U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 000-24455
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TORVEC, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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NEW YORK 16-1509512
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(STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.
INCORPORATION OR ORGANIZATION)
3740 ROUTE 104
WILLIAMSON, NEW YORK 14587
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(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (716) 248-8549
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
______________________________ ______________________________
______________________________ ______________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT
$.01 PAR VALUE COMMON VOTING STOCK
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $0.00
State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. (See definition
of affiliate in Rule 12(b)-2 of the Exchange Act). $40,198,792
Note: If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may
calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the
assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed by a court. Yes _____ No_____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable
date. 20,812,616
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part
I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information
statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended
December 24, 1990).
Transitional Small Business Disclosure Form (Check one):
Yes _____ No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) HISTORY AND DEVELOPMENT OF ISSUER'S INVENTIONS
Torvec, Inc. ("the Company") was incorporated as a New York business corporation on September 25, 1996. Upon its
incorporation, 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 stage 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,
(iii) hydraulic pump and motor, (iv) constant velocity joint and (v) spherical gearing.
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 considerable time and expense. 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.
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
necessary to fully engineer and develop a highly refined prototype. Generally, 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) was completed in February, 1999 and the Company will use a portion of the net
proceeds of sales of its common stock in an ongoing private placement and through the exercise of option agreements to explore joint
ventures to produce this vehicle. In addition, the Company will use a portion of the net proceeds of such sales to engineer and
develop highly refined prototypes of the infinitely variable transmission, the hydraulic pump/motor, spherical gearing and constant
velocity joint (also described below) to serve as critical components of the FasTrack vehicle as well as for direct
commercialization.
TORVEC'S FASTRACK
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".
The Company's FasTrack prototype vehicle is a new type of vehicle, that management believes 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. The Company believes that this tracked vehicle can traverse almost any terrain at higher speeds. The
tracks may be made by Goodyear, a corporation dedicated to supporting original equipment manufacturers (OEMs), and Goodyear has
provided the tracks for the Company's prototype vehicle. Goodyear states, "Based on product testing and feedback from our
customers, in most situations, Goodyear's 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 will be able to 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 will also use the Company's infinitely variable
transmission (U.S. patent 5186692). Different from the multi-shifting automatic transmission used on passenger vehicles, the
Company's infinitely variable transmission should contribute to increased fuel mileage and significantly lower emissions.
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.
The military has been seeking an adequate, economical mechanism for steering tracked vehicles. 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. The prototype FasTrack vehicle has been completed as a result of a major
investment of time, know-how and capital.
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. 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.
The Company plans to showcase and test its latest prototype FasTrack vehicle in early spring, 1999.
TORVEC'S INFINITELY VARIABLE TRANSMISSION
The Company's intends to develop a prototype infinitely variable transmission, a transmission that 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 transmission will 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 Company's transmission can accelerate a diesel-powered vehicle as quickly as a gasoline-powered
vehicle. The Company's transmission 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 Company's transmission make it a promising
candidate for such applications.]
In addition to having the potential of reducing particulates, the Company's transmission will be 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 Company's transmission, which the Company believes will be
simpler and less expensive to manufacture than existing transmissions, 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 Company's
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 Company's 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 Company's transmission.
HYDRAULIC PUMP/MOTOR, CONSTANT VELOCITY JOINT, AND SPHERICAL GEARING
The Company's patented infinitely variable transmission will incorporate 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 hydraulic
pump/motors which, like the infinitely variable transmission, are significantly simpler, smaller and lighter than other commercially
available pump/motors having comparable performance specifications. The key feature of the Company's pump/motors is their swash-
plate mounting arrangements that utilize a new form of spherical gearing which is also proprietary to the Company. Further, this
spherical gearing has been incorporated in yet another Company-owned invention, which has been developed to replace constant
velocity joints used, among other places, in all front-wheel drive vehicles. The Company's constant velocity joint is a departure
from known designs, and its efficiency and weight savings may provide a significant competitive advantage in the annual constant
velocity joint market of 180,000,000 units per year (1994 Annual Report of GKN (the world's largest producer of constant velocity
joints)).
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 Company's hydraulic pump and motor, and it will
also be used to create a constant velocity joint as a working prototype ready for installation in a car. The Company's constant
velocity 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 constant velocity joints presently being used in all front-wheel drive vehicles. In spite of
mechanical and design limitations, the constant velocity joints currently in use are manufactured at the rate of over "180 million
units annually" according to the 1994 Annual Report of GKN.
(B) 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 No. 5,878,492
Title: Method for Shaping the Teeth of Spherical Gears
11. U.S. Patent Application
Serial No. 09/213,650
Title: Modular System for Track-Laying Vehicle
12. U.S. Patent Application
Serial No. 09/238,444
Title: Spool Valve for Fluid Control
13. European Pat. 0 160 671:
Title: No-Slip, Imposed Differential
Validated in: France, Germany, Sweden, United Kingdom
14. Japanese Pat. No. 2002555
Title: No-Slip, Imposed Differential
15. Australian Patent No. 681528
Title: Variable-Angle Gear System and Constant Velocity Joint
16. Australian Patent No. 681534
Title: Hydraulic Machine with Gear-Mounted Swash-Plate
17. International Application No. PCT/US95/06538
Title: Variable-Angle Gear System and Constant-Velocity Joint
Corresponding Regional/National applications:
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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
18. 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
steer drive mechanism for tracked vehicles, infinitely variable transmission, hydraulic pump/motors, spherical gearing, 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; Torvec Steer Drive.
3. Prototype of Torvec Steer Drive (GSD-10).
4. Ford automotive parts: 4 engines; transmissions; differentials; worm gears; body parts; windshields; dashboards; and
seats.
5. Complete CAD/CAM design for Infinitely Variable Transmission re-engineered to adapt as retrofit for existing vehicle of a
major U.S. automaker.
6. Engineering data for adapting Torvec Orbital Infinitely Variable Transmission for retrofit on U.S. Army's existing HMMWV
("Hummer" vehicle).
7. Off-the-shelf automotive hydraulic pump/motors made by other manufacturers (used for comparison testing).
8. Parts (gears, housing, shafts) and supporting technical data, relating to designs of Torvec constant velocity joint
appropriate for retrofit in existing vehicle of a major U.S. automaker.
9. Engineering CAD/CAM files for constant velocity joint designs.
10. Isuzu Commercial Vehicle NPR-Diesel
(C) BUSINESS PLAN; DISTRIBUTION METHODS - JOINT VENTURES, COLLABORATIVE AGREEMENTS AND LICENSES
The Company's present business strategy relating to its 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
infinitely variable 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 infinitely variable transmission into a
Taurus to provide test results on gasoline engine fuel mileage and emission levels; (4) to promote worldwide use of the Company's
transmissions for reducing diesel/gasoline engine pollution; (5) to enter into appropriate licensing/joint working arrangements for
all of the Company's products (the FasTrack vehicle, infinitely variable transmission, hydraulic pump/motor, constant velocity
joint, and spherical gearing); (6) to obtain patent protection on at least four new developments and improvements related to the
Company's products described above; 7) to develop a Website for marketing, sales, education and information relating to the
Company's potential products.
The Company currently does not have a manufacturing facility and its present intention is not to manufacture any of its
products itself, since such a decision would entail significant capital expenditures. The Company's present business strategy is,
therefore, 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 potential products. No such arrangements and/or licenses have been consummated to date, although the Company is
presently negotiating with a number of potential joint venture candidates.
In addition to seeking commercially attractive collaborative working arrangements or joint ventures, the Company may license
one or more of its Torvec potential products to unaffiliated third parties for direct commercialization.
(D) COMPETITION AND MARKET ACCEPTANCE
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.
The Company's immediate future development is dependent upon consumer acceptance of the FasTrack_ vehicle especially in the
Asian, African, South and Central American markets. While the potential domestic and international market is great, 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.
The Company's ability to generate revenue and become profitable is also dependent upon the automotive industry's acceptance of
certain of its other products, such as the infinitely-variable transmission, the hydraulic pump and motor, the constant velocity
joint and spherical gearing. The Company's ultimate 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.
ITEM 2. DESCRIPTION OF PROPERTY.
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 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. Although the Agreement will become fully effective upon the successful completion of the
Company's May 11, 1998 private placement (which was still ongoing as of December 31, 1998), the Company has utilized the facility
during its 1998 fiscal year and anticipates utilizing the facility in fiscal year 1999 under the lease. 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. Under the agreement, the Company has been able to use 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 Company believes that this facility is sufficient to construct all prototype
FasTrack vehicles as well as assemble and install all prototypes for the Company's other products for testing and demonstration
purposes.
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 Service and Space Agreement, the
Company has an option to acquire the 80 acres for a cost of $350,000 at any time during the period of the lease. This tract of land
is appropriate for testing all of the Company's products.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending, material litigation. To the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against the Company. See the discussion under the caption "Certain
Proceedings Involving Certain Shareholders."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the Company's Shareholders during the fourth quarter of the Company's fiscal year ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MAY 11, 1998 PRIVATE PLACEMENT
On May 11, 1998, the Company initiated a private placement of up to 1,500,000 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 initial offering price was $5.00 per share. On September
21, 1998, the offering price was increased to $10.00 per share. Although originally scheduled to terminate on November 30, 1998,
the offering was extended until May 31, 1999. Additional extensions are within the discretion of the Board.
The offering is being made by the Company's Board of Directors without payment of commissions. 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, 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 of 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 506 promulgated
thereunder, and from similar states' securities laws, rules and regulations requiring the registration of the offer and sale of such
securities.
The Company sold 138,120 shares of its common stock and received proceeds from such sales from May 11, 1998 to December 31,
1998.
(B) PRIVATELY NEGOTIATED TRANSACTIONS
On March 13, 1998, the Company issued 1,000 shares to its Chief Financial Officer, Samuel M. Bronsky, in exchange for
accounting services rendered.
The Company claimed exemption from registration for this sale under Section 4(2) of the 1933 Act as a transaction by an issuer
not involving a public offering.
(C) MARKET INFORMATION
Effective September 23, 1998, the Company's $.01 par value common stock, as a class, was registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934. As a result, shares of the Company's common stock which have been
owned for one year or more became eligible for trading of the Over-the-Counter Bulletin Board (OTCBB) maintained by the National
Association of Securities Dealers, Inc. (NASD) on December 22, 1998. The Company's stock began trading on January 21, 1999 at
$12.00 per share. The Company has two market makers for its common stock: Lampost Capital, L.C., Boca Raton, Florida and McDonald
& Company Investments, 100 Corporate Woods, Rochester, New York.
(D) HOLDERS
As of December 31, 1998, the Company had 201 shareholders of record.
(E) 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.
(F) 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. The Company is required to comply
with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.
(G) 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Company's present business strategy relating to its 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
the Company's infinitely variable 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 infinitely variable
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 transmission for gasoline engine passenger cars, providing data on gasoline engine fuel mileage and emission
levels; (4) to promote worldwide use of the infinitely variable transmissions for reducing diesel/gasoline engine pollution; (5) to
enter into appropriate licensing/joint working arrangements for all of the Company's products (the FasTrack vehicle, infinitely
variable transmission, hydraulic pump/motor, constant velocity joint, and spherical gearing); (6) to obtain patent protection on at
least four new developments and improvements related to the Company's products described above; 7) to develop a Website for
marketing, sales, education and information relating to the Company's products.
The Company is continuing to implement its business plan. The Company is engaged in discussions with a number of vehicle
manufacturers to license one or more of its products and/or to create one or more joint venture relationships. If successful, these
licenses or relationships will lead to the further development, manufacture and distribution of the Company's products, especially
the FasTrack, the infinitely variable transmission and the Company's constant velocity joint.
The Company has completed its first pre-production prototype of the FasTrack on an Isuzu truck frame and is now testing and
demonstrating the FasTrack. It is anticipated that two more pre-production prototypes will be assembled, if necessary, on Kia truck
frames during the early spring of 1999. The Company believes that its ability to showcase the Isuzu truck frame prototype will
enhance its pursuit of joint venture or licensing agreements with one or more manufacturers of cars, trucks and related equipment,
especially since the FasTrack can be assembled, without significant modification, on nine manufacturer's vehicle frames.
The Company plans to selectively incorporate its other patented technologies, including its infinitely variable transmission,
its lightweight hydraulic pump and motor, its constant velocity joint (with its true infinite gearing based on the Company's
proprietary spherical gearing assembly), into the FasTrack prototype as well as to separately commercialize each of the technologies
through licensing and one or more joint venture partners.
The Company intends to begin emission and fuel economy testing of the infinitely variable transmission as installed into
diesel-powered trucks, perhaps at Alfred State College, Alfred, New York. The Company also intends to install the infinitely
variable transmission into the Ford Taurus owned by the Company to document actual emission levels and fuel economy. The Taurus
vehicle and test results should enhance joint venture/ licensing opportunities with major auto manufacturers throughout the world.
The Company also intends to install its constant velocity joint, including its spherical gearing assembly, into the Company's
Taurus for evaluation. Upon satisfactory results, the Company will present the constant velocity joint to the auto industry for
possible licensing and/or joint venture arrangements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations during its fiscal year ended December 31, 1998 have been funded exclusively through the sale of
138,120 shares of Common Stock to a limited number of investors for an aggregate purchase price of approximately $820,000. These
shares were sold at varying prices ranging from $5.00 to $10.00 per share. The Company does not presently anticipate that it will
be able to generate significant operating revenues 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 prototype
development program, 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 placement successfully raises up to an additional $2,000,000, it shall
have sufficient capital to meet the Company's contemplated capital requirements for its 1999 fiscal year. However, if the offering
does not generate sufficient capital, or the Company's plans change or its assumptions change or prove to be incorrect, the Company
will be required to seek additional financing, if possible. This additional financing could take the form of a significant equity
investment by one or more capital investment firms or debt financing or both.
Y2K COMPLIANCE
The Company currently uses a software which management believes is in "Year 2000" (Y2K) compliance. Management will continue
to evaluate the current software and implement any necessary changes in the second quarter of 1999. Management expects the costs
associated to be less than $2,500. Also, the Company is devising a Y2K contingency plan to avoid any interruption to its business.
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 its fiscal year ending December 31, 1999.
QUARTERLY FLUCTUATIONS
As of December 31, 1998, the Company had not engaged in significant revenue producing operations. Once the Company actually
commences significant revenue producing 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 significant revenue producing operations, the Company's product revenues
may vary significantly by quarter and the Company's operating results may experience significant fluctuations.
TORVEC, INC.
(a development stage company)
ITEM 7. FINANCIAL STATEMENTS.
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
Financial Statements
Balance sheet as of December 31, 1998 F-3
Statements of operations for each of the years
in the two-year period ended December 31, 1998
and for the period from September 25, 1996 (inception)
through December 31, 1998 F-4
Statements of changes in stockholders' equity for
the period from September 25, 1996 (inception)
through December 31, 1996 and each of the years
in the two-year period ended December 31,
1998 F-5
Statements of cash flows for each of the years
in the two-year period ended December 31, 1998
and for the period from September 25, 1996
(inception) through December 31, 1998 F-6
Notes to financial statements F-7
F-1
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, 1998, and the
related statements of operations and cash flows for each of the years in the two-year period ended December 31, 1998 and for the
period from September 25, 1996 (inception) through December 31, 1998 and changes in stockholders' equity for the period from
September 25, 1996 (inception) through December 31, 1996 and each of the years in the two-year period ended December 31, 1998.
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, 1998 and the results of its operations and its cash flows for each of the years in the two-year
period ended December 31, 1998 and for the period from September 25, 1996 through December 31, 1998 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, has a working capital deficiency 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 H[3], the principal stockholders are involved in an arbitration proceeding relating to certain technology which
they contributed to the Company at its formation.
Richard A. Eisner & Company, LLP
/S/ RICHARD A. EISNER
New York, New York
February 10, 1999
With respect to Note G[1]
February 22, 1999
F-2
TORVEC, INC.
(a development stage company)
BALANCE SHEET
DECEMBER 31, 1998
</TABLE>
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 30,000
Subscriptions receivable (Note G[4]) 81,000
--------
Total current assets 111,000
--------
Equipment (Note B[1]):
Office equipment 9,000
Transportation equipment (Note F) 53,000
--------
62,000
Less accumulated depreciation (12,000)
--------
Net equipment 50,000
--------
Other assets (Note H[1]) 164,000
--------
$325,000
========
LIABILITIES
Current liabilities:
Current portion of loan payable (Note F) $ 5,000
Accounts payable and accrued expenses (Note E) 431,000
Consulting fees payable to related parties (Note C[1]) 132,000
--------
Total current liabilities 568,000
Loan payable (Note F) 21,000
-------
589,000
-------
Commitments and other matter (Note H)
STOCKHOLDERS' EQUITY (NOTE G)
Common stock, $.01 par value, 40,000,000 shares authorized,
20,811,616 issued and outstanding 208,000
Additional paid-in capital 3,766,000
Unearned compensatory stock options (705,000)
Deficit accumulated during the development stage (3,533,000)
----------
(264,000)
----------
$ 325,000
==========
</TABLE>
See notes to financial statements F-3
TORVEC, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C>
SEPTEMBER
25,
1996
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
------------- ------------
1998 1997 1998
COST AND EXPENSES:
Research and development $1,055,000 $201,000 $1,278,000
General and administrative 1,067,000 721,000 2,255,000
---------- ------- ----------
NET LOSS $(2,122,000)$(922,000) $(3,533,000)
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.10) $(0.05)
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF 20,726,000 20,320,000
COMMON STOCK - BASIC AND DILUTED =========== ==========
(NOTE B[4])
</TABLE>
See notes to financial statements F-4
TORVEC, INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
UNEARNED ACCUMULATED
COMMON STOCK ADDITIONAL COMPENSATORY DURING THE TOTAL
-------------------- 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 -
November ($1.50 per share) 64,600 1,000 96,000 97,000
Sale of common stock -
December ($1.50 per share) 156,201 1,000 233,000 234,000
Distribution to founders (Note A) (27,000) (27,000)
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 (Note G[2]) 1,000,000 10,000 1,490,000 $(1,500,000) 0
Issuance of stock for services 12,000 18,000 18,000
Sale of common stock -
January ($1.50 per share) 58,266 1,000 86,000 87,000
Sale of common stock -
February ($1.50 per share 75,361 1,000 112,000 113,000
Sale of common stock -
May ($1.50 per share) 30,000 45,000 45,000
Issuance of stock for services 2,000 6,000 6,000
Sale of common stock -
June ($3.00 per share) 73,166 1,000 219,000 220,000
Sale of common stock -
July ($3.00 per share) 13,335 40,000 40,000
Sale of common stock -
August ($3.00 per share) 60,567 1,000 181,000 182,000
Sale of common stock -
September ($3.00 per share) 10,000 30,000 30,000
Sale of common stock -
October ($3.00 per share) 7,000 21,000 21,000
Sale of common stock -
November ($3.00 per share) 10,000 30,000 30,000
Sale of common stock -
December ($3.00 per share) 100,000 1,000 299,000 300,000
Issuance of compensatory
options to consultants (Note G[3]) 234,000 (234,000) 0
Compensatory stock and
options earned 451,000 451,000
Distributions to founders (Note A) (338,000) (338,000)
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
Issuance of stock for services 1,000 3,000 3,000
Sale of common stock - May 11 to
September 20 ($5.00 per share) 112,620 1,000 562,000 563,000
Sale of common stock - September 21
to December 31 ($10.00 per share) 25,500 255,000 255,000
Costs of offering (60,000) (60,000)
Compensatory stock and options earned 578,000 578,000
Contribution of services
(Note C[4]) 15,000 15,000
Net Loss (2,122,000) (2,122,000)
----------- -------- --------- ---------- ----------- -----------
Balance - December 31, 1998 20,811,616 $208,000 $3,766,000 $ (705,000) $(3,533,000) $(264,000)
=========== ========= ========== ============ ============ ==========
F-5
TORVEC, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
</TABLE>
<TABLE>
<S> <C> <C> <C>
SEPTEMBER 25,
1996
(INCEPTION
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
------------------ ------------
1998 1997 1998
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(2,122,000) $(922,000) $ (3,533,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 9,000 3,000 12,000
Common stock issued
for services 3,000 409,000
Contribution of services 15,000 24,000 39,000
Compensation expense
attributable to common
stock options 578,000 451,000 1,029,000
Changes in:
Other assets (164,000) (164,000)
Accounts payable and
accrued expenses 504,000 59,000 563,000
------- -------- ---------
Net cash used in
operating activities (1,013,000) (549,000) (1,645,000)
---------- --------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment (33,000) (29,000) (62,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from sales
of common stock 903,000 842,000 2,076,000
Proceeds from loan 29,000 29,000
Repayments of loan (3,000) (3,000)
Distributions ------- (338,000) (365,000)
Net cash provided
by financing activities 929,000 504,000 1,737,000
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH (117,000) (74,000) 30,000
Cash at beginning of period 147,000 221,000
-------- -------- ---------
CASH AT END OF PERIOD $ 30,000 $147,000 $ 30,000
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Accrued offering costs $14,000
Cash paid for:
Interest $ 2,000
Taxes $ 1,000
</TABLE>
F-6
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
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 H[3]). THE COMPANY INTENDS TO
DEVELOP AND DESIGN SPECIFIC APPLICATIONS FOR THIS TECHNOLOGY RELATING TO
STEERING DRIVES FOR TRACKED 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, 1998, the Company has
accumulated a deficit of $3,533,000, has a working capital deficiency of
$457,000 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 G[1]) and exploring opportunities such as collaborative
arrangements, joint ventures or licensing arrangements. 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 including a vehicle intended to be used as a prototype 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:
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.
[4] Loss per common share:
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Dilutive earnings per share is similar to the
previously reported fully diluted earnings per share.
F-7
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Fairvalue of financial instruments:
The carrying value of cash and accrued expenses approximates their fair value
due to the short maturity of those instruments.
[6] 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.
NOTE C - RELATED PARTY TRANSACTIONS
[1] 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 G[3]). For the years ended December 31,
1998 and 1997, the Company incurred expenses amounting to approximately
$528,000 and $45,000, respectively, 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.
[2] For the years ended December 31, 1998 and 1997 and for the period
December 31, 1996 approximately $116,000, $213,000 and $4,000,
respectively, were charged to operations for services provided by
three law firms, each of which has a partner who is a stockholder
of the Company. At December 31, 1998, the Company owed
$70,000 to two of these firms which is included in accounts payable.
[3] During 1998 a stockholder provided space and services to the Company at no
charge. The fair value of such space and services amounted to $15,000 and was
treated as a capital contribution and expensed (see Note H[1]).
F-8
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
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, 1998, the Company has available $1,263,000 of net operating loss
carryforwards to offset future taxable income tax expiring through 2018.
At December 31, 1998, the Company has a deferred tax asset of approximately
$496,000 representing the benefits of its net operating loss carryforward and a
deferred tax asset of $355,000 from temporary differences, principally 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.
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>
<S> <C>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
Computed federal income tax
benefit at 34% rate $(721,000) $ (313,000)
State tax benefit, net of
federal tax benefit (112,000) (49,000)
Nondeductible expenses 201,000 175,000
Valuation allowance 632,000 187,000
-------- ---------
$ 0 $ 0
======== =========
</TABLE>
Note E - Accounts Payable and Accrued Expenses
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
<TABLE>
<S> <C>
Professional fees (Note C[2]) $ 85,000
Trade payables 346,000
--------
$431,000
========
</TABLE>
Note F - Loan Payable
During 1998, the Company purchased a vehicle that is intended to be used as a
prototype. The vehicle is collateral for the loan. The loan is payable in
monthly installments, principal and interest (at 10.13% per annum) of
approximately $610, through March 2003.
F-9
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
Note F - Loan Payable (continued)
At December 31, 1998 maturities of the loan are as follows:
<TABLE>
<S> <C>
Year Amount
------ ---------
1999 $ 5,000
2000 6,000
2001 6,000
2002 7,000
2003 2,000
-------
$26,000
=======
</TABLE>
At December 31, 1998 the net book value of the prototype vehicle was
approximately $26,000.
Note G - Stockholders' Equity
[1] Private placement:
On May 11, 1998 the Company initiated a private placement of its common stock at
$5.00 per share. On September 21, 1998 the Company increased the offering price
to $10.00 per share. The termination date of this offering was extended to
May 31, 1999 (see Note G[4]).
The Company yielded net proceeds of $758,000, $1,068,000 and $331,000 from
private placements for the years ended December 31, 1998 and 1997 and for the
period ended December 31, 1996. On February 22, 1999, the Company received an
additional $520,000 pursuant to the private placement of which $507,000 was
received from the Gleasman family.
[2] Consultant:
In February 1997, the Company entered into a three year agreement with a
consultant (the "Consultant") whereby the Consultant will provide financial
consulting services and assistance in obtaining financing as well as other
services. In consideration thereof, employees of the Consultant received an
aggregate of 1,000,000 shares of common stock for $50. The Company valued the
shares of common stock at $1.50 per share.
In April 1997, the Company granted an aggregate of 500,000 warrants to five
employees of the Consultant. 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.
F-10
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
Note G - Stockholders' Equity (continued)
[2] Consultant: (continued)
On February 10, 1999, the Company entered into a one year agreement with two
consultants to provide financial and public relation services. In connection
therewith 375,000 of previously granted warrants were cancelled and the Company
granted 375,000 options at an exercise price of $5.00 exercisable immediately
through February 10, 2004. The underlying shares will have registration rights.
The Company valued these options at $2,800,000 which will be charged to
operations over the term of the consulting agreement.
[3] Stock option plan:
In December 1997, the Board of Directors of the Company, 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 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[1]) 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. At December 31, 1998,
15,000 options are exercisable. 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, 1998 these options had a remaining life of 107
months.
In connection with employment agreements which commence upon the date the IPO is
declared effective (see Note H[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. The
Company will record a charge to operations representing the fair value of the
options when the IPO is declared effective.
At December 31, 1998, 1,545,000 options are available under the Plan.
[4] Subscriptions receivable:
At December 31, 1998, the Company had subscriptions receivable for 8,100 shares
of common stock which was subsequently collected.
[5] Noncash transaction:
During 1998, the Company granted 1,000 shares of common stock, valued at $3.00
per share, for services provided. 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.
F-11
TORVEC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1998
Note H - Commitments and Other Matter
[1] Lease:
In January 1998 the Company entered into an agreement with a
stockholder/landlord, as amended to be effective upon the completion of the
Company's private placement 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 $164,000 representing the first month's rent and
rent deposits which are reflected as noncurrent assets at December 31, 1998.
[2] Employment agreements:
The Company has entered into three employment agreements with stockholders 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 family were named in a lawsuit
seeking monetary damages relating to the development of certain technology and
related matters. The court stayed all aspects of the litigation and directed
that the parties arbitrate such matters in dispute. The arbitration proceedings
were conducted during 1998 and a decision on this matter will be rendered in
April 1999. 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
exclusive ownership of certain technology. The Gleasmans believe that the
claims are without merit.
F-12
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
(a) 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 TERMINATION
NAME AGE POSITION OR DESIGNATION OR RESIGNATION
<TABLE>
<S> <C> <C> <C> <C>
Herbert H. Dobbs 67 Chairman of the 02/20/98 *
448 West Maryknoll Road Board of
Rochester Hills, MI 48309 Directors
Keith E. Gleasman 51 Director; 09/26/96 *
11 Pond View Drive President and
Pittsford, NY 14534 Consultant to
Torvec, Inc.(1)
Lee E. Sawyer 57 Director 09/27/96 *
16 Williamsburg Lane
Rolling Hills, CA 90274
Morton A. Polster 71 Director; 09/27/96 *
c/o Eugene Stephens & Secretary of
Associates Torvec, Inc.
56 Windsor Street
Rochester, NY 14605
James A. Gleasman 58 Director; 02/20/98 *
11 Pond View Drive Consultant to
Pittsford, NY 14534 Torvec, Inc.
Vernon E. Gleasman 87 Consultant to 12/01/97 *
11 Pond View Drive Torvec, Inc.
Pittsford, NY 14534
Samuel M. Bronsky 37 Chief Financial 04/01/98 *
6653 Main Street Officer
Williamsville, NY 14221
</TABLE>
*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.
(1) Keith E. Gleasman is serving as the President of the Company until Lee E.
Sawyer assumes such office pursuant to the terms of his employment agreement.
(b) Business Experience
The following sets forth the business experience of the members of the
Company's Board of Directors, its executive officers and other significant
Company personnel:
1. 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.
2. Keith E. Gleasman - Director; President and Consultant to Torvec, Inc.
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(TM) 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. Morton A. Polster - Director; Secretary of Torvec, Inc.
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.
4. Lee E. Sawyer - Director
Over a 30-year career in the wholesale side of the automotive industry, Mr.
Sawyer has worked for Ford in the technical training field and for 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.
5. James A. Gleasman - Director; Consultant to Torvec, Inc.
- - 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 Torsen(R) 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.
6. 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 licensed in New York and 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.
7. Vernon E. Gleasman - Consultant to Torvec, Inc.
Mr. Gleasman 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.
(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 Certain Shareholders
1. On August 29, 1997, McElroy Manufacturing, Inc. of Tulsa, Oklahoma,
and two MMI 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, namely the hydraulic pump and
motor, constant velocity 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. In the opinion of the
Company, even if the plaintiffs are successful, this will not effect the
development and marketing of the FasTrack, since although such products may
enhance that vehicle, its operation and ultimate success is dependent upon
other Company-owned technologies, particularly the steer-drive patents.
Hearings were conducted before the arbitrator in 1998. It is
anticipated that the arbitrator will give his answer on April 19, 1999.
2. In 1993, James A. Gleasman, after a significant 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.
(e) Section 16(a) Beneficial Ownership Reporting Compliance
Based upon its review of copies of Forms 3 and 4 and 5 received by it, the
Company believes that, to the extent such Forms were required to be filed, such
Forms were timely filed pursuant to Section 16 of the Securities Exchange Act of
1934, and that no director, officer and/or 10% Shareholder required to file such
Forms failed to either file them or file them in timely fashion.
Item 10. 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 an
initial public offering of its securities. No such initial public offering was
planned by the Company as of December 31, 1998. 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>
<S> <C> <C>
LONG TERM
COMPENSATION AWARDS
NUMBER OF SHARES OF
COMMON STOCK
ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- ------- ------ ---------- ------------
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) As of December 31, 1998, the Company had not paid 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) 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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information for the Named Executive
Officers as well as the Company's Consultants with respect to the grant of
options to purchase Common Stock during the fiscal year ended December 31, 1998.
<TABLE>
<C> <C> <C> <C> <C>
SHARES UNDERLYING % OF OPTIONS
NAME OPTIONS GRANTED GRANTED TO EXERCISE EXPIRATION
EMPLOYEES PRICE DATE
________________ _______________ ____________ __________ ____________
Herbert H. Dobbs 100,000 26% $5.00 12/31/2007
Lee E. Sawyer 180,000 48% $5.00 12/31/2007
Morton A. Polster 100,000 26% $5.00 12/31/2007
Keith E. Gleasman 0 0% 0 0
James A. Gleasman 0 0% 0 0
Vernon E. Gleasma 0 0% 0 0
</TABLE>
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 as well as the Company's Consultants with respect to the exercise of
options to purchase Common Stock during the fiscal year ended December 31, 1998
and the number and value of securities underlying unexercised options held by
the Named Executive Officers as of such date.
<TABLE>
<S> <C> <C> <C> <C>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE DECEMBER 31, AT DECEMBER 31, 1998(1)
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
Herbert H. Dobbs 0 0 40,000 60,000 $200,000 $300,000
Lee E. Sawyer 0 0 72,000 108,000 $360,000 $540,000
Morton A. Polster 0 0 40,000 60,000 $200,000 $300,000
Keith E. Gleasman 0 0 10,000 15,000 $50,000 $75,000 50,000 75,000
James A. Gleasman 0 0 10,000 15,000 $50,000 $75,000
Vernon E. Gleasman 0 0 10,000 15,000 $50,000 $75,000
</TABLE>
(1) Calculated on the basis of the ongoing private placement price of the
Common Stock of $10.00 per share, minus the per share exercise price multiplied
by the number of shares underlying the option.
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 an initial public offering
of its securities, 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. 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 an initial public offering
of its securities, 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. 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 an initial public offering
of its securities, 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. 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. $117,500 was
paid to Mr. Gleasman pursuant to the consulting agreement during the fiscal year
ended December 31, 1998.
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. $117,500 was
paid to Mr. Gleasman pursuant to the consulting agreement during the fiscal year
ended December 31, 1998.
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. $120,000 was
paid to Mr. Gleasman pursuant to the consulting agreement during the fiscal year
ended December 31, 1998.
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. On May 27, 1998, the Company shareholders
approved the 1998 Stock Option Plan. On December 17, 1998, the Company
registered the shares reserved for issuance under the 1998 Stock Option Plan
under the Securities Act of 1933.
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. 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.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership
The following table sets forth as of December 31, 1998 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.
<TABLE>
<S> <C> <C> <C>
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER POSITION SHARES OWNED(1) SHARES OWNED
- -------------------- ---------- -------------- ------------
Herbert H. Dobbs Chairman of 420,000(2) 2.02%
448 West Maryknoll Road the Board
Rochester Hills, Michigan 48309 of Directors
Keith E. Gleasman Director; 5,498,134(3) 26.42%
11 Pond View Drive President and
Pittsford, New York 14534 Consultant to
Torvec, Inc.
Lee E. Sawyer Director 357,000(4) 1.71%
16 Williamsburg Lane
Rolling Hills, California 90274
Morton A. Polster Director; 295,600(5) 1.42%
c/o Eugene Stephens & Secretary of
Associates Torvec, Inc.
56 Windsor Street
Rochester, New York 14605
James A. Gleasman Director; 5,485,133(6) 26.36%
11 Pond View Drive Consultant
Pittsford, NY 14534 to Torvec, Inc.
Vernon E. Gleasman Consultant to 5,498,133(7) 26.42%
11 Pond View Drive Torvec, Inc.
Pittsford, NY 14534
Samuel M. Bronsky Chief 1,000 Less Than 1%
6653 Main Street
Williamsville, NY 14221
All Executive Officers 17,555,000(8) 83.67%
and Directors as a Group
(7 persons)
</TABLE>
<TABLE>
<S> <C>
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 December 31, 1998 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 December 31, 1998
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 20,811,616 shares of
Common Stock outstanding as of December 31, 1998.
2. Includes 40,000 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 10,000 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 72,000 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 40,000 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 10,000 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 1,744,066 shares attributable to ownership by Mr. Gleasman's
wife. Includes 10,000 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 182,000 shares which may be purchased through
the exercise of options granted in connection with employment and
consulting agreements, exercisable at $5.00 per share.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
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 9 of this Annual Report for a discussion of the lease/service
contract entered into between the Company and Joseph L. Neri, Sr., who received
95,000 shares of the Company's Common Stock at the inception of the Company.
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, 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 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
The following Exhibits, as applicable, are attached to this Annual Report
(Form 10-KSB). The Exhibit Index is found on the page immediately succeeding
the signature page and the Exhibits follow on the pages immediately succeeding
the Exhibit Index.
(2) Plan of acquisition, reorganization, arrangement, liquidation, or
succession
Not Applicable
(3) Articles of incorporation, By-laws
<TABLE>
<S> <C> <C>
3.1 Certificate of Incorporation incorporated by
reference to Form 10-SB/A, Registration Statement,
registering Company's $.01 par value common stock under
section 12(g) of the Securities Exchange Act of
1934;
3.2 By-laws incorporated by reference to Form 10-SB/A,
Registration Statement, registering Company's $.01
par value common stock under section 12(g) of the
Securities Exchange Act of 1934;
</TABLE>
(4) Instruments defining the rights of security holders, including
indentures
Not Applicable
(9) Voting trust agreement
Not Applicable
(10) Material contracts
<TABLE>
<S> <C>
(i) Certain Employment Agreements, Consulting
Agreements, certain assignments of patents,
patent properties, technology and know-how to the
Company, Neri Service and Space Agreement and
Ford Motor Company Agreement and Extension of
Term, all incorporated by reference to Form 10-
SB/A, Registration Statement, registering
Company's $.01 par value common stock under
section 12(g) of the Securities Exchange Act of
1934;
(ii) The Company's 1998 Stock Option Plan and relative
Stock Options Agreements, incorporated by
reference to Form S-8, Registration Statement,
registering 2,000,000 shares of the Company's
$.01 par value common stock reserved for issuance
thereunder, effective December 17, 1998;
</TABLE>
(11) Statement re: computation of per share earnings (loss)
(13) Annual or quarterly reports, Form 10-Q Letter re: unaudited interim
financial information
Not applicable
(16) Letter on change in certifying accountant
Not Applicable
(18) Letter re change in accounting principles
Not applicable
(21) Subsidiaries of the registrant
None
(22) Published report regarding matters submitted to vote of security
holders
Not applicable
(23) Consents of experts and counsel
Not Applicable
(24) Power of attorney
Not applicable
(27) Financial data schedule
(99) Additional exhibits
Not applicable
(B) REPORTS FILED ON 8-K
None
(C) FORWARD LOOKING INFORMATION
This Annual Report contains forward-looking statements that are based on
current expectations, estimates and projections about the Company and its plans
for future operation as well as management's beliefs and assumptions. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
The Future Factors that may affect the Company, its plans for its future
operations and performance and results of the Company's future business include,
but are not limited to, the following:
a. general economic and competitive conditions in the markets and
countries in which the Company will operate, and the risks
inherent in any future international operations;
b. the Company's ability to enter into collaborative joint working
arrangements, formal joint venture arrangements and/or licensing
arrangements with domestic and/or foreign governments, automotive
industry manufacturers and suppliers to manufacture and promote
the Company's products;
c. industry and consumer acceptance of the Company's products;
d. the level of competition and resistance in the automotive
industry;
e. the strength of the U.S. dollar against currencies of other
countries where the Company may operate, as well as cross-
currencies between the Company's future operations outside of the
U.S. and other countries with whom it transacts business.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in the forward-looking statements. The Company does not intend
to update forward-looking statements.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TORVEC, INC.
Date: March 30, 1999 By: /S/ KEITH E. GLEASMAN
________________________________
Keith E. Gleasman, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 30, 1999 By: /S/ HERBERT H. DOBBS
________________________________
Herbert H. Dobbs, Chairman of the
Board of Directors
Date: March 30, 1999 By: /S/ KEITH E. GLEASMAN
___________________________________
Keith E. Gleasman, Director and
President
Date: March 30, 1999 By: /S/ LEE E. SAWYER
___________________________________
Lee E. Sawyer, Director
Date: March 30, 1999 By: /S/ MORTON A. POLSTER
____________________________________
Morton A. Polster, Director; Secretary
Date: March 30, 1999 By: /S/ JAMES A. GLEASMAN
_____________________________________
James A. Gleasman, Director; Consultant
Date: March 30, 1999 By: /S/ SAMUEL M. BRONSKY
_____________________________________
Samuel M. Bronsky, Chief Financial Officer
EXHIBIT INDEX
EXHIBIT PAGE NUMBER
(2) Plan of acquisition, reorganization, arrangement, liquidation, or
succession
Not Applicable
(3) Articles of incorporation, By-laws
3.1 Certificate of Incorporation incorporated by
reference to Form 10-SB/A, Registration
Statement, registering Company's $.01 par value
common stock under section 12(g) of the
Securities Exchange Act of 1934;
3.2 By-laws incorporated by reference to Form 10-
SB/A, Registration Statement, registering
Company's $.01 par value common stock under
section 12(g) of the Securities Exchange Act of
1934;
(4) Instruments defining the rights of security holders, including
indentures
Not Applicable
(9) Voting trust agreement
Not Applicable
(10) Material contracts
(i) Certain Employment Agreements, Consulting
Agreements, certain assignments of patents,
patent properties, technology and know-how to
the Company, Neri Service and Space Agreement
and Ford Motor Company Agreement and Extension
of Term, all incorporated by reference to Form
10-SB/A, Registration Statement, registering
Company's $.01 par value common stock under
section 12(g) of the Securities Exchange Act of
1934;
(ii) The Company's 1998 Stock Option Plan and
relative Stock Options Agreements, incorporated
by reference to Form S-8, Registration
Statement, registering 2,000,000 shares of the
Company's $.01 par value common stock reserved
for issuance thereunder, effective December 17,
1998;
(11) Statement re: computation of per share earnings (loss)
(13) Annual or quarterly reports, Form 10-Q Letter re: unaudited interim
financial information
Not applicable
(16) Letter on change in certifying accountant
Not Applicable
(18) Letter re change in accounting principles
Not applicable
(21) Subsidiaries of the registrant
None
(22) Published report regarding matters submitted to vote of security
holders
Not applicable
(23) Consents of experts and counsel
Not Applicable
(24) Power of attorney
Not applicable
(27) Financial data schedule
(99) Additional exhibits
Not applicable
EX-27.1
<TABLE>
<CAPTION>
FINANCIAL DATA SCHEDULE
12/31/98
</CAPTION>
<S> <C>
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1998
PERIOD-START JAN-01-1998
PERIOD-END DEC-31-1998
CASH 30,000
SECURITIES 0
RECEIVABLES 0
ALLOWANCES 0
INVENTORY 0
CURRENT-ASSETS 111,000
EQUIPMENT 62,000
DEPRECIATION 12,000
TOTAL-ASSETS 325,000
CURRENT-LIABILITIES 568,000
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 208,000
OTHER-SE <472,000>
TOTAL-LIABILITY-AND-EQUITY 325,000
SALES 0
TOTAL-REVENUES 0
CGS 0
TOTAL-COSTS 2,122,000
OTHER-EXPENSES 2,122,000
LOSS-PROVISION 0
INTEREST-EXPENSE 0
INCOME-PRETAX <2,122,000>
INCOME-TAX 0
INCOME-CONTINUING (2,122,000)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (2,122,000)
EPS-BASIC (.10)
EPS-DILUTED (.10)
</TABLE>
