Item 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.
Since September 14, 2007, the company has occupied facilities located at 1999 Mount Read Blvd., Rochester, New York. The facility consists of approximately 13,650 sq. ft., with executive and engineer offices, conference rooms, manufacturing and assembly space, automotive bays, dynamometer and lift facilities and approximately thirty acres of land suitable for vehicle testing and demonstration. On April 29, 2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease commencement date) providing for rent to be paid at a rate of $5,687 per month ($68,244 per annum) and in addition, requiring the company to pay the company’s proportionate share of yearly real estate taxes and yearly common area operating costs. Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants an option to the company to lease up to an additional 7,000 sq. ft. of adjacent manufacturing and assembly space.
Rental payments and certain other payments due to the landlord are to be paid in cash or common shares of the company, based upon the closing price per share on the 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.
The company believes that, given its present circumstances, the facilities located at Mount Read Blvd. are sufficient to meet the company’s anticipated plant requirements for the next twelve months. This situation could change if the company were to receive one or more orders requiring volume production of one or more of its technologies and the company were to elect to fill any such orders itself. See “Management’s Discussion and Analysis.”
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an assignment agreement entered into by the parties, effective June 15, 2007, whereby the company assigned all of its rights and interest in an ice technology license granted by Dartmouth College to Ice Engineering in exchange for a 2.8% royalty interest and a cash reimbursement of $3,500,000. The suit was commenced after the company had been paid approximately $800,000.
On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement agreement, the company’s assignment of the ice technology license is made permanent; the company elected to forego its right to royalties and agreed to receive $1,100,000, with $300,000 paid to the company by Ice Engineering on January 27, 2010 and $800,000 paid to the company by Ice Engineering by February 26, 2010.
There are no other litigation matters, actions and/or proceedings to which the company is a party or to which its properties are subject.
Item 5.
Item 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) 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 had been owned for one year or more became eligible for trading on the over-the-counter bulletin board maintained by the National Association of Securities Dealers, Inc. on December 22, 1998 (“NASD”). The company’s stock began trading on January 21, 1999 at $12.00 per share. The company has approximately 20 market makers for its common stock.
The company’s stock is traded on the over-the-counter bulletin board (OTCBB). The OTCBB is an electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and volume information for shares of over-the-counter companies which file current financial reports with the Securities and Exchange Commission or, if applicable, such companies’ banking or insurance regulators. The NASD oversees the OTCBB.
The following table presents the range of high and low closing prices for the company’s $.01 par value common stock for each quarter during its last two calendar years. The source of the high and low closing price information is the OTCBB. The market represented by the OTCBB is extremely limited, is heavily influenced by market makers and the price for our common stock quoted on the OTCBB is not necessarily a reliable indication of the value of our common stock. The company also believes that the price of its common stock is significantly impacted by short-selling. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
(B) Holders of Common Stock
As of December 31, 2010, the company had approximately 300 shareholders of record and an estimated 3,400 beneficial owners of its common stock. As of December 31, 2010, the company had 45,685,678 common shares issued and outstanding.
(C) Dividend Policy on Common Stock
The company has not paid any dividends on its common stock since its inception. The declaration or payment of dividends, if any, on the company’s common stock is within the discretion of the board of directors and will depend upon the company’s earnings, capital requirements, financial condition and other relevant factors. Given the company’s current financial condition, the board of directors does not anticipate payment of any dividends on its common stock in the foreseeable future.
The declaration and payment of dividends on the company’s common stock is limited by provisions of the New York Business Corporation Law which permits the payment of dividends only if after the dividends are paid, a company’s net assets are at least equal to its stated capital. Payment of dividends on the company’s common stock is also subordinated to the requirement that the company pay all current and accumulated dividends on its Class A and Class B Preferred Shares prior to the payment of any dividends on its common stock.
(D) Securities Authorized for Issuance under Equity Compensation Plans as of December 31,
(1)
Represents the aggregate number of common stock options outstanding under the company’s 1998 Stock Option Plan. The 1998 Plan was terminated effective May 28, 2008 as to the grant of future options thereunder.
(2)
Represents stock options granted to the company’s chief executive officer, chief financial officer, and certain retired directors, as well as common stock warrants issued to executive officers, nonmanagement directors and certain of our business, engineering, financial, governmental affairs and technical consultants. See Note H to the company’s financial statements for details.
On January 27, 2011, at the company’s annual shareholder meeting, our shareholders approved the 2011 Stock Option Plan which provides for the grant of up to 3,000,000 common shares thereunder. In addition, on January 27, 2011 at the company’s annual shareholder meeting, the shareholders approved the grant of 1,350,000 stand-alone options to new directors and a special advisor to the board exercisable at $.90 per common share. On January 28, 2011, 275,000 options were granted under the 2011 Plan to a new director, exercisable at $.90 per share.
(E) Class A Preferred Stock
On August 30, 2000, the company amended its certificate of incorporation to permit the company to issue up to 100,000,000 shares of $.01 par value preferred stock. Under the amendment, the board of directors has the authority to allocate these shares into as many separate classes of preferred as it deems appropriate and with respect to each class, designate the number of preferred shares issuable and the relative rights, preferences, seniority with respect to other classes and to the company’s common stock and any limitations and/or restrictions that may be applicable without obtaining shareholder approval.
In March 2002, the company’s board designated the first series of preferred shares, namely Class A Preferred. The relative rights, preferences and limitations of the Class A Preferred are as follows:
The number of Class A Preferred initially authorized is 3,300,000 Class A Preferred. The initial number authorized shall be increased as required to provide Class A Preferred for payment of dividends as described in Section B, distribution to holders in accordance with Section C and as described in Section F.
(i)
So long as any Class A Preferred is outstanding, the holders of the Class A Preferred will be entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A Preferred for each annual dividend period. The annual dividend period shall commence on the first day of each March and shall end on the last day of the immediately succeeding February, which February date is referred to as the “Dividend Accrual Date”.
(ii)
When and as declared by the board, dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
(iii)
Dividends shall be cumulative from the date of issuance of each share of Class A Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Company legally available for the payment of dividends.
(iv)
Accumulated and unpaid dividends on the Class A Preferred will not bear interest.
(v)
So long as any Class A Preferred is outstanding, the Company may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of, any shares or stock of the Company ranking junior to the Class A Preferred with respect to the payment of dividends, including the $.01 par value common stock of the Company (“Junior Stock”), unless all dividends in respect of the Class A Preferred for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class A Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise on a pro rata basis.
C.
Liquidation Rights
(i)
In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Class A Preferred then outstanding are entitled to be paid out of the assets of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Company, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(ii), all of such accumulated and unpaid dividends will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. No fractions of Class A Preferred shall issue. The Company shall pay cash in lieu of paying fractions of Class A Preferred on a pro rata basis.
(ii)
The Class A Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Company.
(iii)
A consolidation or merger of the Company with or into any other corporation or corporations or any other legal entity will not be deemed to constitute a liquidation, dissolution or winding up of the Company as those terms are used in this Section C.
(i)
The Company may, in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class A Preferred at the Redemption Price.
(ii)
For each redemption, the Redemption Price for each share of Class A Preferred shall be equal to amount paid per share of Class A Preferred payable in cash, plus an amount payable (not withstanding the provisions of Section B (ii)) in cash equal to the sum of all accumulated unpaid dividends per share of Class A Preferred (including a prorated annual dividend from the last Dividend Accrual Date) to the respective date for each redemption on which the Company shall redeem any shares of Class A Preferred (the “Redemption Date”).
(iii)
In the event of redemption of only a portion of the then outstanding Class A Preferred, the Company will affect the redemption pro rata according to the number shares held by each holder of Class A Preferred.
(iv)
At least 20 days and not more than 60 days prior to the date fixed by the board for any redemption of Class A Preferred, written notice (the “Redemption Notice”) will be mailed, postage prepaid, to each holder of record of the Class A Preferred at his or her post office address last shown on the records of the Company. The Redemption Notice will state:
•
Whether all or less than all of the outstanding Class A Preferred is to be redeemed and the total number of shares of Class A Preferred being redeemed;
•
the number of shares of Class A Preferred held by the holder that the Company intends to redeem;
•
the Redemption Date and Redemption Price; and
•
that the holder is to surrender to the Company, in the manner and at the place designated in Section D(v), his or her certificate or certificates representing the number of shares of Class A Preferred to be redeemed.
(v)
On or before the date fixed for redemption, each holder of Class A Preferred must surrender the certificate or certificates representing the number of shares of Class A Preferred to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being redeemed to the Company free and clear of any adverse interest, at the place designated in the Redemption Notice. The Redemption Price for the number of shares of Class A Preferred redeemed will be payable in cash on the Redemption Date to the person whose name appears on the certificate(s) as the owner of such certificate(s) as of the date of the Redemption Notice. In the event that less than all of the shares of Class A Preferred represented by any certificate(s) are redeemed, a new certificate will issued by the Company representing the unredeemed Class A Preferred to the same record owner.
(vi)
As promptly as practicable after surrender of the certificate(s) representing the redeemed Class A Preferred, the Company will pay the Redemption Price to the record holder of the redeemed Class A Preferred.
(vii)
Unless the Company defaults in the payment in full of the Redemption Price, the obligation of the Company to pay dividends on the Class A Preferred redeemed shall cease on the Redemption Date, and the holders of the Class A Preferred redeemed will cease to have any further rights with respect to such redeemed Class A Preferred on the Redemption Date, other than to receive the Redemption Price.
(viii)
The holders of the Class A Preferred have no right to seek or to compel redemption of the Class A Preferred.
(i)
The holders of Class A Preferred are not entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Company shall be required or taken.
F.
Conversion Privilege
(i)
The holders of the Class A Preferred have the right, at each holder’s option but subject to board approval in each case, to convert each share of Class A Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Company (“Common Share”) without payment of any conversion price or other consideration. Such 1 for 1 rate of conversion is subject to adjustment as set forth in Section F(x).
(ii)
The Conversion Privilege set forth in this Section F may not be exercised by the holder of Class A Preferred until 1 year shall have elapsed from the issue date of the Class A Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class A Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion described in Section F(iii) below and the board’s approval of such conversion, the Company shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
(iii)
In order to exercise the Conversion Privilege, the holder of Class A Preferred must give written notice to the Company that the holder elects to covert the number of shares of Class A Preferred as specified in the Notice of Conversion. The Notice of Conversion will also state the name(s) and address (es) in which the certificate(s) for Common Shares issuable upon the conversion are to be issued. Upon receipt of the Company’s Notice of Approval, the holder of the Class A Preferred must surrender the certificate(s) representing the number of shares of Class A Preferred being converted to the Company, accompanied by instruments of transfer satisfactory to the Company and sufficient to transfer the Class A Preferred being converted to the Company free and clear of any adverse interest at the office maintained for such purpose by the Company. As promptly as practicable after the surrender of the certificate(s) representing the number of shares of Class A Preferred converted, the Company will issue and deliver to the holder, or to such other person designated by the holder’s written order, a certificate(s) for the number of full Common Shares issuable upon the conversion of the Class A Preferred in accordance with the provisions of this Section F(iii).
(iv)
The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining number of Class A Preferred in any case in which fewer than all of the Class A Preferred represented by a certificate(s) are converted to the same record holder of Class A Preferred converted.
(v)
Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class A Preferred will have been so surrendered as provided in Section F(iii) (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Common Shares will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Common Shares on the Conversion Date. Effective as of the Conversion Date, the Company will have no obligation to pay dividends on the Class A Preferred converted provided that effective as of the Conversion Date, the Company shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class A Preferred converted, payable in the discretion of the Board, in cash out of any funds legally available for payment of such dividends or in Class A Preferred.
(vi)
The Conversion Privilege shall terminate with respect to Class A Preferred called for redemption by the mailing of a Redemption Notice described in Section D(iv) on the close of business on the date immediately preceding the Redemption Date.
(vii)
Notwithstanding the requirement for board approval and the 1 year limit set forth in Section F(ii), in case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Company with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the holders of Class A Preferred then outstanding will have the right to convert the Class A Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class A Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
(viii)
Notwithstanding the 1 year holding period set forth in Section F(ii), in the event the highest bid price for the Company’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class A Preferred shall have the right to convert such Class A Preferred upon Board approval.
(ix)
Common Shares delivered upon conversion of Class A Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
(x)
In case the Company
•
Declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
•
Subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
•
Combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Common Shares issuable upon the conversion of the Class A Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, the holder of Class A Preferred will be entitled to receive the same percentage of ownership of the Company’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.
Since its designation in March 2002, the company has sold an aggregate 765,512 shares of Class A Preferred for proceeds of approximately $3,062,000.
Since its designation in March 2002, Class A Preferred shareholders have converted an aggregate 183,500 Class A Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with 62,500 and 51,250 Class A Preferred converted in the years ending December 31, 2010 and 2009, respectively.
Upon conversion, converting Class A Preferred shareholders are entitled to receive, in accordance with the terms of the Class A Preferred, dividends payable either in cash or in Class A Preferred shares calculated at the rate of 10 percent per annum.
At times, the board of the company may elect to settle the dividends through the issuance of common stock in lieu of cash. The amount of common stock shares issued is based on the market price of the stock of the company at the time of the conversion.
Through December 31, 2010, an aggregate Class A Preferred dividend amounting to approximately $230,000 was settled through the issuance of 16,760 Class A Preferred and of 92,453 common shares of the company. For the year ended December 31, 2010, the company settled Class A Preferred dividends amounting to $113,000 through the issuance of 22,883 shares of common stock and 5,421 shares of Class A Preferred stock.
For the year ended December 31, 2009, the company settled Class A Preferred dividends amounting to approximately $53,000 through the issuance of 65,965 shares of common stock.
At December 31, 2010, dividends payable upon conversion of 582,012 outstanding shares of Class A Preferred amounted to approximately $1,339,000.
(F) Class B Preferred Stock
On October 19, 2004, the company incorporated Iso-Torque Corporation in order to commercialize its Iso-Torque® differential technology.
In September 2004, the company created a new series of preferred stock-Class B Non-Voting, Cumulative Convertible Preferred Stock (“Class B Preferred”) to fund the business operations of Iso-Torque Corporation.
The designation, relative rights, preferences and limitations of the Class B Preferred, as fixed by the board of directors, are as follows:
A.
Three hundred thousand (300,000) authorized preferred shares of the par value of $.01 each as fixed by the board of directors, shall be issued in and as a series to be designated Class B Non-Voting Cumulative Convertible Preferred Shares, $.01 par value. Said series is hereinafter called “Class B Preferred Shares”. The term preferred shares as used herein shall include all 100,000,000 of the preferred shares, $.01 par value authorized by the Certificate of Incorporation of the Corporation of which Class B Preferred Shares is the second series.
B. (1) So long as any Class B Preferred are outstanding, the holders of the Class B Preferred will be entitled to receive cumulative preferential dividends in the amount of $.50 per share of Class B Preferred and no more for each annual dividend period. The annual dividend period shall commence on the first day of each September and shall end on the last day of the immediately succeeding August, which August date is referred to as the “Dividend Accrual Date”.
(2)
When and as declared by the board, dividends payable on the Class B Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis.
(3)
Dividends shall be cumulative from the date of issuance of each share of Class B Preferred, whether or not declared and whether or not, in any annual dividend period(s), there are net profits or net assets of the Corporation legally available for the payment of dividends.
(4)
Accumulated and unpaid dividends on the Class B Preferred will not bear interest.
(5)
So long as any shares of Class B Preferred are outstanding, the Corporation may not declare or pay any dividend, make any distribution, or fund, set aside or make monies available for a sinking fund for the purchase or redemption of any shares or stock of the Corporation ranking junior to the Class B Preferred with respect to the payment of dividends, including the $.01 par value common stock of the company, for all past annual dividend periods have been paid and such dividends for the current annual dividend period have been paid or declared and duly provided for. Subject to the foregoing, and not otherwise, the dividends (payable in cash, stock or otherwise) as may be determined by the Board, may be declared and paid on any Junior Stock from time to time out of any funds legally available therefore, and the Class B Preferred will be entitled to participate in any such dividends, whether payable in cash, stock or otherwise, on a pro rata basis.
C.
The Class B Preferred shall rank junior and be classified as Junior Stock with respect to the Corporation’s Class A Preferred Shares in all respects.
D. (1) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class B Preferred then outstanding are entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any Junior stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation, all accumulated and unpaid dividends (including a prorated dividend from the last Dividend Accrual Date) in respect of any liquidation, dissolution or winding up consummated except that, notwithstanding the provisions of Section B(2), all of such accumulated and unpaid dividends will be paid in shares of Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. No fractions of Class B Preferred shall be issued. The Corporation shall pay cash in lieu of paying fractions of Class B Preferred on a pro rata basis. (2) The Class B Preferred will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the Corporation.
E. (1) The Corporation may in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class B Preferred at the Redemption Price.
(2)
For each redemption, the Redemption Price for each share of Class B Preferred shall be equal to the sum of $5.00 per share of Class B Preferred, payable in cash, plus an amount payable (not withstanding the provisions of Section B(2)) in cash equal to the sum of all accumulated unpaid dividends per share of Class B Preferred (including a prorated annual dividend from the last Dividend Accrual Date) to the respective date for each redemption on which the Corporation shall redeem any shares of Class B Preferred (the “Redemption Date”).
(3)
In the event of a redemption of only a portion of the then outstanding Class B Preferred, the Corporation will affect the redemption pro rata according to the number shares held by each holder of Class B Preferred.
(4)
Unless the Corporation defaults in the payment in full of the Redemption Price, the obligation of the Corporation to pay dividends on the Class B Preferred redeemed shall cease on the Redemption Date, and the holders of the Class B Preferred redeemed will cease to have any further rights with respect to such redeemed Class B Preferred on the Redemption Date, other than to receive the Redemption Price.
(5)
The holders of the Class B Preferred have no right to seek or to compel redemption of the Class B Preferred.
F.
The holders of Class B Preferred are not entitled to vote in any and all elections of directors and with respect to any and all other matters as to which the vote or consent of shareholders of the Corporation shall be required or taken.
G. (1) The holders of the Class B Preferred have the right, at each holder’s option but subject to board approval in each case, to (i) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of the Corporation (“Torvec Common”) without payment of any conversion price or other consideration; or to (ii) convert each share of Class B Preferred into 1 fully paid and nonassessable share of the $.01 par value common stock of Iso-Torque Corporation (“Iso-Torque Common”) without payment of any conversion price or other consideration upon the happening of any of the following events:
(a)
the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Act of 1933 with respect to an initial public offering of Iso-Torque Common; or
(b)
the effectiveness of a registration statement as filed with the Securities and Exchange Commission pursuant to and under the Securities Exchange Act of 1934 with respect to an initial trading of Iso-Torque Common on a national exchange, the NASDAQ or the OTCBB; or
(c)
notwithstanding the 1 year holding period set forth in Section G(2) the execution of a definitive agreement for the sale, transfer and/or exchange of all of the issued and outstanding Iso-Torque Common to a third party purchaser of such stock or by any of a business combination of Iso-Torque Corporation with an unrelated entity, other than a merger or consolidation in which Iso-Torque Corporation is the surviving corporation.
(2)
The Conversion Privilege set forth in this Section G may not be exercised by the holder of Class B Preferred until 1 year shall have elapsed from the issue date of the Class B Preferred held by such holder and may not be exercised if the board shall not have approved the actual exercise of such Conversion Privilege by such holder of Class B Preferred. Such approval shall not be unreasonably withheld. Upon receipt of the Notice of Conversion and the board’s approval of such conversion, the Corporation shall give a Notice of Approval to the holder within 48 hours of the receipt of the Notice of Conversion that the exercise of the Conversion Privilege by such holder is approved.
(3)
The Conversion Privilege may be exercised in whole or in part and, if exercised in part, a certificate(s) will be issued for the remaining Class B Preferred in any case in which fewer than all of the Class B Preferred represented by a certificate(s) are converted to the same record holder of Class B Preferred converted.
(4)
Each conversion will be deemed to have been effective immediately prior to the close of business on the date on which the Class B Preferred will have been so surrendered (the “Conversion Date”) and the person(s) in whose name(s) any certificate(s) for Torvec Common or Iso-Torque Common will be issuable upon the conversion will be deemed to have become the holder(s) of record of the Torvec Common or Iso-Torque Common on the Conversion Date. Effective as of the Conversion Date, the Corporation will have no obligation to pay dividends on the Class B Preferred converted provided that effective as of the Conversion Date, the Corporation shall pay all accumulated and unpaid dividends (including the prorated dividend from the last Dividend Accrual Date) on the Class B Preferred converted, payable in the discretion of the board, in cash out of any funds legally available for payment of such dividends or in shares of Class B Preferred.
(5)
The Conversion Privilege shall terminate with respect to Class B Preferred called for redemption by the mailing of a Redemption Notice on the close of business on the date immediately preceding the Redemption Date.
(6)
Notwithstanding the requirement for board approval and the 1 year limit set forth in Section G(2), in case of any consolidation or merger to which the Corporation is a party other than a merger or consolidation in which the Corporation is the surviving corporation or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Corporation or in the case of any statutory exchange of securities representing an excess of 50% of the total outstanding securities of the Corporation with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holders of Class B Preferred then outstanding will have the right to convert the Class B Preferred into the kind and amount of securities, cash or other property which the holder would have owned or have been entitled to receive immediately after the consolidation, merger, statutory exchange, sale or conveyance, had the Class B Preferred been converted immediately prior to the effective date of the consolidation, merger, statutory exchange, sale or conveyance as the case may be.
(7)
Notwithstanding the 1 year holding period set forth in Section G(2), in the event the highest bid price for the Corporation’s $.01 par value common stock quoted on any exchange, automated quotation system or the OTC Bulletin Board on which such stock is actively traded is $20 or more on 5 consecutive trading days, the holders of Class B Preferred shall have the right to convert such Class B Preferred upon board approval for such conversion period.
(8)
Torvec Common or Iso-Torque Common delivered upon conversion of Class B Preferred will be, upon delivery, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.
(9)
In case the Corporation
(a)
declares a dividend, or makes a distribution, on shares of its $.01 par value common stock in shares of its $.01 par value common stock; or
(b)
subdivides its outstanding shares of its $.01 par value common stock into a greater number of shares of its $.01 par value common stock; or
(c)
combines its outstanding shares of its $.01 par value common stock into a smaller number of shares of $.01 par value common stock, the number of Torvec Common issuable upon the conversion of the Class B Preferred shall be adjusted at the time of the record date for the dividend or distribution or the effective date of the subdivision or a combination so that after such record or effective date, each holder of Class B Preferred will be entitled to receive the same percentage of ownership of the Corporation’s $.01 par value common stock as such holder would have been entitled to receive immediately prior to such record or effective date.
Since its designation in September 2004, the company has sold an aggregate 97,500 Class B Preferred in a number of private placements for proceeds of approximately $487,500. No Class B Preferred was sold during the years ending December 31, 2010 and 2009.
Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class B Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with no Class B Preferred converted in the year ending December 31, 2010.
Upon conversion, converting Class B Preferred shareholders are entitled to receive, in accordance with the terms of the Class B Preferred, dividends payable, in the discretion of the board of directors, either in cash or in Class B Preferred shares calculated at the rate of 10 percent per annum. Through December 31, 2010, no Class B Preferred shares have been issued to converting Class B Preferred shareholders as a dividend.
Depending upon the company’s cash position, the company from time to time may request that a converting preferred shareholder receiving dividends in cash consent to receive shares of restricted common stock in lieu thereof. Through December 31, 2010, the company has issued 30,103 restricted common shares in payment of Class B dividends amounting to $24,082, based on the market value of the Company’s stock at the time of conversion.
At December 31, 2010, dividends payable upon the conversion of 77,500 outstanding shares of Class B Preferred amounted to approximately $204,000.
(G) Reports to Shareholders
The company furnishes its shareholders with an annual report 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 complies with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.
(H) Transfer Agent and Registrar
Continental Stock Transfer & Trust Company has been appointed as the company’s Transfer Agent and Registrar for its common stock and for its preferred stock.
As a smaller reporting company, we are not required to include information otherwise required by this item.
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(A) Overall Business Strategy
Torvec, Inc. (the “company”) was incorporated as a New York State business corporation in September 1996. The company, which has not had any significant revenue-producing operations and is in the development stage, has developed technology for use in automotive and commercial applications. In September 1996, the company acquired numerous patents, inventions and know-how contributed by Vernon E. Gleasman, James Y. Gleasman and Keith E. Gleasman (the “Gleasmans”).
(B) Current Status of Business Plan and Ongoing Projects
The company’s plan of operation for the year ending December 31, 2011 is as follows:
1) to design, build and provide IsoTorque differentials to domestic and foreign original equipment manufacturers, to engage with such manufacturers in the performance and durability evaluation of the company’s IsoTorque in rear-wheel and front wheel drive applications and to market the IsoTorque to such manufacturers for use in their future vehicle platforms, including automotive and truck fleets;
2) to design and build prototype units of the company’s IsoTorque differential for integration in the drive wheel assemblies of 21 SC mining shuttle cars under a contract with Eastern Mining & Industrial Supply, Inc., Chapmanville, West Virginia, to jointly evaluate the performance and durability of the prototype units and upon successful evaluation, to build and sell IsoTorque differentials to Eastern for incorporation in 21 SC mining cars it remanufactures for the mining industry;
3) to enhance the design of, build prototype units for, and evaluate the operating performance and efficiencies of the company’s Rota-Torque Hydraulic Pump for commercial and industrial applications and to market the Rota-Torque to industrial manufacturers of hydraulic pump and associated manufacturers.
In addition to the activities to be undertaken by the company to implement its plan of operation detailed immediately above, the company may expand its marketing activities depending upon future circumstances and developments. Information regarding the company and all of its automotive inventions, including regular updates on technological and business developments, can be found on the company’s website, www.torvec.com.
(C) Company Revenue and Expenses
Revenue for the years ended December 31, 2010 and 2009 were $0 and $175,000, respectively. The revenue generated in 2009 was primarily due to the sale of a prototype Full Terrain Vehicle, which was a non-recurring event. The cost of goods sold was $90,000 in 2009, or 51% of revenue. Gross profit for the twelve-month periods ended December 31, 2010 and 2009 were $0 and $85,000, respectively.
Research and development expenses for the full year of 2010 amounted to $469,000 as compared to $520,000 for the full year of 2009. The decrease of $51,000 is primarily due to lower personnel costs related to the retirement of the company’s former CEO in the first quarter of 2010.
General and administrative expense for the year ended December 31, 2010 amounted to $4,471,000 compared to $2,877,000 for 2009. The increase of $1,594,000 is mainly related to non-cash stock compensation expense in 2010 from issuances of stock options to directors, officers, and other key personnel in the second half of 2010.
The loss from operations in 2010 was $4,940,000, compared with a loss from operations in 2009 of $3,312,000. Other income for 2010 included a gain of $1,900,000 from the settlement of the company’s litigation for its Ice technology license to Ice Engineering, LLC in the first quarter of 2010. In addition, other income/(expense) was a net expense of $11,000, which included a $45,000 prepayment penalty on the company’s convertible note with Asher Enterprises that was paid in full in the fourth quarter of 2010. There was $0 of other income/(expense) in 2009. The income tax expense was $2,000 in 2010 compared with an income tax benefit of $40,000 in 2009. The income tax benefit in 2009 resulted from New York State R&D tax credits. Preferred stock dividends amounted to $273,000 and $229,000 in 2010 and 2009, respectively.
The net loss attributable to common stockholders for the year ended December 31, 2010 was $3,326,000 as compared to a net loss for the same period in 2009 of $3,501,000. The weighted average basic and diluted common shares outstanding amounted to 38,895,000 and 34,035,000 for 2010 and 2009, respectively. Basic and diluted net loss per share for 2010 and 2009 were $0.09 and $0.10, respectively.
(D) Liquidity and Capital Resources
As of December 31, 2010, cash totaled $1,518,000, an increase of $1,477,000 from the beginning of the year. During the twelve months ended December 31, 2010 and 2009, we used $1,807,000 and $583,000, respectively, of cash in operating activities. The cash used in operating activities during 2010 was mainly attributable to our net loss of $3,053,000 plus an addback of $1,900,000 for a gain recorded from the settlement of litigation pertaining to a technology license with Ice Engineering in the first quarter of 2010, offset in part by non-cash expenditures related to the issuance of common stock, warrants and stock options to employees, directors and consultants and vendors for services rendered. For 2009, the cash used in operating activities of $583,000 was mainly attributable to a net loss of $3,272,000, offset in part by non-cash expenses related to shareholder contribution of services as well as common stock issued to directors, outside consultants and vendors as payment for their services
We generated $1,124,000 in cash from investing activities during 2010 compared with $0 in 2009. The cash generated in 2010 was mainly related to proceeds from the sale of a technology license, as well as proceeds from sales of fixed assets.
During 2010, we generated $2,160,000 in funds from financing activities, compared to $320,000 in 2009. The financing activities in 2010 consisted mainly of proceeds from our private placement of 6,834,002 restricted shares of common stock in October 2010 that generated $2,050,000 in cash.
During the year ended December 31, 2010 and 2009, the company issued 2,398,265 and 2,243,305 common shares, respectively, to business consultants under its business consultants stock plan in exchange for ongoing corporate legal services, internal accounting services, business advisory services as well as legal fees and associated expenses for ongoing patent work and litigation. As of December 31, 2010 and 2009 there were 4,011,717 and 1,409,982 shares, respectively, available for future issuances under the plan (the increase in shares available in 2010 from 2009 was the result of board approval of an additional 5,000,000 business consultant shares on March 23, 2010 and effective registration of such additional shares on April 1, 2010).
Contribution of Shareholder Services:
Effective January 1, 2008, the board of directors instituted a compensation plan for James and Keith Gleasman by which the company would compensate each of them for services performed and inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment of this compensation, or any portion thereof, was conditioned upon a board of director determination that the company had the requisite cash, after the complete funding of all ongoing company projects, to make payment.
The company did not have the requisite cash available to pay the Gleasmans’ compensation under this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the Gleasmans waived all of his rights and interest in and to the board-created compensation plan, including all of his rights and interest in and to the amount(s) under the plan accrued to such date. As a result of such waiver, of the $942,000 accrued under the plan at June 30, 2009, $900,000 was reclassified to equity as a contribution of services and $42,000 accrued under the plan for payroll taxes was recorded as a reduction to general and administrative expenses in the quarter ended June 30, 2009.
For periods for which there is no compensation plan, the company is required to record the estimated value of each of the Gleasman’s services rendered to the company (estimated at $300,000 each per annum) as a contribution of services under generally accepted accounting principles applicable to the company and is required under the same accounting principles to allocate the amount of such contribution between research and development expenses on the one hand and general and administrative on the other hand. For the years ended December 31, 2010 and 2009, the company recorded $125,000 and $200,000 to research and development expense and $236,000 and $400,000 to general and administrative expense, respectively, based upon management’s estimate of the Gleasmans’ time allocation.
Effective March 14, 2010, James Gleasman retired as the company’s chief executive officer, interim chief financial officer and as a member of the board of directors.
Current Cash Outlook:
For the period from September 1996 (inception) through December 31, 2010, the company has accumulated a deficit of $56,266,000 and at December 31, 2010 has working capital of $745,000 and stockholders’ equity of $920,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. Management believes that based upon its current cash position that resulted from the company’s success in raising $2,050,000 in its private equity placement in October 2010 and its current outlook for its business operations, the company will be able to continue operations through December 31, 2011. However, if its cash flow projections are less than expected, the Company may need to downsize operations, issue shares of common stock to pay for certain expenditures, incur debt or raise additional capital. There can be no assurance, however, that the Company will be successful in raising additional capital or incurring debt when needed on terms acceptable to the Company.
At December 31, 2010, the company had current liabilities that amounted to $821,000.
(E) Critical Accounting Policies
Revenue Recognition
The company’s terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customer. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the company’s products is substantially fixed or determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company. To the extent that collectability of the receivable is not assured, the company follows the cost recovery approach. Accordingly, amounts collected will be accounted for as a reduction of costs.
Share-based Payments
The company accounts for the settlement of its commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of its business consulting shares under ASC 505 (Previously known as FASB Statement 123(R) “Share Based Payment”), provided that there are sufficient shares available under the business consulting plan. Under ASC 505, the company measures commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, the company will follow the provisions of ASC 815-40 (previously known as: EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). Under ASC 815-40, the company will record a liability instrument for the resulting changes in fair value from the date incurred to the end of each reporting period until such liability is satisfied.
Recently Issued Accounting Principles
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition - a consensus of the FASB EITF”. ASU No. 2010-17 is limited to research or development arrangements and requires that this ASU be met for an entity to apply the milestone method (record the milestone payment in its entirety in the period received) of recognizing revenue. However, the FASB clarified that, even if the requirements in this ASU are met, entities would not be precluded from making an accounting policy election to apply another appropriate policy that results in the deferral of some portion of the arrangement consideration. The guidance in this ASU will apply to milestones in both single-deliverable and multiple-deliverable arrangements involving research or development transactions. ASU No. 2010-17 will be effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB EITF”. ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010. The company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.
In May 2009, the FASB issued Accounting Standards Codification (“ASC”) No. 855 (SFAS No. 165), “Subsequent Events” which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements.
(F) 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, 2011.
(G) Quarterly Fluctuations
As of December 31, 2010 and 2009, the company had not engaged in substantial 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 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, product returns, 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.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to include information otherwise required by this item.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TORVEC, INC.
(a development stage company)
Contents
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for each of the years in the Two-Year Period Ended December 31, 2010 and for the Period from September 25, 1996 (Inception) through December 31, 2010
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit) for the Period from September 25, 1996 (Inception) through December 31, 2010
Consolidated Statements of Cash Flows for each of the years in the Two-Year Period Ended December 31, 2010 and for the Period from September 25, 1996 (Inception) through December 31, 2010
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Torvec, Inc.
We have audited the accompanying consolidated balance sheets of Torvec, Inc. (a development stage company) and its subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and cash flows for each of the years in the two-year period ended December 31, 2010 and for the period from September 25, 1996 (inception) through December 31, 2010 and changes in stockholders’ equity (capital deficit) for each of the periods from September 25, 1996 (inception) through December 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 consolidated financial position of Torvec, Inc. and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2010 and for the period from September 25, 1996 (inception) through December 31, 2010, in conformity with accounting principles generally accepted in the United States.
/s/ EisnerAmper LLP
New York, New York
March 28, 2011
TORVEC, INC.
(a development stage company)
Consolidated Balance Sheets
See notes to consolidated financial statements.
TORVEC, INC.
(a development stage company)
Consolidated Statements of Operations
See notes to consolidated financial statements.
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity
(Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements
TORVEC, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Capital Deficit)
For the Period from September 25, 1996 (Inception) through December 31, 2010
(continued)
See notes to consolidated financial statements.
TORVEC, INC.
(a development stage company)
Consolidated Statement of Cash Flows
TORVEC, INC.
(a development stage company)
Consolidated Statement of Cash Flows
(continued)
See notes to consolidated financial statements.
TORVEC, INC.
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2010
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
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 created by Vernon E. Gleasman and his sons, James and Keith Gleasman, a family with more than fifty years of experience in the automotive industry. Since its inception, the company has endeavored to design, develop, build and commercialize its automotive technology portfolio. The company currently is focusing its commercialization strategies on the following technologies: the IsoTorque® differential, the Rota-Torque hydraulic pump, and the Torsteer Vehicle Steer-Drive.
For the period from September 1996 (inception) through December 31, 2010, the company has accumulated a deficit of $56,266,000 and at December 31, 2010 has working capital of $745,000 and stockholders’ equity of $920,000. The company has been dependent upon equity financing and advances from stockholders to meet its obligations and sustain operations. Management believes that based upon its current cash position that resulted from the company’s success in raising $2,050,000 in its private equity placement in October 2010 and its current outlook for its business operations, the company will be able to continue operations through December 31, 2011. However, if its cash flow projections are less than expected, the company may need to downsize operations, issue shares of common stock to pay for certain expenditures, incur debt or raise additional capital. There can be no assurance, however, that the company will be successful in raising additional capital or incurring debt when needed on terms acceptable to the company.
The company’s ability to continue as a going concern is ultimately dependent upon achieving profitable operations and generating sufficient cash flows from operations to continue to meet its future obligations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Consolidation
The financial statements include the accounts of the company, its wholly-owned subsidiaries Iso-Torque Corporation, IVT Diesel Corp. and Variable Gear LLC, its majority-owned subsidiary, Ice Surface Development, Inc. (56% owned at December 31, 2010 and 2009), and its majority-owned joint venture, Torvec China, LLC, (60% ownership interest at December 31, 2010). All material intercompany transactions and account balances have been eliminated in consolidation.
[2] Cash and Cash Equivalents
Cash and cash equivalents may include time deposits, certificates of deposit, and highly liquid debt instruments with original maturities of three months or less. The company maintains cash and cash equivalents at financial institutions which periodically may exceed federally insured amounts.
[3] Property and Equipment
Equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are being amortized over shorter of lease term or useful life.
[4] Research and Development and Patents
Research and development costs and patent expenses are charged to operations as incurred. Research and development includes amortization of the Ice technology, purchase of parts, depreciation and consulting services. Depreciation expense in each of the years ended December 31, 2010 and 2009 that was charged to research and development was $16,000 and $19,000 respectively.
Patent costs for the year ended December 31, 2010 and 2009 amounted to $211,000 and $300,000, respectively, and are included in General and Administrative expenses.
[5] Intangible Assets
The company follows ASC 350-30, “General Intangibles Other Than Goodwill.” Whenever events or circumstances indicate, the company’s long-lived assets, including any intangible assets with finite useful lives, are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, an impairment may be indicated. The carrying amount is then compared to the estimated discounted cash flows, and if there is an excess, such amount is recorded as an impairment.
[6] Use of Estimates
The preparation of financial statements in conformity with U.S. 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 revenue and expenses during the reporting period. Such estimates are used in valuing the useful lives of any intangible assets and the future realizable value of such assets. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.
[7] Loss per Common Share
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260-10 ( Previously known as: FASB Statement 128, “Earnings Per Share”) requires the presentation of basic earnings per share, which is based on common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At December 31, 2010 and 2009, the company excluded 8,444,870 and 2,503,949 potential common shares, respectively, relating to convertible preferred stock outstanding, options and warrants from its diluted net loss per common share calculation because they are anti-dilutive. The company also excluded 625,000 warrants at December 31, 2010 and 2009 as the conditions for their vesting were not yet satisfied.
[8] Fair Value of Financial Instruments
The carrying amount of cash, accounts payable, and accrued expenses approximates their fair value due to the short maturity of those instruments. The carrying amount of notes payable approximates fair value since most of the outstanding balance was borrowed in November 2010 at then current interest rates.
[9] Stock-based Compensation
ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. Under the modified prospective method adopted by the company, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with ASC 718-10. Unvested equity-classified awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with ASC 718-10, except that the grant date fair value of all awards are recognized in the results of operations over the remaining vesting periods. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC 718-10.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by ASC 718-10-65 (Previously known as: FASB Staff Position (FSP) No. SFAS 123(R)-c, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.”) This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of ASC 718-10.
[10] Revenue Recognition
The company’s terms provide that customers are obligated to pay for products sold to them within a specified number of days from the date that title to the products is transferred to the customers. The company’s standard terms are typically net 30 days. The company recognizes revenue when transfer of title occurs, risk of ownership passes to a customer at the time of shipment or delivery depending on the terms of the agreement with a particular customer and collection is reasonably assured. The sale price of the company’s products is substantially fixed and determinable at the date of the sale based upon purchase orders generated by a customer and accepted by the company.
[11] Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition - a consensus of the FASB EITF”. ASU No. 2010-17 is limited to research or development arrangements and requires that this ASU be met for an entity to apply the milestone method (record the milestone payment in its entirety in the period received) of recognizing revenue. However, the FASB clarified that, even if the requirements in this ASU are met, entities would not be precluded from making an accounting policy election to apply another appropriate policy that results in the deferral of some portion of the arrangement consideration. The guidance in this ASU will apply to milestones in both single-deliverable and multiple-deliverable arrangements involving research or development transactions. ASU No. 2010-17 will be effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB EITF”. ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010. The company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.
In May 2009, the FASB issued ASC 855 (SFAS No. 165), “Subsequent Events” which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements.
[12] Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year’s presentation.
NOTE C - LICENSE FROM THE TRUSTEES OF DARTMOUTH COLLEGE
On November 28, 2000, the company’s majority-owned subsidiary, Ice Surface Development LLC entered into a 20-year exclusive license with the Trustees of Dartmouth College for land-based applications to a novel ice adhesion modification system developed by Dr. Victor Petrenko at Dartmouth’s Thayer School of Engineering. Under the license agreement the company made a single payment of $140,000 in 2000 for sponsored research. The license agreement provided for a royalty of 3.5% based on the value of net sales of licensed product with minimum annual payments of $10,000 for the first two years, $15,000 for the third year and $25,000 per year through 2021. In addition, the agreement provided for the payment of 50% of sub-license fee income.
Effective June 15, 2007, Ice Surface assigned the license to an unrelated company, Ice Engineering, LLC in exchange for Ice Engineering’s agreement to pay the shareholders of Ice Surface an annual royalty equal to 5% of the annual gross revenues generated by the license and its agreement to assume the obligations to Dartmouth under the license.
Separately, Ice Engineering, LLC agreed to reimburse approximately $3,500,000 of acquisition and maintenance costs expended by the company in connection with the ice technology. Pursuant to the reimbursement agreement, the company received $500,000 on June 15, 2007. Under the license assignment agreement, the $3,000,000 balance was to be paid at the rate of $300,000 per quarter commencing March 1, 2008, less approximately $91,000 in fees payable to Dartmouth College accrued through June 14, 2007 to be deducted from the first quarterly reimbursement amount. The company received the first installment of $209,000 due March 1, 2008 on April 3, 2008 and did not receive the balance of the installments.
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to the assignment agreement.
On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement agreement, the company’s assignment of the ice technology license is made permanent; the company elected to forego its right to royalties and the company agreed to accept $1,100,000 in full payment of Ice Engineering’s reimbursement obligation. The company was paid the settlement amount, $1,100,000, in the first quarter of 2010. (See Note J.)
NOTE D - RELATED PARTY TRANSACTIONS
[1] Effective January 1, 2008, the board of directors instituted a compensation plan for James and Keith Gleasman by which the company would compensate each of them for services performed and inventions and know-how transferred to the company at the rate of $300,000 per year. Actual payment of this compensation, or any portion thereof, was conditioned upon a board of director determination that the company had the requisite cash, after the complete funding of all ongoing company projects, to make payment.
The company did not have the requisite cash available to pay the Gleasmans’ compensation under this arrangement from January 1, 2008 through August 17, 2009, the date on which each of the Gleasmans waived all of his rights and interest in and to the board-created compensation plan, including all of his rights and interest in and to the amount(s) under the plan accrued to such date. As a result of such waiver, of the $942,000 accrued under the plan at June 30, 2009, $900,000 was reclassified to equity as a contribution of services and $42,000 accrued under the plan for payroll taxes was recorded as a reduction to general and administrative expenses in the quarter ended June 30, 2009.
For periods for which there is no compensation plan, the company is required to record the estimated value of each of the Gleasman’s services rendered to the company (estimated at $300,000 each per annum) as a contribution of services under generally accepted accounting principles applicable to the company and is required under the same accounting principles to allocate the amount of such contribution between research and development expenses and general and administrative expenses. For the years ended December 31, 2010 and 2009, the company recorded $125,000 and $200,000 to research and development expense and $236,000 and $400,000 to general and administrative expense, respectively, based upon management’s estimate of the Gleasmans time allocation.
Effective March 14, 2010, James Gleasman retired as the company’s chief executive officer, interim chief financial officer and as a member of the board of directors.
During the year ended December 31, 2009, James Gleasman loaned the company $22,000 for compensation to the engineers. As of December 31, 2010, the company has repaid the full amount of this loan.
[2] During the years ended December 31, 2010 and 2009, the company paid a total value of approximately $117,900 and $94,700, respectively, in a combination of business consultant common shares and cash to a member of the Gleasman family for administrative, technological and engineering consulting services. The $117,900 paid in 2010 was comprised of approximately $114,900 in cash and 7,006 common shares with a value of approximately $3,000. The $94,700 paid in 2009 was comprised of approximately $90,500 in cash and 5,589 common shares with a value of approximately $4,200.
[3] During the years ended December 31, 2010 and 2009, the company paid a total value of $97,500 and $87,700 to a family member of its general counsel for engineering services rendered to the company. The $97,500 paid in 2010 was comprised of approximately $94,900 in cash and 5,982 common shares with a value of approximately $2,600. The $87,700 paid in 2009 was comprised of approximately $87,500 in cash and 292 common shares with a value of approximately $200.
[4] On September 14, 2007, the company moved its executive offices from Pittsford, New York to Rochester, New York, which includes both a manufacturing and executive office facility. The Rochester facility is owned by a partnership, with which Asher J. Flaum, a company director, is associated. On April 28, 2008, the company’s board of directors approved the terms of a lease and such lease was executed on April 29, 2008. (See Notes G and I[2].)
[5] On June 29, 2000, the company granted an exclusive world-wide license of all its automotive technologies to Variable Gear, LLC for the aeronautical and marine markets for $150,000 cash. The company recorded the receipt of the $150,000 as deferred revenue to be recognized when all conditions for earning such fees are complete. At the time of its formation and through June 6, 2007 when his interest was purchased, Robert C. Horton, a company shareholder, owned 51% of Variable Gear, LLC. On June 6, 2007, the company purchased Mr. Horton’s entire interest in Variable Gear for 5,000 shares of common stock valued at $19,250. In fiscal 2007, the company recognized the deferred revenue of $150,000 as other income and recorded an impairment of the goodwill of $19,250, since there were no operations of the entity since inception.
[6] On August 18, 2006, the company granted 400,000 nonqualified common stock warrants valued at approximately $1,237,000 for consulting services to an enterprise, one of whose members was a director. The warrants were immediately exercisable at $3.27 per common share for a period of ten years. These warrants were modified by mutual agreement of the parties effective October 15, 2010. These modified warrants are immediately exercisable at $.44 per common share for a period of ten years from the modification date. This modification was valued at $68,000 and the company recognized this expense in the fourth quarter of 2010.
[7] On June 19, 2006, the company awarded an aggregate 360,000 nonqualified common stock warrants with no expiration date, valued at approximately $629,000, to a director for additional services rendered by such director as chairman of the board’s executive committee during 2006.
[8] On April 28, 2008, the board of directors approved a one-time payment to its chairman of the governance and compensation committee of $46,000 for special services rendered in connection with required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167 common shares valued as of the closing price on April 28, 2008. The company charged $46,000 to operations in connection with such services.
[9] On August 17, 2005, the company repaid $28,000 indebtedness to a stockholder by issuing 11,667 restricted common shares, such number of shares based upon the closing price of the company’s common stock on August 16, 2005.
[10] On October 26, 2010, the company issued 164,187 common shares valued at approximately $62,400 to each of its chairman of the board and general counsel for services rendered in connection with the engagement of the company’s new chief executive officer.
[11] On December 13, 2010, the company executed a consultant agreement with a director to provide consulting services to the company at a rate of $200 per hour. Pursuant to the agreement, the company also agreed to pay the consultant an incentive fee equal to $10,000 or proportionate part thereof for each $1,000,000 of revenue or proportionate part thereof actually received by the company for a period of five years, provided the definitive agreement with the third party results from the material efforts of the consultant.
NOTE E - INCOME TAXES
The company accounts for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The provision (benefit) for income taxes for the years ended December 31, 2010 and 2009 is summarized below:
The difference between income taxes at the statutory federal income tax rate and income taxes reported in the statements of operations is attributable to the following:
At December 31, 2010, we have approximately $24,672,000 of net operating loss carryforwards to offset future taxable income, expiring 2011 through 2028, and $18,392,000 of certain operating expenses which have been deferred as startup costs under Section 195 of the Internal Revenue Code for federal income tax purposes, subject to limitations for alternative minimum tax. Start-up costs are amortized over 15 years.
The deferred tax asset at December 31, 2010 and 2009 consists of the following:
The decrease in the valuation allowance from December 31, 2009 to December 31, 2010 amounted to approximately $211,000. The increase in the valuation allowance from December 31, 2008 to December 31, 2009 amounted to approximately $767,000. The company has provided a full valuation allowance on the net deferred tax assets due to uncertainty of realization through future earnings.
Based upon the change in ownership rules under section 382 of the Internal Revenue Code of 1986, if in the future the company issues common stock or additional equity instruments convertible in common shares which result in an ownership change exceeding the 50% limitation threshold imposed by that section, all of the Company’s net operating loss carry forwards may be significantly limited as to the amount of use in any particular year.
The company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2010, the company has no unrecognized tax benefit, including interest and penalties.
NOTE F - ACCRUED LIABILITIES
At December 31, 2010 and 2009, accrued liabilities consist of the following:
NOTE G - NOTES PAYABLE
During the year ended December 31, 2005, the company financed a vehicle to be used with its prototype technology and pledged the vehicle as collateral for this loan. The loan in the amount of $24,000 is paid in monthly installments of $479 consisting of principal and interest at 6.59% per annum through December 2010.
During the year ended December 31, 2006, the company refinanced two vehicles and pledged the vehicles as collateral for the loan. The loan in the amount of $56,174 is paid in monthly installments of $1,201 consisting of principal and interest at 10.3% per annum scheduled through August 2011. In April 2010, the company paid off the outstanding balance of approximately $18,200 on this loan in full.
On July 19, 2010, the company received a net amount of $57,000, after payment of $3,000 in legal expenses, in connection with a Securities Purchase Agreement for the issuance of a Convertible Note in the principal amount of $60,000 due and payable on April 2, 2011, with interest payable at the rate of 8% per annum. The outstanding Note principal can be converted, in whole or in part, into the company’s common stock at the election of the Holder from time to time beginning 180 days after the July 2, 2010 issue date. The conversion price is equal to 58% of the average of the three lowest closing bid prices of the company’s common stock during a 10 day trading period immediately prior to the date the Holder’s conversion notice is sent to the company. The company may prepay the principal amount of the Note and all accrued interest at any time beginning on the July 2, 2010 issue date and expiring 180 days thereafter. In the event the company elects to prepay within the first 90 days, the repayment amount is 150% of the $60,000 principal amount and outstanding accrued interest and if between the 91st and the 180th day, the repayment amount is 175% of the $60,000 principal amount and outstanding accrued interest. In the event of default, the amount of principal and interest not paid when due bears interest at the rate of 22% per annum and the Note becomes immediately due and payable. The Note agreement contains covenants requiring the Holder’s written consent for certain activities not in existence or not committed to by the company on the date of issuance as follows: common stock dividend distributions in cash or shares, stock repurchases, borrowings, sale of significantly all assets, certain advances and loans in excess of $100,000 and certain guarantees with respect to third-party liabilities. In order to prevent conversion of the Note into our common stock at a discount of 42%, on November 22, 2010, the company elected to exercise its prepayment right by tendering approximately $106,700 to the Holder, which amount represented the principal of $60,000 and the entire amount of the Optional Prepayment Amount under the Note of $45,000, in addition to accrued interest of approximately $1,700. As a result of such prepayment, the Note was paid in full and the Securities Purchase Agreement is of no further legal effect. Both the prepayment penalty and the interest are recorded as other income / (expense) in the Consolidated Statements of Operations for the year ended December 31, 2010.
In November 2010, the company completed a construction project for some additional office space at its leased corporate office facility. The cost of the leasehold improvement was $32,500 and the landlord agreed to finance this cost over the remaining initial term of the lease which expires in May 2013. The monthly payments are approximately $1,100 per month. (See Note D[4].)
In November 2010, the company entered into a capital lease for a copy machine over a 5 year term, with a fair market value buyout. The capitalized value of the lease was approximately $8,900, and the monthly payment is approximately $170.
The following represents the required minimum payments for the outstanding loans as of December 31, 2010:
NOTE H - STOCKHOLDERS’ EQUITY
(CAPITAL DEFICIT)
[1] Private Placements of Common Stock
The company received net proceeds of $550,000, $1,230,000 (of which $507,000 was received from the Gleasman family), $758,000, $1,068,000 and $331,000 from private placements of its common stock for the years ended December 31, 2000, 1999, 1998 and 1997 and for the period ended December 31, 1996, respectively.
During 2002, the company sold 508,897 common shares for net proceeds of approximately $668,000.
In 2003, an existing stockholder purchased 361,112 common shares for $300,000 and was paid 70,000 common shares at market value on the date of issuance (valued at $158,000) for consulting services and rent for the company’s use of a facility and technicians. The company also sold an additional 8,000 common shares to an unrelated party for $20,000.
In 2004, the same existing stockholder purchased 60,000 common shares for $301,000 and was paid 35,000 common shares at market value on the date of issuance(valued at $194,000) as rent for use by the company of a facility and technicians.
In 2005, this stockholder was paid 90,000 common shares at market value on the date of issuance (valued at $259,000) for consulting services rendered to the company.
In 2008, the company sold 101,364 shares of common stock to accredited investors for proceeds of approximately $198,000.
In 2009, the company sold 551,483 shares of common stock to accredited investors for proceeds of approximately $335,000.
During 2010, the company sold an aggregate of 432,738 restricted common shares in a series of non-brokered private placements for proceeds of approximately $139,000 at an average of approximately $.32 per common share. In addition, in October 2010, the company sold 6,834,002 restricted common shares for approximately $2,050,000 of proceeds in a non-brokered private placement of its common stock at $.30 per common share.
[2] Initial Public Offering Consultant
In February 1997, the company entered into a three-year agreement with an IPO consulting firm (“IPO Consultant”) to arrange for an initial public offering of the company’s common stock and to provide financial advisory services. In consideration, the company issued an aggregate 1,000,000 restricted common shares to five principals of the IPO Consultant for an aggregate $50. In addition, the company granted an aggregate 500,000 warrants to the same principals. Such warrants were only exercisable in the event the company conducted an initial public offering for its common stock. In such event, the warrants were exercisable for a term of five years after the IPO and were exercisable at the per share public offering exercise price (unless during the warrant term after the IPO, at least 50% of the company’s assets were acquired by a third party in which case the exercise price was $1.50 per share).
In February 1999, the company entered into a one-year consulting agreement directly with two of the former principals of the IPO Consultant to provide financial advisory services. In connection with this agreement, the company and the two former principals agreed to convert the 375,000 warrants they owned into 375,000 common stock purchase options exercisable immediately through February 2004 at $5.00 per common share. The company valued these options at $2,780,000 using the Black-Scholes option-pricing model with the following weighted average assumptions for the year ended December 31, 1999: risk free interest rate of 5%, dividend yield of 0%, volatility of 40% and expected life of the options granted of 5 years. These options were charged to operations over the term of the consulting agreement. In February 1999, 21,000 of these options were exercised for proceeds of $105,000. The term of the remaining 354,000 options expired in February 2004. As of December 31, 2010, none of the warrants are exercisable.
[3] Equity Funding Commitment
On September 5, 2000, the company entered into an agreement with Swartz Private Equity, LLC (“Swartz”) pursuant to which Swartz granted the company a $50,000,000, three-year equity funding commitment. The agreement provided that, from time to time, at the company’s request, Swartz would purchase from the company that number of common shares equal to 15% of the number of shares traded in the market in the 20 business days occurring after the date of the requested purchase. The purchase price was the lesser of 91% of the average market price during that 20 day period or the average market price less $.20. As a commitment fee, the company granted Swartz a commitment warrant to purchase, in the aggregate, 960,101 common shares at a price which equaled the lowest closing price of the company common stock during the five trading days ending on each six-month anniversary of the warrant issue date.
During 2002, 76,456 commitment warrants were exercised for proceeds of approximately $60,000. During 2003, Swartz exercised the remaining 883,645 commitment warrants in a cashless exercise transaction, and received 647,270 common shares.
Swartz was also issued a warrant to purchase one share of the company’s common stock for every ten shares it purchased from the company under the agreement. During 2002, 47,992 of such warrants were exercised for proceeds of approximately $67,000. In 2003, Swartz exercised the balance of its purchase warrants (9,875) in a cashless exercise transaction and received 7,162 common shares.
The agreement with Swartz terminated on September 5, 2003.
[4] Common Stock Subject to Resale Guarantee
During 2002, the company issued 190,695 common shares to former officers and certain minority shareholders of Ice Surface Development, Inc. in exchange for approximately $269,000 owed to them. If, on the sale of the shares, the amount realized is less than $269,000, additional shares are required to be issued and if the amount is greater than $269,000, the excess is to be paid to the company. During 2002, all of such shares were sold for proceeds of approximately $269,000. The company has no further liability with respect to this transaction.
[5] Class A Preferred Stock
In January 2002, the company authorized the sale of up to 2,000,000 shares of its Class A Non-Voting Cumulative Convertible Preferred Stock (“Class A Preferred”). Each share of Class A Preferred is convertible into one share of voting common stock and entitles the holder to dividends, at $.40 per share per annum. The holder has the right to convert after one year subject to board approval into one share of common stock of the Company. The Company may, in the absolute discretion of its board, redeem at any time and from time to time from any source of funds legally available any and all of the Class A Preferred at the Redemption Price.
In the event of any liquidation, dissolution or winding up of the company, whether voluntary or involuntary, the holders of Class A Preferred Shares then outstanding are entitled to be paid out of the assets of the company available for distribution to its stockholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any junior stock. All of such accumulated and unpaid dividends will be paid in Class A Preferred Shares at a rate of 1 Class A Preferred Share for each $4.00 of dividends. No fractions of Class A Preferred Shares shall issue. The company shall pay cash in lieu of paying fractions of Class A Preferred Shares on a pro rata basis.
The Class A Preferred Shares will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on Junior Stock upon the liquidation, dissolution or winding up of the company. A consolidation or merger of the company with or into any other corporation or corporations or any other legal entity will not be deemed to constitute a liquidation, dissolution or winding up of the company.
In connection with the 2002 offering of Class A Preferred, the company granted the placement agent 5,000 Class A Warrants, exercisable for five years at an exercise price of $1.52 per share into common stock. Such warrants were treated as a cost of the offering. Also, the placement agent was granted 10,000 warrants for providing certain financial analysis for the company. The warrants are immediately exercisable at $.30 per share for five years. The warrant contains a cashless exercise feature. The company valued the warrant at $8,000 using the Black-Scholes option-pricing model and charged operations.
The company also granted to these investors 2,500 Class A Warrants, exercisable for five years at an exercise price of $0.01 per share. On July 8, August 14, September 11, 2003 and August 4, 2006, the company issued 2,500, 7,480, 1,200 and 2,500 common shares, respectively, to the placement agent upon the exercise of warrants issued in connection with this offering.
Since its designation in March 2002, the company has sold an aggregate 765,512 shares of Class A Preferred for proceeds of $3,062,048.
Since its designation in March 2002, Class A Preferred shareholders have converted an aggregate 183,500 Class A Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with 62,500 and 51,250 Class A Preferred converted in the years ending December 31, 2010 and 2009, respectively.
Upon conversion, converting Class A Preferred shareholders are entitled to receive, in accordance with the terms of the Class A Preferred, dividends payable either in cash or in Class A Preferred shares calculated at the rate of 10 percent per annum.
At times, the board of the company may elect to settle the dividends through the issuance of common stock in lieu of cash. The number of shares of common stock issued is based on the market price of the stock of the company at the time of the conversion.
Through December 31, 2010, an aggregate Class A Preferred dividend amounting to approximately $230,000 was settled through the issuance of 16,760 Class A Preferred and of 92,453 common shares of the company. For the year ended December 31, 2010, the company settled Class A Preferred dividends amounting to approximately $113,000 through the issuance of 22,883 shares of common stock and 5,421 shares of Class A Preferred stock.
For the year ended December 31, 2009, the company settled Class A Preferred dividends amounting to approximately $53,000 through the issuance of 65,965 shares of common stock.
At December 31, 2010, dividends payable upon conversion of 582,012 outstanding shares of Class A Preferred amounted to approximately $1,339,000.
[6] Class B Preferred Stock
On October 21, 2004, the company authorized the sale of up to 300,000 shares of its Class B Non-Voting Cumulative Convertible Preferred Stock (“Class B Preferred”). Each share of Class B Preferred pays cumulative dividends at $.50 per share per annum and is convertible into either one share of the company’s common stock or one share of the common stock of the company’s subsidiary, IsoTorque Corporation. The holder has the right to convert after one year, subject to board approval. The Company may, in the absolute discretion of its board, redeem at any time at the redemption price equal to the amount paid per share in cash plus any accumulated unpaid dividends.
In the event of any liquidation, dissolution or winding up of the company, whether voluntary or involuntary, the holders of Class B Preferred Shares then outstanding are entitled to be paid out of the assets of the company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, before any payment or declaration and setting apart for payment of any amount in respect of any shares of any junior stock. All of such accumulated and unpaid dividends will be paid in Class B Preferred Shares at a rate of 1 Class B Preferred Share for each $5.00 of dividends. No fractions of Class B Preferred Shares shall be issued. The company shall pay cash in lieu of paying fractions of Class B Preferred Shares on a pro rata basis. Class B Preferred shares rank junior and is classified as junior stock with respect to the Company’s Class A Preferred shares.
The Class B Preferred Shares will be entitled to participate on a pro rata basis in any distribution of assets as may be made or paid on junior stock upon the liquidation, dissolution or winding up of the company.
Since its designation in September 2004, the company has sold an aggregate 97,500 Class B Preferred in a number of private placements for proceeds of approximately $487,500.
Since its designation, Class B Preferred shareholders have converted an aggregate 20,000 Class B Preferred into the company’s common stock (on a one to one basis) through December 31, 2010, with no Class B Preferred converted in the year ending December 31, 2010.
Upon conversion, converting Class B Preferred shareholders are entitled to receive, in accordance with the terms of the Class B Preferred, dividends payable, in the discretion of the board of directors, either in cash or in Class B Preferred shares calculated at the rate of 10 percent per annum. Through December 31, 2010, no Class B Preferred shares have been issued to converting Class B Preferred shareholders as a dividend.
Depending upon the company’s cash position, the company from time to time may request that a converting preferred shareholder receiving dividends in cash consent to receive shares of restricted common stock in lieu thereof. Through December 31, 2010, the company has issued 30,103 restricted common shares in payment of Class B dividends amounting to $24,082, based on the market value of the Company’s stock at the time of conversion.
At December 31, 2010, dividends payable upon the conversion of 77,500 outstanding shares of Class B Preferred amounted to approximately $204,000.
[7] Business Consultants Stock Plan
In June, 1999, the company adopted the Business Consultants Stock Plan (the “Stock Plan”). The Plan, as amended through the year ended December 31, 2010, provides for the issuance of up to 15,000,000 common shares to be awarded from time to time to officers, directors, employees and consultants in exchange for business, financial, legal, accounting, engineering, research and development, technical, governmental relations and other similar services.
[8] Nonmanagement Directors Plan
On October 1, 2004, the board of directors approved a Nonmanagement Directors Plan pursuant to which each nonmanagement director is entitled to receive, if certain conditions are met, on an annual basis for services rendered as a director, warrants to purchase 12,000 shares of the company’s common stock at $.01 per share. In addition, the chairman of the audit committee is entitled to receive, on an annual basis for services rendered as chairman, additional warrants for 5,000 shares of the company’s common stock at $.01 per share.
For the years ended December 31, 2004, 2005 and 2006, the Company issued an aggregate 123,500 warrants immediately exercisable for a ten year term at $.01 per common share to its nonmanagement directors for services rendered to the board under its Nonmanagement Directors Stock Plan. For the years ended December 31, 2004, 2005 and 2006, the Company recognized compensation expense related to these warrants of approximately $297,000, $110,000 and $48,000, respectively. During fiscal 2005 and 2006, 21,000 and 42,000 of these warrants were exercised.
Due to changes made to the Nonmanagement Directors Plan described below, the company did not issue any warrants under the plan for the years ended December 31, 2008 and 2007. No previously issued warrants were exercised during the year ended December 31, 2008 and 6,000 warrants were exercised during the year ended December 31, 2007.
On October 10, 2007, the Nonmanagement Directors Plan was modified, effective July 1, 2007, to increase the fees payable to the company’s nonmanagement directors. As adjusted, each nonmanagement director (a total of 4 persons) would receive $26,460 for board and committee service per annum. The chairman of the audit committee would receive an additional $12,600 per annum and the chairman of the nominating committee would receive an additional $5,355 per annum.
The Nonmanagement Directors Plan was also modified to provide that the chairman of the board, chairman of the executive committee and chairman of the governance and compensation committee, one person, will be paid an aggregate $110,000 per annum for all services rendered by him as a director and in such capacities. The effective date for these adjustments to the plan was July 1, 2007.
On April 28, 2008, the plan was again modified to increase the compensation of the person serving as chairman of the board, chairman of the executive committee, chairman of the governance and compensation committee (one person) to $125,000 per annum.
On April 28, 2008, the board of directors approved a one-time payment to its chairman of the governance and compensation committee of $46,000 for special services rendered in connection with required compliance under the Sarbanes-Oxley Act. This amount was paid by the issuance of 19,167 common shares under the Business Consultants Plan valued at the closing price on April 28, 2008. The company charged $46,000 to operations in connection with such services.
During the years ended December 31, 2010 and 2009, the company issued 889,195 and 377,152 common shares under the Business Consultants Plan to satisfy payables for services rendered by the company’s nonmanagement directors in their capacity as directors and valued these shares at $339,000 and $290,000 for such years. Of the total shares issued in 2010 and 2009, shares valued at $21,000 and $63,000 were for services provided and accrued for in 2009 and 2008, respectively.
[9] Shares Issued for Consulting Services
On September 17, 2005, certain consultants created a trust to enable them to sell business consultants shares issued to them by the company under their consultant agreements. The company issues business consultant common shares to the trust from time to time, contingent on the performance of services by the consultants under such consulting agreements. The company fair values the shares issued to the trust using the closing market price on the date immediately prior to the date of issuance. Shares issued in excess of the consulting invoices are classified as shares issued for consulting services.
During the year ended December 31, 2009, the company issued to the trust an aggregate 899,271 business consultant common shares with an aggregate value when issued of $610,000 to satisfy the payment of invoices submitted by the consultants for services rendered. During the year ended December 31, 2009, the trustee sold 770,720 business consultants common shares for aggregate proceeds of approximately $536,100 and distributed the proceeds from the trust to the consultants in payment of invoices submitted by the consultants.
During the year ended December 31, 2010, the company issued to the trust an aggregate 104,167 business consultant common shares with an aggregate value when issued of approximately $50,000 to satisfy the payment of invoices submitted by the consultants for services rendered. During 2010, the trustee sold 177,495 business consultants common shares for aggregate proceeds of approximately $83,600 and distributed the proceeds from the trust to the consultants in payment of invoices submitted by the consultants. During March 2010, the trust was effectively terminated and the company’s common shares were no longer used to the trust to pay for the consultants. In May 2010, the trust returned 88,857 of undistributed common shares to the company. The company credited the fair value of the shares returned to general and administrative expenses for approximately $45,000.
The company’s payment obligations with respect to the consultant agreements were met once it has issued shares to the trust in accordance with directives received from the consultants and the consultants, not the company, bear the risk of loss in the event the proceeds of stock sales by the trustee are less than the value of the stock contributed to the trust by the company on the date of contribution.
[10] Commercializing Event Plan
On October 13, 2006, the board of directors adopted a Commercializing Event Plan (“2006 Event Plan”) designed to reward the company’s directors, executives and certain administrative personnel for the successful completion of one or more commercializing events. No payments were made under the 2006 Event Plan.
On October 31, 2007, the board of directors terminated the 2006 Event Plan and approved a new 2007 Commercializing Event Plan (the “2007 Event Plan”), effective October 10, 2007. The 2007 Event Plan provided that upon the happening of any commercializing event, each of the directors and officers of Torvec as well as certain management personnel shall be entitled to share equally in 6% of the gross amounts derived or to be derived from the transaction and/or transactions constituting a commercializing event. Upon the happening of any commercializing event, each of the company’s engineering and security consultants shall be entitled to share equally in 2% of the gross amounts derived and/or to be derived from the transaction and/or transactions constituting a commercializing event. In order to actually receive payment under the 2007 Event Plan, each participant must be both a) employed by, a consultant to or associated with the company and b) judged to be “in good standing” with the company at the time of any and all such payments, all as determined by the board of directors as of the date of the board’s authorization of payments to be made.
The 2007 Event Plant specifically provides that the participants in the commercializing event plan shall be entitled to receive payments as described in the plan regardless of the number of commercializing events, in the aggregate or with respect to any given technology.
The company issued an aggregate 4,669 common shares with a value upon issuance of $14,000 to participants under the 2007 Event Plan for the year ended December 31, 2009. For the year ended December 31, 2010, the company issued an aggregate 32,077 common shares with a value upon issuance of $13,000 to participants under the 2007 Event Plan.
The company accounts for the settlement of its commission arrangements to non-employee consultants, directors, executives and certain administrative personnel with the issuance of its business consulting shares under ASC 505 (Previously known as: FASB Statement 123® “Share Based Payment”), provided that there are sufficient shares available under the business consulting plan. Under ASC 505, the company measures commission arrangements at the fair value of the equity instruments issued. In the event that there are insufficient shares available to settle the obligation, the company will follow the provisions of ASC 815 (Previously known as: EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). Under ASC 815, the company will record a liability instrument for the resulting changes in fair value from the date due to the end of each reporting period until such liability is satisfied.
In 2007, certain engineering consultants agreed to cancel 445,000 warrants issued in 2005 and 2006 in exchange for their participation in the 2007 Event Plan. The exchange of the warrants for the participation rights in a commercializing event did not result in an accounting charge. The warrants at the date of the exchange were considered to have no value because the underlying condition for vesting the warrants was not satisfied. The company determined that the fair value of the rights to be de minimis at the date of the exchange.
Effective November 3, 2010, the company’s board of directors terminated the 2007 Event Plan. In connection with such termination, the board of directors, on December 2, 2010, granted 360,000 common stock options to certain engineer participants in the 2007 Event Plan, exercisable for 6 years at an exercise price of $5.00 per common share. The transaction was considered a modification of a stock-based award and the company recorded a charge of approximately $508,000. The fair value the 360,000 options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
[11] Restricted Shares Issued for Services and Rent
From fiscal 1998 to fiscal 2008, the Company granted an aggregate 335,465 restricted shares of common stock, valued at approximately $748,500, as payment for services and rent.
For the years ended December 31, 2010 and 2009, the company issued 118,099 and 25,173 restricted shares of common stock, respectively, for internal accounting and financial consulting services valued at approximately $44,000 and $19,000.
[12] 1998 Stock-Option Plan
In December 1997, the company’s board approved a Stock Option Plan (the “1998 Plan”) which provided 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, nonqualified or reload stock options which plan was ratified by the shareholders on May 28, 1998. Options granted under the 1998 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 may vest over five years.
In 1997, in connection with certain consulting agreements, the company granted an aggregate 75,000 nonqualified options at an exercise price of $5.00 per common share. The options vested at a rate of 20% per annum and were exercisable through November 30, 2007. The company valued these options using the Black-Scholes option-pricing method. The fair value of these options was expensed over the term of the consulting agreements. The options expired on November 30, 2007 and were not replaced.
In 1998, the company granted three directors an aggregate 380,000 options under the 1998 Plan, all exercisable immediately at $5.00 per common share. These options expired on January 1, 2007. In 2001, the company granted 100,000 options to an officer in his capacity as a consultant under the 1998 Plan exercisable immediately at $5.00 per common share and with a ten years term. In connection with this grant, the company recorded a stock compensation charge of $398,000.
In 2002, in connection with the consulting agreements, the company granted an aggregate 727,047 options under the 1998 Plan, all exercisable immediately at $5.00 per common share. The options were granted in payment of an aggregate $653,000 owed under the consulting agreements. These options expired on September 30, 2007 and were not replaced.
In 2003, in connection with the same consulting agreements, the company granted 166,848 options under the 1998 Plan, all exercisable immediately at $5.00 per common share. The options were granted in payment of an aggregate $265,000 owed under the consulting agreements. These options expire on December 22, 2013.
In 2003, the company granted an aggregate 225,000 options under the 1998 Plan to three directors, all immediately exercisable at $5.00 per common share. These options expire on October 15, 2013.
In 2003, the company granted 50,000 options to a consultant under the 1998 Plan, immediately exercisable at $2.26 per common share. In connection with this grant, the company recorded a stock compensation charge of $46,000. These options expire on May 20, 2013.
In 2005, the company granted 100,000 options to a consultant under the 1998 Plan, immediately exercisable at $5.00 per common share. In connection with this grant, the company recorded a stock compensation charge of $247,000 allocated to research and development. These options expire on June 30, 2015.
By its terms, the company’s 1998 Plan terminated as to the grant of future options on May 27, 2008. Consequently, no additional stock options will be granted under the 1998 Plan, although outstanding options remain available for exercise in accordance with their terms. No options were granted, expired, or exercised during the years ended December 31, 2010 and 2009.
The following table represents information relating to stock options outstanding under the 1998 Plan at December 31, 2010:
Options Outstanding and Exercisable
As of December 31, 2010, the company did not have any unrecognized stock compensation related to unvested awards under the 1998 Plan.
[13] 2011 Stock Option Plan and Other Option Grants
On November 3, 2010 the board adopted and on January 27, 2011 the shareholders approved the 2011 Stock Option Plan (“2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified options and incentive options.
Non-qualified options may be granted to the company’s officers, directors, employees and outside consultants. Incentive options may be granted only to the company’s employees, including officers and directors who are also employees. In the case of non-qualified options, the exercise price may be less than the fair market value of the company’s stock on the date of grant. In the case of incentive options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive option granted to an employee who owns more than 10% of the company’s stock may not be greater than five years.
No options were granted under the 2011 Plan during and for the year ended December 31, 2010. See Note L for information about stock option grants under the 2011 Plan subsequent to December 31, 2010.
In 2010, the company granted stock options (outside the 2011 Plan) to acquire 5,910,000 shares of the company’s common stock to certain of the company’s officers, directors, and engineering consultants, at exercise prices ranging from $.36 to $5.00 per share with various vesting criteria and expiration dates. As of December 31, 2010, 3,572,500 options were vested. For the year ended December 31, 2010, the company recorded compensation expense of approximately $1,573,000 related to the aforementioned options.
On September 30, 2010, the company granted a stock option for 5,150,000 common shares (included in the aforementioned 5,910,000 options) exercisable for ten years at an exercise price of $0.36 per common share to its newly appointed chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $4.00 per share. The company valued the option using a variation of a Black-Scholes model, with the following assumptions: (a) an average expected term of 8 years; (b) an expected forfeiture rate of 0%; (c) a risk-free interest rate of 2.1%; (d) an average volatility of 96%; and (f) a dividend yield of 0%. The weighted average value of a single option was determined to be $0.29. Immediate vesting was utilized for the initial tranche and the shorter of the expected vesting period or the 51/4 years expected service period will be utilized to amortize the expense related to each of the other tranches, but amortization will be accelerated if the market price milestone is achieved prior to the end of the amortization period. The company charged $873,000 to general and administrative expense during the year ended December 31, 2010, including $841,000 for the vesting of the first three tranches.
The weighted average grant-date fair value of all stock options granted during the year ended December 31, 2010 was $0.40. The total grant date fair value of all stock options vested during the year ended year ended December 31, 2010 was approximately $1,525,000.
The fair value of each option granted, excluding the 5,150,000 options granted to the Company’s CEO that are described above, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. The Company determined expected volatility using its historical closing stock price. The expected life was determined using the simplified method as the Company does not believe it has sufficient historical stock option exercise experience on which to base the expected term.
The following tables represent information relating to non-plan stock options outstanding at December 31, 2010:
As of December 31, 2010, there was approximately $779,000 of unrecognized stock compensation expense related to unvested non-plan options expected to be recognized over the next four years.
[14] Warrants
As of December 31, 2010, outstanding warrants to acquire shares of the company’s common stock are as follows:
(a)
Exercisable only if the company has an IPO and exercisable at the IPO price five years from IPO. Through the year ended December 31, 2010, the company has not conducted an IPO.
The following summarizes the activity of the company’s outstanding warrants for the years ended December 31, 2010:
[15] Warrants Issued to Business, Financial and Engineering Consultants
In 2005, the Company issued 12,500 warrants to certain consultants, with an exercise price of $0.01 and valued at approximately $43,000. 3,500 of these warrants were exercised in 2005 and 2006. 6,000 of these warrants were exercised during the year ended December 31, 2010.
During the year ended December 31, 2005, the company issued 210,000 warrants valued at approximately $377,000 to certain engineering consultants, immediately exercisable over a ten year term at an exercise price of $5.00 per common share. The engineering consultants holding 150,000 of these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for their participation in the company’s 2007 Commercializing Event Plan. (See Note H [16].)
In connection with its business and financial operations for the year ended December 31, 2006, the company issued 91,583 warrants valued at approximately $167,000 to a number of business and financial consultants. Such warrants are immediately exercisable at $.01 per common share, each with a ten year term. During the year ended December 31, 2006, 91,083 of these warrants were exercised for proceeds of $910 and the remaining 500 warrants were exercised during the year ended December 31, 2007 for proceeds of $5.00.
In 2006, the company issued 30,000 warrants valued at approximately $168,000 immediately exercisable over a ten year term at $5.00 per common share to certain design engineers.
The company issued 400,000 warrants valued at approximately $1,237,000 to a business consultant on August 18, 2006, immediately exercisable over a ten year term at an exercise price of $3.27 per common share. These warrants were modified and reissued upon mutual agreement of the parties effective October 15, 2010 (see Note H[14]).
On November 21, 2006, the company issued 200,000 warrants valued at approximately $948,000 in connection with the engagement of a governmental affairs consultant, immediately exercisable over a ten year term at an exercise price of $3.75 per common share.
During the year ended December 31, 2006, the company issued 295,000 warrants to certain engineering consultants, exercisable over a ten year term at an exercise price of $5.00 per common share but only if the company were to consummate a commercializing event involving a transaction or series of transactions which results in the sale, license or other technology transfer of one or more of its technologies to a third party for value. These warrants are contingent upon an event occurring in the future and the company will fair value these warrants when the contingency is resolved. The engineering consultants holding 295,000 of these warrants agreed to cancel them in the fourth quarter of 2007 in exchange for their participation in the company’s 2007 Commercializing Event Plan. (See Note H [15].)
In 2007, the company issued 50,000 warrants, valued at approximately $249,000, immediately exercisable for ten years at an exercise price of $5.00 per common share upon the happening of a commercializing event. The warrants were issued to a consultant who assisted the company to potentially place its products in various state school bus programs.
In 2007, the company issued 100,000 warrants, valued at approximately $401,000, immediately exercisable for ten years at an exercise price of $5.00 per common share to engineering consultants.
In 2008, the company issued 195,000 warrants, valued at approximately $249,000, immediately exercisable for ten years at an exercise price of $5.00 per common share to engineering consultants. In 2010, 95,000 of the total 195,000 warrants issued to these consultants were modified to eliminate the ten-year term and the commercializing event condition for exercise. The charge related to the modification was insignificant. (See Note (H [14e].)
In 2010, the company issued a warrant for 100,000 common shares exercisable for 10 years at $2.50 per common share to business consultants.
In 2010 and 2009, 6,000 and 12,500 common stock warrants were exercised for proceeds of $60 and $125, respectively. (See Note (H [14].)
[16] Issuance of Stock and Warrants by Subsidiary
In 2003, the company’s majority-owned subsidiary, Ice Surface Development, Inc. issued 308,041 shares of its common stock at a price of $.76 per share and realized aggregate proceeds of $234,000 in a private placement. These issuances reduced the company’s interest in Ice from 72% to approximately 69.26%. Based upon the company’s accounting policy, the change in the company’s proportionate share of Ice’s equity resulting from the additional equity raised by the subsidiary was accounted for as a capital transaction.
In connection with the private placement, Ice issued 53,948 warrants to the placement agent immediately exercisable at $.76 per common share through June 9, 2007. In addition, 50,000 warrants were issued by Ice to a consultant immediately exercisable at $.76 per common share through June 9, 2007. In connection with the issuance of these warrants, a compensation charge of $36,000 was recognized.
These warrants were cancelled effective June 7, 2007 upon the adoption by Ice’s shareholders of a Plan for the Complete Liquidation and Dissolution of Ice.
NOTE I - COMMITMENTS AND OTHER MATTERS
[1] Variable Gear, LLC
Under the operating agreement of Variable Gear, LLC, the company was required to purchase the 51% membership interest it did not own in such entity by January 1, 2007 at the then fair market value as defined. Since inception, Variable Gear generated no revenues, incurred no expenses and had no operations. On June 3, 2007, the company and the 51% owner agreed that his entire membership interest would be purchased in exchange for 5,000 common shares of the company, valued at the close of trading on such date ($19,250 based upon a $3.85 per common share close). The transaction was finalized on June 6, 2007.
The company has recorded the purchase of the membership interest as additional goodwill. The company also recorded the deferred revenue of $150,000 as other income at June 30, 2007 because all of the company’s obligations regarding this payment have been met. Since there are no operations of the Variable Gear entity since inception, the company has concluded that there is no future benefit to the purchased interest and has impaired the goodwill and recorded a charge of $19,000 at June 30, 2007.
[2] Leases
The company leases a facility located at 1999 Mount Read Blvd., Rochester, New York. On April 29, 2008, the company executed a five-year lease for the premises (with a December 1, 2007 lease commencement date) providing for rent to be paid at a rate of $5,687 per month ($68,244 per annum) and in addition, for the payment of the company’s proportionate share of yearly real estate taxes and yearly common area operating costs. (See Note D[4].)
Under the lease, monthly rental payments commenced June 1, 2008. The lease contains three 5-year renewal options and grants an option to the company to lease additional adjacent manufacturing and assembly space.
Rental payments and certain other payments due to the landlord are to be paid in cash or common shares of the company, based upon the closing price per share on the 15th day of the calendar month immediately prior to the date any installment payment of monthly rent or other payment is due landlord.
Rent expense for the years ended December 31, 2010 and 2009 was approximately $90,500 and $58,500, respectively.
[3] Employment Agreements
Effective October 4, 2010, the company appointed a new chief executive officer and executed a five year employment agreement pursuant to which the company will pay base compensation of $50,000 per annum, which compensation increases to $200,000 per annum on the first day of the calendar year immediately following the calendar year in which the company has adjusted EBITDA of at least $300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all non-cash expenses associated with stock options). Under the agreement, the executive is entitled to a performance bonus based upon financial targets established each year in good faith by the Governance and Compensation Committee and the achievement of individual management objectives established annually by such committee. The executive is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. If the company terminates the executive, removes him as CEO, or a change in control of the company occurs, the executive is entitled to three years’ severance pay, consisting of base pay and any incentive compensation.
On September 30, 2010, the company granted a non-plan stock option for 5,150,000 common shares exercisable for ten years at an exercise price of $0.36 per common share to its newly appointed chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $4.00 per share.
Effective October 18, 2010, the company engaged a new chief financial officer under a letter agreement dated October 18, 2010 pursuant to which the company will pay annual compensation equal to $125,000, with increases of $25,000 per annum effective April 1, 2011, October 1, 2011 and January 1, 2012. The executive also was granted a non-plan stock option exercisable for 10 years to acquire 250,000 shares of the company’s common stock at $0.85 per share. The option vests and is exercisable as follows: 62,500 options vest and are immediately exercisable upon grant; 62,500 options vest and become exercisable on each of October 18, 2011, 2012 and 2013. If the company terminates the executive, removes him as CFO, or a change in control of the company occurs, the executive is entitled to 12 months’ severance pay.
[4] Consulting Agreements
Effective July 1, 2010, the company engaged the services of a consulting firm to provide expertise in local, state and federal governmental relations, to advise the company with respect to media relations, business development and in negotiating with industry representatives. The company has agreed to pay the consultant an annual retainer of $48,000 to be paid in quarterly installments of $12,000 beginning July 1, 2010. The agreement is for a one year term.
Effective July 1, 2010, the company engaged a consultant to provide the company with assistance in the development of strategic plans, financial modeling, licensing agreements, partnership agreements and general funding opportunities. The company has agreed to pay the consultant an annual retainer equal to $34,500 to be paid in quarterly installments of $8,625 beginning July 1, 2010. The company also agreed to pay the consultant a commission equal to 4% of the value received by the company from third parties introduced by or through the auspices of the consultant. The agreement is for a two year term.
NOTE J - LITIGATION
On October 31, 2008, the company commenced an action in New York Supreme Court, County of New York, Commercial Division against Ice Engineering, LLC seeking the total balance owed by Ice Engineering to the company pursuant to an assignment agreement entered into by the parties, effective June 15, 2007, whereby the company assigned all of its rights and interest in an ice technology license granted by Dartmouth College to Ice Engineering in exchange for a 2.8% royalty interest and a cash reimbursement of $3,500,000. The suit was commenced after the company had been paid approximately $800,000 in reimbursement monies.
On January 27, 2010, the company and Ice Engineering settled this litigation. Under the settlement agreement, the company’s assignment of the ice technology license is made permanent; the company elected to forego its right to royalties and agreed to receive $1,100,000, with $300,000 paid to the company by Ice Engineering on January 27, 2010 and $800,000 paid to the company by Ice Engineering by February 26, 2010. The company received the entire $1,100,000 due under the settlement agreement by the due dates specified in the settlement agreement.
The recovery of $1,100,000 received during January and February 2010 was recorded as other income during the quarter ended March 31, 2010. The $800,000 received in 2007 and 2008 was previously recorded as deferred income and, upon settlement of this litigation, was reflected as other income during the quarter ended March 31, 2010. (See Note C).
NOTE K - ROYALTY AGREEMENT
On December 12, 2007, the company granted High Density Poweretrain, Inc. of Waterford, Michigan (“HDP”) an exclusive, worldwide license to incorporate the company’s constant velocity joint technology in HDP’s family of highly-powered, multifueled, fuel efficient, light weight, cost effective internal combustion engines. In consideration for the grant of the license, the company will receive annual royalties equal to 5% of annual gross revenues generated by the sale of HDP’s multifuel engines, including all sublicense of such technology. There are no minimum royalty payments and the grant does not affect the company’s ability to commercialize its constant velocity joint technology in any other field and/or application. For the years ended December 31, 2010 and 2009, the company did not receive any royalties under this agreement.
NOTE L - SUBSEQUENT EVENTS
On January 27, 2011, the company’s shareholders approved the issuance of stock options to 5 directors each for 250,000 common shares exercisable at $.90 per common share. Each option is conditioned upon the optionee serving as a director and vests in four tranches of 62,500 shares on each of the four anniversary dates of January 27, 2011. The optionee must exercise each 62,500 tranche within two and one-half months following the calendar year in which the tranche vests or lose the tranche.
Also, on January 27, 2011, the company’s shareholders approved the issuance of stock options for 100,000 common shares to a consultant acting in the capacity as a special adviser to the board. The options are exercisable at $.90 per common share. Each option is conditioned upon the optionee continuing to serve as a consultant and vests in four tranches of 25,000 shares on each of the four anniversary dates of January 27, 2011. The optionee must exercise each 25,000 tranche within two and one-half months following the calendar year in which the tranche vests or lose the tranche.
Effective January 28, 2011, the company’s board of directors appointed Wesley K. Clark as a member of the board of directors. The company’s board voted to grant Gen. Clark a stock option for 250,000 common shares effective January 28, 2011 exercisable at $.90 per share. The option is conditioned upon Gen. Clark serving as a director and vests in four tranches of 62,500 shares on each of the four anniversary dates of January 28, 2011. The optionee must exercise each 62,500 tranche within two and one-half months following the calendar year in which the tranche vests or lose the tranche. The company’s board also voted to grant Gen. Clark a stock option for 25,000 common shares effective January 28, 2011 exercisable at $.90 per share. This 25,000 share option vests immediately and is exercisable for 10 years.
On January 28, 2011, the company announced that it has entered into a contract with a West Virginia remanufacturer of components for the mining and associated industrial equipment industry to develop, evaluate, manufacture and sell Torvec’s IsoTorque® differential technology in mining shuttle cars. The contract calls for Torvec to design and build a prototype IsoTorque® unit for installation in a 21 SC model mining shuttle car. The remanufacturer will pay Torvec $120,000 for the initial development. Upon successful completion of the prototype phase, the parties have agreed that Torvec will sell 100% of the differential requirements for all 21 SC model mining shuttle cars remanufactured by the remanufacturer on an exclusive basis. Minimum purchase requirements will be established after the first anniversary of the agreement.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Richard A. Kaplan and Robert W. Fishback, as of December 31, 2010, the company’s chief executive officer and chief financial officer, respectively, have informed the board of directors that, based upon each of their evaluations of the company’s disclosure controls and procedures as of the end of the period covered by this annual report (Form 10-K), such disclosure controls and procedures were effective to ensure that information required to be disclosed by the company in the reports it submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management (including the chief executive officer and interim chief financial officer) as appropriate to allow timely decisions regarding required disclosure.
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of the company is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the company’s consolidated financial statements. Our internal control over financial reporting is supported by a program of appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written code of conduct adopted by our company’s board of directors, applicable to all company directors and all officers, consultants and employees of our company.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections or any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The audit committee of our company’s board of directors meets with the company’s independent registered public accounting firm and management periodically to discuss internal control over financial reporting, auditing and financial reporting matters. The audit committee reviews with the company’s independent registered public accountants the scope and the results of the audit effort. The audit committee also meets periodically with such accountants and the company’s chief internal accountant without management present to ensure that the independent registered public accountants and the company’s chief internal accountant have free access to the audit committee. The audit committee’s report can be found in the definitive proxy statement issued in connection with the company’s 2010 annual meeting of shareholders.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.” Based upon our assessment, management concluded that as of December 31, 2010 internal control over financial reporting was effective.
As of December 31, 2009, our Audit Committee was advised by EisnerAmper LLP (formerly Eisner LLP), our independent registered public accounting firm, that during their performance of audit procedures for 2009, EisnerAmper LLP (formerly Eisner LLP) identified material weaknesses as defined in Public Company Accounting Oversight Board Standard No. 5 in our internal control over financial reporting. Based on our evaluation as of December 31, 2009, our management concluded that there were material weaknesses in our internal control over financial reporting. The material weaknesses identified did not result in the restatement of any previously reported financial statements nor did management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses as of December 31, 2009 related to the a) preparation of the income tax disclosures including the related components of our deferred tax assets, b) accounting for equity transactions, resulting in the Company providing price protection to consultants which is inconsistent with its disclosed policy and c) preparation of financial statements and related footnotes and financial data provided to the Company’s independent registered public accounting firm in connection with the annual audit. While we engage outside consultants to assist us in preparing our tax provision, our financial statements and related disclosures; we did not have proper review controls to monitor such processes
During 2010, our management took appropriate and reasonable steps to make the necessary improvements to remediate the material weaknesses identified as of December 31, 2009. Along with improving the controls around each of the specific material weaknesses described previously, we have substantially improved our focus on our control environment with the addition of a new Chief Financial Officer in October 2010.
This annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
None.
PART III
Item 10.
Item 10.
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 and executive officers of the company as of December 31, 2010 (with respect to Wesley K. Clark, January 28, 2011)
**
Changes in Control - To the best 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. Under the company’s bylaws, the members of the board of directors serve until the next annual meeting of shareholders and until their successors have been elected or appointed and shall have qualified, or until their prior resignation or termination. All directors were reelected to the board at the annual meeting of shareholders held on January 27, 2011.
(b) Business Experience
Prior to opening the dealership and collision business, Mr. Siconolfi acquired an excellent foundation in the automotive business, working in sales, sales management and general management at Vanderstyne Ford, Schrieber Buick, Judge Motor Corporation and Meisenzahl Auto Parts, all in the Rochester area. He has completed 100+ programs sponsored by Chrysler Corporation, Ford Motor Company and General Motors in fields such as management, sales management, sales, customer relations, human resources and service training. He earned numerous awards given by these companies.
A very active participant in his community, Mr. Siconolfi is currently involved in commercial real estate.
(2)
Richard Kaplan is the former president of Richland Industries, Inc., a retail floor covering chain; chairman and co-founder of Resnick Media Associates, Inc., an advertising and marketing agency; chairman and co-founder of Blanton Communications, Inc., a computer software company; president of RAK Realty Corporation, a real estate development company; chairman and founder of WorkSmart International, Inc., a human resource development,publishing and training company for multi-market, multinational corporations and organizations. He was also chairman and founder of Maxim Group Inc., a publicly held company previously listed on the New York Stock Exchange.
Mr. Kaplan is on the boards of two startup companies: Cerebral Assessment Systems and Vnomics Corp.
Mr. Kaplan serves as vice-president of the Rochester Angel Investment Network, is former chairman of the Rochester Broadway Theatre League, vice-chairman of the Better Business Bureau and is, or has been, active in community organizations such as Sojourner House, Rochester’s Child, the Martial Arts Center of Rochester, the Center for Governmental Research, Camp Good Days and Special Times and was former chairman of the Monroe County division of The American Cancer Society.
Mr. Kaplan is a member of the Board of Trustees of Rochester Institute of Technology and Nazareth College. He is also chairman of the board of advisors at RIT’s Chester F. Carlson Center for Imaging Science as well as serving as a member of the University of Rochester’s Economic Development Board.
Mr. Kaplan’s business success and contributions within the community have been recognized by multiple awards, including the prestigious Herbert W. Vanden Brul Entrepreneurial Award presented by RIT’s E. Philip Saunders College of Business in April 2007. Other recipients include B. Thomas Golisano, Robert Wegman, Arunas Chesonis, E. Philip Saunders, Wayne LeChase and James Hammer. Mr. Kaplan was also designated the“Business Man of the Year” in 2007.
Mr. Kaplan is the author of a book entitled “A Time for CARING” which delineates the causes of many of the problems confronting American society in the 21st century and provides concrete solutions for the remediation of such problems.
Mr. Kaplan has an extensive background in economics, accounting, management and executive leadership. He is regularly sought out by startups, universities and other organizations for which he has done private consulting and guest lecturing on marketing, economics and organizational development.
(3)
Keith E. Gleasman is 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 former Vice President of Sales for the unrelated Gleason Corporation (Power Systems Division), designed and conducted seminars on vehicle driveline systems for engineers at the U.S. army tank automotive command.
Mr. Gleasman’s accomplishments include: a) Designing 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; b) Developing extensive after-market experience including pricing, distribution, sales catalogs, promotions, trade show booths designs and vehicle sponsorships; c) publishing over 300 articles in trade magazines highlighting the Torsen differential (e.g., Popular Science, Auto Week, Motor Trend, Off-Road, and Four Wheeler); d) designing the FTV vehicle (from concept to assembly); and e) assisting in the development and manufacturing procedures for the Torsen differential and for all of the Torvec products. Mr. Gleasman has also 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), and 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.
(4)
Thomas F. Bonadio is Managing Partner of The Bonadio Group which he founded in 1978 with one partner and one part-time employee (his mother). With 325 people in six offices, The Bonadio Group has grown to be the largest independent provider of accounting, business advisory and financial services in upstate New York. As founder and managing partner, Mr. Bonadio has been the driver behind the firm’s growth and diversification, growing from a firm offering only public accounting and auditing services to a multi-dimensional accounting, business advisory and financial services organization.
Mr. Bonadio has a B.B.A. degree in accounting from St. John Fisher College and was certified as a CPA in 1973. He is a member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants and the National Association of Certified Valuation Analysts. He was named a “CPA ALLSTAR” by CPA Magazine, an “Outstanding Alumni” by St. John Fisher and received The Point of Light Foundation Award, sponsored by President George W. Bush. Mr. Bonadio was named the 2009 “Business Person of the Year” by the Small Business Council and inducted into the Rochester Business Hall of Fame in 2010.
Mr. Bonadio has served as chairman of the Board of Trustees of St. John Fisher College and chairman of the College’s Accounting Advisory Board. He is chairman of the Audit Committee of Conceptus, a NASDAQ-listed company and a board member of Eagle Productivity Solutions, CLIX Photo, Moore Stephens North America and Windsor Technology.
Mr. Bonadio has been active for many years in various charitable, cultural and professional organizations, including Junior Achievement, United Way, Small Business Council’s CEO Roundtable, the City of Rochester City Budget Review Committee and the Athena Awards.
(5)
During 34 years of service in the United States Army, Wesley K. Clark rose to the rank of four-star general as NATO’s Supreme Allied Commander, Europe. After his retirement in 2000, he became an investment banker, author, commentator and businessman. In September 2003 he entered politics as a Democratic candidate for president of the United States. His campaign won the state of Oklahoma before he returned to the private sector in February 2004.
In his final military command, Clark commanded Operation Allied Force, NATO’s first major combat action, which saved 1.5 million Albanians from ethnic cleansing in Kosovo. He was also responsible for the peacekeeping operation in Bosnia.
Clark’s awards and honors include the Presidential Medal of Freedom, the State Department Distinguished Service Award, the U.S. Department of Defense Distinguished Service Medal (five awards), the U.S. Army Distinguished Service Medal(two awards), the Silver Star, the Bronze Star, the Purple Heart, and Honorary Knighthoods from the British and Dutch governments.
He is the author of two books and is seen as a guest commentator on many national news programs.
Clark graduated from the U.S. Military Academy in 1966 as valedictorian of his class, and completed two degrees at Oxford University as a Rhodes Scholar. He is also a graduate of the Ranger and Airborne schools.
Today, Clark is an investment banker and is active in the finance, technology and energy fields. He currently serves in leadership roles with a number of for profit and non-profit organizations, including Chairman of New York investment bank Rodman and Renshaw, Chairman of Wesley K. Clark and Associates, a strategic consulting firm, Trustee of the International Crisis Group, and Chairman of City Year Little Rock, as well as a member of other private and public boards.
(6)
Dr. William W. Destler became president of Rochester Institute of Technology on July 1, 2007. He is the ninth president in the university’s 178-year history. He was formerly senior vice president for academic affairs and provost of the University of Maryland at College Park.
Dr. Destler serves on the American Council on Education’s Commission on Effective Leadership and is a board member for the National Institute of Aerospace Foundation. He is a member of the board of directors for New York’s Commission on Independent Colleges and Universities. He also serves on community boards in Rochester: Rochester General Health System, Greater Rochester Enterprise, Rochester Business Alliance, Golisano Family Foundation and High Tech of Rochester, and Torvec Inc.
Prior to RIT, Dr. Destler spent more than 30 years at the University of Maryland, rising from the ranks of research associate and assistant professor of electrical engineering to senior vice president and provost. At Maryland, he also served as electrical engineering department chair, dean of the A. James Clark School of Engineering, interim vice president for university advancement, vice president for research, and dean of the graduate school.
As engineering school dean, Dr. Destler created the Gemstone Program, a multidisciplinary four-year research program for undergraduate honors students of all majors in which teams of students design, direct and conduct research exploring the interdependence of science and technology with society. During his term as graduate school dean, student applications increased by more than 20 percent and research funding rose by more than 30 percent. While interim vice president for advancement, Dr. Destler was credited with securing a $25 million gift from Comcast Corp. for naming rights supporting the construction of the Comcast Center sports arena. As senior vice president for academic affairs, retention increased and the graduation rate rose from 62 percent to 80 percent over five years. Other achievements at Maryland include leading a faculty team in the creation of a cross-disciplinary master’s degree program in telecommunications; originating the Hinman CEOs Program, a living-learning entrepreneurship initiative for undergraduate students; and involvement in the President’s Promise, an outside-the-classroom experiential program for freshmen.
Dr. Destler is an international authority on high-power microwave sources and advanced accelerator concepts. He is best known for his pioneering work in the collective acceleration of heavy ions, achieving the highest energies to date by this method, and for his development of large orbit microwave devices, including large orbit gyrotrons and rotating beam free electron lasers. He has consulted for government agencies and private firms, received more than $40 million in grants and contracts, published more than 200 journal articles and book chapters, and presented many papers. Dr. Destler has also directed 18 master’s and doctoral student theses and earned awards for his teaching.
Dr. Destler earned a bachelor’s degree from Stevens Institute of Technology and a Ph.D. from Cornell University. Both degrees were in the field of applied physics.
(7)
Asher J. Flaum is President of Flaum Management Co., Inc., a full service real estate company that owns and manages a portfolio of several million square feet of commercial real estate including retail, office, industrial, development projects as well as provides complete real estate brokerage services through its real estate brokerage division. Through his active involvement with Flaum Management, Mr. Flaum focuses on real property management, development, acquisitions and finance, leasing and brokerage services. He has participated in multiple real estate transactions involving Fortune 500, national and regional companies. A licensed real estate broker, Mr. Flaum is a member of the International Council of Shopping Centers (ICSC) and a member of the New York State Commercial Association of Realtors (NYSCAR). Mr. Flaum, who has a B.S. degree from Syracuse University, serves on the board of directors and finance committee of the Jewish Community Federation and on the board of directors of Constellation Brands Marvin Sands Performing Arts Center (CMAC).
(8)
As Director of High-Performance Vehicle Operations, General Motors Performance Division until 2008, Mr. Heinricy was responsible for the planning, development, testing and execution of all the performance versions of GM vehicles, from the Cobalt SS to the Cadillac CTS-V to the Corvette Z-06. John is also a legendary race-car driver, capturing 11 SCCA national titles. This past summer, he won six out of six SCCA races, driving a C-5 Corvette equipped with Torvec’s IsoTorque® differential.
Mr. Heinricy began his career at General Motors in 1970. During his first tour of the engineering rotation in Chevrolet Racing R&D, he was assigned to the Milford Proving Grounds where he became immersed in the development and testing of GM’s LS6 and LS7 Corvettes and Chevrolet Chevelle L88s. Mr. Heinricy became Vehicle Development Manager for the Corvette platform in 1989 and in 1995, he became head of Vehicle Integration Engineering for the Corvette. In 1997, he became Chief Engineer for the Camaro and Firebird and was appointed the Director of Vehicle Dynamics for all of GM’s cars and trucks in 2001. Later that same year, he became the Director of High-Performance Vehicle Operations in GM’s Performance Division, retiring from GM in 2008.
Through his company, Heinrocket Inc., Mr. Heinricy today is an international automotive consultant, specializing in vehicle testing and development, high performance driver training, race car development and motivational speaking.
(9)
Charles Mills founded the law firm of Mills, Schwartz and White in 1967 which later merged to become Bernstein, Mills, Schwartz, White and Bernstein. Mr. Mills substantially concentrated on real estate syndication, venture capital and securities law. Wanting to branch out from his legal career, Mr. Mills ventured into his own real estate development company. As CEO of Crosskeys Corporation, he led the company into many successful ventures, including office parks, high-end office buildings and a commercial mall/plaza. In 2001, Mr. Mills sold most of his real estate empire but still manages quite a few prime properties.
Mr. Mills holds a BS degree in Business Administration from Syracuse University and a law degree from Cornell Law School. He is also active in several charitable organizations in his community.
(10)
Known for both his business acumen and his philanthropic efforts, E. Philip Saunders’ ventures are far-reaching and diverse. He was instrumental in reshaping the truck stop industry, taking it from poorly stocked, overgrown gas stations to modern travel plazas with stores, restaurants, and lodging facilities. Saunders began in 1958 with his father’s gas station, and built it into the Truckstops of America chain. Saunders later founded Travel Ports of America, Inc. which merged with Ryder’s TravelCenters of America in 1999. Today, TravelCenters is the nation’s largest chain of truck stops.
Mr. Saunders ventured into liquid-fuels distribution and convenience stores. In 1979, he purchased W.W. Griffith Oil Corp. and began the Sugar Creek Corp. chain of retail gas and convenience stores. In 1998, Saunders sold Griffith Oil Inc to Rochester Gas and Electric Corp.’s Energetix subsidiary. Two years later he sold the 105-store Sugar Creek chain to Tops Markets Inc.
Mr. Saunders has successfully diversified his interests to auto and truck rental, recreation and tourism, packaged foods, property management, and banking. His previous business history includes owner of Econocar International, owner of Richardson Foods, chief executive officer of American Rock Salt, and Sr. Vice President of Ryder Systems. Currently, Mr. Saunders is the owner of Swain Ski Center in Swain, NY and Bristol Harbour Resort in Canandaigua, NY. He is also owner of Essex Property Management, which maintains over 100 commercial properties. Saunders has a major interest in Western New York Energy, Youngblood and Genesee Regional Bank where he serves as Board Chairman. In 1997, Mr. Saunders and a Rochester attorney bought Lyndon Guaranty Bank of New York from ITT Corp., renaming it Genesee Regional Bank.
Mr. Saunders currently serves on the board of directors for Paul Smiths College, American Rock Salt, Western New York Energy, Lewis Tree and the Rochester Institute of Technology. His past services have incorporated membership on the board of directors of several organizations, including Rochester General Hospital, Excellus Blue Cross/Blue Shield, Security-Norstar Ryder Systems, and the Boy Scouts of America-Steuben Area Council. He has received numerous awards for his contributions to the community, including the Herbert W. Vanden Brul Entrepreneurial Award from the Rochester Institute of Technology’s College of Business (now known as the E. Philip Saunders College of Business), a Doctorate of Commercial Science from Paul Smiths College, the Teddi Award from Camp Good Days and Special Times and the Livingston County Citizen of the Year. He was elected to the Rochester Business Hall of Fame in 2004.
(c) Relationships; Agreements
There are no family relationships among any of the directors or executive officers of the company. There are no agreements or arrangements for the nomination or the appointment of any persons to the board of directors.
(d) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, our executive officers and persons who own more than 10% of our common stock to file initial reports of ownership (Form 3) and reports of changes in ownership of our common stock (Forms 4 and 5) with the Securities and Exchange Commission. These persons are required by SEC regulations to furnish us with copies of all section 16(a) reports they file.
To the best of the company’s knowledge, based upon its review of all of the copies of Forms 3, 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 by the current directors and executive officers pursuant to section 16 of the Securities Exchange Act of 1934, and that no current director or executive officer required to file such forms failed to either file them or file them in timely fashion.
(e) Corporate Governance, Code of Ethics, Director Independence
Role of the Board of Directors
All corporate authority resides in the board of directors as the representative of the shareholders. The board has delegated authority to management to implement Torvec’s mission of maximizing long-term shareholder value, while adhering to the laws of the jurisdictions where we operate and at all times observing the highest ethical standards. With respect to its relationship to management, the board’s role is not to manage but to provide independent oversight of management’s decisions.
Management’s responsibilities include the development and implementation of the company’s strategic plans, utilization of company resources, authorization of spending limits and the authority to hire consultants and employees and terminate their services. The board retains responsibility to recommend candidates to the shareholders for election to the board of directors. The board retains responsibility for selection and evaluation of the chief executive officer, determination of senior management compensation, approval of the annual budget, assurance of adequate financial and accounting systems, procedures and controls. The board also provides advice and counsel to senior management on a regular basis.
All major decisions are considered by the board as a whole; however, the board has chosen to exercise certain of its responsibilities through committees of the board. The board has established three standing committees - an Audit Committee, a Nominating Committee, and a Governance and Compensation Committee.
Consistent with the company’s view of our board of directors’ and management’s distinct but mutually supportive roles described above, the company has chosen to separate the positions of board chairman and chief executive officer. The role of the board chairman is to set board agendas, priorities and procedures to facilitate the board in its review and oversight function. The role of the chief executive officer is to establish and implement the company’s strategic direction, subject to board oversight.
Risk Oversight
The board oversees the company’s risk management process through regular discussions of the company’s credit, liquidity, operational, compliance and similar risks with senior management both during and outside of regularly scheduled board meetings. In addition, the Audit Committee assists the board by administering such oversight function with respect to risks relating to the company’s accounting and financial controls.
Annual Meeting Attendance
It is the company’s policy that all directors attend the annual shareholders meeting. All persons who were directors on the date of last year’s annual shareholders meeting attended such meeting.
Operation of the Board of Directors
The board of directors of the company met and/or took official action 9 times during the year ended December 31, 2010. During this period, each incumbent director attended, either in person or by telephonic conference as permitted by the company’s Bylaws, approximately 100% of the total number of meetings held during the period for which he was a director and approximately 100% of the total number of meetings of the committees of the board on which he served during the period for which he was a member of such committee(s).
Director Independence
The company’s common stock is traded on the over-the-counter bulletin board, an electronic inter-dealer quotation system that displays real-time quotes, last-sale prices and volume information. While the bulletin board is owned by the National Association of Securities Dealers, Inc., the company’s common stock is not “listed” for trading on the NASDAQ system or any stock exchange.
Despite the company’s common stock not being so listed, the board has voluntarily adopted and implemented the NASD’s “listed company rules” regulating the composition and operation of the board and its committees as in effect from time to time since the company’s common stock began trading in January 1999.
Under NASD’s rules applicable to listed companies, a majority of the board must be independent. This requirement means that a majority of the company’s board must be composed of persons who are not executive officers or employees of the company or who have a relationship with the company which, in the board’s opinion, would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. In addition, a director can not be considered independent if he is compensated by the company for any reason other than for service rendered as a member of the board and/or its committees.
Based upon these independence standards and all of the relevant facts and circumstances, the board has affirmatively determined that Thomas F. Bonadio, Wesley K. Clark, William W. Destler, Asher J. Flaum, John W. Heinricy, Charles Mills, E. Philip Saunders and Gary A. Siconolfi (constituting 8 members of a 10 person board) are independent. In making this determination, the board noted that none of these directors is an executive officer or employee of the company and that each will be compensated by the company solely for his service on the board and its committees.
In making its determination with respect to Mr. Heinricy, the board considered that while the company has a consulting agreement with a company owned by Mr. Heinricy, the agreement does not impair Mr. Heinricy’s independence since the amount paid under the agreement in any one year since its inception (and since a prior agreement’s inception) did not exceed $200,000 or 5% of such company’s gross revenues during such period.
In making its determination with respect to Mr. Flaum, the board considered that while Mr. Flaum is an affiliate of the company’s landlord, such relationship does not impair his independence since the amount of fees paid by the company in any one year since the inception of the lease did not exceed the greater of $200,000 or 5% of such landlord’s gross revenues during such period.
Code of Ethics/Committee Charters
The board has adopted, implemented and published on the company’s website (www.torvec.com) the company’s code of business conduct which applies to all members of the Board, all executive and financial officers and all employees and consultants of the company, its divisions and its subsidiaries. The code mandates that all company personnel observe the highest standards of business and personal conduct in the performance of their duties and responsibilities, especially in dealing with other company personnel, our shareholders, the general public, the business community, customers, suppliers, and governmental authorities. It addresses conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of corporate assets, compliance with laws, rules and regulations and requires the reporting of any illegal or unethical behavior.
We require our employees, our officers and directors to talk to supervisors, managers or other appropriate personnel to report and discuss any known or suspected unethical, illegal or criminal activity involving the company and/or its employees. We have established a process which allows employees, officers and directors to anonymously report any known or suspected violation of policies and rules set forth in the code of business conduct.
Waivers or amendments of the code’s provisions are generally not permitted, may be granted only by the board of directors, and if granted, will be disclosed promptly by the company by posting the waiver or amendment on the company’s website and by filing a current report (Form 8-K) with the Securities and Exchange Commission. There were no waivers of the code during the year ended December 31, 2010.
The board has also adopted, implemented and posted on the company’s website the company’s financial integrity and compliance program. The program mandates that the company’s results of operations and financial position must be recorded in accordance with the requirements of law and generally accepted accounting principles and that all books, records and accounts must be maintained in reasonable detail so that they accurately and fairly reflect the business transactions and disposition of assets of the company. The written policy requires all personnel responsible for the preparation of financial information to ensure that the company’s financial policies and internal control procedures are followed and holds each person involved in creating, processing and recording financial information accountable for the integrity of the financial reporting process. The program establishes a network for the receipt, retention, and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters and provides for the submission (including the confidential anonymous submission) by company personnel of any concerns they might have regarding questionable accounting or auditing practices.
On November 9, 2004, the board adopted a statement of corporate governance principles which establishes policies governing the role of the board of directors, its relationship to management, qualifications of directors, independence of directors, the size of the board and selection process, board committees, independence of committee members, meetings of independent directors, shareholder communications, board and committee agendas, ethics and conflicts of interest, reporting and access to advisers. The statement can be found on the company’s website at www.torvec.com.
The board adopted an Audit Committee charter delineating the composition and the responsibilities of the Audit Committee which became effective on April 17, 2000. The charter was revised by the board on January 15, 2003 to further delineate the Committee’s responsibilities and authority in accordance with provisions of the Sarbanes-Oxley Act of 2002. The charter is on the company’s website.
On November 9, 2004, the board adopted a Nominating Committee charter delineating the composition and responsibilities of the Nominating Committee. The Nominating Committee charter is on the company’s website.
Policy/Procedure for Review/ Approval of Related Party Transactions
Business transactions between Torvec and its officers or directors, including companies in which a director or officer (or an immediate family member) has a substantial ownership interest or a company where such director or officer (or an immediate family member) serves as an executive officer (“related party transactions”) are not prohibited. In fact, certain related party transactions can be beneficial to the company and to its shareholders.
It is important, however, to ensure that any related party transactions are beneficial to the company. Accordingly, any related party transaction, regardless of amount, is submitted to the Governance and Compensation Committee in advance for review and approval. All existing related party transactions are reviewed at least annually by the Governance and Compensation Committee. All related party transactions are reviewed by the company’s general counsel to determine the appropriateness of each related party transaction. The Committee may, at its discretion, consult with outside legal counsel.
No related party transaction may be approved by the Committee if such transaction, regardless of its benefit to the company, would violate the company’s written code of business conduct, its written financial integrity and compliance program and/or its statement of corporate governance principles.
Any director or officer with an interest in a related party transaction is expected to recluse himself from considering the matter and voting upon it. In all cases, a director or officer with an interest in a related party transaction may not attempt to influence company personnel in making any decision with respect to the transaction.
Executive Sessions of Independent Directors
The company’s independent directors meet in executive session without management or non-independent directors present. Currently, Gary A. Siconolfi presides at all executive sessions of the independent directors.
Committees of the Board
The Audit Committee
Number of Members: 3
Members:
Thomas F. Bonadio, chairman
E. Philip Saunders
Asher J. Flaum
Number of Meetings in 2010: 4
Functions:
The primary function of the Audit Committee as stated in its charter is to assist the board of directors in fulfilling its oversight responsibilities relating to monitoring the quality, reliability and integrity of the company’s external financial reporting process, the adequacy of the company’s internal controls particularly with respect to the company’s compliance with legal and regulatory requirements and corporate policy, and the independence and performance of the company’s registered public accounting firm who is ultimately accountable and must report directly to the Audit Committee. More specifically, the Audit Committee is directly responsible for:
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the appointment, compensation, retention and oversight of the work of the independent, registered public accounting firm engaged (including the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services;
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the pre-approval of all auditing and legally permissible non-auditing services to be performed by the company’s independent, registered public accounting firm;
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the disclosure by the company of all pre-approved non-audit services in periodic reports filed by the company with the Securities and Exchange Commission;
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the disclosure by the company of the number and name(s) of each Audit Committee member who is an “audit committee financial expert” as defined by the charter in accordance with rules promulgated by the Securities and Exchange Commission;
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the establishment of internal procedures for complaints concerning the company’s accounting, internal accounting controls or auditing matters;
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the review of internal controls, accounting practices, and financial reporting, including the results of the annual audit and the review of the interim financial statements with management and the independent, registered public accounting firm;
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the engagement of independent counsel and advisors as it determines necessary to carry out its duties and the funding thereof.
All members of the Audit Committee are “independent” as independence is defined in Rule 4200(a)(15) of the National Association of Securities Dealers, Inc. listing standards and as defined by Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission. Thomas F. Bonadio has been appointed the Audit Committee’s “financial expert” as defined by the Audit Committee’s charter in accordance with rules promulgated by the Securities and Exchange Commission.
The Nominating Committee
Number of Members: 3
Members:
Gary Siconolfi, chairman
Wesley K. Clark
Asher J. Flaum
Number of Meetings in 2010: 2
Functions:
As specified in its charter, the purpose of the Nominating Committee is to identify, consider and recommend qualified individuals to the Board for election as directors, including the slate of directors that the board proposes for election by shareholders at the annual meeting. The charter sets forth the following policy and procedures with respect to the consideration of any director candidates recommended by security holders:
Shareholders wishing to directly nominate candidates for election to the board of directors at an annual meeting must do so by giving notice in writing to the chairman of the Nominating Committee, Torvec, Inc., Mount Read Industrial Facility, 1999 Mount Read Blvd., Rochester, New York 14615. The notice with respect to any annual meeting must be delivered to the chairman not less than 120 days prior to the first anniversary of the preceding year’s annual meeting. The notice shall set forth (a) the name and address of the shareholder who intends to make the nomination; (b) the name, age, business address and residence address of each nominee; (c) the principal occupation or employment of each nominee; (d) the class and number of shares of Torvec securities which are beneficially owned by each nominee and by the nominating shareholder; (e) any other information concerning the nominee that must be disclosed in nominee and proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act of 1934; and (f) the executed consent of each nominee to serve as a director of Torvec if elected.
Nominations submitted in accordance with the foregoing procedure will be considered and voted upon by the Nominating Committee. Any shareholder nominee recommended by the Committee and proposed by the board for election at the next annual meeting of shareholders shall be included in the company’s proxy statement for such annual meeting.
The Nominating Committee charter also sets forth the qualifications and a specific description of skills that members of the board of the company should possess, regardless of by whom nominated:
In recommending candidates, the Committee shall consider the candidates’ mix of skills, experience with businesses and other organizations of comparable size, reputation, background and time availability (in light of anticipated needs), the interplay of the candidate’s experience with the experience of other board members, the extent to which the candidate would be a desirable addition to the board and any committees of the board and any other factors the Committee deems appropriate. At a minimum, the Committee shall address the following skill sets in evaluating director candidates: accounting or finance, business or management experience, industry knowledge, customer base experience or perspective, international marketing and business experience, strategic planning and leadership experience.
Directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interest of the shareholders. They must also have an inquisitive and objective perspective, practical wisdom and mature judgment. The board should represent diverse experience at policy making levels in business, government, education and technology, and in areas that are relevant to the company’s worldwide activities.
Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively, and should be committed to serve on the board for an extended period of time. Directors should consider offering their resignation in the event that significant change in their personal circumstances, including their health, family responsibilities, or a change in their principal job responsibilities, would preclude them from devoting sufficient time to carrying out their responsibilities effectively.
The board does not believe that arbitrary term limits on director service are appropriate, nor does it believe that directors should expect to be renominated automatically. The contribution of each member as a member of a committee or the board shall be evaluated each year by the Committee before his renomination is recommended to the board.
Each of member of the Nominating Committee is an independent director as defined by Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and as defined by Rule 4200(a)(15) of the National Association of Securities Dealers, Inc.
The Governance and Compensation Committee
Number of Members: 3
Members:
William W. Destler, chairman
Charles N. Mills
John W. Heinricy
Number of Meetings in 2010: 2
Functions:
The purpose of the Governance and Compensation Committee is to regularly monitor the effectiveness of management’s policies and decisions including the execution of the company’s strategies in order to insure that the company represents the shareholders’ interests, including optimizing long term as well as short term financial returns. The Committee develops and recommends to the board corporate governance principles and guidelines and reviews the charter and composition of each committee of the board and makes recommendations to the board for the adoption of or revisions to committee charters, the creation of additional committees or the elimination of committees.
The Committee also:
(1) establishes and reviews the overall executive compensation philosophy and strategy of the company and oversees the company’s various compensation programs and plans.
(2) reviews and makes recommendations to the board of directors on employment and business consultants compensation policies, forms and levels of annual compensation, including specifically, the performance and level of annual compensation of the executive officers and top management personnel of the company;
(3) specifically reviews the annual compensation of the chief executive officer in the light of established goals and objectives and based upon such evaluation, makes specific recommendations to the board regarding such compensation;
(4) reviews and makes recommendations to the board on the operation, performance and administration of the company’s employee benefit plans, including the company’s Business Consultants Stock Plan, the Nonmanagement Directors Plan and Commercializing Event Plan.
All members of the Committee are independent within the meaning of Rule 10A-3(b) (1)(ii) and Rule 4200(a)(15) promulgated by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. respectively.
Compensation Committee Interlocks and Insider Participation
The Governance and Compensation Committee is composed of William W. Destler, Charles N. Mills and John W. Heinricy None of these persons is a current or former employee of the company. John W. Heinricy serves as the president of an automotive consulting firm that provides services to the company.
Shareholder Communications
We encourage all shareholders to communicate with management and with our directors, including our independent directors. Any shareholder wishing to communicate directly with management should e-mail or address regular mail to:
Any shareholder wishing to communicate directly with any of our independent directors should e-mail him as follows:
Thomas F. Bonadio
tbonadio@bonadio.com
Wesley K. Clark
wclark@wesleykclark.com
William W. Destler
wwdpro@rit.edu
Asher J. Flaum
aflaum@flaummgt.com
John W. Heinricy
heinrocket@gmail.com
Charles N. Mills
charlesnmills@gmail.com
E. Philip Saunders
PhilS@saundersmgt.com
Gary A. Siconolfi
gsiconolfi@torvec.com
Regular mail may be addressed to:
Torvec Independent Directors
c/o Torvec, Inc.
Mt. Read Industrial Facility
1999 Mt. Read Blvd.
Rochester, New York 14615
Attention: Robert W. Fishback
Sarbanes-Oxley Compliance
The Sarbanes-Oxley Act of 2002 was enacted on July 30, 2002. The statute addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. On November 4, 2003, the National Association of Securities Dealers, Inc. adopted final NASD Rules addressing corporate governance, director independence and corporate accountability. The NASD has amended these Rules from time to time.
The company’s board of directors has acted to strengthen and improve its already strong corporate governance policies and practices as a result of the Act and Rules. A summary of formal policies the board has adopted to comply with Sarbanes-Oxley, the NASD Rules and to enhance shareholder confidence in the company and its management is found under the caption “Corporate Governance, Code of Ethics, Director Independence.”
A majority of the members of the company’s board of directors and of its executive committee are independent within the meaning of Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and Rule 4200 (a) (15) promulgated by the National Association of Securities Dealers, Inc.
A. Compensation Discussion and Analysis
The company is a development stage company which means that the company has not generated significant revenues on an ongoing basis. Since its inception in September 1996, the company’s principal business activity has consisted of research, development and patenting its automotive technologies worldwide. Since inception through December 31, 2010, the company has relied primarily on monies generated by the sale of its common and Preferred equity to sustain its business. During 2009 and 2010, the company generated limited revenues from the sale of certain of its products. The board of directors has adopted and has consistently followed a policy to expend the proceeds of equity sales and any revenues generated by the sale of its products directly on the costs and expenses associated with the actual development and manufacture of its products (including the development of prototypes, pre-production and production-ready models, and the leasing of research and testing facilities).
1) Current Executive Compensation
Effective October 4, 2010, the company appointed a new chief executive officer and executed a five year employment agreement pursuant to which the company will pay base compensation of $50,000 per annum, which compensation increases to $200,000 per annum on the first day of the calendar year immediately following the calendar year in which the company has adjusted EBITDA of at least $300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all non-cash expenses associated with stock options). Under the agreement, the executive is entitled to a performance bonus based upon financial targets established each year in good faith by the Governance and Compensation Committee and the achievement of individual management objectives established annually by such committee. The executive is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. If the company terminates the executive, removes him as CEO, or a change in control of the company occurs, the executive is entitled to three years’ severance pay, consisting of base pay and any incentive compensation.
On September 30, 2010, the company granted a non-plan stock option for 5,150,000 common shares exercisable for ten years at an exercise price of $0.36 per common share to its newly appointed chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price of the company’s common stock closing at a minimum of $4.00 per share.
Effective October 18, 2010, the company engaged a new chief financial officer under a letter agreement dated October 18, 2010 pursuant to which the company will pay annual compensation equal to $125,000, with increases of $25,000 per annum effective April 1, 2011, October 1, 2011 and January 1, 2012. The executive also was granted a non-plan stock option exercisable for 10 years to acquire 250,000 shares of the company’s common stock at $0.85 per share. The option vests and is exercisable as follows: 62,500 options vest and are immediately exercisable upon grant; 62,500 options vest and become exercisable on each of October 18, 2011, 2012 and 2013. If the company terminates the executive, removes him as CFO, or a change in control of the company occurs, the executive is entitled to 12 months’ severance pay.
Effective January 1, 2004, Keith E. Gleasman and the company reached an understanding pursuant to which Mr. Gleasman agreed to serve the company as its president without payment of compensation. From time to time, the company’s board of directors and Mr. Gleasman revisited this arrangement. Effective January 1, 2008, the board of directors agreed to pay Mr. Gleasman $300,000 per annum based upon the company’s ability to pay such compensation in cash. The company did not have the cash to pay Mr. Gleasman from January 1, 2008 through August 17, 2009, the date when Mr. Gleasman waived all of his right to such compensation, including specifically all compensation which had accrued to the date of waiver. For the year ended December 31, 2010, Mr. Gleasman continued to serve the company as its president and Chief Marketing Officer without compensation.
2) Shareholder Advice on Executive Compensation
The company’s board of directors values and encourages constructive dialogue on executive compensation and other important governance topics with our shareholders, to whom it is ultimately accountable. In connection with the annual meeting of shareholders held on January 27, 2011, the board of directors requested shareholders to provide their input on executive compensation in order to enhance shareholder communication and provide another avenue to obtain information on investor sentiment about the company’s executive compensation philosophy, policies, and procedures. In addition, the board requested shareholder opinion on the frequency (whether one year, two year or three year) during which it should seek shareholder input on the company’s executive compensation. In this regard, the board indicated its preference for seeking shareholder input on executive compensation each year since executive compensation is evaluated, adjusted and approved on an annual basis and the board’s believes that investor sentiment should be a factor taken into consideration in setting annual executive compensation.
In response to these requests, the company’s shareholders supported the company’s executive compensation policies by a large majority of the votes cast and by a similar majority, agreed with the board that shareholder advice on executive compensation should be obtained every year.
3) Long-Term Compensation Philosophy
The core of the board’s long-term compensation philosophy is based upon its realization that the company’s shareholders will be rewarded only by a business transaction involving the commercialization of one or more of the company’s automotive technologies. This means that the company sells, licenses, enters into supply contracts, receives purchase orders and/or enters into any other arrangement for any of the company’s technologies in a manner designed to generate revenue for the company. This can also mean that the company itself is acquired in a business combination such that the company’s shareholders will receive cash, the buyer’s stock or a combination of cash and purchaser stock.
To accomplish this goal, the board adopted a commercializing event plan designed to reward the company’s directors, executive officers and specified management and engineering personnel for the successful completion of one or more commercializing events. Under the plan, business consultants’ shares will be issued to participants in the plan if and only if a revenue-producing business transaction is consummated.
Consequently, from time to time, the company adopted various incentive plans used to grant equity awards to members of the board of directors, senior management, engineering and business consultants designed to optimize the profitability and growth of the company through annual and long-term incentives that are consistent with the company’s goals and that link the personal interests of the participants to those of the company’s shareholders. Specifically, on December 1, 1997, the board adopted the 1998 Stock Option Plan; on October 19, 2004, the board adopted the Nonmanagement Directors’ Plan; and on October 13, 2006, the board adopted the Commercializing Event Plan.
The 1998 Stock Option Plan terminated by its own terms as to the grant of future stock options under the Plan on May 27, 2008. The board terminated both the Nonmanagement Directors’ Plan and the Commercializing Event Plan on November 3, 2010. In terminating these plans, the board reaffirmed its belief that it order for the company to continue to attract and retain outstanding individuals, it must continue to provide equity incentives through the granting of stock options to directors, senior management, employees and consultants. Consequently, on November 3, 2010, the board adopted the 2011 Stock Option Plan (“2011 Plan”) as an important part of the board’s strategy for recruiting and retaining outstanding individuals in the service of the company and for aligning their interests with the interests of the company’s shareholders.
4) The 2011 Stock Option Plan
The following description sets forth the material terms and conditions of the 2011 Plan:
a) Types of Options
A stock option is the right to purchase one or more shares of the company’s common stock at a specified price, commonly called the “exercise price”, as determined by the Governance and Compensation Committee. Under the 2011 Plan, there are two types of options which may be granted: “non-qualified” options and “incentive” stock options.
Non-qualified options may be granted to the company’s officers, directors, employees and outside consultants. Incentive options may be granted only to the company’s employees, including officers and directors who are also employees. In the case of non-qualified options, the exercise price may be less than the fair market value of the company’s stock on the date of grant. In the case of incentive options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive option granted to an employee who owns more than 10% of the company’s stock may not be greater than five years.
b) Corporate Governance Provisions
The 2011 Plan contains provisions intended to make sure that grants under the 2011 Plan comply with established principles of corporate governance. These provisions include:
i) No Stock Option Repricings. - Stock options may not be repriced absent shareholder approval. This provision applies to both direct repricings-lowering the exercise price of an outstanding stock option-and indirect repricings, that is, canceling an outstanding stock option and granting a replacement stock option with a lower exercise price;
ii) No Evergreen Provision. - The 2011 Plan does not contain an “evergreen provision”-there is no automatic provision to replenish the aggregate number of shares of common stock authorized for issuance under the 2011 Plan;
iii) No Unlimited Recycling.-The 2011 Plan permits recycling (i.e. adding back shares to the number of shares available for future grants) only with respect to shares underlying options that have expired or terminated without issuance. Specifically, recycling is not permitted with respect to common stock transferred as consideration for the purchase of shares underlying an option, common stock retained to satisfy tax withholding obligations, or common stock repurchased by the company in open market transactions
c) Administration
The 2011 Plan will be administered by the Governance and Compensation Committee which is composed entirely of independent directors. Subject to the terms of the 2011 Plan, the Committee is responsible for making recommendations to the board of directors as to option grant recipients; number of options granted; exercise price of options; duration; vesting; as well as all other terms and conditions of all such option grants. The Committee has full authority to interpret the 2011 Plan and to adopt rules, forms, instruments, option agreements and guidelines for administering the 2011 Plan.
d) Eligibility
Options under the 2011 Plan may be granted to members of the board of directors, including retired members of the board, senior executives, employees and business advisers and consultants to the company. In the case of incentive options, options may only be granted to persons who are employees of the company at the time of grant. The Governance and Compensation Committee will initially recommend to the board who should receive options and the terms and conditions pertaining to each option grant. The final determination will be made by the board of directors.
e) Authorized Number of Shares Reserved Under the 2011 Plan
As of the date of this Proxy Statement, the board has not granted any options under the 2011 Plan. In adopting the 2011 Plan on November 3, 2010, the board reserved 3,000,000 shares of common stock to be issued upon the exercise of options granted under the 2011 Plan after its approval by the shareholders.
f) Adjustments
In the event of a change in the number of outstanding shares of common stock of the company due to a stock-split, stock dividend, recapitalization, merger, consolidation, spin-off, or reorganization, the Governance and Compensation Committee shall take certain actions to prevent the dilution or enlargement of benefits under the 2011 Plan, including adjusting the number of shares of common stock that may be issued under the 2011 Plan and adjusting the number of shares or exercise price of shares subject to outstanding options.
g) Change in Control
In the event of a change in control of the company, as defined in the 2011 Plan, unless otherwise specified in the stock option agreement, all outstanding options will become immediately exercisable in full during their remaining term.
h) Transferability of Options
Except as otherwise provided in the stock option agreement, options may not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution. Except as otherwise provided in the stock option agreement, during the life of the optionee, options are exercisable only by the optionee or the optionee’s legal representative.
i) Amendment and Termination
The Governance and Compensation Committee may recommend to the board amendments to the 2011 Plan or that the 2011 Plan be terminated at any time, except that no amendment or 2011 Plan termination may adversely affect in any material way the rights of an optionee with respect to an outstanding option grant without the optionee’s written consent.
j) Federal Income Tax Consequences
The following summary is based on existing U.S. federal income tax laws as of December 31, 2010 and is not intended as, and should not be relied upon, as tax guidance for optionees under the 2011 Plan. Changes to such tax laws could alter the income tax consequences described below.
Non-Qualified Options
The grant of a non-qualified stock option at fair market value on the grant date will not be a taxable event for the optionee or for the company. Upon exercising a non-qualified option, an optionee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a non-qualified stock option, the optionee will have taxable gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares (generally, the amount paid by the optionee for the shares plus the amount treated as ordinary income at the time the option was exercised). Subject to the restrictions of section 162(m) of the Internal Revenue Code, the company will be entitled to a business expense deduction in the same amount and generally at the same time as the optionee recognizes ordinary income.
The 2011 Plan permits non-qualified options to be granted at exercise prices which are less than the fair market value of the company’s common stock on the date of grant. Pursuant to the provisions of section 409A of the Internal Revenue Code, if the exercise price of a stock option is less than the fair market value of the company’s common stock on the date of grant (‘discounted option”), then upon the vesting of the option, the optionee will recognize ordinary income in an amount equal to the difference between the exercise price of the discounted option and the fair market value of the company’s common stock on the date of grant. In addition, the optionee is subject to an excise tax equal to 20% of the amount of ordinary income recognized. Section 409A contains a number of “safe-harbor” provisions which eliminate the section’s adverse tax consequences.
Incentive Options
An incentive stock option must set forth an exercise price at least equal to the underlying common stock’s fair market value on the date of grant. The grant of an incentive stock option will not be a taxable event for the optionee or for the company. An optionee will not recognize taxable income upon exercise of an incentive stock option (except that the alternative minimum tax may apply), and any gain realized upon a disposition of common stock acquired pursuant to the exercise of an incentive stock option will be taxed as long-term capital gain if the optionee holds the shares of common stock for at least two years from the date of grant and one year from the date of exercise(“the holding period requirement”). The company will not be entitled to any business expense deduction with respect to the exercise of an incentive stock option, except as discussed below. For the exercise of an incentive option to qualify for this favorable income tax treatment, the optionee must exercise the option while the optionee is an employee of the company, or if the optionee has terminated employment, no later than three months after the participant terminated employment.
If the holding period requirement is not met, the optionee will recognize ordinary income upon the disposition of the common stock in an amount generally equal to the excess of the fair market value of the common stock on the date of exercise over the exercise price (but not in excess of the gain realized on the sale). The balance of the realized gain, if any, will be capital gain, long or short term depending upon the holding period of the stock. In these circumstances, the company will be allowed a business expense deduction when and to the extent the optionee recognizes ordinary income, subject to the restrictions of section 162(m) of the Internal Revenue Code.
5) Stand-Alone Director Options
On November 3, 2010, the board granted options for 250,000 shares of the company’s common stock to each of 4 non-officer individuals who had been appointed to the board of directors on that date or, in one case, within a year prior to November 3rd. The board also granted options for 250,000 common shares each in the case of an individual who had been invited to join the board but who, as of November 3rd, had not reached a decision to accept the invitation. Each of these options are conditioned upon and become effective only upon the individual being elected as a director at the annual meeting of shareholders on January 27, 2011. Each of these options vest and become exercisable at an exercise price of $.90 per share on each of the four anniversaries of the effective date (i.e. January 27, 2011) at the rate of 62,500 options each year. The option agreements also provide that the vested portion of each option must be exercised by the optionee within two and one-half months after the calendar year such portion vests or such portion is forfeited. The exercise price of $.90 per share represents the closing price of the company’s common stock on the date(s) the invitation to join the board was first issued to the new directors.
At the same meeting, the board granted options for 50,000 shares of the company’s common stock to each of three retiring directors. These options are exercisable for a one year period at, in the case of two grants, an exercise price of $.85 per share and the other grant at an exercise price of $1.07 per share. The exercise price per share represents the closing price of the company’s common stock on the date each director retired from the board.
Effective January 28, 2011, the board granted an option to a new director for 250,000 common shares at the exercise price of $.90 per share with vesting terms identical with the vesting terms incorporated in the board’s November 3, 2010 new director grants. In addition, the board granted the same individual a ten year option for 25,000 common shares exercisable at $.90 per common share.
SUMMARY COMPENSATION TABLE FOR YEARS
ENDED DECEMBER 31, 2008, 2009 and 2010
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2010
DIRECTOR COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2010
Discussion of Director Compensation
1) Participation in the Nonmanagement Directors’ Plan
On October 31, 2007, the Board of Directors approved a Nonmanagement Directors’ Plan by which, effective for the quarter commencing July 1, 2007 and for all subsequent quarters commencing thereafter, all individuals who were directors of the company but who were not officers, employees or consultants, were paid $26,460 per annum for board and committee service. In addition, the chairman of the audit committee would receive an additional $13,125 per annum and the chairman of the nominating committee would receive an additional $5,355 per annum.
In recognition of the circumstance that the chairman of the board, chairman of the governance and compensation committee and the chairman of then-existing executive committee is the same individual, the value of such service performed by such individual and the fact that the time expended by such individual in service to the company in each of these positions had expanded greatly as the result of the Sarbanes-Oxley Act, the Board approved an increase in the fee payable to such person to $125,000 per annum. Effective for the year commencing January 1, 2010, this fee for the chairman of the board was increased to $175,000 per annum.
Daniel R. Bickel, Herbert H. Dobbs, Asher J. Flaum, Joseph B. Rizzo and Gary A. Siconolfi were each eligible to participate in the Nonmanagement Directors’ Plan during 2010. Keith E. Gleasman and James Y. Gleasman were not eligible to participate since they were executive officers of the company. Dr. William W. Destler elected not to participate in the Nonmanagement Directors’ Plan and effective March 29, 2010 Dr. Dobbs elected to withdraw from participation.
On November 3, 2010, the board of directors terminated the Nonmanagement Directors’ Plan.
2) Participation in Commercializing Event Plan
On October 31, 2007, the board of directors the “2007 Commercializing Event” Plan (“2007 Event Plan”). The 2007 Event Plan provided that upon the happening of any “commercializing event”, each of the directors and executive officers of the company as well as certain other management personnel shared equally in 6% of the gross dollars generated by the commercializing event. On February 3, 2010, each director received 2,673 common shares valued at $8,019 as a result of a commercializing event pursuant to the 2007 Event Plan.
On November 3, 2010, the board of directors terminated the 2007 Event Plan.
3) Participation in 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’s 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 Stock Option Plan provided 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 required 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 Stock Option 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 Stock Option Plan permitted the exercise price to be less than the fair market value of the common stock on the date the option is granted and permitted Board discretion with respect to the establishment of the terms of such options. Unless the Board otherwise determined, in the event that the option holder ceases to be an employee of the company, such option holder’s non-qualified options immediately terminate.
As of December 31, 2010, current and former officers and directors held 391,848 common stock options, exercisable until 2013 at $5.00 per share.
The Stock Option Plan terminated on May 27, 2008. Consequently, no new options will be granted under the Stock Option Plan although outstanding options remain exercisable in accordance with their terms.
4) Participation in 2011 Stock Option Plan
All directors are eligible to participate in the company’s 2011 Stock Option Plan which was adopted by the board of directors on November 3, 2010 and approved by the company’s shareholders at the annual meeting held on January 27, 2011.
Effective January 28, 2011, the board granted an option under the 2011 Stock Option Plan for 250,000 common shares to a new director. The option is exercisable in quarterly installments of 62,500 shares on each of the four anniversary dates of the grant at $.90 per common share. Each installment must be exercised within two and one-half months after the taxable year in which the installment vests. The board also granted this same director a separate option under the 2011 Stock Option Plan for 25,000 common shares exercisable for ten years at $.90 per common share.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Security Ownership - Common Stock
The following table presents information concerning the beneficial ownership of the shares of our common stock as of December 31, 2010 (with respect to Wesley K. Clark, January 28, 2011) by:
•
each person who is known by us to beneficially own more than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
The number and percentage of shares beneficially owned are based on 45,685,678 shares of common stock outstanding as of December 31, 2010. Beneficial ownership is determined under rules promulgated by the Securities and Exchange Commission. Shares of common stock subject to options that are exercisable on December 31, 2010 or exercisable within 60 days thereafter are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of calculating the number of shares beneficially owned and the percentage ownership of that person, but are not deemed to be outstanding for the purpose of calculating the percentage ownership of any other person. Except as indicated in the footnotes to this table, these persons have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
Security Ownership - Preferred Stock
No director, executive officer and/or 5% shareholder owns any of our Class A Preferred or Class B Preferred.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Transactions
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 involved exceeds $120,000 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.
Director Independence
See Item 10 of this annual report for a discussion regarding the independence of our directors under standards set forth by the Securities and Exchange Commission and by the National Association of Securities Dealers, Inc.
Item 14.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
Audit Fees
EisnerAmper LLP (formerly Eisner LLP) served as the company’s independent registered public accounting firm for the years ended December 31, 2010 and 2009. The aggregate expense incurred by the company for professional services rendered by EisnerAmper LLP (formerly Eisner LLP) for the audit of the company’s annual consolidated financial statements included in the company’s annual report on Form 10-K, for the review of the company’s consolidated financial statements included in the company’s quarterly reports on Form 10-Q, and for services normally provided in connection with statutory and regulatory filings or engagements was approximately $130,000 for the year ended December 31, 2010 and approximately $134,000 for the year ended December 31, 2009.
Audit-Related Fees
The company incurred a total of $3,000 in other fees with EisnerAmper LLP (formerly Eisner LLP) for the year ended December 31, 2010, compared with $0 in 2009. The $3,000 expense incurred in 2010 was related to fees for a Form S-8 registration filing.
Tax Fees
The company did not engage EisnerAmper LLP (formerly Eisner LLP) for any tax services for the years ended December 31, 2010 and 2009.
All Other Fees
The Company did not engage EisnerAmper LLP (formerly Eisner LLP) for any other services for the years ended December 31, 2010 and 2009.
Total Fees
The company incurred total fees of approximately $133,000 for the year ended December 31, 2010 with its principal accountant, EisnerAmper LLP (formerly Eisner LLP), compared to approximately $134,000 in 2009. The shareholders approved the Audit Committee’s appointment of EisnerAmper LLP as the company’s independent registered public accounting firm for the year ended December 31, 2010 at the annual meeting of shareholders held on January 27, 2011.
Pre-Approval of Policies and Procedures
Article II of our Audit Committee Charter, as amended, specifically provides that the Audit Committee must pre-approve all auditing and legally permissible non-auditing services to be performed by the company’s registered public accounting firm. In accordance with such mandate, at a meeting held on January 15, 2003, the Audit Committee established a set of procedures governing the pre-approval process. Under the procedure, for each fiscal year, the Committee first shall determine the general nature and scope of the audit, audit-related, tax and other legally permissible non-audit services to be performed by the company’s registered accounting firm. Prior to the performance of any services, the Committee shall require such firm to submit to the Committee one or more engagement letter(s) delineating specific audit, audit-related, tax and other legally permissible non-audit services to be rendered (together with a schedule of fees with respect to each of such services). Upon receipt of such engagement letter(s), the Committee shall review and approve such engagement letter(s) in advance of the performance of any such services, including the specific advance approval of fees in connection with each of such services. Upon approval and execution of each of such engagement letter(s) by the Committee, the registered public accounting firm shall perform such pre-approved services in accordance with the terms and conditions of each engagement letter and shall not engage in any other services unless each of said services, if any, shall have been specifically approved (including the specific approval of all fees associated therewith) by the Audit Committee in advance of the rendering any such service.
Audit Committee Approval
The Audit Committee pre-approved 100% of the services rendered by EisnerAmper LLP in accordance with such Committee’s Pre-Approval Policies and Procedures.
Item 15.
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following Exhibits, as applicable, are attached to this Annual Report (Form 10-K). 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
(3)
Articles of Incorporation, By-laws
(4)
Instruments defining the rights of holders including indentures
None.
(9)
Voting Trust Agreement
None.
(11)
Statement re computation of per share earnings (loss)
Not applicable.
(14)
Code of Ethics
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.
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.
Dated: March 29, 2011
By:
/s/ Richard A. Kaplan
Richard A. Kaplan,
Chief Executive Officer and Director
Dated: March 29, 2011
By:
/s/ Robert W. Fishback
Robert W. Fishback,
Chief Financial Officer and Secretary
Dated: March 29, 2011
By:
/s/ Keith E. Gleasman
Keith E. Gleasman,
President and Director
Dated: March 29, 2011
By:
/s/ Thomas F. Bonadio
Thomas F. Bonadio
Director
Dated: March 29, 2011
By:
/s/ Wesley K. Clark
Wesley K. Clark
Director
Dated: March 29, 2011
By:
/s/ William W. Destler
William W. Destler
Director
Dated: March 29, 2011
By:
/s/ Asher J. Flaum
Asher J. Flaum,
Director
Dated: March 29, 2011
By:
/s/ John W. Heinricy
John W. Heinricy
Director
Dated: March 29, 2011
By:
/s/ Charles N. Mills
Charles N. Mills
Director
Dated: March 29, 2011
By:
/s/ E. Philip Saunders
E. Philip Saunders
Director
Dated: March 29, 2011
By:
/s/ Gary A. Siconolfi
Gary A. Siconolfi
Director
EXHIBIT INDEX