission
systems through the years). This same Ford document states: "Ford began
investigations into CVT (Continuously Variable Transmission) concepts in 1969
and started detailed engineering work in 1976 on a new design, known as the Ford
CTX (Continuously variable Transaxle), developed jointly with Van Doorne and
Fiat. In late 1983, a formal programme for CTX was initiated, at a total cost
of $120 million. Using some Ford components (castings and differentials) the
CTX will be produced by Van Doorne Transmissie as the first stage in the build-
up to mass production at Ford's Bordeaux transmission plant in France." The
transmission described in this Ford document is limited to very small engines
(1.6 liter). While the CVT is a step toward the IVT (Infinitely Variable
Transmission), it does not perform the same or as well as an IVT. In addition,
unlike the Torvec_ IVT, which can be built to accommodate every size engine, the
CVT used by Ford and other companies is only viable when used in conjunction
with very small engines. In order to increase its ability to work with larger
engines (e.g., 2 liters and above), a torque converter must be used with the
CVT, adding weight and cost, increasing size, and reducing the efficiency of the
transmission. Like the GSD-10 steer drive, the Torvec IVT incorporates the new
Torvec hydraulic pump and motor, which is remarkably smaller in weight and size
when compared to standard pump/motors that would otherwise be needed for the
Torvec IVT. For example, conventional pumps/motors for the IVT could weigh as
much as 400 lbs. In comparison, the Torvec hydraulic pump/motor weighs less
than 100 lbs. In effect ,the Company's products appear to meet the essential
criteria for needed automotive innovation as expressed in a recent statement by
the Chief Executive Officer of Honda: "We must begin to make cleaner cars that
people actually want to buy_with more performance, safety and comfort and
vehicles that also use less fuel, produce fewer emissions, and yet don't cost
much more" (SAE Automotive Engineering, 10/97). Transmissions are needed by all
of the 50 million vehicles produced annually throughout the world. Therefore,
the Company's potential could be substantial in view of the proven weight, cost,
and size reductions of its products coupled with their potential to increase
fuel efficiency.
SPHERICAL GEARING
The compact size and full power start-up torque of the Torvec hydraulic
pump/motors are made possible through the invention of a revolutionary new form
of gearing based on the geometry of spheres rather than conventional gear
geometry of cylinders and cones. This new "spherical" gear is perhaps the most
important and creative Gleasman invention to date, surpassing the "impossible
geometry" of the Torsena differential gearing.
The Gleasman spherical gears have been used to form a geared ball-and-
socket coupling in which driving tooth contact is maintained continuously while,
at the same time, permitting the coupling to be flexed at 40 degrees to either
side of center. The potential versatility of the Company's spherical gears may
open the door to many yet unknown solutions and products yet to be discovered.
This new gearing paradigm is found in the swash-plate mechanism of the Torvec
hydraulic pump and motor, and it has also been used to create a constant
velocity (CV) joint that is fully engineered as a working prototype and is ready
for installation in a car. The Torvec CV joint is designed to be
interchangeable in over 40 existing car models. It is notably lighter, less
costly to manufacture, and potentially more durable than the CV joints presently
being used in all front-wheel drive vehicles. In contrast, conventional
automotive CV joints, like the conventional automotive pump/motors discussed
above, have defied major improvements over the last 60 years in spite of the
large expenditure of time and money by individuals and corporations. Further,
in spite of severe mechanical and design limitations, the CV joints currently in
use are manufactured at the rate of over "180 million units annually" according
to the 1994 Annual Report of GKN (the world's largest producer of CV joints).
THE COMPANY'S ASSETS
The Company owns the exclusive right, title and interest in and to the
following patent properties:
1. U.S. Patent No.: 4,732,053
Title: Multi-Axle Vehicle Steer Drive System
2. U.S. Patent No.: 4,776,235
Title: No-Slip, Imposed Differential Reduction Drive
3. U.S. Patent No.: 4,776,236
Title: No-Slip, Imposed Differential
4. U.S. Patent No.: 4,895,052
Title: Steer-Driven Reduction Drive System
5. U.S. Patent No.: 5,186,692
Title: Hydro-Mechanical Orbital Transmission
6. U.S. Patent No.: 5,440,878
Title: Variable Hydraulic Machine
7. U.S. Patent No.: 5,513,553
Title: Hydraulic Machine with Gear-Mounted Swash-Plate
8. U.S. Patent No.: 5,647,802
Title: Variable-Angle Gears
9. U.S. Patent No.: 5,613,914
Title: Universal Coupling
10. U.S. Patent Application (application number not yet assigned)
Title: Method for Shaping the Teeth of Spherical Gears
11. European Pat. 0 160 671:
Title: No-Slip, Imposed Differential
Validated in: France, Germany, Sweden, United Kingdom
12. Japanese Pat. No. 200255
Title: No-Slip, Imposed Differential
13. Australian Patent No. 681528
Title: Variable-Angle Gear System and Constant Velocity Joint
14. Australian Patent No. 681534
Title: Hydraulic Machine with Gear-Mounted Swash-Plate
15. International Application No. PCT/US95/06538
Title: Variable-Angle Gear System and Constant-Velocity Joint
Corresponding Regional/National applications:
Europe 95 921372.9
Brazil PI 9507908-4
Canada 2,191,701
China 95 1 94440.1
Japan 501004/96
Korea 96-706840
Mexico 96 05859
16. International Application No.: PCT/U595/08732
Title: Hydraulic Machine with Gear Mounted Swash-Plate
Corresponding Regional/National applications:
Europe 95 926258.5
Brazil PI 9508276-0
Canada 2,194,963
China 95 1 95044.4
Japan 505116/96
Korea 97-700152
Mexico 9700288
In addition, the Company owns the exclusive right, title and interest in
and to the following prototypes, automotive parts, engineering documentation,
computer-readable data and other technological assets relating to the
development and testing of the drive mechanisms for tracked vehicles,
transmission, hydraulic pump/motors, a unique form of gearing, universal joints
and constant-velocity joints disclosed and found in the above-referenced patent
properties:
1. 1997 Ford Taurus 4-door sedan.
2. FasTrack tracked vehicle (Dimensions: length - 142", width - 68",
height - 72"; weight: 4100 lbs; Engine: Ford, gasoline 2.3 liter;
Transmission: Ford A4lLd; Steering system: Gleasman Steer Drive (GSD-
10).
3. Scale Model designs for various FasTrack vehicles.
4. Prototype of Gleasman Steer Drive (GSD-10).
5. Ford automotive parts: 4 engines; transmissions; differentials; worm
gears; body parts; windshields; dashboards; and seats.
6. 3 prototypes of Gleasman Orbital (IVT) Transmission
7. One year of test results relating to testing of Gleasman IVT's at
Alfred State University.
8. Right to use laboratory equipment at Alfred State University
(equipment donated to University by Gleasmans); 250 hp eddy current
dynamometer; lebow torque sensor; strain gauge shaft sensor;
various transducers; Datatronic data acquisition system; and 1 Ford V-
6 (3 liter) engine.
9. Complete CAD/CAM design for Gleasman Ortibal (IVT) Transmission re-
engineered to adapt as retrofit for existing vehicle of a major U.S.
automaker.
10. Engineering data for adapting Gleasman Orbital (IVT) Transmission for
retrofit on U.S. Army's existing HMMWV ("Hummer" vehicle).
11. Prototype Gleasman hydraulic pump/motors.
12. Off-the-shelf automotive hydraulic pump/motors made by other
manufacturers (used for comparison testing).
13. Various prototypes of Gleasman "special" gears with supporting
technical data.
14. Parts (gears, housing, shafts) and supporting technical data, relating
to designs of Gleasman CV-joint apppropriate for retrofit in existing
vehicle of a major U.S. automaker.
15. Engineering CAD/CAM files (representing 2,000 hours of development
work) for Gleasman CV-joint designs.
16. Isuzu Commercial Vehicle NPR-Diesel
(C) SPECIAL RISK FACTORS ASSOCIATED WITH BUSINESS
The present and intended business operations of the Company must be
considered to be highly speculative and involve substantial risks, and an
investment in the Common Stock should only be considered by those persons who
can bear the economic risk of their entire investment. Among the risk factors
to be considered are the following:
DEVELOPMENT STAGE; NO OPERATING HISTORY
Since its incorporation on September 25, 1996, the Company's activities
have consisted primarily of continuing the development of and designing specific
applications for the inventions patented by Vernon E. Gleasman and Keith E.
Gleasman as independent inventors during a period of more than ten years. See
"Business of Issuer." The Company as yet has not manufactured nor entered into
any arrangements to manufacture its prototypes as commercially available
products and therefore has no operating history. To date, operations have been
funded exclusively from sales of its Common Stock, including sales made pursuant
to the terms of a Confidential Placement Memorandum, dated November 8, 1996.
The Company is subject to all of the business risks associated with a new
enterprise, including, but not limited to, risks of unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages as against larger and more
established companies. The Company's ability to succeed may be hampered by the
expenses, difficulties, complications and delays frequently encountered in
connection with the formation and commencement of operations of a new business,
including, but not limited to management's potential underestimation of initial
and ongoing costs associated with the enterprise, overestimation of gross
receipts and market penetration, the adverse impact of competition, as well as
the adverse impact on the Company, and its cash flow, of the Company's inability
to promote the worldwide use of Torvec_ products.
ABILITY OF COMPANY TO CONTINUE AS A GOING CONCERN
The Company's Financial Statements (contained elsewhere herein) were
prepared assuming that the Company will continue as a going concern. The
Company's independent auditors, in its report regarding the Company's Financial
Statements, has expressed the fact that the Company is experiencing net losses
and is not generating cash flows from operating activities to sustain its
operations which raises substantial doubt the Company's ability to continue as a
going concern. The Company is planning to offer up to 1,500,000 shares of its
Common Stock at $5.00 per share in the near future to generate sufficient
capital to effectuate its "Plan of Operation" described herein.
NO ASSURANCE OF COLLABORATIVE AGREEMENTS, JOINT VENTURES OR LICENSES
The Company's business strategy is based upon entering into collaborative
joint working arrangements, formal joint venture agreements and/or licensing
agreements with domestic and/or foreign governments, automotive industry
manufacturers and suppliers in order to promote the use of the Torvec products.
No such arrangements and/or licenses have been consummated to date and there is
no assurance that the Company will be able to enter into definitive joint
working arrangements or joint venture collaborative agreements with prospective
working partners or others, or that such agreements, if entered into, will be on
terms and conditions that are sufficiently attractive to the Company to enable
it to generate profits.
In addition to seeking commercially attractive collaborative working
arrangements or joint ventures, the Company may license one or more of its
Torvec products to unaffiliated third parties. There is no assurance that the
Company will be able to enter into such license arrangements or that such
licenses will produce any income to the Company. See "Plan of Operation. "
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's ability to generate revenue and become profitable is
dependent, in part, upon the automotive industry's acceptance of certain of its
products, such as the steering drive for tracked vehicles, the infinitely-
variable transmission (IVT), the hydraulic pump and motor, the CV (constant
velocity) joint and spherical gearing. The Company's growth and future
financial performance will depend on demonstrating the advantages of such
products over existing technologies to an automotive industry which has
committed substantial resources to product systems utilizing old technology. In
addition, despite management's belief that its products are superior, the
Company will have to overcome the "not invented here" attitude that permeates
the industry.
The Company's future development is also dependent upon consumer acceptance
of certain other of its products, for example, the FasTrack_ vehicle especially
in the Asian, African, South and Central American markets. While the potential
domestic and international market is great, see "Business of Issuer", the
Company faces considerable obstacles in introducing the FasTrack in these
markets and there can be no assurance that it will be able to do so
successfully.
POTENTIAL NEED FOR ADDITIONAL FINANCING; OUTSOURCING-COST AND TIMING
The Company is not currently generating revenues to fund its operations for
the twelve months immediately following the effectiveness of this Registration
Statement. See "Plan of Operation-Liquidity and Capital Resources."
Accordingly, the Company has embarked and is implementing plans to raise
additional capital, including an offering for up to 1,500,000 shares of its
Common Stock at $5.00 per share. This proposed offering may not be successful.
In addition, the Company currently does not have a manufacturing facility and
its present intention is not to manufacture any of its products itself. Should
the Company find that it is desirable to do so, this decision would require
significant additional capital. The Company presently intends to outsource its
requirements through collaborative working agreements, joint venture
arrangements, licenses or a combination of all three. The Company may not be
able to control the terms and conditions of such outsourcing arrangements,
including the costs of labor, component parts and manufacturers' mark-up as well
as the time involved for the manufacture and/or delivery of the products it
outsources. The Company, therefore, very likely will be faced with the need for
additional financing of a capital nature in order to successfully commercialize
its products.
The Company intends to satisfy any such additional capital requirements
through debt and/or future equity financing. There can be no assurance that
such financing will be available or, if available, that it will be on favorable
terms. If adequate financing is not available, the Company may be required to
delay, scale back or eliminate certain of its research and development programs,
to relinquish rights to certain of its technologies, or to license third parties
to commercialize technologies that the Company would otherwise seek to develop
itself. See "Plan of Operation."
UNPREDICTABILITY OF PATENT PROTECTION AND PROPRIETARY TECHNOLOGY
The Company currently has the United States and foreign patent properties
listed on Page 9 of this Registration Statement. The Company's success depends,
in part, on its ability to enforce the patents which it owns, maintain trade
secrecy protection and operate without infringing on the proprietary rights of
third parties. All of the pending applications are based upon technology that
has already been patented in the United States, and therefore, the Company is
optimistic that these applications will mature into appropriate protection.
However, there can be no assurance that any of the Company's pending patent
applications will be approved, that the Company will develop additional
proprietary technology that is patentable, that any patents issued to the
Company will provide the Company with competitive advantages or will not be
challenged by third parties or that the patents of others will not have an
adverse effect on the Company's ability to conduct its business. Furthermore,
there can be no assurance that others will not independently develop similar or
superior technologies, duplicate any of the Company's automotive technologies,
or design around the Company's patented automotive technologies. It is possible
that the Company may need to contest the validity of issued or pending patents
of third parties relating to its automotive technologies. There can be no
assurance that the Company would prevail in any such contest. In addition, the
Company could incur substantial costs in defending itself in suits brought
against the Company on its patents or in bringing patent suits against other
parties.
In addition to patent protection, the Company also relies on trade secrets,
proprietary know-how and technology which it seeks to protect, in part, by
confidentiality agreements with its prospective working partners and
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently discovered by others. See
"Business; Certain Proceedings Involving Stockholders."
COMPETITION
The Company believes that its patented technology is superior to similar
products manufactured in the automotive industry and in some instances represent
a true paradigm shift with respect to presently known technology. However,
once the Company commences operations, it will be marketing products that are
provided by companies in the automotive industry that have significantly
greater financial, marketing and operating resources than the Company.
DEPENDENCE ON KEY MANAGEMENT AND OTHER PERSONNEL
To date, the Company has been dependent upon and for the foreseeable
future, it will be dependent upon the efforts of its management and scientific
staff, including Herbert H. Dobbs, Lee E. Sawyer, Morton A. Polster, Vernon E.
Gleasman, Keith E. Gleasman, and James A. Gleasman. Therefore, the loss of the
services of any one or more of such persons may have a material adverse effect
on the Company. However, the Company's negotiations and communications with
others is quite well documented, and the technology relating to the Company's
FasTrack vehicle, orbital transmission, hydraulic pump/motor, CV-Joint, and
spherical gears has all (a) been quite thoroughly documented, by engineering
drawings and on CAD computer disks, and (b) already undergone considerable
applied development and testing. The Company believes that Messrs. Dobbs,
Sawyer and Polster should be capable of continuing the further development and
marketing of the Company's products supported by this just-identified
technology.
Consequently, the Company's future success will depend in large part upon
its ability to attract and retain skilled scientific, management, operational
and marketing personnel. The Company faces competition for hiring such
personnel from other companies, government entities and other organizations.
While there can be no assurance that the Company will be successful in
attracting and retaining such personnel in the future, the Company feels quite
fortunate that its management presently includes non-family individuals with
skills and experience remarkably pertinent to the Company's present needs.
CONTROL BY EXISTING STOCKHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
COMMON STOCK
The Company's existing stockholders are able to elect all of the Company's
directors, dissolve, merge or sell all of the Company's assets and otherwise
control the Company. Such concentration of control of the Company may also have
the effect of delaying, deferring or preventing a third party from acquiring
control of the Company, may discourage bids for the Company's Common Stock at a
premium over the market price and may adversely affect the market price of the
Common Stock. See "Security Ownership of Certain Beneficial Owners and
Management."
NO DIVIDENDS
The Company has never paid any dividends on its Common Stock, and has no
plans to pay dividends on its Common Stock in the foreseeable future. Future
dividend policy will depend upon the Company's earnings, capital requirements,
financial condition and other factors considered relevant by the Company's Board
of Directors. See "Market Price of and Dividends on the Company's Common Equity
and Other Stockholder Matters."
FUTURE SALES OF RESTRICTED SECURITIES; REGISTRATION RIGHTS
The Company has 20,673,496 shares of Common Stock outstanding. These
shares of Common Stock (the "Restricted Shares") outstanding were sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act, are "restricted securities" as defined in Rule 144 promulgated
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption therefrom, including an exemption
afforded by Rule 144, is available. Under Rule 144 (and subject to the
conditions thereof), 20,453,594 of the Restricted Shares will become eligible
for sale beginning 90 days after the date of this Registration Statement, and
substantially all of the remaining 219,902 Restricted Shares will become
eligible for sale as of January 30, 1999. In addition, the holders of 1,000,000
of the Restricted Shares have certain registration rights. The sale of a
substantial number of shares of Common Stock or the availability of Common Stock
for sale could adversely affect the market price of the Common Stock prevailing
from time to time. See "Shares Eligible for Future Sale;" "Certain
Transactions."
EFFECT OF PREVIOUSLY ISSUED OPTIONS AND WARRANTS ON STOCK PRICE
The Company has reserved from the authorized, but unissued, Common Stock,
455,000 shares of Common Stock for issuance upon exercise of outstanding options
granted under the Company's 1998 Stock Option Plan, 1,545,000 shares for
issuance upon exercise of options available for future grant under the Plan and
500,000 shares reserved for issuance upon the exercise of Consulting Warrants
granted to LT Lawrence & Co., Inc. The existence of these options and warrants
may prove to be a hindrance to future financings, since the holders of such
securities may be expected to exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. In addition, the holders of these securities have certain
registration rights, and the sale of the shares issuable upon exercise of such
securities or the availability of such shares for sale could adversely affect
the market price of the Common Stock. See "Shares Eligible for Future Sale;"
"Certain Transactions."
NO ASSURANCE OF PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF COMMON STOCK
PRICES; MARKET MAKERS' POTENTIAL INFLUENCE ON THE MARKET
There is no public market for the Common Stock, and there can be no
assurance that an active trading market for any of the Shares will develop or,
if developed, be sustained. Upon the effectiveness of this Registration
Statement, the Company intends to make appplication to have its Common Stock
traded on the "Electronic Bulletin Board" of the National Association of
Securities Dealers, Inc. ("NASD").
The market price for the Company's Common Stock may be highly volatile as
has been the case with the securities of other small capitalized companies.
Factors such as the Company's financial results, the introduction of the
Company's products, its ability to enter into joint venture or licensing
agreements and various factors effecting the automotive industry may have a
significant impact on the market price of the Company's Common Stock.
Additionally, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies,
particularly of small capitalization companies the Common Stock of which trade
in the over-the-counter market, have experienced wide price fluctuations which
have not necessarily been related to the operating performance of such
companies. The Company is seeking the services of one or more market makers to
make a market in the Company's Common Stock. Such activities may exert a
dominating influence on the market during their duration and such activities may
be discontinued at any time.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Registration Statement, including without limitation, statements containing the
words "believes," "anticipates," "intends," "expects," "plans" and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, assumptions and other
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the risks identified
above under "Special Risk Factors." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revision to any of the forward-looking
statements contained herein to reflect future events or developments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PLAN OF OPERATION
12-MONTH BUSINESS STRATEGY
During the twelve months immediately following the effectiveness of this
Registration Statement, the Company intends to focus its efforts upon the
following strategies:
1. TO PROVIDE DEVELOPING COUNTRY FASTRACK_ VEHICLE MODELS FOR MARKETING
TO POTENTIAL ASIAN, AFRICA, SOUTH AND CENTRAL AMERICAN JOINT VENTURE
PARTNERS.
On January 7, 1998, the Company entered into a Service and Space
Agreement with Joseph L. Neri, Sr. (a shareholder) and Joseph Neri
Chevrolet-Oldsmobile-Pontiac pursuant to which the Company is entitled
to lease the premises described below for 1 year with an option to
renew for an additional 5 years and will be provided with labor and
certain services which will enable the Company to construct, assemble
and install the Company's products into various vehicles, including
FasTrack. The Agreement will become effective upon completion of the
Company's planned initial public offering of up to 1,500,000 shares at
$5.00 per share. The facility is located at 3740 Route 104,
Williamson, New York (approximately 20 minutes from downtown
Rochester). The facility is approximately 17,000 sq. ft.,
situated on 8 acres of land. The agreement includes the facility,
all utilities (including telephone system with an after-hour
answering service), computer system, service department,
specialized equipment and tools with above-ground lifts (D.E.C.
approved) one of which has a 28,000 lb. capacity for trucks
and buses, an 8 bay body shop, complete with a paint room and
Kansas Jack straightening machine, a two floor parts
department and a 30 member staff (sales, managers, office staff,
mechanics and a computer programmer). The annual rental for the 8 acre
facility, cost of labor and services aggregate to $630,000 (payable in
12 monthly installments). This facility is sufficient to construct
all necessary FasTrack vehicles as well as assemble and install all
Torvec products. Keith Gleasman shall have the primary responsibility
to train the employees provided to the Company under the agreement
with support from other Company executives. CAD/CAM design work will
be needed and will be contracted with independent companies for
approximately $2,000 weekly.
Adjacent to this property is 80 acres which fronts Route 104 and
is ideal for demonstrating the Company's vehicles. This acreage has
ponds, swamps and woods and will require only minor changes to
construct a course that would be similar to developing country roads.
Nominal bulldozing will enable the Company to construct the course.
Under the lease/service contract, the 80 acres will be transferred and
deeded to the Company for a cost of $350,000 on the last day of the
the first year of the lease term. This tract of land, which is
approximately 1.5 miles from the premises, is appropriate for testing
all of the Company's products.
The cost of parts for building the FasTrack vehicle (windows,
doors, engines, etc.) can range from $10,000-$40,000 per vehicle,
depending on the vehicle design and size. The Company has already
ordered appropriate diesel-powered truck parts for three FasTrack
vehicles (one such set of parts has already been received from Isuzu
Motors and the parts for the other two have been promised for delivery
at the end of May 1998 by Kia Motors). IVTs will be built for the
FasTrack using parts already designed (e.g., for the Taurus, etc.) at
an estimated cost of $50,000. An additional $100,000 will be used to
build a Torvec_ steer drive. For the latter, an outside contractor
will provide the suspension components, material and frame, while
Goodyear has agreed to supply the rubber track elements.
Upon completion of the Company's planned offering to raise needed
capital, Lee E. Sawyer will commence dialogue and discussions with
various automotive manufacturers to provide a business plan to supply
parts to the Company on a purchase or joint-venture basis. After the
parts suppliers have been identified and agreements executed, the
FasTrack demonstration vehicles will be designed using the parts
supplier's components. In this regard, Kia Motors has already
indicated that it is interested in being a parts supplier for the
FasTrack and that Kia has capacity to supply parts for as many as
80,000 vehicles per year. (Note: See appendix for correspondence
from Kia Motors.) Concurrently, Herbert H. Dobbs, Chairman of the
Board of Directors, assisted by Vernon and Keith Gleasman, will work
together to finalize the design and engineering of the demonstration
vehicles. At the same time, Herbert H. Dobbs and James Gleasman will
be opening dialogue with potential developing country joint-venture
partners in order to market the FasTrack.
2. TO COMPLETE THE INSTALLATION OF A TORVEC TRANSMISSION INTO DIESEL-
POWERED TRUCKS FOR APPROPRIATE TESTING BY NATIONAL AND STATE
ENVIRONMENTAL AGENCIES IN THE U.S. AND OTHER COUNTRIES TO QUANTIFY
EXACT FUEL SAVINGS AND EMISSIONS LEVELS AND TO DETERMINE ITS
POTENTIAL EFFECT ON THE WORLDWIDE PROBLEM OF DIESEL ENGINE POLLUTANTS.
The basic engineering layout of the Torvec IVT has already been
completed. The drawings will be submitted to a CAD/CAM contractor for
the final engineering evaluation and detailing of parts. The cost of
the trucks will be approximately $80,000, in addition to $150,000 to
complete the Torvec IVT design and manufacturing.
Alfred State College has tested Torvec IVT's in the past and is
equipped for emission and fuel economy testing. The Gleasman family,
prior to the formation of the Company, had donated most of the
dynamometer test equipment to Alfred via a grant. In addition, Toyota
donated the emission test equipment. Although negotiations have not
yet been finalized, the Company expects to contract with Alfred State
College, Alfred, New York to obtain emission and fuel economy results.
The Company expects to spend $100,000-200,000 to obtain emission and
fuel economy results, depending on the requirements of the United
States Environmental Protection Agency. (Note: Re: Testing - see
appendix for correspondence to the White House Climate Change Task
Force from Yogendra B. Jonchhe of Alfred State College.)
3. A MAJOR U.S. AUTOMAKER, FORD MOTOR COMPANY HAS AN AGREEMENT WITH THE
COMPANY FOR AN EXCLUSIVE "FIRST LOOK" AT THE IVT FOR GASOLINE-ENGINE
PASSENGER CARS.
The engineering drawings for the Taurus IVT are in the final
stages of detailing and should be ready during the next business
quarter. From these drawings the parts will be manufactured, subject
to the schedule of the suppliers. When complete, the IVT will be
installed into a Ford Taurus, owned by the Company. This car,
equipped with the IVT, will be used to document emission levels and
fuel economy. The vehicle and test results will be used to establish
joint-venture/licensing opportunities with major car manufacturers
around the world. To complete the above, a budget of approximately
$350,000 has been established. (Note: Installation of the IVT into
the Taurus is more complicated than the installation into the diesel
trucks because the Taurus has a gasoline engine and also has a more
complex front-wheel drive transaxle configuration, electronic controls
and tight packaging.)
4. TO PROMOTE WORLDWIDE USE OF IVT'S FOR REDUCING DIESEL/GASOLINE ENGINE
POLLUTION:
This will be accomplished with public relations, electronic and
print news media and auto magazines. Included in the budget will be
transportation of the vehicles, travel for the Company's support
personnel, spare componentry, and promotional material. In addition,
the Company will create displays for trade shows, SAE meetings, and
other interested parties. The estmated budget to accomplish the above
will be approximately $600,000.
5. TO ENTER INTO APPROPRIATE LICENSING COLLABORATIVE JOINT WORKING
ARRANGEMENT WITH ALL TORVEC PRODUCTS (THE FASTRACK VEHICLE, IVT
TRANSMISSION, HYDRAULIC PUMP/MOTOR, CV JOINT, AND SPHERICAL GEARING):
The Torvec CV joint for a front wheel drive Ford Taurus has been
detailed by a contracted manufacturer, which has started to produce
parts from the Company's CAD/CAM files. Assuming the parts are
manufactured to specification, the completed Torvec CV joint will be
installed in the Company's Taurus for evaluation, (durability,
handling, etc.) If the results are satisfactory, the Company will
present the CV Joint to the auto industry for their appraisal. The
budget for completing the above will be approximately $100,000.
6. TO OBTAIN A WEBSITE FOR MARKETING, SALES, EDUCATION AND INFORMATION
RELATING TO THE TORVEC PRODUCTS:
The Company will enter into arrangements with one or more
companies to produce and manage Torvec's website. The beginning stages
of the design are underway and will be ready as soon as practicable.
The budget for production and management of the website is estimated
to be $50,000.
7. TO OBTAIN PATENT PROTECTION ON AT LEAST FOUR NEW DEVELOPMENTS AND
IMPROVEMENTS RELATED TO THE TORVEC PRODUCTS DESCRIBED ABOVE:
The budget, from past experience, is estimated to be
approximately $130,000 for these patents.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations to date have been funded exclusively through the
sale of 658,496 shares of Common Stock to a limited number of investors for an
aggregate purchase price of approximately $1,400,000. These shares were sold at
varying prices ranging from $1.50 to $3.00 per share. The Company does not
presently anticipate that it will be able to generate significant operating
revenues during the twelve months immediately following the effectiveness of
this Registration Statement and therefore, the Company is presently planning to
offer up to 1,500,000 shares of its Common Stock at $5.00 per share to generate
sufficient capital to fund its continuing testing, development and other working
capital requirements during the next twelve months. The Company anticipates,
based on its currently proposed plans and assumptions relating to its operations
(including assumptions regarding the nature and extent of its testing program,
the ability of the Company to secure adequate manufacturing and distribution
relationships and market acceptance of the Company's products) that if such
offering is successful, the Company shall have sufficient capital to meet the
Company's contemplated capital requirements for the next twelve months.
However, if the Company's plans change or its assumptions change or prove to be
incorrect, the Company could be required to seek additional financing. In
addition, the Company may have to raise substantial additional capital to fund
its operations, upon completion of its first year's operations. There can be no
assurance that additional financing will be available when needed on terms
acceptable to the Company, or at all.
If the Company successfully completes its planned offering of 1,500,000
shares, it will utilize the net proceeds of said offering as follows:
APPROXIMATE
DOLLAR AMOUNT
Named Executive Officers' salaries (1) $600,000
Consultant's fees(2) $450,000
Service and Space Agreement
3740 Route 104, Williamson, New York (3) $630,000
Purchase of 80 Acre Tract
3740 Route 104, Williamson, New York (4) $350,000
CAD/CAM Design Work (5) $104,000
IVT for FasTrack_ (6) $ 50,000
Torvec_ Steer Drive (7) $100,000
Diesel Trucks (8) $ 80,000
IVT Design and Manufacturing (9) $150,000
Emission and Fuel Economy Testing (Alfred State) (10) $200,000
Installation of IVT into Taurus (11) $350,000
Promotion of Worldwide Use of IVT (12) $600,000
Collaborative Joint Working Arrangements (13) $100,000
Website (14) $ 50,000
New Patents (15) $130,000
Legal and Accounting Expenses $250,000
Miscellaneous Costs of Public Offering, Including
Registration Fees and Printing Costs $150,000
Working Capital and General Corporate Purposes $3,156,000
Total $7,500,000
(1) See Page 21 of this Registration Statement for a description of
the Company's employment agreements with its Named Executive
Officers.
(2) See Page 22 of this Registration Statement for a description of
the Company's consulting agreements with Keith, James and Vernon
Gleasman.
(3) On January 7, 1998, the Company executed a Service and Space
Agreement with Jospeh L. Neri, Sr. and Joseph L. Neri Chevrolet-
Oldsmobile-Pontiac, Inc. pursuant to which the Company shall
lease the premises located at 3740 Route 104, Williamson, New
York 14589, rent equipment on premises and shall utilize Neri's
personnel to construct, assemble and install the Company's
products into vehicles. See "Plan of Operation." The agreement
is for a term of one year, effective upon the completion of this
Offering, and may be renewed, at the Company's option, for up to
four additional one-year periods. The annual fee for facility,
equipment and personnel is $630,000.
(4) Under the Space and Service Agreement, the Company has agreed to
purchase, unless it would violate zoning laws or restrictions,
an 80 acre tract of land adjacent to the premises located at
3740 Route 104 which acreage contains ponds, swamps and wood
suitable for testing vehicles containing Company products. See
"Plan of Operation." The purchase price is $350,000 and closing
is to take place one year from the effective date of the
agreement.
(5) See "Plan of Operation", Strategy 1.
(6) See "Plan of Operation", Strategy 1.
(7) See "Plan of Operation", Strategy 1.
(8) See "Plan of Operation", Strategy 2.
(9) See "Plan of Operation", Strategy 2.
(10) See "Plan of Operation", Strategy 2.
(11) See "Plan of Operation", Strategy 3.
(12) See "Plan of Operation", Strategy 4.
(13) See "Plan of Operation", Strategy 5.
(14) See "Plan of Operation", Strategy 6.
(15) See "Plan of Operation", Strategy 7.
The foregoing represents the Company's best estimate of its expenses during
the 12 months immediately following the effectiveness of this Registration
Statement. This estimate is based on certain assumptions, including that
testing, development and marketing efforts relating to the Company's products
can be completed at budgeted costs. Projected expenditures are estimates or
approximations only. Future events, including the problems, delays, expenses,
difficulties and complications frequently encountered by companies in an early
stage of development, changes in economic or competitive conditions or in the
Company's planned business, and the success or lack thereof of the Company's
development and marketing efforts during the next twelve months may make shifts
in the allocation of funds and curtailment of certain planned expenditures
necessary or desirable. Any such shifts will be at the discretion of the
Company. See "Plan of Operation."
Proceeds not immediately required for the purposes described above will be
invested principally in short-term interest bearing securities, money market
funds, certificates of deposit or direct or guaranteed obligations of the United
States government.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations to
date and management is currently unable to determine the extent inflation may
impact the Company's operations during the twelve months immediately following
the effectiveness of this Registration Statement.
QUARTERLY FLUCTUATIONS
As of the date of this Registration Statement, the Company has not engaged
in operations. Once the Company actually commences operations, the Company's
operating results may fluctuate significantly from period to period as a result
of a variety of factors, including product returns, purchasing patterns of
consumers, the length of the Company's sales cycle to key customers and
distributors, the timing of the introduction of new products and product
enhancements by the Company and its competitors, technological factors,
variations in sales by product and distribution channel, and competitive
pricing. Consequently, once the Company actually commences operations, the
Company's product revenues may vary significantly by quarter and the Company's
operating results may experience significant fluctuations.
ITEM 3. DESCRIPTION OF PROPERTY.
See the Company's "Plan of Operation," Strategy 1 for a narrative
description of the Company's Lease/Service Agreement, with respect to the
Company's leasehold interest in plant and equipment located at 3740 Route 104,
Williamson, New York 14587. See "Business of Issuer-The Company's Assets" for a
narrative of the Company's patented inventions and other properties.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(A) SECURITY OWNERSHIP
The following table sets forth as of the date of this Registration
Statement certain information with respect to the beneficial ownership of the
Common Stock of the Company by (i) each person known by the Company to own more
than 5% of the outstanding shares of the Common Stock of the Company, each
director, each executive officer, each consultant and (ii) all directors,
executive officers and named consultants of the Company as a group. Unless
otherwise indicated, the owners have sole voting and investment power with
respect to their respective shares.
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER POSITION SHARES OWNED(1) SHARES OWNED
Herbert H. Dobbs Chairman of the Board 400,000(2) 1.93%
448 West Maryknoll Road of Directors
Rochester Hills, MI 48309
Keith E. Gleasman Dir.; President and 5,493,134(3) 26.56%
11 Pond View Drive Consultant to Torvec,
Pittsford, NY 14534 Inc.
Lee E. Sawyer Director 357,000(4) 1.72%
16 Williamsburg Lane
Rolling Hills, CA 90274
Morton A. Polster Director; Secretary of 275,600(5) 1.33%
c/o Eugene Stephens Torvec, Inc.
& Associates
56 Windsor Street
Rochester, NY 14605
James A. Gleasman Director; Consultant 5,480,133(6) 26.50%
11 Pond View Drive to Torvec, Inc.
Pittsford, NY 14534
Vernon E. Gleasman Consultant to 5,493,133(7) 26.56%
11 Pond View Drive Torvec, Inc.
Pittsford, NY 14534
Samuel M. Bronsky Chief Financial Officer 1,000 Less Than
6653 Main Street 1%
Williamsville, NY 14221
All Executive Officers 17,500,000(8) 84.60%
and Directors as a Group
(7 persons)
1. Except as indicated in the footnotes to this table, the Company believes
that all the persons named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them,
subject to community property laws where applicable. In accordance with
the rules of the Commission, a person or entity is deemed to be the
beneficial owner of securities that can be acquired by such person or
entity within 60 days from the date of this Registration Statement upon the
exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options and warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days of the date of this Registration Statement have
been exercised. The inclusion herein of such shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
Percentages herein assume a base of 20,673,496 shares of Common Stock
outstanding as of the date of this Registration Statement.
2. Includes 20,000 shares which may be purchased through the exercise of an
option granted in connection with his employment agreement, exercisable at
$5.00 per share. In May, 1998, Mr. Dobbs entered into option agreements
pursuant to which related parties have the right to purchase 360,000 shares
of the Company's Common Stock from him at an exercise price of $5.00 per
share at any time during a ten year option term.
3. Includes 5,000 shares which may be purchased through the exercise of an
option granted in connection with his consulting agreement, exercisable at
$5.00 per share. In December, 1997, Mr. Gleasman entered into option
agreements pursuant to which related parties have the right to purchase
300,000 shares of the Company's Common Stock from him at an exercise price
of $5.00 per share at any time during a ten year option term.
4. Includes 36,000 shares which may be purchased through the exercise of an
option granted in connection with his employment agreement, exercisable at
$5.00 per share.
5. Includes 20,000 shares which may be purchased through the exercise of an
option granted in connection with his employment agreement, exercisable at
$5.00 per share.
6. Includes 5,000 shares which may be purchased through the exercise of an
option granted in connection with his consulting agreement, exercisable at
$5.00 per share. In November, December 1997, Mr. Gleasman entered into
option agreements pursuant to which related parties have the right to
purchase 364,000 shares of the Company's Common Stock from him at an
exercise price of $5.00 per share at any time during a 10 year option term.
7. Includes 5,000 shares which may be purchased through the exercise of an
option granted in connection with his consulting agreement, exercisable at
$5.00 per share. In December, 1997, Mr. Gleasman entered into option
agreements pursuant to which related parties have the right to purchase
2,000,000 shares of the Company's Common Stock from him at an exercise
price of $5.00 per share at any time during a 10 year option term.
8. Includes an aggregate 91,000 shares which may be purchased through the
exercise of options granted in connection with employment and consulting
agreements, exercisable at $5.00 per share.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND CONSULTANTS
The following table sets forth certain information about the current
directors, executive officers of the Company and its consultants.
DATE OF DATE OF
ELECTION OR TERMINATION
NAME AGE POSITIION DESIGNATION OR RESIGNATION
Herbert H. Dobbs 66 Chairman of the 02/20/98 *
48 West Maryknoll Rd Board of Directors
Rochester Hills, MI
48309
Keith E. Gleasman 50 Director; President 09/26/96 *
11 Pond View Drive and Consultant to
Pittsford, NY 14534 Torvec, Inc.
Lee E. Sawyer 56 Director 09/27/96 *
16 Williamsburg Lane
Rolling Hills, CA 90274
Morton A. Polster 70 Director; Secretary of 09/27/96 *
c/o Eugene Stephens & Torvec, Inc.
Associates
56 Windsor Street
Rochester, NY 14605
James A. Gleasman 57 Director; Consultant to 02/20/98 *
11 Pond View Drive Torvec, Inc.
Pittsford, NY 14534
Vernon E. Gleasman 86 Consultant to Torvec, 12/01/97 *
11 Pond View Drive Inc.
Pittsford, NY 14534
Samuel M. Bronsky 36 Chief Financial Officer 04/01/98 *
6653 Main Street
Williamsville, NY 14221
*CHANGES IN CONTROL
To the knowledge of the Company's management, there are no present
arrangements or pledges of the Company's Common Stock which may result in a
change of control of the Company. The members of the Board of Directors shall
serve until the next annual meeting of shareholders and until their successors
are elected or appointed and shall have qualified, or until their prior
resignation or termination.
(B) BUSINESS EXPERIENCE
The business experience of Messrs. Dobbs, Sawyer, Polster and Vernon E.
Gleasman is provided on Pages 3 and 4 of this Registration Statement.
The following sets forth the business experience of Messrs. James A. and
Keith E. Gleasman:
1. JAMES A. GLEASMAN - CONSULTANT
. Life-long entrepreneur.
. Skilled in management, finance, strategic planning, organizing and
marketing.
. Co-inventor of the Gleasman GSD-10 steer drive.
. Established manufacturing of the TorsenR Differential in Argentina,
Brazil, etc.
. Principal at two of the family companies, raised capital,
negotiated international, military and automotive contracts.
. Set business strategies for small company's dealings with large
companies, including sale of family company to Gleason Corp., New
York.
. Joint venture partner with Clayton Brokerage Co. of St. Louis, MO.
. Owned financial-consulting business.
. Negotiated with numerous Asian Corporations (including Mitsubishi
and Mitsui).
. Educated in Asian philosophy, business practices and culture.
2. KEITH E. GLEASMAN - CONSULTANT
Co-Inventor with Vernon E. Gleasman on all Torvec patents, Mr.
Gleasman's strengths include his extensive marketing and sales
executive experience, in addition to his design and development
knowledge. His particular expertise has been in the area of defining
and demonstrating the products to persons within all levels of the
automotive industry, race crew members, educators and students.
. As Vice President of Sales for Gleason Corporation (Power Systems
Division), designed and conducted seminars on vehicle driveline
systems for engineers at the U.S. army tank automotive command.
. Designed a complete nationwide after-market program for the Torsen
Differential, which included trade show participation for the
largest after-market shows in the U.S.,SCORE and SEMA.
. Extensive after-market experience including pricing, distribuiton,
sales catalogs, promotions, trade show booths designs and vehicle
sponsorships.
. Responsible for over 300 articles in trade magazines highlighting
the Torsen Differential (e.g., Popular Science, Auto Week, Motor
Trend, Off-Road, and Four Wheeler).
. Designed FasTrack_ vehicle prototype, (from concept to asssembly).
. Assisted in developing engineering and manufacturing procedures
for the Torsen Differential and for all of the Torvec prototypes.
. Instructed race teams on use of the Torsen Differential (Indy cars,
Formula 1, SCCA Trans-Am, IMSA, GTO, GTU, GT-1, NASCAR, truck
pullers and off-road racers).
. Has been trained for up-to-date manufacturing techniques such as
NWH, statistical process control and MRP II.
Mr. Gleasman has extensive technical and practical experience,
covering all aspect of the Company's products such as, promotion,
engineering and manufacturing.
3. SAMUEL M. BRONSKY - CHIEF FINANCIAL OFFICER
Owner of a Certified Public Accounting firm specializing in small
to medium-sized businesses. Services include audits, reviews,
compilations, and consulting services, including among other items,
business valuations, computer applications, assisting in debt
acquisition and consolidation, purchasing and selling of businesses
and related tax ramifications, and general business assistance for
clients. In addition, Mr. Bronsky has worked with various government
agencies in a variety of audit contexts, including sales tax audits,
IRS examinations. Mr. Bronsky is a member of the New York State
Society of CPAs and the American Institute of CPAs. He is a
director of the East Buffalo Credit Union and the Erie Community
College Foundation and is the treasurer of the East Buffalo Credit
Union. Mr. Bronsky is past treasurer and director of the Amherst
Chamber of Commerce.
(C) FAMILY RELATIONSHIPS
Vernon E. Gleasman is the father of James A. and Keith E. Gleasman. There
are no other family relationships between any directors or executive officers of
the Company, either by blood or by marriage.
(D) CERTAIN PROCEEDINGS INVOLVING STOCKHOLDERS
1. On August 29, 1997, McElroy Manufacturing, Inc. of Tulsa, Oklahoma,
and two of its employees (collectively "MMI"), initiated a lawsuit against
Vernon and Keith Gleasman in the United States District Court for the Northern
District of Oklahoma. The Company is not a party to this litigation. The
plaintiffs seek money damages against the Gleasmans in the amount of $750,000
representing amounts MMI allegedly contributed to the development of hydraulic
pump/motor prototypes and also allege that the two MMI employees should have
been named as co-inventors on three patents.
In responding to the MMI complaints, the Gleasmans requested dismissal
of the complaint on the grounds that the claims relate to an Agreement dated
October 10, 1991, entered into by MMI and the Gleasmans under which the parties
agreed to arbitrate "any controversy or claim arising out of or relating to this
Agreement." The Gleasmans also requested dismissal of the complaint on the
additional grounds that the two individuals were not co-inventors and, even if
they were, that pursuant to the Agreement the individuals and MMI assigned any
and all interest they may have had in such patents and prototypes to the
Gleasmans.
On February 6, 1998, the Court stayed all aspects of the litigation
pending arbitration in New York State. In the opinion of the Gleasmans, MMI's
claims are without merit.
As indicated above, the Company is not a party to this MMI litigation.
The litigation sets forth claims which do not effect the validity of the
patents, but could impact the Company's exclusive ownership of three patents
listed among the future products of the Company on Page 9 of this Registration
Statement, namely the Hydraulic Pump/Motor, CV-Joint, and Spherical Gearing
thus, enabling MMI to commercialize such patents. The claims are based upon the
allegations that (1) the products were not included within the Agreement between
the parties and therefore not assigned to the Gleasmans which fact is disputed
by the Gleasmans and is one of the subjects of the arbitration, and (2) the
plaintiffs are co-inventors of the invention with the Gleasmans, which
allegation is contrary to every fact known by the Gleasmans. In the opinion of
the Company, if the plaintiffs are successful, this will not effect the
development and marketing of the FasTracka. Two of the three products are not
used in the FasTrack. The third will be used by the Company, but a
non-exclusive interest in that product, which is all that the plaintiffs could
win, will not enable them to build the FasTrack which relies heavily on other
Company patents, particularly the steer-drive patents.
2. In 1993, James A. Gleasman, after a dramatic reduction in income,
suffered financial reverses and filed for protection under Chapter 11 of the
United States Bankruptcy Code in United States Bankruptcy Court for the Western
District of Texas. The reorganization was completed within 14 months and all
allowed claims were paid in full.
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Pursuant to the terms of the Company's employment agreements with Messrs.
Herbert H. Dobbs, Lee E. Sawyer and Morton A. Polster (as more fully described
below), such persons shall assume the capacities of Chief Executive Officer,
President and Chief Operating Officer, and Secretary, Legal and Patent Counsel,
respectively, on the first day of the month in which the Company completes its
planned initial public offering of 1,500,000 shares of its Common Stock at
$5.00 per share. The following table sets forth the aggregate compensation
to be paid or accrued by the Company for services rendered in such capacities
during the twelve month period beginning on the first day of the month
following completion of such offering by Herbert H. Dobbs, Lee E. Sawyer and
Morton A. Polster (together, the "Named Executive Officers").
<TABLE>
LONG TERM
<CAPTION>
<CAPTION> COMPENSATION AWARDS
<C> <C> <C>NUMBER OF SHARES <C>
OF COMMON STOCK
ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL BONUS _________________ ____________
SALARY
POSITION
Herbert H. Dobbs $150,000 (1) $ -0- 100,000 (2) $0
Lee E. Sawyer $240,000 (1) $60,000 180,000 (2) $0
Morton A. Polster $150,000 (1) $ -0- 100,000 (2) $0
</TABLE>
(1) Prior to the date of this Registration Statement, the Company did not pay
cash compensation to the Company's Chief Executive Officer or to the Company's
other Named Executive Officers. The Named Executive Officers and the
consultants named below have performed services to the Company to date in
exchange for receipt of shares of Common Stock in the Company and in the case of
the Gleasmans, a cash reimbursement in the amount of $365,000 for expenses
incurred prior to the Company's formation with respect to the Company's
inventions and patent properties. See "Security Ownership of Management and
Certain Security Holders"; "Certain Transactions." It is not anticipated that
such personnel will receive additional shares for such past services. The
Company has executed employment agreements with its Named Executive Officers and
consulting agreements with its consultants, the salient terms and conditions of
which are described below. See "Employment Agreements;" "Consulting
Agreements."
(2) In 1998 380,000 stock options have been granted to the Named Executive
Officers in connection with their employment agreements exercisable in
cumulative increments at the rate of 20% annually.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information for the Named Executive
Officers with respect to the exercise of options to purchase Common Stock
during the fiscal year ended December 31, 1997 and the number and value of
securities underlying unexercised options held by the Named Executive Officers
as of April 15, 1998.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE APRIL 15, 1998 AT APRIL 15, 1998(1)
NAME ON EXECISE REALIZED EXERCISAB(2) UNEXERCISAB EXERCISAB UNEXERCISAB
Herbert H. Dobbs 0 0 20,000 80,000 $0 $0
Lee E. Sawyer 0 0 36,000 144,000 $0 $0
Morton A. Polster 0 0 20,000 80,000 $0 $0
(1) Calculated on the basis of the planned initial public offering price of the
the Common Stock of $5.00 per share, minus the per share exercise price
multiplied by the number of shares underlying the option.
(2) At December 31, 1997 the options indicated as exercisable were included
in the unexercisable column.
EMPLOYMENT AGREEMENTS
On February 6, 1998, the Company entered into a 3 year employment agreement
with Herbert H. Dobbs, commencing on the first day of the month in which the
Company receives the proceeds from the completion of its planned initial public
offering of up to 1,500,000 shares at $5.00 per share, under which he is
obligated to devote substantially all of his business and professional
time to the Company and its Plan of Operation in the capacity as Chairman
and Chief Executive Officer of the Company. Under such agreement,
Herbert H. Dobbs is entitled to receive a salary of $150,000 during the
first year of the agreement, $150,000 during the second year and $150,000
during the last year. He is also entitled to certain employee benefits
normally associated with employment such as vacation, health and disability
insurance and was granted an option to purchase 100,000 shares of the
Company's Common Stock pursuant to the Company's 1998 Stock Option Plan
conditioned upon shareholder approval of the 1998 Stock Option Plan. The
agreement is automatically renewable for an additional 3 years and may be
terminated earlier by the employee upon 12 months notice or by the Company upon
payment of a severence of 12 months base pay, except if the termination is for
cause.
On February 6, 1998, the Company entered into a 3 year employment agreement
with Lee E. Sawyer, commencing on the first day of the month in which the
Company receives the proceeds from the completion of its planned initial public
offering of up to 1,500,000 shares at $5.00 per share, under which he
is obligated to devote substantially all of his business and professional
time to the Company and its Plan of Operation in the capacity as President
and Chief Operating Officer of the Company. Under such agreement,
Mr. Sawyer is entitled to receive a salary of $240,000 during the
first year of the agreement, $252,000 during the second year and $264,000
during the last year and a minimum bonus of $15,000 per quarter during
the agreement's term, with bonus increases determined by the Board of
Directors depending upon such factors as performance, profitability and
the financial condition of the Company. He is also entitled to certain employee
benefits normally associated with employment such as vacation, health and
disability insurance and was granted an option to purchase 180,000 shares of the
Company's Common Stock pursuant to the Company's 1998 Stock Option Plan
conditioned upon shareholder approval of the 1998 Stock Option Plan. The
agreement is automatically renewable for an additional 3 years and may be
terminated earlier by the employee upon 12 months notice or by the Company upon
payment of a severence of 12 months base pay and minimum bonus, except if the
termination is for cause.
On February 6, 1998, the Company entered into a 3 year employment agreement
with Morton A. Polster, commencing on the first day of the month in which
the Company receives the proceeds from the completion of its planned initial
public offering of up to 1,500,000 shares at $5.00 per share, under which he
is obligated to devote substantially all of his business and professional
time to the Company and its Plan of Operation in the capacity as Secretary
and Legal and Patent Counsel of the Company. Under such agreement,
Mr. Polster is entitled to receive a salary of $150,000 during the first
year of the agreement, $150,000 during the second year and $150,000 during
the last year. He is also entitled to certain employee benefits normally
associated with employment such as vacation, health and disability insurance
and was granted an option to purchase 100,000 shares of the Company's
Common Stock pursuant to the Company's 1998 Stock Option Plan
conditioned upon shareholder approval of the 1998 Stock Option Plan. The
agreement is automatically renewable for an additional 3 years and may be
terminated earlier by the employee upon 12 months notice or by the Company upon
payment of a severence of 12 months base pay, except if the termination is for
cause.
CONSULTING AGREEMENTS
On December 1, 1997, the Company entered into a 3 year consulting
agreement with Vernon E. Gleasman, under which he is obligated to devote
substantially all of his business and professional time to the Company and its
Plan of Operation in the capacity of Consultant to the Company. Under such
agreement, Mr. Vernon Gleasman shall receive an annual consulting fee of
$150,000 and was granted an option to purchase 25,000 shares of the Company's
Common Stock pursuant to the Company's 1998 Stock Option Plan conditioned upon
shareholder approval of the 1998 Stock Option Plan.
On December 1, 1997, the Company entered into a 3 year consulting
agreement with James A. Gleasman, under which he is obligated to devote
substantially all of his business and professional time to the Company and its
Plan of Operation in the capacity of Consultant to the Company. Under such
agreement, Mr. James A. Gleasman shall receive an annual consulting fee of
$150,000 and was granted an option to purchase 25,000 shares of the Company's
Common Stock pursuant to the Company's 1998 Stock Option Plan conditioned upon
shareholder approval of the 1998 Stock Option Plan.
On December 1, 1997, the Company entered into a 3 year consulting
agreement with Keith E. Gleasman, under which he is obligated to devote
substantially all of his business and professional time to the Company and its
Plan of Operation in the capacity of Consultant to the Company. Under such
agreement, Mr. Keith E. Gleasman shall receive an annual consulting fee of
$150,000 and was granted an option to purchase 25,000 shares of the Company's
Common Stock pursuant to the Company's 1998 Stock Option Plan conditioned upon
shareholder approval of the 1998 Stock Option Plan.
Each of the employment agreements and each of the consulting agreements
contain customary covenants prohibiting the employee or the consultant, as the
case may be, from disclosure of confidential information regarding the Company,
its inventions and its products, and provisions confirming that all inventions
conceived, made or developed by the employee or the consultant, as the case may
be, and relating to the business of the Company constitutes the sole property of
the Company. Each of the consulting agreements contains covenants restricting
the consultant from engaging in any activities competitive with the business of
the Company during the terms of such agreements and for a period of two years
after termination. Each of the consulting agreements also contain a provision
that the benefits provided thereunder continue even if the consultant were to
become unable to perform services for the Company during its term.
1998 STOCK OPTION PLAN
On December 1, 1997, the Company's Board of Directors adopted the Company's
1998 Stock Option Plan pursuant to which officers, directors, key employees
and/or consultants of the Company may be granted incentive stock options and/or
non-qualified stock options to purchase up to an aggregate of 2,000,000 shares
of the Company's Common Stock. The Company intends to submit its 1998 Stock
Option Plan to existing shareholders prior to the effective date of this
Registration Statement.
With respect to incentive stock options, the Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (110%
of fair market value in the case of shareholders who, at the time the option is
granted, own more than 10% of the total outstanding Common Stock), and requires
that all such options have an expiration date not later than the date which is
one day before the tenth anniversary of the date of the grant of such options
(or the fifth anniversary of the date of grant in the case of 10% shareholders).
However, in the event that the option holder ceases to be an employee of the
Company, such option holder's incentive options immediately terminate. Pursuant
to the provisions of the Plan, the aggregate fair market value, determined as of
the date(s) of grant, for which incentive stock options are first exercisable by
an option holder during any one calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the Plan permits the exercise
price to be less than the fair market value of the Common Stock on the date the
option is granted and permits Board discretion with respect to the establishment
of the terms of such options. Unless the Board otherwise determines, in the
event that the option holder ceases to be an employee of the Company, such
option holder's non-qualified options immediately terminate.
In connection with their employment agreements, the Company's Board of
Directors granted stock options under the 1998 Stock Option Plan to the
Company's Named Executive Officers entitling them to purchase an aggregate of
380,000 shares of Common Stock, all of which provide for an exercise price of
$5.00 per share, are exercisable on a cumulative basis at the rate of 20% per
year beginning on January 1, 1998 and provide that the right to exercise the
option in accordance with its terms shall survive the executive's termination of
employment. Each option expires on December 31, 2007 and is conditioned upon
shareholder approval of the Plan. In connection with their consulting
agreements, the Board of Directors granted stock options under the 1998 Stock
Option Plan to the Company's consultants entitling them to purchase an aggregate
of 75,000 shares of Common Stock, all of which provide for an exercise price of
$5.00 per share, are exercisable on a cumulative basis at the rate of 20% per
year beginning on December 1, 1997 and provide that the right to exercise the
option in accordance with its terms shall survive the consultant's termination
of services. Each option expires on November 30, 2007 and is conditioned upon
shareholder approval of the Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
As stated elsewhere in this Registration Statement, during the ten plus
years prior to the incorporation of the Company, Vernon E., Keith E. and James
A. Gleasman invented and patented numerous improvements relating to drive
mechanisms for tracked vehicles, transmissions, hydraulic pumps/motors, a unique
form of gearing, universal joints, and constant velocity joints as disclosed in
such patents. Upon the Company's incorporation, the Gleasmans assigned all
their right, title and interest to and in such inventions and patents to the
Company in exchange for the issuance of 16,464,400 shares of the Company's
Common Stock and the agreement of the Company to pay the Gleasmans the sum of
$365,000 for expenditures in the development of these inventions and products,
the Gleasmans having agreed to waive and release the Company from payment of any
other expenses that they incurred in the development of these inventions and
products. The Board of Directors of the Company concluded that the value of
the inventions, patents and patent applications assigned to the Company, as well
as the value of the services rendered, had a value in excess of the par value of
the number of shares transferred to the assignors and service providers,
respectively. Shares issued are fully paid and nonassessable.
Mr. Morton A. Polster, a director of the Company and its Secretary, has
been Patent Counsel to the Gleasman family since 1989 and has been in charge of
the preparation and execution of the Gleasmans' and now the Company's U.S. and
international patent protection. Mr. Polster received 291,600 shares of the
Company's Common Stock at the inception of the Company.
See Page 13 of this Registration Statement for a discussion of the
lease/service contract entered into between the Company and Joseph L. Neri, Sr.,
who owns 95,000 shares of the Common Stock of the Company.
On February 11, 1997, the Company entered into a consulting agreement to
retain LT Lawrence & Co., Inc. on a nonexclusive basis as a financial consultant
for a period of three years. Under the agreement, the consultant will assist
the Company in developing, studying and evaluating financing, merger and
acquisition proposals, assist the Company in obtaining short and long-term
financing and serve as a liaison between the Company and individuals and
financial institutions in the investment community, such as security analysts,
portfolio managers and market makers. As compensation, the Company issued an
aggregate 1,000,000 shares of its Common Stock to the consultant's principals
and granted the same persons 500,000 Consulting Warrants exercisable for a
period of 5 years, commencing upon the consummation of this Offering, at an
exercise price equal to the initial public offering price. If 50% or more of
the Company's assets or Common Stock is acquired by a third party during the 5
year Consulting Warrant term, the exercise price shall be $1.50. In the event
that the Representative originates an acquisition or merger transaction to which
the Company is a party, LT Lawrence & Co., Inc. will also be entitled to receive
a finder's fee in consideration for origination of such transaction.
The Company has agreed to register, at the request of the holders of a
majority of the 1,000,000 shares and/or the 500,000 Consulting Warrants and at
Company expense, the shares and/or the shares of Common Stock underlying the
Consulting Warrants under the Securities Act on one occasion during the
Consulting Warrant term and to include such underlying shares in any
registration statement that is filed by the Company during the Consulting
Warrant term and for two years after its expiration.
Each of consultant's principals have agreed not to offer, sell, assign,
pledge or transfer any of such shares of Common Stock or the shares of Common
Stock underlying the Consulting Warrants for a period of 12 months from the date
of this Registration Statement.
Certain officers, directors and consultants may engage in transactions with
the Company in the ordinary course of the business of the Company. It is
expected that the terms and conditions of such transactions will be
substantially the same as similar transactions with unrelated parties.
Other than as described herein, and other than as described in Part I, Item
6, there have been no material transactions, series of similar transactions or
currently proposed transactions to which the Company was or is a party, in which
the amount invested exceeds $60,000 and in which any director or executive
officer, or any security holder who is known to the Company to own of record or
beneficially more than five percent of the Company's Common Stock, or any
member of the immediate family of any of the foregoing persons, had a material
interest.
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
The Company is authorized to issue 40,000,000 shares of Common Stock, $.01
par value per share, of which 20,673,496 shares are currently issued and
outstanding. Once issued for consideration, the shares of Common Stock are not
subject to assessment or call. The following summary description of the Common
Stock is qualified in its entirety by reference to the Company's Certificate of
Incorporation, as amended, a copy of which is included as an exhibit to the
Company's Registration Statement.
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting with respect to the election of directors, which means that
the holders of more than 50% of the outstanding shares of Common Stock can elect
all of the Company's directors if they choose to do so and, in such event, the
holders of the remaining shares would not be able to elect any directors.
Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of all
liabilities. Holders of the Common Stock do not have subscription, redemption
or conversion rights, nor do they have any preemptive rights. In the event the
Company were to elect to sell additional shares of its Common Stock following
this Offering, investors in this Offering would have no right to purchase such
additional shares. As a result, their percentage equity interest in the Company
would be diluted. All of the outstanding shares of Common Stock are, and the
shares to be outstanding upon completion of this Offering will be, duly
authorized, validly issued, fully paid and nonassessable. The Board of
Directors is authorized to issue additional shares of Common Stock, not to
exceed the amount authorized by the Company's Certificate of Incorporation as
amended from time to time, and to issue options and warrants for the purchase of
such Common Stock, on such terms and conditions and for such consideration as
the Board of Directors may deem appropriate without further stockholder action.
OUTSTANDING WARRANTS
The Company has outstanding Consulting Warrants granting the holders the
right to purchase up to an aggregate of 500,000 shares of Common Stock at a
purchase price equal to the initial public offering price per share. The
Consulting Warrants may be exercised on the date the Registration Statement
filed with the Commission of which this Registration Statement is a part is
declared effective by the Commission and shall expire five years thereafter.
The Consulting Warrant holders are entitled to one demand and unlimited
piggyback registration rights with respect to the underlying shares. See
"Certain Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
As of the effective date of the Registration Statement, the Company will
have issued and outstanding 20,673,496 shares of Common Stock. Of such shares,
all 20,673,496 shares of Common Stock are restricted securities within the
meaning of Rule 144 under the Securities Act and, in general, if held for at
least one year, will be eligible for sale in the public market in reliance upon
and subject to the limitations of Rule 144.
In general under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
affiliate of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of shares beneficially
owned for at least one year that does not exceed the greater of (i) one percent
of the number of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. Furthermore, a person who is not deemed
to have been an affiliate of the Company during the ninety days preceding a sale
by such person and who has beneficially owned such shares for at least two years
is entitled to sell such shares without regard to the volume, manner of sale,
public information or notice requirements. Under Rule 144 (and subject to the
conditions thereof), of the 20,673,496 shares of Common Stock outstanding as of
the date of this Registration Statement, 20,453,594 will become eligible for
sale beginning 90 days after the date of this Registration Statement and
substantially all of the remaining 219,902 shares will become eligible for sale
as of January 30, 1999. In addition, the Company has granted certain
registration rights with respect to 1,000,000 shares of Common Stock issued to
certain principals of the LT Lawrence & Co., Inc. and with respect to the
500,000 shares of Common Stock underlying the Representative's Warrants and the
Consulting Warrants, respectively. See "Certain Transactions."
There has been no public market for the Company's securities. The Company
cannot predict the effect, if any, that market sales of the Common Stock, or the
availability of such shares for sale, will have on the market price prevailing
from time to time. Nevertheless, sales by the existing stockholders of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices for the Company's securities. In addition, the
availability for sale of substantial amounts of Common Stock acquired through
the exercise of options or warrants could adversely affect prevailing market
prices for the Common Stock.
No prediction can be made as to the effect, if any, that sales of Common
Stock and of Common Stock underlying outstanding options or warrants or the
availability of such shares for sale in the public market will have on the
market price for the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market and/or upon
the exercise of outstanding options and warrants after the restrictions
described above lapse, or in the case of LT Lawrence & Co., Inc. after the
exercise of its registration rights, could adversely effect prevailing market
prices for the Common Stock and impair the ability of the Company to raise
capital through an offering of its equity securities in the future.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
(A) MARKET INFORMATION
Since the Company's incorporation in September, 1996, there has been no
public market for the Company's Common Stock. The Company anticipates that upon
the effectiveness of this Registration Statement, it will apply to have its
Common Stock traded on the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. ("NASD") and it is anticipated that upon
such event, high and low bid and asked prices for the Company's Common Stock as
reported by NASD will become available.
(B) HOLDERS
As of April 15, 1998, the Company had 113 shareholders of record.
(C) DIVIDEND POLICY
The Company has not paid any dividends to its shareholders since its
inception. The declaration or payment of dividends, if any, to its shareholders
is within the discretion of the Board of Directors of the Company and will
depend upon the Company's earnings, capital requirements, financial condition
and other relevant factors. The Board of Directors does not currently intend to
declare or pay any dividends in the foreseeable future and intends to retain any
earnings to finance the growth of the Company.
(D) REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law. Upon the
effectiveness of this Registration Statement, the Company will be required to
comply with periodic reporting, proxy solicitation and certain other
requirements of the Securities Exchange Act of 1934.
(E) TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company has been appointed as the
Company's Transfer Agent and Registrar for its Common Stock.
ITEM 2. LEGAL PROCEEDINGS.
The Company is not a party to any pending , material legal proceeding. To
the knowledge of management, no federal, state or local governmental agency is
presently contemplating any proceeding against the Company. See "Management-
Certain Proceedings Involving Consultants."
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None, not applicable
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following table provides information with respect to the sale of all
"unregistered" and "restricted" securities sold by the Company since its
incorporation in September, 1996, which were not registered under the Securities
Act of 1933, as amended:
(a) Sale of Shares Upon Company's Formation
Upon its formation on September 27, 1996, the Company issued shares to
the Company's founders, members of its initial Board of Directors, its initial
officers, and to consultants and advisors who had from time to time assisted
the Gleasmans with the development of their products and who were interested
in joining with them to form the Company. The Company claimed exemption from
registration for these sales under Section 4(2) of the Securities Act of 1933
as a transaction by an issuer not involving a public offering. The names of
these persons, date of sale, number of shares sold and amount paid are as
follows:
<TABLE>
<S> <C>DATE OF <C>NO. <C>AMOUNT PAID
NAME OF STOCKHOLDER SALE SHARES
Gleasman, Keith E. 9-27-96 1.0 Founder's Shares
Gleasman, Vernon E. 9-27-96 5,488,133.0 Founder's Shares
Gleasman, Keith E. 9-27-96 5,488,133.0 Founder's Shares
Gleasman, James A. 9-27-96 5,488,133.0 Founder's Shares
Vogt, James M. 9-27-96 380,000.0 60,845.00
Polster, Morton A. 9-27-96 291,600.0 46,691.00
Oppenheimer, Robert 9-27-96 95,000.0 15,211.00
Jackson Investment 9-27-96 190,000.0 30,423.00
Sawyer, Lee 9-27-96 285,000.0 45,634.00
Cleaver, Derek 9-27-96 285,000.0 45,634.00
Martindale, Michael 9-27-96 190,000.0 30,423.00
Gleasman, David 9-27-96 95,000.0 15,217.00
Smith, Tim 9-27-96 47,500.0 7,607.00
McCracken, Peter 9-27-96 47,500.0 7,607.00
Neri, Joseph 9-27-96 95,000.0 15,211.00
Neri, Gerard J. 9-27-96 154,000.0 24,658.00
Dobbs, Herbert 9-27-96 380,000.0 60,845.00
</TABLE>
(b) November 18, 1996 Private Placement
On November 18, 1996, the Company initiated a private placement of up
to 1,000,000 shares of its $.01 par value common stock to institutional
investors or persons of substantial means or substantial income who qualified
as accredited investors as defined by Rule 501 of Regulation D promulgated
under the 1933 Securities Act. The first sale pursuant to this offering
occurred on January 7, 1997 and the offering terminated on October 5, 1997.
Based upon completed investor questionnaires received by the Company
in the offering, management believes all of the investors in this offering
were either "accredited investors" as that term is defined under applicable
federal and state securities laws, rules and regulations, or were persons
who were by virtue of background, education and experience, either alone
or through the aid and assistance of a personal representative, could
accurately evaluate the risks and merits accordant to an investment of the
securities of the Company. Further, all such persons were provided with
access to all material information regarding the Company, prior to the
offer or sale of these securities, and each had an opportunity to ask of
and receive answers from directors, executive officers, attorneys and
accountants for the Company. The offers and sales of the foregoing
securities are believed to be exempt from the registration requirements
of Section 5 of the 1933 Act pursuant to Section 4(2) thereof, and
pursuant to and in accordance with Regulation D, Rule 505 promulgated
thereunder, and from similiar states' securities laws, rules and
regulations requiring the offer and sale of securities by available
state exemptions from such registration.
The names of the persons who purchased shares pursuant to the
offering, date of sale, number of shares sold and amount paid are as follows:
<TABLE>
<S>Name of Stockholder <C>Date of Sale <C>No. Shares <C>Amount Paid
Post, John A. II 1-7-97 3,000.0 4,500.00
Kettle, John 1-7-97 2,000.0 3,500.00
Testa, David R. 1-7-97 4,000.0 6,000.00
Jordan, William E. 1-7-97 10,000.0 15,000.00
and Janis E.
Bauer, Gerard R. 1-7-97 2,800.0 4,200.00
and Barbara
Post, Jack E. 1-7-97 10,000.0 15,000.00
Resch, David P. 1-7-97 13,000.0 19,500.00
Lawson, Alfred C. 1-7-97 6,000.0 9,000.00
and Audrey
Gale, Diane L. 1-7-97 10,000.0 15,000.00
Bonn, Kenneth Sr. 1-7-97 5,000.0 7,500.00
Liberty Systems 1-7-97 5,000.0 7,500.00
Warner, Greg 1-7-97 20,000.0 30,000.00
Husser, John D. 1-7-97 5,000.0 7,500.00
Bauer, Kimberly A. 1-7-97 2,000.0 3,000.00
Tallo, Gerard A. 1-7-97 4,500.0 6,750.00
and Sandra
Woodworth, Richard L. 1-7-97 3,334.0 5,001.00
and Essie M.
Cook, Clark 1-7-97 66,660.0 100,000.00
Brenner, Lloyd M. 1-7-97 3,333.3 5,000.00
and Wyllo
Miller, Gregory 1-7-97 2,500.0 3,750.00
and Mary Ann
Ellison, Deborah M. 1-7-97 3,333.0 5,000.00
Millet, Carol S. 1-7-97 1,000.0 1,500.00
Millet, David J. 1-7-97 7,000.0 10,500.00
Maker, Christine M. 1-7-97 2,000.0 3,000.00
Hampton, William R. 1-7-97 6,666.0 10,000.00
and Shirley
DeManincor, Daniel 1-7-97 6,667.0 10,000.00
and Donna
Visconte, Joseph J. 1-7-97 9,334.0 14,001.00
and Diane M.
Visconte, Joseph D. 1-7-97 6,667.0 10,000.00
and Irene M.
Lyles, James and 2-5-97 5,000.0 7,500.00
Nancy
Webster, Odgen H. 2-5-97 6,667.0 10,000.50
Gysel, Charles P. 2-5-97 3,333.3 5,000.00
and Jeri
Dailey, Kenneth P. 2-5-97 6,666.0 10,000.00
and Marcia
Radford, Gary 2-5-97 4,000.0 6,000.00
Schmidt, Stephen and 2-5-97 4,600.0 6,900.00
Patricia
Case, Theodore D. 2-5-97 4,000.0 6,000.00
Mihevc, Mayda 2-5-97 10,000.0 15,000.00
Hanson, James R. and 2-5-97 10,000.0 15,000.00
Portia P.
Williams, Fred 2-5-97 2,000.0 3,000.00
Miller, Michael T. 2-5-97 2,000.0 3,000.00
Galusha, Gloria 2-5-97 5,000.0 7,500.00
Weinstein, Eugene A. 2-5-97 4,000.0 6,000.00
Nygard, Kirsten Erica 2-5-97 700.0 1,050.00
Hubbard, Gary A. 2-24-97 3,334.0 5,001.00
Schmidt, Stephen and 2-24-97 1,666.0 2,500.00
Patricia
Schmidt, Pete W. and 2-24-97 4,666.0 7,000.00
Lorraine J.
Gerace, Vincent J. 2-24-97 4,000.0 6,000.00
Warner, W. Greg 2-24-97 20,000.0 30,000.00
Warner, W. Greg 2-25-97 20,000.0 30,000.00
Sevene, Paul H. Jr. 2-25-97 1,334.0 2,001.00
and Dalessando, Paul
Marvek Investments, Inc. 2-25-97 10,667.0 16,000.50
Resch, David P. 6-1-97 15,000.0 22,500.00
Marvek Investments 6-1-97 15,000.0 22,500.00
Post, Jack E. 6-1-97 5,000.0 15,000.00
Lawson, Alfred C. and 6-1-97 2,500.0 7,500.00
Audrey F.
Canan, Patricia L. 6-1-97 2,500.0 7,500.00
Martin, Henry A. and 6-1-97 2,000.0 6,000.00
Annabelle V.
Polster, Keith A. and 6-1-97 16,000.0 48,000.00
Theresa
Polster, Evan D. 6-1-97 2,000.0 6,000.00
Polster, Mark S. 6-1-97 1,000.0 3,000.00
Runberg, Jon E. 6-1-97 500.0 1,500.00
Sharpe, Joanne L. 6-1-97 500.0 1,500.00
Sharpe, Larissa M. 6-1-97 500.0 1,500.00
Hampton, William R. 6-1-97 1,667.0 5,000.00
and Shirley
Martindale, Michael and 6-1-97 16,000.0 48,000.00
Dorothy
Miller, Michael T. and 6-1-97 1,000.0 3,000.00
Elizabeth J.
Stendardo, Joseph G. and 6-1-97 3,500.0 10,500.00
Ellicot, Laurie B.
Cook, Clark W. 6-1-97 1,000.0 3,000.00
Ramsey, Christine E. 6-1-97 1,000.0 3,000.00
Ramsey, Donald W. and 6-1-97 1,000.0 3,000.00
Suzanne M.
Miller, Gregory J. and 6-1-97 1,000.0 3,000.00
Mary Ann
Weinstein, Eugene 6-1-97 2,000.0 6,000.00
Post, John A. 6-1-97 2,500.0 7,500.00
Radford, G. Gary and 6-1-97 1,000.0 3,000.00
Patricia M.
(Living Trust)
Millet, David J. 6-1-97 3,000.0 9,000.00
Runberg, Jon and 6-1-97 1,000.0 3,000.00
Janet
Maker, Christine 6-1-97 1,000.0 3,000.00
Siconolfi, Samuel A. 7-25-97 1,667.0 5,001.00
and Mary
Siconolfi, Gary A. 7-25-97 6,667.0 20,000.00
Flammia, James M. Sr. 7-25-97 1,667.0 5,001.00
Lunn, Robert J. and 7-25-97 1,667.0 5,001.00
Paul L.
Alberti, Joseph 7-25-97 1,667.0 5,001.00
Gabel, Donald W. and 7-25-97 5,000.0 7,500.00
Dora N.
R.L.T. Associates, Inc. 7-25-97 5,000.0 7,500.00
Elting, Arthur S. and 7-25-97 1,000.0 3,000.00
Marilyn M.
Dreyer, Charles 7-25-97 1,000.0 3,000.00
Pastore, Carl P. 7-25-97 1,000.0 3,000.00
Dickinson, Jerry B. 7-25-97 1,000.0 3,000.00
Bradia, David Jr. 8-1-97 12,000.0 36,000.00
Toscano, Joseph 9-1-97 1,667.0 5,001.00
Ray, Larry G. and 9-1-97 2,000.0 6,000.00
Rebecca M.
Rogers, Mark 9-1-97 1,500.0 4,500.00
Abelove, David 9-1-97 20,000.0 60,000.00
Hopson, Bradford J. 9-1-97 1,700.0 5,100.00
Giosio, Angelo 9-1-97 1,700.0 5,100.00
Howard Norvasel Trust 9-1-97 20,000.0 60,000.00
MLPF&S f/b/o M. Mihevc 9-1-97 10,000.0 30,000.00
Richter, Douglas C. and 10-1-97 2,000.0 6,000.00
Jean S.
Miller, Russell S. 10-1-97 2,000.0 6,000.00
Whitehead, James A. and 10-1-97 1,000.0 3,000.00
Susan S.
Gleasman, Jason 10-1-97 500.0 1,500.00
Gleasman, Patricia 10-1-97 500.0 1,500.00
Gleasman, Howard and 10-1-97 1,000.0 3,000.00
Patricia
Kane, Clifford and 10-1-97 2,000.0 3,000.00
Jill
Paul, James R. 10-5-97 1,000.0 3,000.00
Dolan, Brendan 10-5-97 1,000.0 3,000.00
</TABLE>
(c) Privately Negotiated Transactions
On April 15, 1997, the Company issued 1,000,000 shares of its $.01
par value common stock to certain principals of LT Lawrence & Co., Inc.
as compensation pursuant to the terms of a nonexclusive financial consulting
agreement entered into on February 11, 1997.
On December 30, 1997, the Company sold 100,000 and 10,000 shares to two
individual accredited investors, respectively, in privately negotiated
transactions. On March 13, 1998, the Company sold 1,000 shares to its
Chief Financial Officer.
The Company claimed exemption from registration for these sales under
Section 4(2) of the 1933 Act as transactions by an issuer not involving a
public offering. The names of these persons, date of sale, number of shares
sold and amount paid are as follows:
<TABLE>
<S>Name of Stockholder <C>Date of Sale <C>No. of Shares <C>Amount Paid
Principato, Lawrence 4-15-97 250,000.0 10.00
Roberti, Todd 4-15-97 250,000.0 10.00
Paone, Richard J. 4-15-97 250,000.0 10.00
Gold, Joel 4-15-97 125,000.0 10.00
Toto, James 4-15-97 125,000.0 10.00
</TABLE>
<TABLE>
<S>Name of Stockholder <C>Date of Sale <C>No. Shares <C>Amount Paid
Bunner, Robert B. IRA 12-30-97 10,000.0 30,000.00
Horton, Robert C. 12-30-97 100,000.0 300,000.00
Bronsky, Samuel M. 3-13-98 1,000.0 3,000.00
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of the Company provides for elimination or
limitation of personal liability of directors to the Company or its shareholders
for money damages for conduct as a director, except that in accordance with
New York law, a director's liability cannot be eliminated or limited for conduct
which constitutes a breach of the director's duty of loyalty to the Company or
its shareholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, or for any unlawful
distribution or transaction involving improper personal benefit.
The Certificate of Incorporation of the Company further provides for
indemnification of officers and directors for expenses incurred in connection
with any proceeding to which a person is made a party by reason of the fact that
the person was serving as an officer or director of the Company or any of its
subsidiaries, or of any other entity at the request of the Company, provided
that such person acted in good faith, did not engage in intentional misconduct,
and, with respect to any criminal action, did not know the conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
PART F/S
<TABLE>
<CAPTION>I
Index to Financial Statements
Page
----
<S>Independent Auditors' Report <C>F-2
Financial Statements
Balance sheet as of December 31, 1997 F-3
Statements of operations for the year ended F-4
December 31, 1997 and for the periods from
September 25, 1996 (inception) through December
31, 1996 and September 25, 1996 (inception)
through December 31, 1997
Statements of changes in stockholders' equity for F-5
the year ended December 31, 1997 and for the
period from September 25, 1996 (inception)
through December 31, 1996
Statements of cash flows for the year ended F-6
December 31, 1997 and for the periods from
September 25, 1996 (inception) through December
31, 1996 and September 25, 1996 (inception)
through December 31, 1997
Notes to financial statements F-7
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Torvec, Inc.
We have audited the accompanying balance sheet of Torvec, Inc., (a
development stage company), as of December 31, 1997, and the related
statements of operations and cash flows for the year ended
December 31, 1997 and for the periods from September 25, 1996
(inception) through December 31, 1996 and September 25, 1996
(inception) through December 31, 1997 and changes in stockholders'
equity for the year ended December 31, 1997 and the period from
September 25, 1996 (inception) through December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of Torvec,
Inc. as of December 31, 1997 and the results of its operations and its
cash flows for the year ended December 31, 1997 and for the periods
from September 25, 1996 through December 31, 1996 and from
September 25, 1996 through December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A
to the financial statements, the Company has incurred net losses and
is not generating cash flows from operating activities to sustain its
operations which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these
matters are described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
As described in Note G(3), the principal stockholders are involved in
an arbitration proceeding relating to certain technology which they
contributed to the Company at its formation.
/S RICHARD A. EISNER & COMPANY, LLP
------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
March 4, 1998
TORVEC, INC.
(a development stage company)
<TABLE>
<CAPTION>
Balance Sheet
December 31, 1997
<S>ASSETS <C>
Current assets:
Cash $147,000
Other current assets (Note G(1)) 53,000
Subscriptions receivable (Note F(4)) 180,000
--------
Total current assets 380,000
--------
Equipment (Note B(1)):
Office equipment 5,000
Transportation equipment 24,000
--------
29,000
Less accumulated depreciation (3,000)
--------
Net equipment 26,000
--------
Other Assets:
Deposits (Note G(1)) 111,000
Deferred offering costs (Note F(3)) 60,000
--------
171,000
--------
$577,000
========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses (Note E) $73,000
-------
Commitments and other matter (Note G)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 40,000,000 shares
authorized, 20,672,496 issued and
outstanding 207,000
Additional paid-in capital 2,991,000
Unearned compensatory stock options (1,283,000)
Deficit accumulated during the development stage (1,411,000)
----------
Total stockholders' equity 504,000
----------
$577,000
==========
</TABLE>
See notes to financial statements
TORVEC, INC.
(a development stage company)
<TABLE>
<CAPTION>
Statements of Operations
<S> <C> <C>September <C>September
25, 1996 25, 1996
(Inception) (Inception)
Year Ended Through Through
December December December
31, 1997 31, 1996 31, 1997
Cost and expenses:
Research and development $201,000 $22,000 $223,000
General and administrative 721,000 467,000 1,188,000
Net loss $(922,000) $(489,000) $(1,411,000)
Basic and diluted loss per $(0.05) $(0.03)
common share
Weighted average number of
shares of common
stock - basic and diluted 20,320,000 18,668,000
(Note B(4))
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>Deficit <C>
Unearned Accumulated
Additional Compensatory During the Total
Common Stock Paid-in Stock and Development Stockholders'
Shares Amount Capital Options Stage Equity
Issuance of shares
to founders 16,464,400 $165,000 $(165,000) $0
Issuance of stock
for services 2,535,600 25,000 381,000 406,000
Sale of common stock - 64,600 1,000 96,000 97,000
November
($1.50 per share)
Sale of common stock - 156,201 1,000 233,000 234,000
December
($1.50 per share)
Distribution to founders (27,000) (27,000)
(Note A)
Net loss $(489,000) (489,000)
--------- --------
Balance - December 31, 1996 19,220,801 192,000 518,000 (489,000) 221,000
Issuance of compensatory stock 1,000,000 10,000 1,490,000 $(1,500,000 0
(Note C(1)) )
Issuance of stock for services 12,000 18,000 18,000
Sale of common stock - January 58,266 1,000 86,000 87,000
($1.50 per share)
Sale of common stock - February 75,361 1,000 112,000 113,000
($1.50 per share)
Sale of common stock - May 30,000 45,000 45,000
($1.50 per share)
Issuance of stock for services 2,000 6,000 6,000
Sale of common stock - June 73,166 1,000 219,000 220,000
($3.00 per share)
Sale of common stock - July 13,335 40,000 40,000
($3.00 per share)
Sale of common stock - August 60,567 1,000 181,000 182,000
($3.00 per share)
Sale of common stock -September 10,000 30,000 30,000
($3.00 per share)
Sale of common stock - October 7,000 21,000 21,000
($3.00 per share)
Sale of common stock - November 10,000 30,000 30,000
($3.00 per share)
Sale of common stock - December 100,000 1,000 299,000 300,000
($3.00 per share)
Issuance of compensatory 234,000 (234,000) 0
options to consultants (Note F(2))
Compensatory stock and options 451,000 451,000
earned
Distributions to founders (338,000) (338,000)
(Note A)
Net loss (922,000) (922,000)
-------- --------
Balance - December 31, 1997 20,672,496 $207,000 $2,991,000 $(1,283,000) $(1,411,000) $504,000
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
<S> <C> <C>September <C>September
25, 1996 25, 1996
(Inception) (Inception)
Year Ended Through Through
December 31, December 31, December 31,
1997 1996 1997
Cash flows from operating
activities:
Net loss $(922,000) $(489,000) $(1,411,000)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 3,000 3,000
Common stock issued for services 406,000 406,000
Contribution of services 24,000 24,000
Compensation expense attributable
to common
stock options 451,000 451,000
Changes in:
Other assets (164,000) (164,000)
Accounts payable and accrued 59,000 59,000
expenses
Net cash used in operating (549,000) (83,000) (632,000)
activities -------- ------- --------
Cash flows from investing
activities:
Purchase of equipment (29,000) (29,000)
------- -------
Cash flows from financing
activities:
Net proceeds from sales of common 888,000 331,000 1,219,000
stock
Distributions (338,000) (27,000) (365,000)
Offering cost expenditures (46,000) (46,000)
------- -------
Net cash provided by financing 504,000 304,000 808,000
activities
Net increase (decrease) in cash (74,000) 221,000 147,000
Cash at beginning of period 221,000
Cash at end of period $147,000 $221,000 $147,000
Supplemental disclosure of noncash
investing and
financing activities:
Accrued offering costs $14,000 $14,000
</TABLE>
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE A - THE COMPANY
TORVEC, INC. (THE "COMPANY") WAS INCORPORATED IN NEW YORK ON
SEPTEMBER 25, 1996. THE COMPANY WHICH IS IN THE DEVELOPMENT STAGE,
SPECIALIZES IN AUTOMOTIVE TECHNOLOGY. IN SEPTEMBER 1996, THE COMPANY
ACQUIRED NUMEROUS PATENTS, INVENTIONS AND KNOW-HOW (THE "TECHNOLOGY")
CONTRIBUTED BY VERNON E. GLEASMAN AND MEMBERS OF HIS FAMILY (THE
"GLEASMANS") (SEE NOTE G(3)). THE COMPANY INTENDS TO DEVELOP AND
DESIGN SPECIFIC APPLICATIONS FOR THIS TECHNOLOGY RELATING TO STEERING
DRIVES FOR TRACKER VEHICLES, INFINITELY VARIABLE TRANSMISSIONS,
HYDRAULIC PUMPS AND MOTORS AND CONSTANT VELOCITY JOINTS AND SPHERICAL
GEARINGS. AS CONSIDERATION FOR THIS CONTRIBUTED TECHNOLOGY, THE
COMPANY ISSUED 16,464,400 SHARES OF COMMON STOCK AND $365,000 TO THE
GLEASMANS. IN SEPTEMBER 1996, THE COMPANY ISSUED 2,535,600 SHARES OF
COMMON STOCK (VALUED AT $406,000) TO INDIVIDUALS AS CONSIDERATION FOR
THE COST OF SERVICES AND FACILITIES PROVIDED IN ASSISTING WITH THE
DEVELOPMENT OF THIS TECHNOLOGY.
For the period from inception through December 31, 1997, the Company
has accumulated a deficit of $1,411,000, and has been dependent upon
equity financing to meet its obligations and sustain operations.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. In order to continue its operations, the
Company is seeking additional financing by means of an offering of
securities (see Note F(3)). However, there is no assurance that the
Company will complete its proposed securities offering or that it can
obtain adequate additional financing from other sources or that
products will be developed which will be commercially successful, or
that profitable operations can be attained. The financial statements
do not include any adjustments relating to the recoverability or
classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary as a result of
the above uncertainty.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Equipment:
Equipment is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets which range from five to seven
years.
(2) Research and development and patents:
Research and development costs and patent expenses are charged to
operations as incurred.
(3) Use of estimates:
TORVEC, Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1997
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(1) Loss per share of common stock:
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," in the year ended December 31,
1997 and has retroactively applied the effects thereof for all periods
presented. Accordingly, the presentation of per share information
includes calculations of basic and dilutive loss per share.
Additionally, pursuant to the Securities and Exchange Commission's
Staff Accounting Bulletin No. 98, issuances of common shares and
potential common shares issued for nominal consideration during the
periods covered by statements of operations that are included in the
registration statement and in subsequent filings with the SEC are
reflected in the computation of loss per share in a manner similar to
a stock split or stock dividend.
(2) Fair value of financial instruments:
The carrying value of cash and accrued expenses approximates their
fair value due to the short maturity of those instruments.
(3) Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") encourages, but does not
require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to
account for its employee stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"). Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's common stock at the date of the grant over the amount
an employee must pay to acquire the stock. Stock options granted to
nonemployees for goods or services are measured using the fair value
of these options and such costs are included in operating results as
an expense.
(4) Recently issued accounting pronouncements:
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure"; No. 130, "Reporting
Comprehensive Income" and No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company has not yet
determined if the above pronouncements will have a significant effect
on the information presented in the financial statements.
NOTE C - RELATED PARTY TRANSACTIONS
(1) In February 1997, the Company entered into a three year consulting
agreement with LT Lawrence (the "Consultant") whereby the Consultant
will provide financial consulting services and assistance in obtaining
financing as well as other services. In consideration thereof,
members of the Consultant received an aggregate of 1,000,000 shares of
common stock for $50 and warrants to purchase an additional 500,000
shares of common stock (see Note F(1)). The Company valued the shares
of common stock at $1.50 per share.
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE C - RELATED PARTY TRANSACTIONS (CONTINUED)
(1) (continued)
In the event the Consultant provides the Company with interested
parties who effect debt or equity financing, the Agreement provides
for compensation based on a percentage of the consideration received
as defined in the Agreement.
(2) On December 1, 1997, the Company entered into three year
consulting agreements with three members of the Gleasman family
whereby each will provide technical services to the Company in
exchange for compensation of $12,500 each per month. In addition, the
Company granted them options to purchase a total of 75,000 shares of
common stock at an exercise price of $5.00 per share (Note F(2)). For
the year ended December 31, 1997, the Company incurred expenses
amounting to approximately $45,000 in connection with these
agreements. Prior to December 1997, one member of the Gleasman family
provided consulting services to the Company. Amounts charged to
operations for the year ended December 31, 1997 and for the period
ended December 31, 1996 were approximately $55,000 and $18,000,
respectively.
(3) For the period September 25, 1996 (inception) through December 31,
1996 and for the year ended December 31, 1997 approximately $4,000 and
$116,000, respectively, were charged to operations for services
provided by two law firms, each of which has a partner who is a
stockholder of the Company. At December 31, 1997, the Company owed
$14,000 to one of these firms which is included in accounts payable.
NOTE D - INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
At December 31, 1997, the Company has available $223,000 of net
operating loss carryforwards to offset future taxable income tax
expiring through 2012.
At December 31, 1997, the Company has a deferred tax asset of
approximately $88,000 representing the benefits of its net operating
loss carryforward and a deferred tax asset of $466,000 from temporary
differences, principally compensatory stock and stock options not
currently deductible and certain operating expenses which have been
capitalized as start-up costs for federal income tax purposes. The
total of these deferred tax assets has been fully reserved by a
valuation allowance since realization of their benefit is uncertain.
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
A reconciliation between the actual income tax benefit and income
taxes computed by applying the federal income tax rate of 34% to the
net loss is as follows:
<TABLE>
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
<S> <C> <C>
Period
from
September 26,
1996
(Inception)
Year Ended Through
December 31, December 31,
1997 1996
Computed federal income tax $(313,000) $(166,000)
(benefit) at 34% rate
State tax (benefit), net of federal (49,000) (26,000)
tax benefit
Valuation allowance 362,000 192,000
$0 $0
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
</TABLE>
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE D - INCOME TAXES (CONTINUED)
THE INTERNAL REVENUE CODE CONTAINS PROVISIONS WHICH MAY LIMIT THE
UTILIZATION OF THE NET OPERATING LOSS CARRYFORWARD AVAILABLE IN ANY
GIVEN YEAR IF SIGNIFICANT CHANGES OCCUR IN STOCKHOLDER OWNERSHIP
INTERESTS. IF THE PROPOSED OFFERING DISCUSSED IN NOTE F(3) TO THE
FINANCIAL STATEMENTS IS CONSUMMATED, THE AMOUNT OF CARRYFORWARD
AVAILABLE IN ANY GIVEN YEAR COULD BE LIMITED.
Note E - Accounts Payable and Accrued Expenses
At December 31, 1997, accounts payable and accrued expenses consist of
the following:
<TABLE>
<S>Professional fees (Note C(3)) <C>$14,00
0
Trade payables 21,000
Consulting (Note C(2)) 38,000
-------
$73,000
=======
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY
(1) Warrants:
In April 1997, the Company granted an aggregate of 500,000 warrants to
five employees of the Consultant (see Note C(1)). The warrants are
exercisable into common stock at the initial public offering
(the "IPO") price and are exercisable for five years from the
date the Company's IPO is declared effective ("warrant term").
However, if fifty percent or more of either the Company's assets
or its common stock is acquired by another entity or group
during the warrant term, the exercise price shall be $1.50.
The Company will record a charge to operations representing the
fair value of the warrants when the IPO is declared effective.
(2) Stock options:
In December 1997, the Board of Directors of the Company, subject to
stockholder approval approved a Stock Option Plan (the "Plan") which
provides for the granting of up to 2,000,000 shares of common stock,
pursuant to which officers, directors, key employees and key
consultants/advisors are eligible to receive incentive, nonstatutory
or reload stock options. Options granted under the Plan are
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
exercisable for a period of up to 10 years from date of grant at an
exercise price which is not less than the fair value on date of grant,
except that the exercise period of options granted to a stockholder
owning more than 10% of the outstanding capital stock may not exceed
five years and their exercise price may not be less than 110% of the
fair value of the common stock at date of grant. Options generally
vest over five years.
In connection with certain consulting agreements (see Note C(2)) the
Company granted an aggregate of 75,000 nonqualified options to
purchase common stock under the Plan at an exercise price of $5.00 per
share. The options vest 20% per annum and are exercisable through
November 30, 2007. The Company valued these options at $234,000 using
the Black-Scholes Option pricing model with the following weighted
average assumptions for the year ended December 31, 1997: risk-free
interest rate of 5.91%, dividend yield 0%, volatility 40% and expected
life for options granted for 10 years. The options are being
amortized over the term of the consulting agreements. At December 31,
1997 these options had a remaining life of 121 months.
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
(2) Stock options: (continued)
In connection with employment agreements which commence upon the date
the IPO is declared effective, (Note G(2)) the
Company granted 380,000 options under the Plan at an exercise
price of $5.00 per share. The options are exercisable for a period
of ten years from January 1, 1998 and vest 20% per annum.
At December 31, 1997, 1,545,000 options are available under the Plan.
(3) Proposed offering:
The Company anticipates offering its securities in a private placement.
There is no assurance that such offering will be consummated. In
connection therewith the Company anticipates incurring substantial
expenses which, if the offering is not consummated, will be charged
to expense.
(4) Subscriptions receivable:
At December 31, 1997, the Company had subscriptions receivable for
70,000 shares of common stock which was subsequently collected.
(5) Noncash transaction:
During 1997, the Company granted 12,000 and 2,000 shares of common
stock for services provided. The Company valued the shares at their
fair value of $1.50 and $3.00 per share, respectively.
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1997
Note G - Commitments and Other Matter
(1) Lease:
In January 1998 the Company entered into an agreement with a
stockholder/landlord, which is effective upon the date that the
proceeds of an IPO are received to lease
land and a building for one year at $52,500 per month. The
agreement provides for four one year renewal periods at
the Company's option. In addition, pursuant to this agreement
the landlord will provide labor, utilities and equipment
under the terms of the lease. The Agreement also provides
for the purchase of land adjacent to the leased premises
for one year after the effective date of the lease for
$350,000.
The Company paid approximately $53,000 representing the first month's
rent, which is reflected as a current asset at December 31, 1997, and
approximately $111,000 representing the last month's rent and two-
twelfths of the purchase price of the land which is reflected as
noncurrent assets at December 31, 1997.
Note G - Commitments and Other Matter (continued)
(2) Employment agreements:
The Company has entered into three employment agreements for a period of three
years, commencing on the first day of the month in which the Company receives
the proceeds from an IPO.
Two agreements each provide for salaries of $150,000 per year. One agreement
provides for a salary of $240,000 in the first year, $252,000 in the second
year and $264,000 in the third year and provides for a minimum bonus of $15,000
per quarter for the duration of the agreement.
(3) Arbitration:
During 1997 certain members of the Gleasman faimly were named in a lawsuit
seeking monetary damages of $750,000 relating to the development of certain
technology and related matters. The court stayed all aspects of the
litigation and directed the parties to arbitrate such matters in dispute.
The Company has not been named as a defendant in this action. In the event
the claimants prevail, it could adversely affect the Company's rights to,
and exclusive ownership of, certain technology. The Gleasmans believe that
the claims are without merit. Management's preliminary assessment of this
situation has resulted in a determination that the likelihood of an unfavorable
outcome is less than probable and that the ultimate outcome of this matter
will not have material adverse effect on the results of operations or
financial position of the Company.
<TABLE>
<CAPTION>
TORVEC, INC.
BALANCE SHEET COMPARISON
As of June 30, 1998
<S> <C> June 30, '98 <C> June 30, '97
ASSETS
Current Assets
Checking/Savings
Business Checking 125,343.24 322,440.31
-------------- --------------
Total Checking/Savings 125,343.24 322,440.31
Other Current Assets
Other Current Assets Lease Deposit 52,500.00 0.00
-------------- -------------
Total Other Current Assets 52,500.00 0.00
-------------- ------------
Total Current Assets 177,843.24 322,440.31
Fixed Assets
Office Equipment 5,876.65 0.00
Transportation Equipment 52,797.78 0.00
Accumulated Depreciation -4,992.00 0.00
-------------- -------------
Total Fixed Assets 53,682.43 0.00
Other Assets
Lease Deposit 110,832.00 0.00
Registration Costs 60,210.00 0.00
-------------- -------------
Total Other Assets 171,042.00 0.00
TOTAL ASSETS 402,567.67 322,440.31
============== ==============
LIABILITIES & EQUITY
Liabilities
Long Term Liabilities
Loan Payable American Credit 27,490.10 0.00
-------------- --------------
Total Long Term Liabilities 27,490.10 0.00
-------------- --------------
TOTAL LIABILITIES 27,490.10 0.00
============== ==============
Equity
Additional Paid in Capital 3,313,080.00 842,540.00
Capital Stock $.01 par value, 207,370.00 149,655.00
40,000,000 authorized
20,737,016 issued and outstanding
Retained Earnings -1,410,281.25 -488,452.74
Net Income (loss) -596,578.18 -375,740.95
Unearned Compensatory Stock -1,138,523.00 194,439.00
--------------- ------------
Total Equity 375,077.57 322,440.31
--------------- ------------
TOTAL LIABILITIES & EQUITY 402,667.87 322,440.31
=============== ============
</TABLE>
<TABLE>
<CAPTION>
Torvec, Inc.
Profit and Loss Comparison
January through June 1998
(Unaudited)
<S> <C> Jan - Jun '98 <C> Jan - Jun '97
------------- -------------
Ordinary Income/Expense
Expense
Amortization Unearned $ 144,496.00 $ 194,439.00
Compensatory Stock
Art Work 2,300.00 0.00
Bank Service Charges 0.00 10.00
Consulting Fees 166,900.00 25,000.00
Depreciation Expense 2,208.00 0.00
Design Work 84,721.00 0.00
Dues and Subscriptions 0.00 97.38
Insurance 525.00 0.00
Interest Expense 715.06 0.00
Office Expense 2,135.97 968.01
Outside services-operations 32,307.34 45,077.83
Parts 3,478.38 609.85
Postage and Delivery 2,545.72 289.75
Printing and Reproduction 1,880.66 0.00
Professional Fees
Accounting 15,000.00 0.00
Legal Fees 106,708.50 101,822.00
Underwriter Fees 25,000.00 0.00
---------- ----------
Total Professional Fees 146,708.50 101,822.00
Stockholders Meeting 1,070.68 0.00
Storage 846.00 987.00
Telephone 191.32 0.00
Travel & Ent
Meals 0.00 80.34
Travel 3,134.70 6,379.79
---------- ----------
Total Travel & Ent 3,134.70 6,440.13
Utilities 88.85 0.00
----------------- -----------------
Total Expense 596,253.18 375,740.95
----------------- -----------------
Net Ordinary Income 596,253.18 -375,740.95
Ordinary Income/Expense
Other Expense
NY State Corporation Tax 325.00 0.00
----------------- -----------------
Total Other Expense 325.00 0.00
----------------- -----------------
Net Other Income -325.00 0.00
----------------- -----------------
Net Income $ -888,878.18 -375,740.95
================= =================
Loss per common share $ .03 $ .02
================= =================
</TABLE>
TORVEC, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 Interim Financial Statements
The balance sheet as of June 30, 1998 and 1997, and the profit and loss
statement for the six months ended June 30, 1998 and 1997 are unaudited,
but in the opinion of management included all adjustments necessary for a
fair presentation of the financial position and results of operations. The
results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1998. These interim statements should be read in conjunction
with the Company's December 31, 1998 financial statements and notes thereto
included in its Form 10-K.
Note 2 The Company
Torvec, Inc. (the Company) was incorporated in New York on September 25, 1996.
The Company, which is in the development stage, specializes in automotive
technology.
Note 3 Summary of Significant Accounting Policies
Equipment
Equipment is stated at cost less accumulated depreciation. Depreciation
is provided using the straight-line method over the useful lives of the
assets.
Research and development and patents
Research and development costs and patent expenses are charged to operations
as incurred.
Note 4 Related Party Transactions
The Company has entered into various consulting agreements with LT Lawrence
and members of the Gleasman family. Consulting expenses are recorded as the
monies are spent.
The Company has also entered into various employment agreements with the
members of the Gleasman family.
Note 5 Warrants
The Company has granted an aggregate of 500,000 warrants to five employees
of the Consultant.
Note 6 Stock Options
The Company's Board of Directors has approved a Stock Option Plan, which
provides for the granting of up to 2,000,000 shares of common stock. Options
granted under the plan are exercisable for a period of up to 10 years from
date of grant.
The Company has also granted a total of 455,000 options to purchase common
stock under the Plan at an exercise price of $5.00 per share pursuant to
certain consulting agreements.
Note 7 Lease
The Company has entered into an agreement with a shareholder to lease
land and building for $52,500 per month upon the date that the proceeds
from a proposed public offering are received. The agreement provides for
four one year renewal periods at the Company's option.
The agreement also provides for the purchase of land adjacent to the
leased premises for one year after the effective date of the lease for
$350,000.
The Company paid $52,500 representing the first month's rent, which is
reflected as a current asset, and $110,832 representing the last month's
rent and two twelfths of the purchase price of the land, which is
reflected, as a non-current asset.
Note 8 Contingency
During 1997 certain members of the Gleasman family were named in a lawsuit
seeking monetary damages relating to the development of certain technology.
The Company's legal counsel believes the lawsuit is without merit, and will
not affect the Company.
PART III
ITEM 1. INDEX TO EXHIBITS.
The following exhibits are filed as a part of this Registration Statement:
EXHIBIT
SEQUENTIAL
NUMBER EXHIBIT PAGE
NUMBER*
2.1 Certificate of Incorporation of Torvec, Inc.
2.2 Bylaws of Torvec, Inc.
3 Specimen Stock Certificate
6.1 Employment Agreement with Herbert H. Dobbs
6.2 Employment Agreement with Lee E. Sawyer
6.3 Employment Agreement with Morton A. Polster
6.4 Consulting Agreement with Keith E. Gleasman
6.5 Consulting Agreement with James A. Gleasman
6.6 Consulting Agreement with Vernon E. Gleasman
6.7 Torvec, Inc. Stock Option Plan
6.8 Specimen Stock Option Agreement
6.9 Assignments of Patents, Patent Properties, Technology and
Know-How to Company
6.10 Neri Service and Space Agreement
6.11 Ford Motor Company Agreement and Extension of Term
12.1 Power of Attorney
12.2 October 24, 1997 Letter from Yogendra B. Jonchhe , Alfred
State University Depart. of Mechanical Engineering Technology
12.3 March 12, 1998 Letter from J.U. Koo, Kia Motors Corp.
* Incorporated herein from previously.
SIGNATURES
In accordance with Section of the Securities Exchange Act of 1934, the
Registrant caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
TORVEC, INC.
Date: _______, 1998 By: /S HERBERT H. DOBBS
------------------------------
Herbert H. Dobbs, Chairman of the
Board of Directors
Date:_________, 1998 By: /S KEITH E. GLEASMAN
-----------------------------
Keith E. Gleasman, Director and
President
Date:__________, 1998 By: /S LEE E. SAWYER
----------------------------
Lee E. Sawyer, Director
Date:__________, 1998 By: /S MORTON A. POLSTER
----------------------------
Morton A. Polster, Director; Secretary
of Torvec, Inc.
Date:__________, 1998 By: /S JAMES A. GLEASMAN
---------------------------
James A. Gleasman, Director;
Consultant to Torvec, Inc.
Date: _________, 1998 By: /S SAMUEL M. BRONSKY
--------------------------
Samuel M. Bronsky,
Chief Financial Officer
