FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, C.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of AUGUST, 1997
TURBODYNE TECHNOLOGIES INC.
(Translation of registrant's name into English)
SUITE 510, 1090 WEST PENDER STREET, VANCOUVER, BC, CANADA, V6E 2N7
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
------- ------
[Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
Yes No X
-------- --------
[If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82
--------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 1, 1997
Date /S/ LEON NOWEK
----------------------------
Signature
LEON E. NOWEK
-----------------------------
Name
CHIEF FINANCIAL OFFICER
-----------------------------
Title
*Print the name and title of the signing officer under his signature
<PAGE>
THIS PROSPECTUS CONSTITUTES A PUBLIC OFFERING OF THESE SECURITIES ONLY IN
THOSE JURISDICTIONS WHERE THEY MAY BE LAWFULLY OFFERED FOR SALE AND THEREIN
ONLY BY PERSONS PERMITTED TO SELL SUCH SECURITIES. NO SECURITIES
COMMISSION OR SIMILAR AUTHORITY IN CANADA HAS IN ANY WAY PASSED UPON THE
MERITS OF THE SECURITIES OFFERED HEREUNDER AND ANY REPRESENTATION TO THE
CONTRARY IS AN OFFENCE. THESE SECURITIES HAVE NOT AND WILL NOT BE
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THESE SECURITIES IN THE UNITED STATES.
NEW ISSUE DATE: JUNE 24,1997
TURBODYNE TECHNOLOGIES INC.
4,125,000 COMMON SHARES AND 4,125,000 SHARE PURCHASE WARRANTS
ISSUABLE ON THE EXERCISE OF 4,125,000 SERIES A SPECIAL WARRANTS
This prospectus qualifies the distribution (the "Series A Special Warrant
Offering") in the Provinces of British Columbia, Manitoba and Ontario of
4,125,000 common shares (the "Series A Common Shares") of Turbodyne
Technologies Inc. (the "Company") and 4,125,000 Series A share purchase
warrants (the"Series A Ordinary Warrants") of the Company to be issued
without any additional payment upon the exercise or deemed exercise of
4,125,000 outstanding Series A special warrants (the "Series A Special
Warrants"). Each Series A Ordinary Warrant will entitle the holder to
purchase one common share of the Company at a price of $5.50 per common
share on or before 4:00 p.m. (Vancouver time) on July 2, 1997.
The Series A Special Warrants were issued pursuant to a special warrant
indenture made as of June 14, 1996 between the Company and Montreal Trust
Company of Canada (the "Trustee"). Each Series A Special Warrant is
exchangeable upon exercise, or deemed exercise, for a unit consisting of
one Series A Common Share and one Series A Ordinary Warrant. The Series A
Special Warrants are exercisable at any time until July 2, 1997 and will be
deemed to be exercised on the fifth business day following the date on
which a receipt for a final prospectus is issued by the last of the
securities commissions in British Columbia, Ontario and Manitoba. Any
Series A Special Warrants which have not been exercised by such date will
be deemed to have been exercised immediately prior thereto without any
further action on the holder's part. The Series A Special Warrants were
sold to investors on July 2, 1996. Yorkton Securities Inc., Sprott
Securities Limited and Wellington West Capital Inc. acted as agents (the
"Series A Agents") with respect to the distribution of the Series A Special
Warrants.
<TABLE>
<CAPTION>
Price Series A Agents' Net Proceeds to the
Commission Company(3)
------------ --------------- ------------------
<S> <C> <C> <C>
Per Series "A" Special $ 5.00(1) See Note 2 $ 5.00
Warrant
Total Series "A" Special $ 20,625,000 See Note 2 $ 18,750,000
Warrant Offering
</TABLE>
(1) The price of the Series A Special Warrants was determined by
negotiation between the Company and the Series A Agents and was
announced on November 1, 1995. Pricing was based on the discount
permitted by the Rules and Policies of the VSE from the market price
of the Company's common shares at the time the private placement was
publicly announced. The closing price of the common shares of the
Company on November 1, 1995 was $5.25 per share.
(2) As compensation, the Company agreed to pay the Series A Agents a
commission of 10% of the gross proceeds of the private placement of
Series A Special Warrants. The commission was payable at the option
of the Series A Agents by the issue of Series A Special Warrants at a
deemed price of $5.00 per Series A Special Warrant, by cash payment or
by a combination of Series A Special Warrants and cash. Each Series A
Agent elected to receive the full amount of commission in Series A
Special Warrants, being a total of
<PAGE>
375,000 Series A Special Warrants. This prospectus qualifies the
distribution in the Provinces of British Columbia, Manitoba and Ontario
of the 375,000 Series A Common Shares and 375,000 Series A Ordinary
Warrants to be issued upon exercise of the 375,000 Series A Special
Warrants issued to the Series A Agents.
(3) Before deducting the costs of the Series A Special Warrant Offering,
including the preparation of this prospectus, estimated to be
$300,000. No additional fee will be paid to Series A Agents upon
exercise of the Series A Special Warrants.
All of the proceeds from the sale of the Series A Special Warrants were
paid to the Company on the completion of the acquisition by the Company of
Pacific Baja Light Metals Holding Inc ("Pacific Baja") on September 5, 1996
pursuant to the acquisition agreement dated March 15, 1996 among Lennart
Renberg, Michael Joyce, Sadayappa Durairaj Family Trust, Naresh Saxena and
Mugerdish Balabanian (the "Principal Shareholders"), the Company and
Pacific Baja (the "Acquisition Agreement").
The issue price of the Series A Special Warrants exceeds the net tangible
book value per common share as at December 31, 1996 after giving effect to
the Series A Special Warrant Offering, but prior to giving effect to the
exercise of the Series A Ordinary Warrants by $4.53 representing dilution
to subscribers of 90.6%.
THERE IS NO MARKET THROUGH WHICH THE SERIES A ORDINARY WARRANTS CAN BE
SOLD. INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SUBJECT TO CERTAIN
RISK FACTORS. REFER TO "RISK FACTORS".
The common shares of the Company are listed and posted for trading on the
Vancouver Stock Exchange (the "VSE") and the NASDAQ Small Cap Market. The
closing price of the common shares on the VSE on September 5, 1996 was
$9.90 per share. The closing price of the common shares on the VSE on June
20, 1997 was $6.45 per share.
<PAGE>
TABLE OF CONTENTS
-----------------
GLOSSARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
EXCHANGE RATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . v
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
BUSINESS AND PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS . . . . . . . . . .18
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . .26
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . .31
TRADING IN COMMON SHARES . . . . . . . . . . . . . . . . . . . . . . . .31
SHARE AND LOAN CAPITAL STRUCTURE. . . . . . . . . . . . . . . . . . . . .32
PRIOR SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
DIVIDEND RECORD AND POLICY. . . . . . . . . . . . . . . . . . . . . . . .37
DIRECTORS AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . .37
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . .40
STOCK OPTIONS AND OTHER RIGHTS TO PURCHASE SECURITIES . . . . . . . . . .43
SECURITIES HELD IN ESCROW OR POOL . . . . . . . . . . . . . . . . . . . .45
PRINCIPAL SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . .47
DILUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS. . . . . . . .48
PROMOTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
MATERIAL CONTRACTS AND DOCUMENTS. . . . . . . . . . . . . . . . . . . . .49
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
AUDITORS, REGISTRAR, TRANSFER AGENT AND WARRANT AGENT . . . . . . . . . .51
STATUTORY RIGHTS OF RESCISSION AND WITHDRAWAL . . . . . . . . . . . . . .51
CONTRACTUAL RIGHT OF ACTION FOR RESCISSION. . . . . . . . . . . . . . . .52
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND OF PACIFIC BAJA LIGHT METALS HOLDING INC. . . . . . . . . . . . . . . I
CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II
<PAGE>
GLOSSARY
--------
"Company" Turbodyne Technologies Inc.
"Turbodyne Systems" Turbodyne Systems, Inc.
"Optima Wheel" Optima Wheel, Inc.
"Baja Pacific" Baja Pacific Light Metals, Inc.
"Baja Oriente" Baja Oriente S.A. de C.V.
"Pacific Baja" Pacific Baja Light Metal Holdings Inc.
"Pacific Baja Light Metals" Pacific Baja Light Metals Corp.
"VSE" Vancouver Stock Exchange
Page i
<PAGE>
PROSPECTUS SUMMARY
------------------
THE FOLLOWING IS A SUMMARY ONLY AND IS QUALIFIED BY, AND MUST BE READ IN
CONJUNCTION WITH, THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
Turbodyne Technologies Inc. (the "Company") is a British Columbia company
engaged in the following businesses through its U.S. subsidiaries:
(A) the manufacture of aluminum cast automotive products, including
engine components and speciality wheels (the "Pacific Baja
Business"); and
(B) the development of products to enhance performance and reduce
emissions of internal combustion engines (the "Turbodyne
Business").
THE OFFERING
THE ISSUE:
4,125,000 Series A Common Shares and 4,125,000 Series A Ordinary
Warrants of the Company to be issued without any additional
payment upon the exercise or deemed exercise of 4,125,000 Series
A Special Warrants on the basis of one Series A Common Share and
one Series A Ordinary Warrant per each Series A Special Warrant
exercised. Each Series A Ordinary Warrant shall entitle the
holder to purchase one common share of the Company at a price of
$5.50 per Common Share on or before 4:00 p.m. (Vancouver time) on
July 2, 1997.
SERIES A SPECIAL WARRANTS:
3,750,000 Series A Special Warrants were issued on July 2, 1996
to certain investors on a private placement basis at $5.00 each
for gross proceeds of $18,750,000. Yorkton Securities Inc.,
Sprott Securities Limited and Wellington West Capital Inc. acted
as agents (the "Series A Agents") with respect to the
distribution. The Series A Agents were paid a commission of 10%
of the sale proceeds from the Series A Special Warrants.
Pursuant to the agency agreement between the Company and the
Series A Agents, the Series A Agents elected to require the
Company to pay the commission by the issue to the Series A Agents
of 375,000 Series A Special Warrants. No additional commissions
or fees are payable to the Series A Agents. The distribution of
the Series A Common Shares and Series A Ordinary Warrants
issuable on exercise of the Series A Special Warrants is
qualified by this prospectus.
Each Series A Special Warrant is exchangeable upon exercise, or
deemed exercise, for a unit consisting of one Series A Common
Share and one Series A Ordinary Warrant without payment of any
additional consideration. The Series A Special Warrants are
exercisable at the option of the holder at any time until 4:00
p.m. (Vancouver time) on July 2, 1997 and will be deemed to be
exercised on the fifth business day following the date of issue
of a receipt for this prospectus by the last of the securities
regulatory authorities in the Provinces of British Columbia,
Manitoba and Ontario. Any Series A Special Warrants which have
not been exercised by 4:00 p.m. (Vancouver Time) on July 2, 1997
will be deemed to have been exercised immediately prior thereto
without any further action on the holder's part.
IF THE SERIES A SPECIAL WARRANTS ARE EXERCISED PRIOR TO THE
ISSUANCE OF A RECEIPT FOR THIS PROSPECTUS BY EACH OF THE
SECURITIES COMMISSIONS IN BRITISH COLUMBIA, MANITOBA AND ONTARIO,
THE SERIES A COMMON SHARES, THE SERIES A ORDINARY WARRANTS AND
THE COMMON SHARES ISSUABLE UPON THE EXERCISE OF THE SERIES A
ORDINARY WARRANTS WILL BE SUBJECT TO A HOLD PERIOD AND OTHER
RESTRICTIONS ON TRANSFER UNDER APPLICABLE SECURITIES LEGISLATION
UNTIL AT LEAST JULY 2, 1997.
Page ii
<PAGE>
USE OF PROCEEDS:
The Company derived gross proceeds of $18,750,000 from the sale of the
Series A Special Warrants. In addition, the Company derived gross proceeds
of $4,500,000 from the sale of 500,000 Series C Special Warrants on
December 6, 1996 (See "Management Discussion and Analysis of Financial
Condition and Operating Results"). These proceeds have been applied up to
March 31, 1997 as follows:
SPECIAL WARRANTS
SERIES A SERIES C
-------- ---------
$ $
GROSS PROCEEDS:
Series A Special Warrants 18,750,000
Series C Special Warrants 4,500,000
---------- ---------
18,750,000 4,500,000
========== =========
SPECIAL WARRANTS
SERIES A SERIES C
------- ---------
$ $
USE OF PROCEEDS
Share issue costs (751,000) (37,000)
Agent's commissions 0 (450,000)
Cash consideration paid on (16,360,000) 0
Acquisition of Pacific Baja
Product research and development (1,289,000) (1,604,000)
General and administration (350,000) (865,000)
Inventory acquisition ----- (1,544,000)
----------- ------------
(18,750,000) (4,500,000)
=========== ===========
The working capital of the Company as at December 31, 1996 on a
consolidated basis was $9,964,000. Of this working capital, a total of
$5,368,000 was attributable to the Pacific Baja Business. The Company does
not anticipate advancing additional funds to the Pacific Baja Business in
1997. As at December 31, 1996, working capital of $4,393,000 was available
for funding of the Turbodyne Business and the balance of working capital of
$203,000 was attributable to the Company. The working capital available
for Turbodyne Systems of $4,393,000 was inclusive of $3,999,000 of cash, of
which $2,760,000 was derived from the Series C Offering. The Company
intends to apply this working capital of the Turbodyne Business as follows:
Use of Working Capital Amount
--------------------- ------
1. General and Administrative $ 1,098,000
2. Research, Development and Inventory Acquisition $ 3,295,000
- -- ----------------------------------------------- -----------
Total Available Working Capital as at December 31, 1996: $ 4,393,000
===========
For the period from January 1, 1997 to March 31, 1997, the Company
advanced approximately $3,585,000 of the available working capital to
Turbodyne Systems.
Page iii
<PAGE>
The working capital of the Company on a consolidated basis as at March 31,
1997 is equal to $10,899,000. Of this working capital a total of
$7,029,000 was attributable to the Pacific Baja Business. The balance of
$3,870,000 of working capital is available for funding of the Turbodyne
Business.
BUSINESS OF THE COMPANY:
1. Pacific Baja Business:
The Company carries on its Pacific Baja Business through its
wholly owned Wyoming subsidiary, Pacific Baja Light Metals Corp.
("Pacific Baja Light Metals") which was formed by the merger of
Pacific Baja and Pacific Baja Acquisition Corp., a wholly owned
subsidiary of the Company, on September 5, 1996. Pacific Baja
Light Metals operates its business through two California
subsidiaries, Baja Pacific Light Metals, Inc. and Optima Wheel,
Inc., and a Mexican subsidiary, Baja Oriente S.A. de C.V. Pacific
Baja Light Metals is a manufacturer of permanent mould and sand
cast aluminium products, both machined and raw, for automotive and
industrial applications. Pacific Baja Light Metals produces
custom wheels for the automotive aftermarket through its Optima
Wheel operating unit. Pacific Baja Light Metals also manufactures
cast aluminum manifolds, compressor housings and pedestals
manufactured on a contract basis for original equipment
manufacturers and short production runs of cast aluminium
products, including prototypes, for a variety of industrial
customers. Pacific Baja Light Metals' manufacturing facilities
are located in La Mirada, California and Ensenada, Mexico.
2. TURBODYNE BUSINESS:
------------------
The Company carries on its Turbodyne Business through its wholly
owned Nevada subsidiary, Turbodyne Systems Inc. ("Turbodyne
Systems"). Turbodyne Systems is the owner of a technology known
as the Turbodyne Technology which is designed to optimize air flow
to both diesel and gasoline engines resulting in enhanced
performance and more efficient fuel consumption. Turbodyne
Systems has not achieved commercial production or commenced sales
of its products to date. Turbodyne Systems has commenced
preliminary production of its 1500 Turbopac Product. Turbodyne
Systems has not achieved commercial production or commercial sales
of the products to date. Turbodyne Systems hopes to finalize the
development of other products soon.
LISTING: All presently outstanding common shares of the Company are
listed on the VSE and on the NASDAQ Small Cap Market.
RISK FACTORS:
1. GENERAL RISKS
-------------
The securities offered hereby are speculative investments.
Investment in the securities qualified hereby is subject to
certain risks and should only be made by persons who can afford
the total loss of their investment. There is no established
market for the Series A Ordinary Warrants. See "Plan of
Distribution" and "Risk Factors".
2. RISKS ASSOCIATED WITH THE PACIFIC BAJA BUSINESS
-----------------------------------------------
Although Pacific Baja Light Metals has been profitable in recent
years there is no assurance that changes in product mix or
competitive factors will not affect future profitability of
Pacific Baja Light Metals. Pacific Baja Light Metals competes in
markets with much larger competitors who have greater financial
and other resources. The great majority of Pacific Baja Light
Metals' sales come from a small number of customers. Loss of
major contracts or deterioration of relationships with major
customers could adversely affect Pacific Baja Light Metals' sales
and profitability.
Page iv
<PAGE>
Pacific Baja Light Metals is also subject to risks associated with
operating a plant in Mexico including risks that trade
arrangements between the United States and Mexico may change
adversely and economic risks, particularly risks associated with
changes in the exchange rates between the Mexican Peso and the US
Dollar, all of which may adversely affect Pacific Baja Light
Metals' operating costs. See "Risk Factors".
3. RISKS ASSOCIATED WITH THE TURBODYNE BUSINESS
--------------------------------------------
The Company's Turbodyne Business is subject to risks associated
with developing companies including initial losses, uncertainty of
revenue, markets and profitability, and the necessity of
additional funding. The Company's Turbodyne products are not in
the production stage, and unexpected problems and changes to
specifications frequently arise in the development and production
of new products. There is a risk that bringing the product to
commercial production, for any number of reasons, will be
unexpectedly delayed or halted. There can be no guarantee that
outside suppliers for manufacturing components will be able to
meet all the demands as required. There is no assurance of the
ultimate cost of completing the development, demonstration and
validation of the Company's Turbodyne products or of the cost to
produce the products. The Company has not discovered products
directly competitive with its own products, however, indirectly
competitive products are currently sold in the marketplace and
other products or technologies may be developed that may make the
Company's Turbodyne products less competitive or even obsolete
over time. Market acceptance cannot be quantified until
completion of ongoing evaluations. There is no certainty of the
ultimate selling price of the Company's Turbodyne products. There
is no guarantee that pricing levels will be accepted by the
marketplace or that the cost benefit to manufacturers will be
sufficient to encourage mass purchase of the products. Turbodyne
Systems is dependent on the personal efforts of its management
team and in particular, Mr. Edward Halimi. The loss of Mr.
Halimi's services could adversely affect development of the
business of Turbodyne Systems. Neither product liability nor
keyman life insurance is in place to date. The Company's
Turbodyne Business may be affected by other factors beyond its
control such as a diminished demand for turbocharged engines.
See"Risk Factors".
EXCHANGE RATE INFORMATION
- -------------------------
In this prospectus, unless otherwise indicated, all dollar amounts
including financial information for the Company are stated in Canadian
currency, the unit of measure of the Company's financial statements. The
following table sets forth the rates of exchange for the U.S. dollar in
terms of Canadian currency in each of the last four calendar years, as
reported by the Bank of Canada.
1996(1) 1995 1994 1993
------- ---- ---- -----
High: 1.3865 $1.3820 $1.4090 $1.3484
Low: 1.3515 $1.3577 $1.3085 $1.2400
Average: 1.3679 1.3725 1.3659 $1.2898
(1) To December 31, 1996
On May 30, 1997, the noon rate of exchange of the Bank of Canada was $1.00
(U.S.) which equals $1.4035(Cdn.).
Page v
<PAGE>
THE COMPANY
-----------
Turbodyne Technologies Inc. (the "Company") was incorporated under the
COMPANY ACT (British Columbia) on May 18, 1983, under the name "Dundee
Resources Corp.", by registration of its Memorandum and Articles. The name
of the Company was changed from "Dundee Resources Corp." to "Clear View
Ventures Inc." on January 20, 1993 and from "Clear View Ventures Inc." to
"Turbodyne" Technologies Inc." on April 28, 1994. The Company has
continued from British Columbia to the Canadian federal jurisdiction under
the CANADA BUSINESS CORPORATIONS ACT. The continuation was effective
December 3, 1996.
The address of the head office of the Company is Suite 510, 1090 West
Pender Street, Vancouver, British Columbia, V6E 2N7. The address of the
registered and records office of the Company is 12th Floor, 1190 Hornby
Street, Vancouver, British Columbia, V6Z 2L3.
The Company has two wholly owned subsidiaries, Turbodyne Systems
("Turbodyne Systems") and Pacific Baja Light Metals Corp. ("Pacific Baja
Light Metals").
Turbodyne Systems was incorporated pursuant to the laws of the State of
Nevada, USA, on May 21, 1993. The address of the head office of Turbodyne
Systems is 6155 Carpinteria Avenue, Carpinteria, California, 93013.
Pacific Baja Light Metals was incorporated as "Pacific Baja Acquisition
Corp." pursuant to the laws of the State of Wyoming, USA, on April 15,
1996. Pacific Baja Acquisition Corp. merged with Pacific Baja Light
Metals Holding, Inc. ("Pacific Baja") on September 5, 1996 to form Pacific
Baja Light Metals. The address of the head office of Pacific Baja Light
Metals is 15300 Valley View, La Mirada, California. Pacific Baja Light
Metals has two wholly owned California subsidiaries, Optima Wheel Inc.
("Optima Wheel") and Baja Pacific Light Metals Inc. ("Baja Pacific"), and a
wholly owned Mexican subsidiary, Baja Oriente S.A. de C.V. ("Baja
Oriente").
The Company's corporate structure is as follows:
TURBODYNE TECHNOLOGIES INC.
--------------------------
100% 100%
TURBODYNE SYSTEMS INC. PACIFIC BAJA LIGHT METALS CORP.
---------------------- -------------------------------
- 100% of Optima Wheel.
- 100% of Baja Pacific.
- 100% of Baja Oriente
During the period from its incorporation on May 18, 1983 until July of
1993, when it commenced funding the development of the Turbodyne
Technology, the Company was engaged in the business of mineral exploration.
The Company divested itself of any mineral properties prior to the
acquisition of the Turbodyne Technology and no longer holds any interest in
any mineral properties and does not carry on mineral exploration.
<PAGE>
BUSINESS AND PROPERTY
---------------------
The Company is engaged in the following businesses through its U.S.
subsidiaries:
(A) the manufacture of automotive products, including engine
components and speciality wheels (the "Pacific Baja Business");
and
(B) the development of products to enhance performance and reduce
emissions of internal combustion engines (the "Turbodyne
Business").
The Pacific Baja Business is carried on through Pacific Baja Light Metals,
the Company's Wyoming subsidiary, from its head office in La Mirada,
California. The Turbodyne Business is carried on through Turbodyne
Systems, the Company's Nevada subsidiary, from its head office in
Carpinteria, California. The Pacific Baja Business and the Turbodyne
Business are summarized below.
A. PACIFIC BAJA BUSINESS
---------------------
Pacific Baja Light Metals is an established manufacturer of aluminum cast
products primarily for the automotive industry. Pacific Baja Light Metals
and its Mexican subsidiary, Baja Oriente, operate a 95,000 square foot
manufacturing facility in La Mirada, California and a 120,000 square foot
manufacturing facility in Ensenada, Mexico. Pacific Baja Light Metals'
product line includes turbocharger housings. Pacific Baja Light Metals
will also manufacture on a contract basis, the housings for the Turbodyne
System, Turbopac and Dynacharger products manufactured by Turbodyne
Systems.
1. ACQUISITION OF PACIFIC BAJA LIGHT METALS BY THE COMPANY
-------------------------------------------------------
The Company acquired Pacific Baja on September 5, 1996 pursuant to the
Acquisition Agreement. The Company and Pacific Baja have agreed that the
acquisition is effective July 2, 1996. The Company acquired all of the
issued and outstanding shares of Pacific Baja for total consideration paid
on closing consisting of a cash payment of US $12,000,670 and the issue
of 3,076,923 common shares of the Company. The purchase price of Pacific
Baja was established by arms length negotiation between the Company and the
shareholders of Pacific Baja.
The Company has accounted for its acquisition of Pacific Baja in its
audited financial statements for the year ending December 31, 1996 at a
deemed purchase price of $31,705,000. The deemed purchase price of
$31,705,000 is comprised of $16,320,000 in cash paid by the Company on
closing and a deemed value of $15,385,000 attributed to the 3,076,923
common shares issued by the Company on closing. The deemed value is based
on $5.00 per share issued. The deemed value of $5.00 was attributed to the
shares issued based on the following factors:
1. The issue price of the Series A Special Warrants used to finance the
acquisition of Pacific Baja was $5.00 per Special Warrant;
2. The shares issued to the shareholders of Pacific Baja are subject to a
minimum one-year hold period commencing September 5, 1996;
3. The price of the Company's shares upon announcement of the acquisition
of Pacific Baja was in the range of $5.00 per share.
Page 2
<PAGE>
The principal reason for the acquisition was to form an alliance with a
manufacturer with a proven track record of volume manufacturing of quality
auto parts, particularly in the turbocharger field. The Turbodyne
products developed by Turbodyne Systems are comprised of precision
automotive parts, including cast aluminum components manufactured by
Pacific Baja. The acquisition was viewed by management of the Company as a
key factor in establishing the credibility of the Company with potential
Original Equipment Manufacturers ("OEM's") as a quality manufacturer of
automotive parts. In addition, the acquisition has brought to the Company
personnel experienced in manufacturing and who have contacts with
turbocharger manufacturers and the potential customers for the Turbodyne
products.
2. PRODUCTS
--------
EXISTING PRODUCTS
Pacific Baja Light Metals manufactures and markets permanent mold and sand
aluminum castings, both machined and raw, for the automotive aftermarket as
well as automotive and industrial original equipment manufactures
("OEM's"). The Company has three operating units: Optima Wheel; Baja
Oriente; and Baja Pacific.
Pacific Baja Light Metals' present product lines include the following:
CUSTOM WHEELS. Pacific Baja Light Metals, through its Optima Wheel
operating unit, manufactures and markets styled aluminum road wheels
for the automotive aftermarket. Products consist of one-piece aluminum
wheels for passenger cars, light trucks, and motorcycles, as well as
two-piece (steel outer, aluminum center) wheels for the passenger car
replacement wheel market. Sixty percent (60%) of Pacific Baja Light
Metals' custom wheel sales are private label brands produced for
other wheel manufacturers and distributors with the remaining forty
percent (40%) marketed under the "Optima Wheels" brandname to
approximately 25 wholesale distributors located throughout the United
States. As Optima Wheel is not a dominant aftermarket supplier of
aluminum custom wheels, there is a risk that revenues from these
products will decline. Management intends to minimize the risk of
revenue loss by focusing on increasing revenues in the non-wheel,
industrial products areas.
NON-WHEEL ALUMINUM COMPONENTS. Pacific Baja Light Metals, through
Baja Oriente's facility located in Ensenada, Baja California, Mexico,
casts and machines permanent mold aluminum parts for the Garrett
division of AlliedSignal Automotive, Inc. ("AlliedSignal"), which
manufactures turbo-charging systems for Class 8 trucks. Pacific Baja
Light Metals is the sole source to AlliedSignal for air-to-air heat
exchange manifolds and is one of two aluminum foundries manufacturing
compressor housings, pedestals, and other aluminum components for
AlliedSignal. Pacific Baja Light Metals manufactures a ready-to-
assemble product for AlliedSignal that is shipped directly to its
plant in Mexicali, Mexico. The supply agreement between AlliedSignal
and Pacific Baja Light Metals commenced on January 1, 1994 for an
initial three year term and has been renewed for an additional three
year term commencing on January 1, 1997 and expiring December 31,
1999. Pacific Baja Light Metals, through its Baja Pacific operating
unit, manufactures short-run sand and permanent mold aluminum castings
for automotive, aerospace, and other industrial applications.
Products manufactured include turbine fan blades for maritime vessels,
rotors for fan blades, and short production runs for existing
customers.
NEW PRODUCT DEVELOPMENT
Pacific Baja Light Metals seeks to develop new products to respond to
customer requests, to react to stylistic trends in the marketplace, and to
diversify its product lines. Pacific Baja's engineering team has on-site
design and development capabilities that enable it to design products
utilizing computer aided design and computer aided manufacturing (CAD/CAM)
drawings. Pacific Baja Light Metals' new product development activities
among its various product lines are as follows:
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CUSTOM WHEELS. Optima Wheels does not design new and unproven custom
aluminum road wheels. Instead, Pacific Baja Light Metals solicits
market information from its customers and attends auto shows to
determine which styles are popular, then using its CAD/CAM system,
makes new molds and manufactures those wheels. Pacific Baja Light
Metals will typically manufacture approximately ten new wheel products
annually.
NON-WHEEL ALUMINUM COMPONENTS. Over the past few years, Management
has implemented a strategy of altering the product mix of Pacific Baja
Light Metals from being predominantly an aluminum wheel manufacturer
to a full-service aluminum foundry with a wheel capability. As a
result of its efforts to implement this shift in strategy, Pacific
Baja Light Metals has identified several new product opportunities.
New products developed by Pacific Baja Light Metals start as short-run
prototypes at the La Mirada facility. Once these products become accepted
by the OEM/customer, production is commenced at the higher volume foundry
in Ensenada, Mexico. There can be no assurance that any of these product
opportunities will be developed to production by Pacific Baja Light Metals
or, even if developed, that they will ultimately be profitable for Pacific
Baja Light Metals.
4. MANUFACTURING
-------------
Pacific Baja Light Metals manufactures products such as manifolds,
compressor housings, and pedestals at its Ensenada foundry, performs its
short-run foundry and prototype production in La Mirada, and manufactures
aluminum cast custom wheels at both locations. The La Mirada and Ensenada
foundries offer full-service capabilities to Pacific Baja's customers, with
manufacturing activities ranging from casting to heat treating, powder
painting (Ensenada only), finished machining, and packaging.
ENSENADA FOUNDRY
Baja Oriente, as a subsidiary of Pacific Baja Light Metals, operates an
aluminum permanent mold foundry at Ensenada, Baja California, Mexico, which
occupies approximately 120,000 square feet. The Mexican manufacturing
facility is located in leased premises at #700 Miramar y Calle, 18
Ensenada, Baja California, Mexico. The facility is leased from Baja
Pacific Properties for a ten year term expiring September 5, 2005. The
rent payable is $16,850 (U.S.) per month, inclusive of taxes, rent and
operating expenses, and escalates at a rate of 5% per annum during each
subsequent year of the lease. The Ensenada facility serves as Pacific Baja
Light Metals' primary long run, high volume casting operation, where custom
wheels are cast, heat treated, painted, machined to a semi-finished state,
and shipped to Pacific Baja Light Metals's La Mirada facility. The facility
also houses Pacific Baja Light Metals's Baja Pacific operating unit,
manufacturing aluminium components under contract for AlliedSignal, where
manifolds are cast, machined, and shipped directly to AlliedSignal's
assembly plant in Mexicali, Mexico and compressor housings and pedestals
are cast, machined, and shipped to their Torrance, California facility. As
of May 31, 1997 Pacific Baja Light Metals employed approximately 325
persons at its Ensenada foundry with two production shifts and one
maintenance shift operating five and one half days a week.
LA MIRADA FOUNDRY
Located southeast of Los Angeles, California, Pacific Baja Light Metals's
La Mirada sand and permanent mold foundry occupies approximately 95,000
square feet. The La Mirada Foundry is located in leased premises at 15300
Valley View Avenue, La Mirada, California 90638. The facility is leased
from New England Mutual Life Insurance Company for a seventy-five month
term expiring March 31, 2001. The rent payable by Pacific Baja Light
Metals is $24,269.50 (U.S.) per month, inclusive of taxes, rent and
operating expenses. In addition, Pacific Baja Light Metals's corporate
offices and distributing facility are located in the La Mirada building.
At this facility, Pacific Baja Light Metals receives semi-finished custom
wheels, shipped from its Ensenada foundry, where they are finished,
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packaged, and prepared for shipment to its private label customers and
Optima Wheel distributors. The facility also facilitates short-run and
prototype aluminum casting production for customers and serves as Pacific
Baja Light Metals's 'feeder' operation for longer run production in
Ensenada, Mexico. As of May 31, 1997, Pacific Baja Light Metals employed
approximately 100 persons at its La Mirada facility working two shifts,
five days a week.
The only manufacturing activity that is outsourced by Pacific Baja Light
Metals is chrome plating and polishing of Pacific Baja Light Metals' custom
wheels due to the presence of hazardous materials associated with this
process and the resulting risk of environmental litigation.
5. SUPPLIERS
---------
The raw materials used in Pacific Baja Light Metals' production of cast
aluminum custom wheels for the automotive aftermarket and cast aluminum
parts for automotive and industrial OEM's consist primarily of aluminum and
sand. Aluminum ingots are purchased from aluminum suppliers such as TST
Inc., Vista Corporation, and Noranda Company and are melted, poured into
sand and/or permanent mold castings, heat treated, machined, and finished
into the final product. Aluminum purchases are based predominantly on
price and terms, typically net 60 days, and Pacific Baja Light Metals does
not expect any disruption in its ability to obtain aluminum in the near
future. At present, there are no significant concentrations of aluminum
suppliers at Pacific Baja Light Metals.
Sand is used in manufacturing the cores that are placed within permanent
molds prior to pouring aluminum, as well as in sand aluminum castings
produced by Pacific Baja Light Metals'. Pacific Baja Light Metals
purchases approximately 90% of its sand from one supplier, however, sand is
an abundant material and alternative sources of this raw material are
available in the market.
Pacific Baja Light Metals' two-piece composite steel wheels are supplied by
American Wheel, a division of Titan Wheel Corporation, and are fitted with
aluminum centers manufactured at Pacific Baja Light Metals' facility in
Ensenada, Mexico. Two-piece composite custom wheels comprise approximately
15% of total custom wheel revenues.
Pacific Baja Light Metals' facility in Ensenada, Mexico is supplied with
raw materials purchased in, and delivered from, the United States, which
serves to insulate Pacific Baja Light Metals from adverse foreign exchange
fluctuations.
5. MANAGEMENT
----------
Key personnel of Pacific Baja Light Metals are summarized as follows:
MICHAEL J. JOYCE, PRESIDENT
Mr. Joyce, 52, graduated from Kent State University with a BA in Physics
and from Ohio State University with an MBA and has over 25 years of
manufacturing and management experience. He has 15 years of experience in
the aluminum casting and machining industry as a supplier to both
automotive OEM's and aftermarket companies. Prior to joining Pacific Baja
Light Metals in 1990, Mr. Joyce was Group President of a major automotive
supplier for 13 years.
MR. LENNART RENBERG, EXCLUSIVE CONSULTANT
Mr. Renberg, 52, possesses over 30 years experience in both the 'tool and
die' industry as well as the aluminum foundry industry. Mr. Renberg owned
and operated a tool and die business and an aluminum foundry in the Los
Angeles area. Mr. Renberg's services are provided pursuant to a consulting
agreement between Lykar Specialties Inc. and Pacific Baja Light Metals
whereby Lykar Specialties Inc. has agreed to provide the consultant
services of Mr. Renberg to Pacific Baja Light Metals. The consultant
agreement obligates Lykar Specialties Inc. to provide the full-time
services of Mr.
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<PAGE>
Renberg on a day to day basis in connection with management of the
operations of Pacific Baja Light Metals.
MR. THOMAS ZASTERA, VICE PRESIDENT OF FINANCE
Mr. Zastera, 58, earned a BS degree in Business Administration from the
University of Nebraska. Mr. Zastera worked as controller for several
foundry related companies, including 15 years with Western Wheel
Corporation as National Sales Manager from 1979 to 1990. He joined Pacific
Baja Light Metals in 1990.
The involvement of the Company's directors and officers in Pacific Baja
Light Metals in the day to day operations of the Pacific Baja Business is
limited to fundamental decisions affecting the Pacific Baja Business and to
discussions as to the production by Pacific Baja Light Metals of parts for
the Turbodyne products. Management of Pacific Baja Light Metals reports to
the Company as to the financial and operational conditions of the Pacific
Baja Business on a monthly basis and as otherwise required. Day to day
management of the Pacific Baja Business is the responsibility of management
of Pacific Baja Light Metals.
6. BAJA ORIENTE
------------
Baja Oriente is incorporated under Mexican law and is 100% beneficially
owned by Pacific Baja Light Metals Corp. Ownership of Baja Oriente by its
U.S. parent is permitted under an exemption to Mexican foreign investment
law for "maquiladora" ventures. Baja Oriente operates as a maquiladora
pursuant to a maquiladora license granted by the Mexican Ministry of
Commerce. As a maquiladora, Baja Oriente is able to import raw material
from the U.S. and export final products to Pacific Baja Light Metals in the
U.S. without being subject to import and export duties levied under Mexican
Federal Customs law. Baja Oriente purchases raw materials and receives
payment for products in U.S. currency and is accordingly insulated from
fluctuations in the exchange rate of the Mexican peso in respect of its
purchases of raw materials and sales revenues.
7. COMPETITION
-----------
Pacific Baja Light Metals faces significant competition in both the cast
aluminum wheels automotive aftermarket industry and cast aluminum product
industry. In general, the barriers to entry to the aluminum foundry
business are not prohibitive as capital costs are less than those
associated with steel mills. Foundry operations incorporate little high
technology and environmental issues are reduced since foundries use natural
gas versus coal. The competition in each industry segment is summarized as
follows:
(a) CAST ALUMINUM WHEELS FOR AUTOMOTIVE AFTERMARKET
-----------------------------------------------
Pacific Baja Light Metals faces competition from approximately 85
wheel companies within the United States, of which approximately one-
third have manufacturing capability. Key competitors include American
Racing Equipment, Progressive Wheel, Prima Wheel, American Eagle
Wheel, Ultra Wheel, KMC Wheel and MHT Wheel. Sales from each of these
competitors are estimated by management to be in the range of
$30,000,000 U.S. to $100,000,000 U.S. Sales of aftermarket wheels are
limited to the North American automotive market.
(b) CAST ALUMINUM PRODUCTS FOR OEM'S
--------------------------------
Pacific Baja Light Metals faces competition in the cast aluminum
product manufacturing industry from a large number of competitors,
including CMI, Stahl Foudry, Consolidated Metal and Citation
Industries. Sales of each of these competitors are estimated by
management to be in the range of $250,000,000 U.S. to $800,000,000
U.S.
Page 6
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Barriers to entry for the cast aluminum product industry for
automotive and industrial OEM's are significantly higher than the
barriers of entry for cast aluminum wheels as OEM's impose high
standards of quality control and low production tolerances on
suppliers.
The sales of the cast aluminum products to OEM's by Pacific Baja Light
Metals is restricted to OEM's operating within the United States.
B. TURBODYNE BUSINESS
------------------
Turbodyne Systems is in the business of developing products to enhance
performance and reduce emissions of internal combustion engines. The
products developed by Turbodyne Systems employ a technology known as the
Turbodyne Technology which is designed to optimize air flow to internal
combustion engines resulting in efficient fuel combustion in both diesel
and gasoline engines. The Company acquired the Turbodyne Technology from
Edward M. Halimi, a director of the Company, pursuant to an agreement dated
July 15, 1993 and amended by agreements dated October 1, 1993 and December
31, 1993. See "Interest of Management and Others in Material
Transactions".
1. PRODUCTS
--------
Turbodyne Systems has developed three principal products employing the
Turbodyne Technology more particularly described as follows:
(i) TURBODYNE SYSTEM
----------------
The Turbodyne System is an air flow enhancement product designed to
improve the performance of internal combustion engines by
increasing air flow to the cylinders. As a result of increased air
flow, more efficient combustion takes place within the cylinders
resulting in increased power for the same amount of fuel and
reduction of engine emissions.
In order for combustion to take place in an internal combustion
engine, both oxygen and fuel must be present within the combustion
chamber (cylinder). Typically, the vacuum created by the action of
the piston causes air to be sucked into the engine through the
carburator. The fuel is supplied to the cylinder under pressure
through the action of the fuel pump and fuel injectors. While
engineers attempt to design engines so that optimal combustion
occurs, the variation in the air fuel ratio which occurs as a
result of the difficulty in controlling air intake pressure results
in intervals of inefficient combustion, especially during rapid
acceleration or deceleration and on cold start up. These
variations in air fuel ratios result in lack of or inconsistent
engine power, fuel wastage and emissions. The two principal
attempts to solve this problem are superchargers and turbochargers.
A supercharger is essentially an air compressor which is driven by
the engine and supplies positive air intake pressure to the
cylinder through the carburator. Although superchargers solve most
of the air fuel ratio problems they have become unpopular because
they are expensive, rob engine power and increase fuel consumption.
Turbochargers perform the same function as superchargers by
delivering positive air intake pressure through the carburetor to
the cylinders. Unlike superchargers, turbochargers are driven
through the pressure of exhaust gases exiting the engine. Although
turbochargers solve many of the power and fuel consumption problems
of superchargers they are designed to work efficiently at
relatively high speeds. Until the pressure of exhaust gases spins
the turbine blades of the turbocharger above relatively high
speeds, there is insufficient air flow to the engine causing the
engine to burn a fuel rich mixture. This results in the phenomenon
known as turbo lag. Turbo lag occurs during the period from
initial acceleration to the time when the turbine blades spin at
full boost (30,000 + RPM). The inefficient operation of the engine
during the turbo lag period presents safety problems due to lurches
in the acceleration phase of the
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driving cycle. The inefficient operation of the engine during the
turbo lag period increases fuel consumption and maintenance
problems and causes an increase in emissions due to the incorrect
air fuel ratio. Although turbochargers solve air fuel ratio
problems during peak operating periods, they actually exacerbate
the problems during the turbo lag period.
The Turbodyne System is an add on device for turbocharged engines
which uses an electric motor to drive the turbine and provide
positive intake pressure through the carburetor during the turbo
lag period.
The Turbodyne System increases the speed of the turbocharger when
exhaust gases are insufficient to maintain appropriate turbocharger
speed. The Turbodyne System incorporates brushless electric motors
and clutch designs that alleviate wear problems. The brushless
motor and an electronic controller convert the automotive D.C.
power into a three phase power supply and feed-back circuit. The
motor is integrated as part of an air-duct which is attached to the
air intake port of a turbocharger. Rotational power is transmitted
through an automatic Bendix type full disconnecting clutch with a
conical clutch interface. When the electric motor is engaged and
the shaft rotates, the clutch assembly engages the motor with the
turbocharger rotor. Upon acceleration of the clutch and rotor
assembly, radial load is centered using a clutch piloting bore.
The motor is activated by remote sensors that monitor the demand
for power and turbo boost.
The earliest models of the Turbodyne System were developed
primarily for the purpose of overcoming turbo lag, modulating power
delivery and avoiding sudden power surges which may cause accidents
in turbocharged vehicles. The ability of the Turbodyne System to
reduce emissions was discovered during the development of the
Turbodyne System when it was observed that vehicles equipped with
the system did not generate customary smoke during acceleration.
The absence of smoke results from the fact that turbocharger
equipped engines are calibrated to deliver fuel to the engine based
on optimal air flow that occurs when the turbocharger is running at
30,000+ rpms. During the turbo-lag period the fuel to air ratio is
too rich resulting in inefficient combustion, excessive smoke,
particulate matter emissions and wasted fuel. Initial independent
laboratory results to date indicate that the Turbodyne System
reduces fuel consumption and emissions by providing improved air
fuel ratio for combustion during acceleration. More efficient
combustion also results in better power delivery and elimination of
turbolag.
Management of Turbodyne Systems views the Turbodyne System as a
prototype product which was fundamental in establishing the
technical viability of the Turbodyne products. The technology
employed in the Turbodyne System has been incorporated into the
Turbopac and Dynacharger products subsequently developed by
Turbodyne Systems, as discussed below. The Company is of the view
that the Turbopac and Dynacharger products have superceded the
Turbodyne System for a majority of applications in the automotive
industry. There may still be limited applications within the
automotive industry and general applications outside the automotive
industry where the Turbodyne System may be commercially employed.
(ii) TURBOPAC
--------
Turbopac applies similar technology as the Turbodyne System to make
combustion more efficient in both turbocharged and non-turbocharged
gasoline and diesel engines by optimizing the air to fuel ratio.
The Turbopac products are designed to provide an air boost into the
engine in-take manifold during the acceleration phase. Testing to
date indicates that Turbopac extends the benefits of the Turbodyne
System of increased engine power, reduced fuel consumption and
reduced emissions to non-turbocharged vehicles. Turbopac employs a
high speed, electronically controlled brushless electric motor
which runs continuously once the engine has started, providing
positive air intake
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pressure to optimize the air to fuel ratio. Turbopac essentially
serves as an electronic supercharger. Turbopac can also be
installed on turbocharger equipped engines. Unlike the Turbodyne
System, Turbopac can be installed without the need for precision
machining of a turbocharger. The most significant aspect of
Turbopac is that it allows Turbodyne Systems to target much larger
international markets because of its ability to be installed on
non-turbocharged engines.
Turbodyne Systems plans to design and produce four separate
Turbopac models which may be installed on both turbocharged and
non-turbocharged engines:
(1) the 1200 Turbopac model for carburetted two-cycle gasoline
engines installed in motorcycles, water-ski jets and
snowmobiles;
(2) the 1500 Turbopac model for cars, performance vehicles and
light trucks with either fuel injected or carburetted
gasoline engines and with displacements up to 3.5 litres;
(3) the 2200 Turbopac model for cars, performance vehicles and
light trucks with either fuel injected or carburetted
engines with displacements greater than 3.5 litres;
(4) the 2500 Turbopac model for heavy duty trucks and buses for
either fuel injected or carburetted diesel engines.
Turbodyne Systems has completed development of the 1500 Turbopac
model and has commenced production. Development of the 1200
Turbopac, 2200 Turbopac and the 2500 Turbopac models is in
progress. Production of the 1200 Turbopac model and the 2200
Turbopac model is anticipated by the end of September, 1997 and
production of the 2500 Turbopac model is anticipated by the end of
1997.
(iii) DYNACHARGER
-----------
The Dynacharger is Turbodyne Systems's newest product. It is
essentially an electric motor built into a turbocharger.
Dynacharger was developed primarily as a result of feedback from
evaluations by potential customers who indicated that they would
prefer to see the Turbodyne Technology built into a turbocharger
rather than provided by an additional external component. Its
principal advantages over the Turbodyne System attached to a
turbocharger are in cost, weight and space economies. Operation of
the Dynacharger is similar to the Turbodyne System, except that the
electric motor is part of the internal design of the turbocharger
and does not require a clutch to attach it to the turbocharger's
rotating assembly. The Dynacharger can be interchangeable with an
original equipment turbocharger, thus making it appropriate for
sale to both the original equipment manufacturer's market and the
after market. Turbochargers incorporating the Dynacharger products
can be installed on both fuel injected and naturally aspirated (ie.
carburetted) diesel and gasoline engines.
Turbodyne Systems is also developing a product described as a
Motor-Assisted Variable Geometry Turbocharging System
("Motoassist") which is essentially a Dynacharger with a valve
system to concentrate exhaust gases resulting in faster turbine
acceleration.
(iv) LABORATORY TESTING
------------------
The Turbopac products have been tested by the following independent
laboratories: Golden West College of 15744 Golden West St.,
Huntington Beach, California and Southwest Research Institute of
62220 Culebra Road, San Antonio, Texas. Various Turbodyne products
have been tested by the
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following OEM's: Caterpillar, Navistar, Volkswagen, KKK, SAAB,
Cummins Engines, Viessmann, MAN. The 2500 Turbopac product is
currently undergoing a testing and evaluation process towards a
U.S. Environmental Protection Agency certification for the U.S.
Urban Bus Retrofit Program.
2. STATUS OF PRODUCT DEVELOPMENT
-----------------------------
The Turbodyne System, 1200 Turbopac, 2200 Turbopac, 2500 Turbopac and
Dynacharger products are not yet being commercially produced. Turbodyne
Systems has commenced preliminary production of the 1500 Turbopac products
at its facility in Carpinteria, California.
Turbopac specification and design for the 1500 Turbopac products is
essentially complete. Turbodyne Systems's engineering staff are in the
process of finalizing parts and vendor lists and coordinating delivery
schedules for all components. Milestones yet to be completed prior to
being ready for commercial production and sale of product include:
completion of production equipment procurement and tooling; establishment
of manufacturing and testing standards/procedures; establishment of the
production/assembly lines; creation of installation procedures and related
documentation; and completion of environmental and other performance tests
on the final production units. There is no assurance that commercial
production will be achieved in the near future or at all or that the
products will be commercially successful. In addition, no commercial order
is currently in place and there is no assurance that the Company will ever
receive such an order.
Turbodyne Systems is close to completion of specification and design for
its Dynacharger product. As many of the components and vendors for the
Dynacharger are consistent with Turbopac, Turbodyne Systems's management
expects to ready the first Dynacharger model for production at the end of
1997, subject to a commercial order being in place. No assurance can be
given that this product will be produced and if produced that it will be
commercially successful.
Turbodyne Systems's production plan calls for the electronic components of
Turbopac and Dynacharger to be assembled and tested at Turbodyne Systems's
facility in Carpinteria. Final assembly and testing of the products will
be done at the Baja facility in La Mirada. Turbodyne Systems has adequate
space at its Carpinteria facility for these purposes and Pacific Baja Light
Metals intends to commit approximately 30,000 square feet at its La Mirada
plant for final assembly and inventory of Turbodyne products. Turbodyne
Systems expects to concentrate its production and sales efforts on the
Turbopac and Dynacharger products, although limited sales and production of
the Turbodyne System are expected for customers interested in an add on
product for existing turbocharged vehicles.
Turbodyne Systems's limited production to date has been for the purposes of
meeting requirements of potential customers and testing agencies
undertaking evaluations of Turbodyne Systems' products. Evaluations
underway are primarily for the purpose of allowing potential customers to
determine the suitability and performance of the products for their
applications with the goal of obtaining purchase orders. To date,
Turbodyne Systems has had no significant sales of its products.
Turbodyne Systems has spent approximately $8,705,000 developing the
Turbodyne System, Turbopac and Dynacharger products to December 31, 1996.
Management anticipates that an additional $1,500,000 of additional research
and development expense will be required in order to bring all Turbopac
models and the Dynacharger product into full scale commercial production.
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4. MARKETING OF THE TURBODYNE PRODUCTS
-----------------------------------
MARKET SEGMENTS
- ---------------
(a) TURBODYNE SYSTEM
----------------
The Company is not currently marketing the Turbodyne System as it considers
that the Turbopac and Dynacharger products, which incorporate the
technology developed in the Turbodyne System, have superceded the Turbodyne
System and are more marketable products.
(b) TURBOPAC PRODUCTS
-----------------
The Company is marketing its Turbopac products in both the OEM (Original
Equipment Manufacturer) sector and the aftermarket installation sector.
The Company is pursuing evaluations of all of its Turbopac products with
OEM's, including Navistar, AlliedSignal, Volkswagen and MANN, in an attempt
to convince these manufacturers as to the performance and marketability of
the Turbopac products. The evaluation programs being conducted by OEM's
are long-term evaluation programs and accordingly the Company does not
anticipate a contract with an OEM for its Turbopac products until 1998 at
the earliest. The Company hopes to supply OEM's with the Turbopac products
under joint venture manufacturing projects to be entered into with the
OEM's who may agree to purchase the Turbopac products.
The Company is marketing the 1500 Turbopac product in the aftermarket
automobile markets pursuant to the Grand Distribution Agreement, discussed
below. Grand has yet to achieve significant sales of the 1500 Turbopac
product due partially to delays in full scale production of the product by
Turbodyne Systems. The Company is now finalizing warranties and
installation and operation manuals and anticipates commencing full scale
production shortly. Grand will market the 1500 Turbopac product under the
Grand Agreement. While Grand has yet to commence full scale marketing,
Grand has received a strong response to test advertising conducted for the
1500 Turbopac product.
The Company intends to market the 2500 Turbopac product for the heavy duty
truck and bus aftermarket installation market. The 2500 Turbopac product
is being tested at Southwest Research Laboratories for compliance with the
pollution standards imposed by the U.S. Environmental Protection Agency
for the U.S. Urban Bus Retrofit program. This testing is in the final
stages. If the 2500 Turbopac product receives certification, the Company
will commence marketing activities. Production of the 2500 Turbopac
product will be undertaken by the Company alone or under a joint venture
program with an existing retrofitter in the truck and bus industry.
(c) DYNACHARGER PRODUCTS
--------------------
The Company will pursue evaluation programs with OEM's upon the
finalization of the development of the Dynacharger product. As with the
Turbopac products, the Company has the objective of securing OEM supply
contracts under which the Dynacharger products will be incorporated
directly into OEM products. The Company anticipates that it will commence
these marketing efforts in early 1998.
(d) GEOGRAPHICAL MARKET
-------------------
The Company's geographical market for OEM manufacturers is defined by the
location of the OEM's. Initially, the Company has targeted OEM's in the
United States and Europe who are involved in automobile and truck and
related parts manufacture. The ultimate consumers of these products will
be worldwide.
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The Company's geographical market for aftermarket products is initially the
United States through the Grand Distribution Agreement and the U.S. urban
bus retrofit market.
ADDITIONAL MARKETING EFFORTS
- ----------------------------
In addition to these marketing efforts, the Company is pursuing a marketing
plan which has been designed to quickly establish a wide distribution of
the Turbodyne System and includes sales materials such as brochures,
advertisements and mail-outs. Trade shows will be attended three or four
times per year. Sales will be solicited through the assistance of
marketing departments of target customers which will be followed by
comprehensive technical presentations and demonstrations to senior
management. These efforts will be directed to the marketing departments on
the basis that the product will contribute to vehicle sales through
performance enhancement and the reduction of emissions. In this way, both
the OEM and after-market levels can be pursued. No assurance can be given
that the Company's marketing plan will be successful.
BURSON - MARSTELLAR
- -------------------
The Company has entered into an agreement dated April 4, 1997, with Burson
- - Marstellar whereby Burson - Marstellar will provide marketing,
communication and media relations services in connection with the marketing
of the Company's Turbodyne products in consideration for $10,000 U.S. per
month plus expenses. The agreement may be terminated by either party on
giving 60 days written notice. The marketing services provided are
strictly in connection with the Company's products and do not extend to
investor relations activities.
COMPETITION
- -----------
While the Company believes there is no direct competition to the Turbodyne
Technology, competition to the Turbodyne Technology exists from competing
technologies marketed by companies who may have more resources and who may
be better financed than the Company. In addition, there is no assurance
that new competitors will not attempt to enter the industry.
Competition for the Turbopac products will come from improvements and
refinement to conventional internal combustion engines which may be able to
increase fuel efficiency and decrease emissions. The cost of incorporating
these improvements and refinements into existing internal combustion
engines may be less than the cost of installing a Turbopac product. In
addition, improvements and modifications to existing technology may be more
readily accepted by OEM's and consumers.
Competition for the Dynacharger products will exist from improvements and
refinements to existing turbocharger technology. Turbochargers
incorporating improvements and refinements to existing turbocharger
technology may be cheaper than turbochargers incorporating the Dynacharger
products. In addition, OEM's and consumers may be more willing to accept
improvements and refinements to existing turbocharger technology than
turbochargers installed with the Dynacharger product.
Both the Turbopac and Dynacharger products may incur competition from
existing products manufactured by OEM's who are not prepared to incorporate
Turbodyne products into their final products. Due to the size and
financial resources of OEM's and the relatively small number of OEM's in
the automotive market, this unwillingness could be a significant barrier of
entry to the Company.
IMPACT OF GOVERNMENT REGULATION
- -------------------------------
The imposition of increased pollution standards by government regulatory
agencies may have an impact on the demand for the Turbodyne product. As
pollution standards increase, the automotive market may increase its demand
for technical improvements to existing internal combustion engine
technology in order to meet these standards. Demand
Page 12
<PAGE>
for the Turbodyne products will increase with increased pollution standards
if the Company is able to convince OEM's and consumers of the performance
of the Turbodyne products.
In the U.S., emissions standards for diesel engines are imposed by the US
Environmental Protection Agency (the "US EPA) and by other regulatory
agencies such as the California Air Resources Board ("CARB"). Testing
indicates that vehicles equipped with Turbodyne Products meet the US EPA's
emissions standards as specified in the 1990 Clean Air Act Amendments of
1990 (the "Clean Air Act") which established the US emission standards for
on-highway diesel engines produced through 2001. Insofar as light and
medium heavy-duty diesel engines are concerned, the CARB standards are
similar to those adopted by the US EPA. There can be no assurance that
these government regulations will not be changed, either to relax emissions
standards or to increase emissions standards to a level where the Turbodyne
Products would not meet the required emissions standards.
4. PROPRIETARY PROTECTION OF PRODUCTS
----------------------------------
Turbodyne Systems has filed and will continue to file patent applications
for its products and inventions. Turbodyne Systems has made patent
applications for its Turbodyne Technology as described below. Except as
indicated below, there is no assurance that patents will be granted in
respect of these patent applications.
A U.S. patent application was made by Edward M. Halimi, as inventor, in
1993 for Turbodyne Systems's original Turbodyne Systems product. This
patent application was assigned by Mr. Halimi to Turbodyne Systems pursuant
to an asset purchase agreement between Mr. Halimi and Turbodyne Systems
dated August 18, 1993. Turbodyne Systems has been advised by the U.S.
Patent Office that all claims in respect of this patent application have
been approved. Turbodyne Systems has submitted final drawings to the
Patent Office and has paid the patent issuance fee required for the issue
of the formal patent. The issue of the formal patent is subject only to
the acceptance by the Patent Office of the final drawings. No royalty is
payable in respect of this patent. The patent will expire 17 years from
the date of formal issuance.
Two U.S. patent applications were submitted by Edward M. Halimi, William
Woolenweber and Ralph Maloof, as inventors, in 1995 in respect of Turbodyne
Systems's proprietary Dynacharger products. The U.S. Patent Office has
approved all claims with respect to the earlier of the patent applications
and a formal patent has been issued in the name of the inventors. With
respect to the second of the patent applications, the U.S. Patent Office
has approved 40 out of 42 claims and has issued a formal patent in the name
of the inventors. Patents issued in respect of the Dynacharger products
will expire 20 years from the date of application of each patent. In
respect of the first patent which has been issued, this patent will expire
on July 28, 2015. In respect of the second patent, this patent will expire
on September 18, 2015. The inventors have executed formal patent
assignment documents in favour of Turbodyne Systems for each of the patent
applications in respect of the Dynacharger product which have been
submitted to the U.S. Patent Office for registration. Turbodyne Systems
has agreed to pay a royalty to each of the inventors equal to 1% of the
gross revenues directly attributable to the Dynacharger products, for a
total royalty equal to 3% of gross revenues.
Two U.S. patent applications were submitted in late 1995 by Edward Halimi,
William Woolenweber and Ralph Maloof, as inventors, in respect of Turbodyne
Systems's Turbopac products. Turbodyne Systems has yet to receive any
notice from the U.S. Patent Office approving or disapproving the claims
made in these patent applications. The inventors have executed formal
patent assignments in favour of Turbodyne Systems in respect of these
patent applications which have been submitted to the U.S. Patent Office for
registration. Turbodyne Systems has agreed to pay a royalty to each of the
inventors equal to 1.5% of gross revenues directly attributable to the
Turbopac products, for a total royalty equal to 4.5% of gross revenues.
Turbodyne Systems has also made patent applications for recognition of each
of the patent applications for the Turbopac and Dynacharger products with
each country that it is party to the International Patent Convention Treaty
in order to secure international patent protection of Turbodyne Systems's
Turbodyne Technology.
Page 13
<PAGE>
Turbodyne Systems's policy is to diligently defend any infringement of its
patents. To date Turbodyne Systems has not encountered any challenges or
potential challenges of its patents. Turbodyne Systems has not established
a fund for defense of its patents but may do so if significant sales of its
products are achieved.
Turbodyne Systems also requires all employees, consultants and persons or
companies involved in the testing of Turbodyne Systems's products to
execute confidentiality agreements and to agree to keep confidential all
proprietary information with respect to Turbodyne Systems's products.
The Company is obligated to make the following payments in the nature of
royalties on each Turbodyne unit sold:
(a) $1.00 per Turbodyne unit to Douglas B. Johnson ("Johnson")
to a maximum of $200,000, pursuant to a loan agreement
between the Company, Johnson and Edward Halimi as guarantor
dated August 4, 1994 as amended by an agreement dated
December 8, 1994 (the "Johnson Loan Agreement");
(b) $5.00 per Turbodyne Unit to 482047 B.C. Ltd. ("482047"), to
a maximum of $1,000,000, pursuant to a loan agreement dated
January 24, 1995 between the Company, Turbodyne Systems and
482047 (the "482047 Loan Agreement").
Under the terms of the Johnson Loan Agreement, Johnson advanced to the
Company the principal sum of $200,000 (U.S.) as a short term loan
repayable on demand. The Company has repaid the loan from Johnson under
the Johnson Loan Agreement in full, however the royalty obligation remains.
As additional consideration for this loan, the Company issued 25,000 shares
to Johnson at a deemed price of $0.40 per share, being the market price of
the shares of the Company at the time of the agreement. The royalty
payable under the Johnson Loan Agreement extends to the sale by the Company
of its Turbopac and Dynacharger products.
Under the terms of the 482047 Loan Agreement, 482047 advanced to the
Company the principal sum of $300,000 U.S. as a short term loan repayable
on demand. As an additional bonus, the Company agreed to issue to 482047 a
number of shares equal to 20% of the $300,000 U.S. advance, divided by a
deemed price of $0.36 (Cdn.) per share being the market price of the shares
of the Company at the time of the agreement. Pursuant to this obligation,
the Company issued 233,333 shares to 482047 at a deemed price of $0.36 per
share. In addition, the Company issued 116,667 shares at a deemed price of
$0.36 per share as a finders fee in connection with this loan. The Company
has repaid the loan from 482047 under the 482047 Loan Agreement in full,
however the royalty obligation remains. The royalty payable under the
482047 Loan Agreement extends to the sale by the Company of its Turbopac
and Dynacharger products.
5. KEY EMPLOYEES
-------------
In addition to Edward Halimi, who serves as President of Turbodyne Systems
and whose qualifications are discussed in "Directors and Officers", the
following are considered to be the key employees of Turbodyne Systems:
DR. WILLIAM E. WOOLLENWEBER - VICE PRESIDENT, TURBOCHARGER TECHNOLOGY
AND CHIEF ENGINEER, DYNACHARGER PROGRAM
--------------------------------------------------------------------
Dr. Woollenweber has a Bachelors degree in Mechanical Engineering from
Yale University and Masters and PhD degrees in Mechanical Engineering
from California Coast University. He has been granted over 25 patents,
primarily on turbochargers and turbo machinery and has authored
several articles on these subjects. Prior to joining Turbodyne
Systems in 1995 he served as President of Turbo Design Inc. of
Carlsbad, California, a technical consulting firm specializing in
turbochargers and superchargers. He is a former executive director of
Cummins Engine Company, Inc., a former Vice-President of Holset
Corporation, a former Managing Director of BHD Engineers and former
Vice-President of Schwitzer Corporation.
Page 14
<PAGE>
RALPH P. MALOOF - VICE PRESIDENT AND CHIEF ENGINEER, TURBOPAC PROGRAM
---------------------------------------------------------------------
Mr. Maloof is a professional engineer with degrees in Mechanical and
Aeronautical Engineering. Prior to joining Turbodyne in 1994 he was
an engineering consultant in private practise. He was formerly Senior
Program Manager and Manager of Manufacturing Research with Lockheed
Aircraft Corporation.
DR. ANATOLY MEZHERITSKY - VICE PRESIDENT, EMISSIONS TECHNOLOGY AND
TURBOCHARGERS
-------------------------------------------------------------------
Dr. Mezheritsky holds an M.Sc degree in Mechanical Engineering from
the University of Transport Machine Production in the former U.S.S.R.
He holds a Ph.D in gas turbines from Leningrad Ship Manufacturing and
a D.Sc in turbochargers for deisal engines from Leningrad
Politechnical University. Prior to joining Turbodyne in 1996 he served
as President of M.A. Turbo/Engine Design. He is formerly a senior
mechanical engineer with Vicmar Engineering Ltd. He was formerly
Department Manager, the All Union Design and Technical Institute of
Power Engineering in Leningrad, U.S.S.R. He formerly served as a
professor with the U.S.S.R. Navy Higher Academy and the High Marine
Engineering Academy in Murmansk, U.S.S.R. He began his career in the
1950's as an engineer researcher in a Turbine Engineering Plant in
Leningrad, U.S.S.R. He has published 9 books and 76 articles in the
field of mechanical engineering and holds 8 U.S.S.R. patents and one
U.S. patent.
DR. DORRIAH L. PAGE - VICE-PRESIDENT, EMISSION TECHNOLOGY AND
ENVIRONMENTAL COMPLIANCE
---------------------------------------------------------------
Dr. Page holds a Ph.D. and M.Sc. in Transportation Engineering from
the University of California. She also holds a B.Sc (Biology) and a
B.A. (Political Science). Prior to joining Turbodyne Systems in 1995
she was an independent Air Quality and Environmental Research
Consultant. She has authored numerous papers on air quality and
engine performance subjects and is an executive member of several
transportation and emission related boards and organizations.
LENARD WEDMAN - VICE-PRESIDENT, ELECTROMAGNETICS AND MOTOR TECHNOLOGY
---------------------------------------------------------------------
Mr. Wedman holds a B.Sc. in Electrical Engineering from the University
of Alberta and a M.Sc. in Electrical Engineering from the University
of British Columbia.
DAVID WILLETT - VICE-PRESIDENT, ELECTRONICS AND CONTROL TECHNOLOGY
------------------------------------------------------------------
Mr. Willett holds a B.Sc. degree in Electrical Engineering from the
University of California, Santa Barbara and a M.Sc. degree in
Electrical Engineering from the University of Wisconsin, Madison.
Prior to joining Turbodyne in 1996, he was Engineering Design Manager
with Pacific Scientific Company where he was employed in various
engineering capacities since 1987.
6. PRODUCT EVALUATIONS
-------------------
Turbodyne Systems is currently involved in ongoing evaluation programs and
joint development programs with OEM's. Turbodyne Systems's goal is to
convince OEM's as to the effectiveness of the Turbodyne Technology and to
enter into supply contracts with these OEM's.
7. DISTRIBUTORSHIP AGREEMENTS
--------------------------
a.) GRAND TECHNOLOGIES INC.
-----------------------
On June 13, 1996, Turbodyne Systems entered into an exclusive
distributorship agreement (the "Grand Agreement") with Grand Technologies
Inc. ("Grand"), formerly Granatelli Performance Technologies, Inc. of
Camarillo,
Page 15
<PAGE>
California. Under the terms of the Grand Agreement, Grand will act as the
exclusive worldwide distributor of Turbodyne Systems's Turbopac products
for the automotive and motorcycle gasoline engine performance aftermarket.
Grand is a recently incorporated corporation formed for the purpose of
marketing the Company's Turbopac products under the Grand Agreement and has
no history of prior sales. The principals of Grand include Mr. Harry
Hibler, an automotive publisher, and Mr. George Fencl, a director of Vector
Automobiles Company. Mr. Hibbler was formerly Director of Sales and
Marketing for Specialty Events for Peterson Publishing Co. From 1994 to
1996. During this time, Mr. Hibbler was publisher of Event Scene Magazine.
Mr. Hibbler was publisher of Hot Rod Magazine from 1980 to 1985 and from
1987 to 1994 and publisher of Car Craft Magazine from 1976 to 1980. Vector
Automobile Company is a manufacturer of limited production high performance
automobiles. Each of Mr. Fencl and Mr. Hibbler have in excess of 20 years
experience in the automobile industry.
Grand has no revenue other than any revenue which may have been received
from any sale of Turbopac products delivered by the Company.
Capitalization of Grand has been nominal and contribution to Grand from its
principals is on an as needed basis in order to meet necessary obligations
and ongoing expenses. The Company does not know of any assets which may be
owned by Grand other than the Turbopac products delivered to Grand by the
Company and the interest of Grand in the Grand Agreement.
Turbodyne Systems entered into the Grand Agreement based on the experience
and reputation of Mr. Hibbler and Mr. Fencl, the principals of Grand.
While there is a risk that Grand will not be able to complete its
obligation under the Grand Agreement, Turbodyne Systems has the right to
terminate the Grand Agreement for cause, as defined in the Grand Agreement,
or without cause upon delivery of 90 days notice. If the Grand Agreement
is terminated, all rights of Grand to distribute Turbopac products will
terminate. Grand is an independent contractor under the Grand Agreement
and will not be an agent or consignee in any way of Turbodyne Systems. Any
product ordered by Grand will be purchased by Grand from Turbodyne Systems.
Turbodyne Systems is not obligated to fund the operations of Grand or to
provide any personnel or material to Grand under the Grand Agreement.
At the time the Grand Agreement was entered into, Grand was known as
Granatelli Performance Technologies Inc. Granatelli Performance
Technologies Inc. subsequently changed its name to Grand Technologies Inc.
GRAND HAS NO ASSOCIATION WITH THE ANDY GRANATELLI GROUP OF COMPANIES,
PAXTON PRODUCTS, INC., VINCE GRANATELLI RACING INC., ANDY GRANATELLI OR ANY
COMPANY OF WHICH ANDY GRANATELLI IS AN OWNER OR A PRINCIPAL.
Under the terms of the Grand Agreement, Grand is required to purchase a
minimum of 15,000 units in 1996 at an aggregate cost of $9,375,000 U.S. and
50,000 units at an aggregate cost of $31,250,000 US in each subsequent year
in order to maintain its distributorship rights. There is no assurance
these purchase obligations will be met by Grand or that Turbodyne Systems
will realize these revenues. Turbodyne Systems has agreed that it will not
terminate the Grand Agreement for failure to meet these minimum orders if
Grand has been diligent in promoting sales. Turbodyne Systems completed
the initial delivery of 85 Turbopac products under the Grand Agreement
during the week of October 14 - 18, 1996. These units were not recorded as
sales as they were delivered for product evaluation purposes. Turbodyne
Systems completed a subsequent delivery of 125 Turbopac products during the
period ending December 31, 1996, which deliveries were not recorded as
sales. Payment has been received from Grand for the 125 Turbopac products
delivered. The payment will be applied against development costs. The
Turbopac products shipped were produced in limited scale production runs at
Turbodyne Systems' Carpenteria facility. While Grand did not meet the
minimum purchase requirement of 15,000 units in 1996, Turbodyne Systems
has elected not to terminate the Grand Agreement for failure to meet the
minimum distribution requirement in 1996 as Turbodyne Systems has been
satisfied with the marketing efforts of Grand to date and due to the fact
that Turbodyne Systems commenced limited production of the 1500 Turbopac
Product in late 1996.
The Grand Agreement is for an initial term of three years and will be
automatically renewed, subject to Grand complying with the terms of the
Grand Agreement, for successive two year periods.
Page 16
<PAGE>
The Grand Agreement does not restrict Turbodyne Systems's right to appoint
other distributors for aftermarket applications other than the automotive
and motorcycle gasoline engine performance aftermarket, or for the original
equipment manufacturer market.
Under the Grand Agreement, Turbodyne Systems will offer a limited 50,000
mile warranty for each Turbopac unit sold by Grand. The warranty obligates
Turbodyne Systems to replace any defective Turbopac unit. The warranty is
limited to the expiry of the two year period from purchase or 50,000 miles
of use, whichever is earlier.
There is no assurance that Grand will be sufficiently capitalized to enable
Grand to complete its obligations under the Grand Agreement or any purchase
orders delivered by Grand to the Company.
There is no assurance Turbodyne Systems will be able to supply the
Turbodyne Products ordered under the Grand Agreement.
b.) VIESSMAN WERKE
--------------
The Company has been advised by Viessman Werke GmbH & Company of Allendorf,
Germany that Viessman has received positive results from its performance
evaluations of the Company's Turbopac products. The evaluations were
completed by Viessman pursuant to a development and supply proposal agreed
to between the Company and Viessman in January, 1996. The proposal
contemplated the supply of approximately 200,000 Turbopac units per year
upon completion of successful evaluations by Viessman.
There is no assurance that the Company and Viessman will enter into a
formal supply contract for the 200,000 Turbopac units, as contemplated in
the proposal, and no purchase orders have been received from Viessman.
c.) KUHNLE, KOPP AND KAUSCHE AG
---------------------------
The Company has entered into an agreement in principle with Kuhnle, Kopp
and Kausche AG ("3K"), dated for reference April 11, 1997, for the design,
development and manufacture of a prototype line of turbochargers
incorporating the Company's technology and to be manufactured by 3K. The
prototype turbochargers would be developed for 3K's major customers in the
European automotive market. 3K is owned by the Penske Automotive
Organization and is the largest manufacturer of turbochargers in Germany.
The agreement in principle contemplates formation of a joint venture
pursuant to which the Company will license its turbodyne technology to the
joint venture and will participate in the development, component supply
and assembly of the turbocharger products. 3K will have the overall
responsibility for marketing and sales of the joint venture products
through 3K's established distributor and dealer network. An exclusive
license is to be granted by the Company to the joint venture which will be
for automotive manufacturers in Europe and such other territories as the
Company and 3K may agree. The Company will not receive any royalty from
its license to the joint venture. The Company will participate in joint
venture profits to be shared pursuant to a formula based on cost
distribution. The agreement in principle also provides 3K with the option
to continue to use any technology licensed to the joint venture for a
period of 3 years after termination, in consideration for the payment of a
royalty in an amount to be agreed upon.
There is no assurance that the agreement in principal between the Company
and 3K will result in a formal joint venture agreement between the Company
and 3K being executed. In addition, there is no assurance that the joint
venture between the Company and 3K will achieve sales of the turbochargers
incorporating the Company's Turbodyne Technology or that the Company will
ever realize any profits from the joint venture.
Page 17
<PAGE>
8. DEVELOPMENT COSTS TO DATE
-------------------------
Turbodyne Systems has incurred product development costs for the Turbodyne
products totalling $8,705,000 to December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
prospectus. The financial condition and operating results for the Company
described for the period from January 1, 1996 to December 31, 1996
includes the financial condition and operating results of Pacific Baja
Light Metals from July 2, 1996. The financial condition and operating
results for Pacific Baja Light Metals described for the periods up to June
30, 1996 represent the financial condition and operating results of Pacific
Baja prior to the acquisition by the Company.
1. TURBODYNE TECHNOLOGIES INC.
---------------------------
- ---------------------------------------------------------------------------
SUMMARY OF FINANCIAL INFORMATION IN THE COMPANY FINANCIAL STATEMENTS
(CANADIAN GAAP)(AUDITED)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Sales $19,007,000 Nil Nil
Gross Profit $ 2,509,000 Nil Nil
Net Income (Loss) ($2,558,000) ($1,528,000) ($ 936,000)
Working capital (Deficit) $ 9,964,000 $ 83,000 ($ 426,000)
Property, Plant, and Equipment (Net) $15,703,000 $ 638,000 $ 113,000
Deferred Product Development Costs $ 8,705,000 $ 3,771,000 $1,754,157
Other Intangibles (1) $21,234,000 Nil Nil
Total Assets $64,495,000 $ 5,202,000 $1,899,000
Long Term Liabilities $ 8,666,000 $ 463,000 Nil
Total Liabilities $17,517,000 $ 966,000 $ 458,000
Shareholders Equity $46,978,000 $ 4,236,000 $1,441,000
Number of Shares Outstanding 23,580,098 16,542,121 10,663,052
- --------------------------------------------------------------------------------------
</TABLE>
(1) Goodwill
Page 18
<PAGE>
From the date of the acquisition of the Turbodyne Technology in April, 1993
to the completion of the acquisition of Pacific Baja, the Company was
engaged, through Turbodyne Systems, principally in researching and
developing products incorporating the Turbodyne Technology To enhance
engine performance and reduce emissions of internal combustion engines.
During this period, the Company commenced development of the Turbodyne
System, the Turbopac product and the Dynacharger product. In addition, the
Company's research and development resulted in the filing of the patent
applications in respect of the Turbodyne System and the Turbopac and
Dynacharger products. While Turbodyne Systems has undertaken low volume
production of its products, the products produced have been primarily used
for testing and evaluation with OEM's and major retrofit customers.
Turbodyne Systems has not recorded any revenues for the period ending
December 31, 1996 and has expended $8,705,000 to December 31, 1996 as
development costs for the Turbodyne products. The development of the
Turbodyne products was financed during this period primarily from private
placement equity financings. The Company's financial results for the
period from July 2, 1996 to December 31, 1996 include financial results
from both the Turbodyne Business and the Pacific Baja Business.
MARCH 31, 1997
- --------------
The following financial results are taken from the unaudited financial
statements for the Company for the period ending March 31, 1997, as
prepared by management:
Three Months Three Months
Ending Ending
March 31, 1997 March 31, 1996
-------------- --------------
Sales $12,359,000 Nil
Gross Profit $ 3,071,000 Nil
Total Assets $71,485,000 $ 8,263,000
Goodwill $20,871,000 Nil
Total Liabilities $22,604,000 $ 735,000
Total Long Term Liabilities $11,186,000 $ 100,000
Shareholders Equity $48,881,000 $ 7,825,000
Net Loss $ 1,130,000 $ 542,000
Net Loss Per Share $ 0.05 $ 0.03
December 31, 1996
- -----------------
The Company's audited financial statements for the year ending December 31,
1996 are based on the consolidation of the Company and Pacific Baja Light
Metals and its subsidiaries effective July 2, 1996. The consolidation date
is the date agreed by the Company and Pacific Baja that all material
conditions precedent to the completion of the acquisition of Pacific Baja
had been satisfied.
The Company has accounted for its acquisition of Pacific Baja in its
audited financial statements for the year ending December 31, 1996 at a
deemed purchase price of $31,705,000. The deemed purchase price of
$31,705,000 is comprised of $16,320,000 in cash paid by the Company on
closing and a deemed value of $15,385,000 attributed to the 3,076,923
common shares issued by the Company on closing. The deemed value is based
on $5.00 per share issued. The deemed value of $5.00 was attributed to the
shares issued based on the following factors:
1. The issue price of the Series A Special Warrants used to finance the
acquisition of Pacific Baja was $5.00 per Special Warrant;
2. The shares issued to the shareholders of Pacific Baja are subject to a
minimum one-year hold period commencing September 5, 1996;
Page 19
<PAGE>
3. The price of the Company's shares upon announcement of the acquisition
of Pacific Baja was in the range of $5.00 per share.
Sales of the Company for the period ending December 31, 1996 increased from
nil in prior years to $19,007,000. These sales are attributable solely to
the sales recorded by Pacific Baja Light Metals for the period from July 2,
1996 to December 31, 1996. The Company recorded a gross profit of
$2,509,000 representing 13.20% of sales, which was again attributable to
the Pacific Baja Business. Of the total sales attributable to the Pacific
Baja Business, sales of aftermarket wheel products accounted for sales of
$9,799,000 and sales of cast aluminum products, including compressor
housings and manifolds, accounted for sales of $9,208,000. Of the gross
profit attributable to the Pacific Baja Business, sales of aftermarket
wheel products accounted for gross profits of $1,309,000 representing
13.36% of sales, and sales of cast aluminum products, including compressor
housings and manifolds, accounted for a gross profit of $1,200,000
representing 13.0% of sales. Gross profit from sales of aftermarket wheel
products declined from $2,650,000 U.S. for the first six months of 1996 to
$1,309,000 Cdn. for the six month period from July 2, 1996 to December 31,
1996 due to seasonal declines in the aftermarket wheel product business.
Sales of aftermarket wheel products peak in the spring of each year while
operating costs continue throughout the year. Gross profit from sales of
cast aluminum products declined from $2,482,000 U.S. for the first six
months of 1996 to $1,200,000 Cdn. for the six month period from July 2,
1996 to December 31, 1996 due to increases in the price of raw aluminum and
increased labour costs. Pacific Baja Light Metals' profitability is
affected by increasing aluminum costs as the prices of its cast aluminum
products are fixed under contract in advance of production. Increased
labour costs resulted from Pacific Baja Light Metals increasing production
of cast aluminum products in order to meet deliveries required under
contracts. Revenues from this production are not realized until such time
as the product is delivered under the contract.
The Company recorded product development costs of $4,934,490 during the
period from January 1, 1996 to December 31, 1996. These costs are
attributable solely to product development costs incurred by Turbodyne
Systems. The costs for the year ending December 31, 1996 exceeded the
product development costs incurred in 1995. The increase is attributable
to the finalization of development of the 1500 Turbopac product, ongoing
development of the 2500 Turbopac product and the Dynacharger product and
gearing up for production of the 1500 Turbopac product.
Operating expenses for the year ending December 31, 1996 increased to
$5,060,678, in comparison to total operating expenses of $1,527,342 in
1995. This increase is primarily attributable to the consolidation of
operating expenses for Pacific Baja Light Metals for the period from July
2, 1996 to December 31, 1996. Salaries for the year ending December 31,
1996 increased to $1,812,094, in comparison for total salaries paid for the
year ending December 31, 1995 in the amount of $127,652. The increase
resulted from the acquisition of Pacific Baja and inclusion of salaries for
its employees for the period from July 2, 1996 to December 31, 1996. In
addition, Turbodyne Systems entered into new employment agreements during
1996 with several of its vice-presidents which increased salaries paid by
Turbodyne Systems. See "Executive Compensation". Office rent,
administration and sundry expenses paid for the year ended December 31,
1996 increased to $669,942, in comparison with total office rent,
administrative and sundry expenses of $192,177 for the year ending December
31, 1995. The increase resulted from the acquisition of Pacific Baja and
the increase in the lease expense paid by Turbodyne Systems for its
Carpinteria facility from $15,000 U.S. per month during 1995 to $27,619
U.S. per month during 1996.
Product development costs incurred during the year ending December 31, 1996
totalled $4,934,490. These costs included $1,906,150 in project
development costs and $2,029,943 in project staff salaries and benefits.
Project development costs included establishing a quality control
laboratory at Turbodyne Systems, designing an electronic controller unit
for the Turbopac products and continuing development and evaluation of the
Turbopac and Dynacharger products. Project staff salaries increased as a
result of the establishment of an electronic engineering department for
Turbodyne Systems and the continued hiring of technical staff for
development of the Turbopac and Dynacharger products.
Page 20
<PAGE>
Liquidity of the Company during this period was enhanced by the completion
of the Series A Special Warrant Offering. The Company received cash
proceeds from this offering of $1,638,434, after completion of the
acquisition of Pacific Baja and payment of expenses associated with this
offering. These proceeds formed a significant portion of the total cash of
$4,304,000 of the Company as at December 31, 1996.
DECEMBER 31, 1995 AND 1994
- --------------------------
During the 1994 and 1995 financial years, the Company's sole business was
the Turbodyne Business as carried on by Turbodyne Systems. Turbodyne
Systems did not record any sales during this period. The business
activities consisted of research and development of the Turbodyne System
and the Turbopac and Dynacharger products. The Company incurred product
development costs of $2,017,000 in 1995. Cumulative product development
costs to December 31, 1994 totalled $1,754,157. Operating expenses
increased from $935,992 in 1994 to $1,527,342 in 1995 as the Company
increased its product development activities. Operating expenses included
travel and business development expenses equal to $335,811 for the year
ending December 31, 1995 and equal to $245,297 for the year ending December
31, 1994. The travel and business development expenses were incurred in
connection with establishing relationships and joint evaluation testing
programs with potential OEM manufacturers and establishing contacts with
suppliers and manufacturers for the Turbodyne products.
Product development costs for the year ended December 31, 1995 were
$3,770,883 in comparison to cumulative total product development costs
equal to $1,754,157 as of December 31, 1994. The majority of product
development costs were accounted for by project development costs (testing,
evaluations and research and development ) for the Turbodyne products and
associated staff salaries and benefits.
The Company's business activities during 1994 and 1995 were financed
primarily from private placement financings of the Company's common shares.
The Company also borrowed $100,000 pursuant to the Johnson Loan Agreement
and $212,025 pursuant to the 482047 Loan Agreement. The Johnson Loan
Agreement was repaid in full by the Company prior to December 31, 1995 and
the 482047 Loan Agreement was repaid in full by March 31, 1996.
OPERATING EXPENSES
- ------------------
The following table discloses the unaudited operating expenses of the
Company (prepared by management) for the periods ending December 31, 1996,
December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDING YEAR ENDING YEAR ENDING
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Advertising and Trade Shows $ 91,050 $ 40,716 $ 49,115
Bad Debts $ 114,509 0 0
Bank Charges, Interest and Exchange, Net 53,270 115,315 40,877
Consulting Fees 210,665 163,051 111,358
Depreciation 84,339 5,822 700
Finder's Fees 0 42,000 0
Filing and Transfer Fees 111,624 30,362 7,806
Fiscal Agency Fees 164,156 0 0
Insurance 190,808 0 0
Investor Relations 168,550 103,312 75,359
Management Fees 30,000 30,000 25,000
Office Rent, 291,703 42,300 30,000
Office Administration and Sundry 378,239 149,877 121,963
Printing 77,876 103,486 0
Professional Fees 625,932 194,089 136,782
Salaries and Employee Benefits 1,812,094 127,652 86,465
Telephone 84,108 42,549 5,272
Travel and Business Development 571,757 336,811 245,297
---------- ---------- ----------
Total Operating Expenses $5,060,678 $1,527,342 $ 935,992
========== ========== ==========
</TABLE>
Page 21
<PAGE>
PRODUCT DEVELOPMENT COSTS
- -------------------------
The following table discloses the unaudited cumulative product development
costs of the Company (prepared by management) for the periods ending
December 31, 1996, December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDING YEAR ENDING YEAR ENDING
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Project Consulting 740,110 406,061 294,930
Depreciation of Equipment Used in Development 178,532 65,016 16,691
Project Management Fees 870,534 788,727 706,674
Office Expenses Related to Project Space 211,380 79,415 49,796
Project space rent and occupancy costs 722,116 429,209 183,050
Project Development (testing, R&D, evaluations) 3,096,643 363,811 1,257,341
Project Staff salaries and benefits 2,624,063 594,120 83,513
Telephone and fax 131,028 72,664 34,285
Travel Related to Product Testing and Evaluation 130,697 78,330 21,407
----------- ------------ -----------
Total Deferred Product Development Costs $ 8,705,373 $3,770,883 $1,754,157
============ ========== ==========
</TABLE>
2. PACIFIC BAJA LIGHT METALS
-------------------------
- ---------------------------------------------------------------------------
SUMMARY OF FINANCIAL INFORMATION IN PACIFIC BAJA FINANCIAL STATEMENTS
(U.S. GAAP) ($U.S.)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ending
Six Months Ending December 31,
June 30, 1996 (1) 1995 (1) 1994 (1)
----------------- ----------------------------
(Unaudited) (Audited) (Audited)
<S> <C> <C> <C>
Sales
Custom Wheels: $13,665,000 $17,262,000 $12,956,000
Cast Aluminum Parts: $ 6,359,000 $11,724,000 $6,436,000
$20,024,000 $28,986,000 $19,392,000
Gross Profit
Custom Wheels: $2,650,000 $3,077,000 $1,749,000
Cast Aluminum Parts: $2,482,000 $2,576,000 $2,240,000
---------- ---------- ----------
$5,132,000 $5,653,000 $3,989,000
Research and Development ---- ---- ----
Sales and marketing Expenses $ 300,000 $516,000 $424,000
General and Administrative $1,386,000 $3,128,000 $2,184,000
Net Income $1,894,000 $815,000 $480,000
Working Capital (Deficit) $225,000 ($1,019,000) $343,000
Property, Plant and Equip., Net $8,135,000 $7,978,000 $5,466,000
Deferred Research and Develop. ----- ---- -----
Other Intangibles ----- ---- -----
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
Years Ending
Six Months Ending December 31,
June 30, 1996 (1) 1995 (1) 1994 (1)
----------------- ----------------------------
(Unaudited) (Audited) (Audited)
<S> <C> <C> <C>
Total Assets $18,733,000 $16,118,000 $12,213,000
Long Term Liabilities $ 1,655,000 $2,177,000 $1,841,000
Total Liabilities $12,028,000 $11,307,000 $8,217,000
Shareholders' Equity
Dollar Amount: $ 6,705,000 $4,811,000 $3,996,000
No. Of common Shares: 1,131,247 1,131,247 1,131,247
</TABLE>
(1) Financial Information is for Pacific Baja, prior to the merger of
Pacific Baja with Pacific Baja Acquisition Corp. to form Pacific Baja
Light Metals.
JUNE 30, 1996
- -------------
The consolidated sales of Pacific Baja for the first six months of 1996
were $20,024,000, compared with $14,661,000 for the first six months of
1995. Gross profit for the first six months of 1996 was $5,132,000,
representing 25.63% of sales, compared with gross profit of $2,990,000 for
the first six months of 1995, representing 20.39% of sales. Gross profits
as a percentage of revenues for aftermarket automotive wheels for the first
six months of 1996 was 19.39%, based on sales of $13,665,000 and a gross
profit of $2,650,000. Gross profits as a percentage of revenues for
compressor housings and manifolds for the first six months of 1996 was
39.03%, based on sales of $6,359,000 and a gross profit of $2,482,000.
Net income for the six month period increased to $1,894,000, as compared
with net income of $664,000 for the same period during 1995. Operations
during the six month period were funded by revenues from product sales and
advances under the credit facilities of Pacific Baja. The outstanding
balance of the credit facilities as of June 30, 1996 are summarized as
follows:
COMPANY CREDITOR OUTSTANDING BALANCE
-------- -------- -------------------
Optima Wheel Wells Fargo Bank $3,239,000 U.S.
Baja Pacific Wells Fargo Bank $1,246,000 U.S.
The increase in both sales and net income of Pacific Baja is attributable
to continued expansion of both the aftermarket wheel business and the cast
aluminum products business of Pacific Baja.
General and administrative expenses for the six month period ending June
30, 1996 totalled $1,386,000 in comparison to general and administrative
expenses of $3,128,000 for the year ended December 31, 1995. Salaries
payable to the employees of Pacific Baja accounted for $381,000 of the
total general and administrative expenses for this six month period.
DECEMBER 31 1995 AND 1994
- -------------------------
The consolidated sales of Pacific Baja for 1995 were $28,986,000 compared
with sales of $19,392,000 for 1994, an increase of 49%. This sales
increase resulted from increases in both the wheel market and general
castings. Wheel sales increased because of added orders from Interstate
Tire Company in North Carolina, one of the United States' largest buyers of
after market styled wheels, as well as a broader and more accepted product
line. The general castings sales increase resulted from additional
business from AlliedSignal.
Page 23
<PAGE>
Gross profit for 1995 was $5,653,000, representing 19.50% of sales,
compared with a gross profit of $3,809,000 for 1994, representing 19.64% of
sales. Gross profits as a percentage of revenues for aftermarket
automotive wheels for 1995 was 17.82%, based on sales of $17,262,000 and a
gross profit of $3,077,000. Gross profits as a percentage of revenues for
compressor housings and manifolds for 1995 was 21.97%, based on sales of
$11,724,000 and a gross profit of $2,576,000. Net income for 1995 was
$815,000 compared with $480,000 for 1994. Gross margins remained
consistent at approximately 20% for both years. Operating expenses
decreased slightly as a percent of sales for 1994 to 1995. Interest
expenses increased to $519,000 in 1995 from $355,000 in 1994. This
increase resulted from the additional borrowing used to support the capital
additions in 1995. These capital expenditures were made at both the La
Mirada and Ensenada facilities to support projected sales increases in 1996
and beyond.
General and administrative expenses for the year ended December 31, 1995
increased to $3,128,000 from $2,019,000 for the period ending December 31,
1994. Salaries payable to the employees of Pacific Baja accounted for
$1,113,000 for the total general and administrative expense for this year.
DECEMBER 31, 1994 AND 1993
- --------------------------
The consolidated sales of Pacific Baja for 1994 were $19,392,000 compared
with 1993 sales of $13,871,000, an increase of 40%. The sales increase was
a result of the addition of the compressor housing product line from
AlliedSignal, increased manifold sales and increased wheel sales. The
increased wheel sales resulted mainly from the addition of additional
customers, resulting in greater distribution and product-line acceptance.
Gross profit for 1994 was $3,809,000 for 1994, representing 19.6% of sales,
compared with a gross profit of $2,501,000 for 1993, representing 18.03% of
sales. Gross profits as a percentage of revenues for aftermarket
automotive wheels for 1994 was 13.50%, based on sales of $12,956,000 and a
gross profit of $1,749,000. Gross profits as a percentage of revenues for
compressor housings and manifolds for 1994 was 34.80%, based on sales of
$6,436,000 and a gross profit of $2,240,000. Net income for 1994 was
$480,000 compared to $245,000 for 1993. Gross margins increased from
18.03% in 1993 to approximately 19.6% in 1994. This increase resulted from
greater manufacturing efficiencies due to increased volume.
The installation of quality systems resulted in slightly higher operating
expenses in 1994. Interest expenses were also slightly higher in 1994 but
were consistent with the sales and working capital increases.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
As of December 31, 1996, the Company had cash in the amount of $4,304,000.
As at March 31, 1997, the Company had cash in the amount of $2,040,000. As
at May 31, 1997, the Company had a cash deficit in the amount of $382,000.
As at June 23, 1997, the consolidated cash position of the Company was
$1,030,500. On completion of the acquisition of Pacific Baja on September
5, 1996, the Company received an amount of cash in the approximate amount
of $1,638,434 from the proceeds of the Series A Special Warrant financing
which were not applied to the acquisition of Pacific Baja.
Pacific Baja Light Metals has the following line of credit facilities for
the Pacific Baja Business:
(a) Optima Wheel has an operating line of credit facility with
Wells Fargo Bank in the maximum amount of $6,000,000 (U.S.);
(b) Baja Pacific has an operating line of credit facility with
Wells Fargo Bank in the maximum amount of $2,000,000 (U.S.).
The outstanding balances of the operating credit lines of Pacific Baja
Light Metals as at December 31, 1996 are as follows:
Page 24
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING BALANCE OUTSTANDING BALANCE
COMPANY CREDITOR AT DECEMBER 31/96 AT MAY 30, 1997
------- -------- ------------------- -------------------
<S> <C> <C> <C>
Optima Wheel Wells Fargo Bank $3,224,000 U.S. $5,685,000 U.S.
Baja Pacific Wells Fargo Bank $1,215,000 U.S. $1,238,000 U.S.
</TABLE>
As at December 31, 1995, June 30, 1996 and December 31, 1996, Pacific Baja
was in violation of certain covenants under its line of credit facilities
with Wells Fargo Bank with respect to tangible net worth criteria, total
liabilities to tangible net worth ratios and delivery of projected
financial statements. As at March 18, 1997, Wells Fargo had agreed to
amend the covenants such that Pacific Baja Light Metals would not be in
violation of these covenants based on the financial projections prepared by
Pacific Baja Light Metals and delivered to Wells Fargo Bank. As of the
date of this Prospectus the credit agreement with Wells Fargo Bank has not
been formally amended.
The Company is a guarantor of each of these line of credit facilities. The
line of credit facilities are secured by security interests granted by each
of Baja Pacific and Optima Wheel against all accounts receivable,
inventory, rights of payment, intangibles and equipment.
Pacific Baja Light Metals has entered into a line of credit agreement with
TST Inc. for the supply of aluminum. The line of credit has been
guaranteed by the Company. Pacific Baja Light Metals has not borrowed any
funds against the line of credit and no amount is outstanding to TST Inc.
under the line of credit.
The operating expenses of the Company will increase as Turbodyne Systems
finalizes its preparations for commercial production of the Turbodyne
products. As at December 31, 1996, the Company had working capital equal
to $9,964,000. As at March 31, 1997, the Company had working capital equal
to $10,899,000. The Company's working capital as at May 31, 1997 is
estimated by management to equal $9,156,000.
The liquidity of the Company will be affected if Turbodyne Systems is
unable to:
(a) finalize agreements with OEM's and major retrofitters for
the incorporation of its Turbodyne products in new diesel
engines and after-market diesel engine products;
(b) achieve sales of its Turbodyne products directly to after-
market customers at commercially viable rates.
Turbodyne Systems is using its best efforts to enter into contracts with
OEM's and major retrofitters for the incorporation of its Turbodyne
products. No such contracts are currently in force. The liquidity of the
Company's Turbodyne Business will be affected if Turbodyne Systems is
unable to commence commercial production of its products in time to meet
any purchase orders received from Grand or if Grand is unable to complete
its commitments under the purchase orders.
The Company has financed its operations to date, including research and
development activities, general and administrative expenditures, and
evaluation and joint development programs, from the sale of equity
securities. The initial acquisition of the Turbodyne Technology was
completed by reverse takeover whereby the Company issued 1,000,000 common
shares to the shareholders of Turbodyne Systems in order to acquire
Turbodyne Systems.
The Company believes that additional funding will be available upon the
commencement of commercial production of the Turbodyne products and sales
indicating market acceptance of the Turbodyne products.
The Company's intent is to keep the cash flow from the Pacific Baja
Business for the operation and expansion of the Pacific Baja Business. The
Company does not intend to use the cash flow from the Pacific Baja Business
to fund the Turbodyne Business, although these plans are subject to change
at any time.
Page 25
<PAGE>
C. SERIES C SPECIAL WARRANTS
-------------------------
The Company issued 500,000 Series C special warrants (the "Series C Special
Warrants") on December 6, 1996 to certain investors on a private placement
basis at $9.00 each for gross proceeds of $4,500,000 (the "Series C Special
Warrant Offering"). Yorkton Securities Inc. acted as agent (the "Series C
Agent") with respect to the distribution. The Series C Agent was paid a
commission of 10% of the sale proceeds from the Series C Special Warrants.
Pursuant to the agency agreement between the Company and the Series C
Agent, the Series C Agent elected to require the Company to pay the
commission by the cash payment of $450,000. No additional commissions or
fees are payable to the Series C Agent.
Upon issue, each Series C Special Warrant was exchangeable upon exercise,
or deemed exercise, for a unit consisting of one common share (a "Series C
Common Share") and one-half of one share purchase warrant (a "Series C
Ordinary Warrant) without payment of any additional consideration. Each
Series C Ordinary Warrant shall entitle the holder to purchase one common
share of the Company at a price of $9.50 per common share on or before 4:00
p.m.(Vancouver time) on December 8, 1997. As a final receipt for a
prospectus qualifying the distribution of the Series C Common Shares and
the Series C Ordinary Warrants issuable upon exercise of the Series C
Special Warrants was not issued by each of the British Columbia Securities
Commission and the Ontario Securities Commission by March 6, 1997, each
Series C Special Warrant is exchangeable upon exercise, or deemed exercise,
for a unit consisting of one Series C Common Share and one Series C
Ordinary Warrant without payment of any additional consideration. The
Series C Common Shares, Series C Ordinary Warrants and the common shares
issuable upon exercise of the Series C Ordinary Warrants are subject to
pooling arrangements restricting the transfer of these securities and these
securities will only be released from the pooling arrangements on the
earlier of 30 days after the date a final receipt for this prospectus is
issued by the British Columbia Securities Commission and the Ontario
Securities Commission and August 1, 1997. The Series C Special Warrants
are exercisable at the option of the holder at any time until 4:00 p.m.
(Vancouver time) on December 8, 1997 and will be deemed to be exercised on
the fifth business day following the date of issue of a receipt for this
prospectus by the last of the securities regulatory authorities in the
Provinces of British Columbia and Ontario. Any Series C Special Warrants
which have not been exercised by 4:00 p.m. (Vancouver time) on December 8,
1997 will be deemed to have been exercised immediately prior thereto
without any further action on the holder's part.
The Company completed the Series C Special Warrant Offering on December 6,
1996 and received net proceeds on closing of $4,040,000, being gross
proceeds of $4,500,000 less the commission payable to the Series C Agent of
$450,000 and less estimated legal expenses of the Series C Agent in the
amount of $10,000. The proceeds of the Series C Special Warrant Offering
have been used for product research and development, general administration
and inventory acquisition for Turbodyne Systems. See "Use of Proceeds".
PLAN OF DISTRIBUTION
This prospectus qualifies the distribution in the Provinces of British
Columbia, Ontario and Manitoba of 4,125,000 Series A Common Shares and
4,125,000 Series A Ordinary Warrants to be issued without any additional
payment upon the exercise or deemed exercise of 4,125,000 outstanding
Series A Special Warrants. Each Series A Ordinary Warrant shall entitle
the holder to purchase one common share of the Company at a price of $5.50
per common share on or before 4:00 p.m. (Vancouver time) on July 2, 1997.
SERIES A SPECIAL WARRANTS
- -------------------------
Each Series A Special Warrant is exchangeable upon exercise, or deemed
exercise, for a unit consisting of one Series A Common Share and one Series
A Ordinary Warrant without payment of any additional consideration. The
Series A Special Warrants are exercisable at the option of the holder at
any time until 4:00 p.m. (Vancouver time) on July 2, 1997 and will be
deemed to be exercised on the fifth day following the issue of a receipt
for this prospectus. Any
Page 26
<PAGE>
Series A Special Warrants which have not been exercised by 4:00 p.m.
(Vancouver time) on July 2, 1997 will be deemed to have been exercised
immediately prior thereto without any further action on the holder's part.
The Series A Special Warrants were issued pursuant to a special warrant
indenture made as of June 14, 1996 (the "Series A Special Warrant
Indenture") between the Company and Montreal Trust Company of Canada (the
"Trustee"). The 3,750,000 Series A Special Warrants were sold on July 2,
1996 to certain investors pursuant to a private placement at $5.00 each for
gross proceeds of $18,750,000. Yorkton Securities Inc., Sprott Securities
Limited and Wellington West Capital Inc. acted as agents (the "Series A
Agents") with respect to the distribution. The Series A Special Warrants
were sold to investors under prospectus exemptions of applicable securities
legislation pursuant to an agreement dated as of June 14, 1996 (the "Agency
Agreement") between the Company and the Series A Agents. The Series A
Agents were paid a commission of 10% of the sale proceeds from the Series A
Special Warrants. Pursuant to the Agency Agreement between the Company and
the Series A Agents, the Series A Agents elected to require the Company to
pay the commission by the issue to the Series A Agents of 375,000 Series A
Special Warrants. No additional commissions or fees are payable to the
Series A Agents other than reimbursement of their expenses.
Under the terms of the Series A Special Warrant Indenture, the Series A
Special Warrants were exchangeable upon exercise, or deemed exercise, for a
unit consisting of one Series A Common Share and one-half of one Series A
Ordinary Warrant without payment of any additional consideration, provided
that if a (final) receipt for a prospectus qualifying the distribution of
the Common Shares and Series A Ordinary Warrants was not obtained from each
of the securities regulatory authorities in British Columbia, Manitoba and
Ontario on or before September 30, 1996, each Series A Special Warrant
would be exchangeable upon exercise, or deemed exercise, for one Series A
Common Share and one Series A Ordinary Warrant. As the Company did not
obtain (final) receipts for a prospectus on or before September 30, 1996,
each Series A Special Warrant is now exchangeable upon exercise, or deemed
exercise, for one Common Share and one whole Series A Ordinary Warrant
without payment of any additional consideration.
IF THE SERIES A SPECIAL WARRANTS ARE EXERCISED PRIOR TO THE ISSUANCE OF A
RECEIPT FOR THIS PROSPECTUS BY EACH OF THE SECURITIES COMMISSIONS OF
BRITISH COLUMBIA, MANITOBA AND ONTARIO, THE SERIES A COMMON SHARES, THE
SERIES A ORDINARY WARRANTS AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THE SERIES A ORDINARY WARRANTS WILL BE SUBJECT TO A HOLD PERIOD AND OTHER
RESTRICTIONS ON TRANSFER UNDER APPLICABLE SECURITIES LEGISLATION UNTIL AT
LEAST JULY 2, 1997.
The Series A Ordinary Warrants will be issued pursuant to a warrant
indenture made as of June 14, 1996 between the Company and the Trustee, as
trustee (the "Series A Ordinary Warrant Indenture"). Each Series A
Ordinary Warrant shall entitle the holder to purchase one common share of
the Company at a price of $5.50 per common share on or before 4:00
p.m.(Vancouver time) on July 2, 1997. The Series A Ordinary Warrant
Indenture contains, among other things, anti-dilution provisions and
provisions for appropriate adjustment of the class, number and price of
common shares issuable pursuant to any exercise thereof upon the occurrence
of certain events including any subdivision, consolidation or
reclassification of the common shares, any amalgamation, merger, or other
reorganization of the Company or the payment of stock dividends. The
common shares issuable upon the exercise of the Series A Ordinary Warrants
will be issued pursuant to exemptions from the prospectus requirements of
applicable securities legislation.
The price of the Series A Special Warrants was determined by negotiation
between the Company and the Series A Agents on November 1, 1995. Pricing
was based on the discount permitted by the Rules and Policies of the VSE
from the market price of the Company's common shares at the time the
private placement was publicly announced. The closing price of the common
shares of the Company on November 1, 1995 was $5.25 per share.
The Series A Agents are entitled to be reimbursed for their expenses in
connection with the Series A Special Warrant Offering and have been
indemnified by the Company.
Page 27
<PAGE>
RISK FACTORS
The securities offered by this prospectus must be considered speculative,
generally because of the nature of the Company's business. In particular:
1. The Company's Turbodyne Business has not yet achieved commercial
production of its Turbodyne Products, other the limited scale
production of Turbopac products, and is being financed by equity and
debt. Turbodyne Systems has had no significant sales to date.
Accordingly, the Company is subject to risks associated with start-up
companies, including initial losses, uncertainty of revenues, markets
and profitability and the necessity of additional funding.
2. The Turbodyne System, Turbopac and Dynacharger products have yet to be
commercially produced and unexpected problems and changes to
specifications may arise in the development of these products. The
resultant changes may affect the overall feasibility of the product,
or could delay completion time and increase costs of development.
There is an element of risk that the project, for any number of
reasons, will be unexpectedly delayed or halted.
3. Turbodyne Systems will be primarily dependent upon outside suppliers
for manufacturing components. There can be no guarantee that these
suppliers will be able to meet all the demands as required.
4. There is no assurance of the ultimate cost of completing the
development, demonstration and validation of the Company's Turbodyne
products, or of the cost to produce the Company's Turbodyne products.
5. The Company has not discovered a product directly competitive with the
Turbodyne System; however, indirectly competitive products are
currently sold in the marketplace. Other products or technologies may
be developed and may make the Company's Turbodyne products less
competitive or even obsolete over time. Existing competitors and
organizations researching and selecting solutions to turbo-lag and
unacceptable emissions have greater financial, managerial and
technical resources, operating histories and name recognition. There
can be no assurance that the market will consider the Company's
Turbodyne products to be superior to existing or future competitive
products, or that the Company will be able to adapt to evolving
markets and technologies, develop new products or achieve and maintain
technological advantages.
6. Although interest has been indicated for the Company's Turbodyne
products, market acceptance cannot be quantified until completion of
ongoing evaluations.
7. The Company has developed a pricing strategy and price lists for its
products in relation to retail selling prices of indirectly
competitive products and on estimated costs of producing the Turbodyne
System. However, there is no certainty of such production costs or
the ultimate selling price to dealers, distributors or end users.
8. Market acceptance of the Turbodyne products will be heavily dependent
on the pricing policy established by the Company and the cost-benefit
of the Company's Turbodyne products. There is no guarantee that
established pricing levels will be accepted by the marketplace or that
the cost-benefit to manufacturers will be sufficient to encourage mass
purchase of the Company's Turbodyne products.
9. Turbodyne Systems is dependent upon the personal efforts and
commitment of the management team, particularly Mr. Halimi who is
responsible for the development of current and future products. To
the extent that the services of the management team would be
unavailable for any reason, other executive persons would be required
to manage and operate the business. In the case of Mr. Halimi, the
loss of his services would adversely affect development of the
business and its likelihood of continuing operations.
Page 28
<PAGE>
10. The Company plans to carry product liability, business interruption
and keyman life insurance, but, to date, such insurance is not in
place.
11. The Company's Turbodyne Business may be affected by other factors
beyond its control, for example, engine and turbocharger
configurations may change, the demand for turbocharged engines may
diminish regardless of the benefits of the Company's products, and the
compartments in which engines are installed might not offer sufficient
space to install the Company's Turbodyne products.
12. The industry in which Pacific Baja Light Metals competes is highly
competitive and characterized by large companies with greater
financial and other resources than Pacific Baja Light Metals.
13. A large proportion of Pacific Baja Light Metals' sales are
concentrated in a small number of major customers. Loss of a contract
with a major customer, deterioration of the relationship with the
customer or changes in the financial circumstances of the customer
could impact detrimentally on Pacific Baja Light Metals' profitability
and future prospects.
14. Some of Pacific Baja Light Metals' products are subject to short term
changes in consumer preferences and demands. Changes in consumer
preferences could adversely effect the sales and profitability of
Pacific Baja Light Metals.
15. A significant amount of Pacific Baja Light Metals' production is
produced by its Mexican subsidiary and imported to the United States
under favourable trade agreements negotiated between the governments
of the United States and Mexico. Changes in these trade arrangements
and in North American trade agreements generally could adversely
affect the production costs and profitability of Pacific Baja Light
Metals. In addition, changes in the foreign exchange rates for
Mexican Peso's and US Dollars or changes in economic conditions in
Mexico could adversely affect the operating costs and profitability of
Pacific Baja Light Metals.
16. Pacific Baja Light Metals must buy the raw aluminum material for its
products at world market prices. Changes in demand and price of
aluminum could affect Pacific Baja Light Metals' profitability. In
addition, changes in aluminum supply could affect Pacific Baja Light
Metals' ability to deliver products when required by its contractual
commitments.
17. Technological changes in aluminum casting and machining technology
could affect Pacific Baja Light Metals's competitiveness or require
Pacific Baja Light Metals to make significant expenditures on new
plant and equipment all of which could adversely affect Pacific Baja
Light Metals' operating costs and profitability.
18. Pacific Baja Light Metals is dependent upon the efforts and commitment
of Michael Joyce and Lennart Renberg. The loss of the services of
either Mr. Joyce or Mr. Renberg could adversely impact on the business
of Pacific Baja Light Metals.
19. There is no assurance that Grand has sufficient financial resources to
complete the purchase of Turbopac products pursuant to Grand's
distribution agreement with Turbodyne Systems or that Turbodyne
Systems will be able to supply products ordered by Grand.
Page 29
<PAGE>
USE OF PROCEEDS
The Company derived gross proceeds of $18,750,000 from the sale of the
Series A Special Warrants. In addition, the Company derived gross proceeds
of $4,500,000 from the sale of the Series C Special Warrants. These
proceeds have been applied up to March 31, 1997 as follows:
SPECIAL WARRANTS
SERIES A SERIES C
---------- -----------
$ $
GROSS PROCEEDS:
Series A Special Warrants 18,750,000
Series C Special Warrants 4,500,000
----------- ----------
18,750,000 4,500,000
=========== ==========
USE OF PROCEEDS
Share issue costs (751,000) (37,000)
Agent's commissions 0 (450,000)
Cash consideration paid on (16,360,000) 0
Acquisition of Pacific Baja
Product research and development (1,289,000) (1,604,000)
General and administration (350,000) (865,000)
Inventory acquisition ----- (1,544,000)
----------- -----------
(18,750,000) (4,500,000)
=========== ============
The working capital of the Company as at December 31, 1996 on a
consolidated basis was $9,964,000. Of this working capital, a total of
$5,368,000 was attributable to the Pacific Baja Business. The Company does
not anticipate advancing additional funds to the Pacific Baja Business in
1997. As at December 31, 1996, working capital of $4,393,000 was available
for funding of the Turbodyne Business and the balance of working capital of
$203,000 was attributable to the Company. The working capital available
for Turbodyne Systems of $4,393,000 was inclusive of $3,999,000 of cash, of
which $2,760,000 was derived from the Series C Offering. The Company
intends to apply this working capital of the Turbodyne Business as follows:
USE OF WORKING CAPITAL AMOUNT
---------------------- --------
1. General and Administrative $ 1,098,000
2. Research, Development and Inventory Acquisition $ 3,295,000
-----------
Total Available Working Capital
as at December 31, 1996: $ 4,393,000
===========
For the period from January 1, 1997 to March 31, 1997, the Company advanced
approximately $3,585,000 of the available working capital to Turbodyne
Systems. Of the $3,585,000 advanced to Turbodyne Systems during the period
from January 1, 1997 to March 31, 1997, $1,176,000 has been applied to
research and development of the Turbopac and Dynacharger products,
$1,544,000 has been applied to inventory acquisition for the 1500 Turbopac
product and $865,000 has been applied to general and administrative
expenses.
Page 30
<PAGE>
The working capital of the Company on a consolidated basis as at March 31,
1997 is equal to $10,899,000. Of this working capital, a total of
$7,029,000 was attributable to the Pacific Baja Business. The balance of
$3,870,000 of working capital is available for funding of the Turbodyne
Business.
DESCRIPTION OF SHARES
The authorized capital of the Company consists of 100,000,000 common shares
without par value, 100,000,000 Class A preference shares without par value
and 100,000,000 Class B preference shares without par value. As of May 31,
1997, 24,310,612 of the Company's common shares have been issued and are
outstanding. None of the Company's Class A or Class B preference shares
are issued.
Each of the common shares of the Company, both issued and unissued, rank
equally as to dividends, voting rights and distribution of assets upon
dissolution, liquidation or winding-up of the Company. Holders of the
common shares are entitled to one vote per share on all matters that may be
brought before them. Holders of the common shares are entitled to receive
dividends when declared by the Board of Directors from funds legally
available therefor. There are no pre-emptive or conversion rights and no
provisions for redemption, purchase for cancellation, surrender or sinking
or purchase funds or amendment provisions attached to the common shares.
The Articles of the Company contain provisions granting certain priorities
over the holders of the common shares to the holders of the classes of
preference shares in the event of liquidation, dissolution or winding-up of
the Company.
TRADING IN COMMON SHARES
The common shares of the Company are listed on the Vancouver Stock Exchange
in British Columbia, Canada. The following table sets forth the trading
volumes and the reported high and low prices for the common shares as
quoted over the Vancouver Stock Exchange on a monthly basis for the most
recent current quarter and the immediately preceding quarter and on a
quarterly basis for the next preceding seven quarters.
<TABLE>
<CAPTION>
VOLUME OF
YEAR AND MONTH HIGH* LOW* COMMON SHARES
- -------------- ------ ----- -------------
<S> <C> <C> <C>
June 1, 1997 to June 20, 1997 $6.80 $5.00 1,180,300
May 1, 1997 to May 31, 1997 $9.45 $5.40 1,548,670
April 1, 1997 to April 30, 1997 $11.65 $7.50 809,023
March 1, 1997 to March 31, 1997 $12.50 $10.00 1,181,989
February 1, 1997 to February 28, 1997 $10.00 $9.20 731,175
January 1, 1997 to January 31, 1997 $11.25 $9.65 419,321
December 1, 1996 to December 31, 1996 $12.00 $10.30 683,771
November 1, 1996 to November 31, 1996 $12.35 $9.80 1,207,548
October 1, 1996 to October 31, 1996 $10.30 $9.70 600,607
July 1, 1996 to September 30, 1996 $12.80 $9.00 1,759,809
April 1, 1996 to June 30, 1996 $15.00 $8.50 3,273,148
January 1, 1996 to March 31, 1996 $12.875 $4.90 3,357,474
October 1, 1995 to December 31, 1995 $5.75 $4.10 2,020,306
July 1, 1995 to Sept 30, 1995 $5.625 $3.30 3,710,823
April 1, 1995 to June 30, 1995 $6.75 $1.21 7,250,934
January 1, 1995 to March 31, 1995 $1.90 $0.30 8,701,687
October 1, 1994 to December 31, 1994 $0.63 $0.28 6,207,067
</TABLE>
* As quoted by the Vancouver Stock Exchange. Expressed in Canadian
dollars.
On June 28, 1996, the last trading day immediately before the Company
issued the Series A Special Warrants, the closing price of the common
shares on the VSE was $12.90. The closing price of the common shares on
June 20, 1997, was $6.45 per share.
Page 31
<PAGE>
SHARE & LOAN CAPITAL STRUCTURE
The following table sets forth information in respect of the Company's
share capital.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AS AT AMOUNT TO BE
DECEMBER 31, 1996, BEING AMOUNT OUTSTANDING UPON THE
AMOUNT THE DATE OF THE MOST RECENT OUTSTANDING AS CONVERSION OF ALL SERIES
AUTHORIZED OR TO BALANCE SHEET CONTAINED IN OF JUNE 13, A SPECIAL WARRANTS (4),
DESIGNATION OF SECURITY BE AUTHORIZED THE PROSPECTUS(1) 1977(2)(3) (5), (6)
- ------------------------ ---------------- --------------------------- -------------- -----------------------
<S> <C> <C> <C> <C>
Common Shares 100,000,000 23,580,098 common 24,379,112 28,504,112 common
shares common shares shares
$30,438,092 $34,404,167 $52,380,762
Class "A" Preference
Shares 100,000,000 Nil Nil Nil
Class "B" Preference
Shares 100,000,000 Nil Nil Nil
</TABLE>
(1) As at December 31, 1996, the Company had share capital (inclusive of
outstanding Series A Special Warrants and Series C Special Warrants)
of $52,366,000 and a deficit of $5,461,000.
(2) A total of 502,000 shares have been issued during the period from
January 1, 1997 to June 13, 1997 pursuant to the exercise of stock
options. See "Prior Sales".
(3) A total of 297,014 shares have been issued during the period from
January 1, 1997 to June 13, 1997 pursuant to the exercise of warrants.
See "Prior Sales".
(4) A total of 500,000 common shares and 500,000 Series C Ordinary
Warrants are issuable on exercise of Series C Special Warrants.
(5) An additional 4,125,000 common shares have been allotted for issuance
pursuant to exercise of the Series A Ordinary Warrants and an
additional 500,000 common shares have been allotted for issuance
pursuant to the exercise of the Series C Ordinary Warrants. See "Plan
of Distribution".
(6) Assuming that no other options or warrants of the Company, as
described in "Stock Options and Other Rights to Purchase Securities",
have been exercised.
Page 32
<PAGE>
The Company has the following indebtedness which is either secured or
payable on a term of more than one year:
- -------------------------------------------------------------------------
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
NATURE OF INDEBTEDNESS AS OF DECEMBER 31, 1996 AS OF MAY 31, 1997
- ---------------------- --------------------- ------------------
- -----------------------------------------------------------------------
Long Term Liabilities
(a) Capital Leases: $ 22,000 $ 18,000
-------- --------
Total: $ 22,000 $ 18,000
Less Current Portion: $ 22,000 $ 18,000
-------- ---------
Total: $ Nil $ Nil
=========
- ------------------------------------------------------------------------
Turbodyne Systems has the following indebtedness which is either secured
or payable on a term of more than one year:
- ------------------------------------------------------------------------
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
NATURE OF INDEBTEDNESS AS OF DECEMBER 31, 1996 MAY 31, 1997 (2)
- ---------------------- ----------------------- ------------------
- ------------------------------------------------------------------------
Long Term Liabilities (1)
(a) Capital Leases $ 145,000 $ 152,000
Total 145,000 152,000
Less: current portion 30,000 50,000
--------- ---------
Total $ 115,000 $ 102,000
========= =========
- --------------------------------------------------------------------------
Total $ 115,000 $102,000
- --------------------------------------------------------------------------
Pacific Baja has the following indebtedness which is secured or payable on
a term of more than one year:
- --------------------------------------------------------------------------
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
NATURE OF INDEBTEDNESS AS OF DECEMBER 31, 1996 AS OF MAY 31, 1997(2)
- ---------------------- ----------------------- ---------------------
- ---------------------------------------------------------------------------
Secured Lines of Credit (4) $6,080,000 $ 9,542,000
Long Term Liabilities (1)
(a) Bank notes secured by
equipment $3,624,000 $ 4,150,000
(b) Sundry Nil $ 34,500
Total $9,704,000 $13,726,500
Less: current portion ($1,321,000) $ 1,220,000
------------ -----------
Total $8,383,000 $12,506,500
Deferred Income Taxes $1,455,000 $ 1,095,000
- --------------------------------------------------------------------------
Total $9,838,000 $13,601,500
- --------------------------------------------------------------------------
Page 33
<PAGE>
(1) Includes obligations under financial leases capitalized in accordance
with generally accepted accounting principals.
(2) Assuming an exchange rate of $1.00 (U.S.) per $1.3783(Cdn.) as at May
31, 1997.
(3) The obligations of Pacific Baja Light Metals arising by virtue of
leases on real property are disclosed in note 10(b) of the Company's
financial statements.
(4) Secured by security interests granted by Baja Pacific and Optima
Wheels in favour of Wells Fargo Bank against all account receivables,
inventory, rights to payment, intangibles and equipment of Baja
Pacific and Optima Wheel. See "Management Discussion and Analysis of
Operating Condition and Results".
PRIOR SALES
The Company has issued the following common shares and special warrants
during the past 12 months:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SECURITY DATE NUMBER PRICE COMMISSION NET CASH
PAID RECEIVED
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIVATE PLACEMENT OF
COMMON SHARES:
Sept 3/96 33,333 $9.00 $30,000 $270,000
Mar 21/96 12,562 $7.96 $10,000 $ 90,000
Mar 19/96 45,368 $7.45 $33,800 $304,192
Mar 18/96 13,793 $7.25 $10,000 $ 90,000
Mar 15/96 28,944 $6.91 $20,000 $180,000
Mar 15/96 14,472 $6.91 $10,000 $ 90,000
Mar 12/96 15,948 $6.27 $10,000 $ 90,000
Mar 15/96 14,925 $6.70 $10,000 $ 90,000
Feb 28/96 15,873 $6.30 $10,000 $ 90,000
Feb 23/96 31,348 $6.38 $20,000 $180,000
Feb 12/96 19,047 $5.25 $10,000 $ 90,000
Feb 1/96 23,529 $4.25 $10,000 $ 90,000
Jan 22/96 23,529 $4.25 $10,000 $ 90,000
Jan 18/96 23,529 $4.25 $10,000 $ 90,000
Jan 2/96 23,530 $4.25 $10,000 $ 90,000
Dec 18/95 25,000 $4.00 $10,000 $ 90,000
Dec 7/95 27,027 $3.70 $10,000 $ 90,000
Dec 5/95 30,000 $3.79 $11,370 $102,330
Dec 1/95 24,752 $4.04 $10,000 $ 90,000
Nov 24/95 30,000 $4.14 $12,510 $112,000
EXERCISE OF STOCK OPTIONS:
June /97 13,500 $4.66 Nil $ 62,910
June 5/97 50,000 $4.66 Nil $233,000
June 4/97 5,000 $4.75 Nil $ 23,750
May 29/97 75,000 $4.20 Nil $315,000
May 29/97 9,000 $4.66 Nil $ 41,940
May 23/97 7,000 $4.66 Nil $ 32,620
May 16/97 30,000 $4.20 Nil $126,000
May 15/97 15,000 $4.75 Nil $ 71,250
May 9/97 15,000 $4.20 Nil $ 63,000
May 8/97 15,000 $4.20 Nil $ 63,000
Apr 10/97 1,400 $7.13 Nil $ 9,982
Mar 29/97 2,000 $7.13 Nil $ 14,260
Page 34
<PAGE>
- ------------------------------------------------------------------------------------------
SECURITY DATE NUMBER PRICE COMMISSION NET CASH
PAID RECEIVED
- ------------------------------------------------------------------------------------------
Mar 26/97 115,000 $4.20 Nil $483,000
Mar 20/97 5,400 $7.13 Nil $ 38,502
Mar 11/97 6,500 $7.13 Nil $ 46,345
Mar 6/97 3,600 $7.13 Nil $ 25,668
Feb 19/97 80,000 $1.65 Nil $132,000
Feb 12/97 50,000 $7.13 Nil $356,500
Jan 14/97 3,600 $7.13 Nil $ 25,668
Nov 20/96 2,000 $4.66 Nil $ 9,320
Oct 28/96 1,000 $7.13 Nil $ 7,130
Oct 7/96 2,000 $7.13 Nil $ 14,260
Sept 27/96 10,000 $7.13 Nil $ 71,300
Sept 6/96 10,000 $7.13 Nil $ 71,300
July 15/96 30,000 $1.65 Nil $ 49,500
July 8/96 2,500 $7.13 Nil $ 17,825
July 2/96 4,500 $7.13 Nil $ 32,085
June 28/96 3,500 $7.13 Nil $ 24,955
June 28/96 15,000 $4.66 Nil $ 69,900
June 20/96 10,000 $4.66 Nil $ 45,600
June 17/96 1,000 $4.66 Nil $ 4,600
June 3/96 75,000 $1.25 Nil $ 93,750
June 3/96 3,000 $7.13 Nil $ 21,390
May 29/96 5,000 $7.13 Nil $ 35,650
May 23/96 1,000 $0.52 Nil $ 5,200
Apr 2/96 85,000 $4.20 Nil $357,000
Mar 25/96 100,000 $2.00 Nil $200,000
Mar 11/96 22,000 $2.00 Nil $ 44,000
Feb 21/96 200,000 $4.66 Nil $932,000
Feb 13/96 20,000 $0.55 Nil $ 11,000
Feb 13/96 20,000 $0.55 Nil $ 11,000
Jan 23/96 2,500 $1.25 Nil $ 4,375
Dec 18/95 5,000 $1.25 Nil $ 8,250
Dec 18/95 20,000 $2.00 Nil $ 40,000
Nov 27/95 10,000 $2.00 Nil $ 20,000
EXERCISE OF WARRANTS:
Mar 24/97 12,562 $8.06 Nil $101,250
Mar 24/97 43,221 $7.55 Nil $326,319
Mar 24/97 13,793 $7.35 Nil $101,379
Mar 19/97 36,180 $7.01 Nil $253,622
Mar 17/97 15,948 $6.37 Nil $101,589
Mar 17/97 14,925 $6.80 Nil $101,490
Mar 17/97 15,873 $6.40 Nil $101,587
Feb 23/97 15,674 $6.48 Nil $101,567
Feb 23/97 15,674 $6.48 Nil $101,567
Feb 12/97 19,047 $5.35 Nil $101,650
Feb 1/97 23,529 $4.35 Nil $102,351
Jan 22/97 23,529 $4.35 Nil $102,351
Jan 18/97 23,529 $4.35 Nil $102,351
Page 35
<PAGE>
- ------------------------------------------------------------------------------------------
SECURITY DATE NUMBER PRICE COMMISSION NET CASH
PAID RECEIVED
- ------------------------------------------------------------------------------------------
Jan 2/97 23,530 $4.35 Nil $102,355
Dec 18/96 25,000 $4.10 Nil $102,500
Dec 7/96 27,027 $3.80 Nil $102,703
Dec 5/96 30,000 $3.89 Nil $116,700
Dec 1/96 24,752 $4.14 Nil $102,473
Nov 24/96 30,000 $4.27 Nil $128,100
Oct 25/96 22,988 $4.45 Nil $102,297
Oct 16/96 24,509 $4.18 Nil $102,448
June 10/96 155,200 $3.29 Nil $510,608
June 1096 49,500 $3.29 Nil $182,855
June 6/96 30,408 $3.29 Nil $100,042
June 1/96 41,452 $2.44 Nil $101,143
June 1/96 41,452 $2.44 Nil $101,143
May 23/96 56,116 $1.88 Nil $105,498
Apr 22/96 41,500 $1.27 Nil $ 52,705
Apr 4/96 41,500 $1.27 Nil $ 52,705
Mar 5/96 110,000 $1.10 Nil $121,000
Feb 21/96 149,231 $0.75 Nil $111,923
Feb 21/96 149,231 $0.75 Nil $111,923
Feb 21/96 153,846 $0.75 Nil $115,385
Feb 14/96 223,076 $0.75 Nil $167,307
Nov 1/95 482,500 $0.75 Nil $361,875
SERIES A SPECIAL WARRANTS:
July 2, 1996 3,750,000 $5.00 Nil $18,750,000
Sept 10/96 375,000 $5.00 Nil $ 1,875,000(1)
ACQUISITION OF PACIFIC BAJA:
Sept. 5, 1996 3,076,923 $5.00(2) Nil $15,384,615(3)
SERIES C SPECIAL WARRANTS:
Dec. 6, 1996 500,000 $9.00 $450,000(4) $4,050,000
</TABLE>
(1) The Series A Agents elected to receive a 10% commission payable by
the Company on the private placement of the Series "A" Special
Warrants by the issue by the Company to the Series A Agents of
375,000 Series A Special Warrants.
(2) Pursuant to the Acquisition Agreement, the 3,076,923 common shares
were issued at a deemed price of $5.00 (Cdn.) per share.
(3) Assuming a conversion rate of $1.00 Cdn./$0.73 U.S.
(4) A commission of $450,000 was paid to the Series C Agent.
Page 36
<PAGE>
DIVIDEND RECORD AND POLICY
The Company has never paid dividends on the common shares and currently
intends to reinvest any earnings to fund the development and growth of its
business. Any future payments of dividends will depend upon the financial
condition, capital requirements and earnings of the Company, as well as
other factors the Board of Directors may consider relevant. The Company
does not expect to pay any dividends within the foreseeable future.
DIRECTORS AND OFFICERS
The names, municipalities of residence, positions held by and principal
occupations for the preceding five years for each of the directors and
officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF POSITION WITH
RESIDENCE COMPANY PRINCIPAL OCCUPATION FOR PREVIOUS FIVE YEARS
- ----------------------- ------------- --------------------------------------------
<S> <C> <C>
Edward Halimi President, Chief President of Turbodyne Systems, Inc. and
546 B San Ysidro Road Executive Officer, Biosonics Corporation. Formerly President and
Montecito, CA Director & Promoter owner of Technodyne Corporation and March
93108 Properties, Inc.
Leon E. Nowek(1) Chief Financial Officer Self-employed management consultant. Director
14223 - 29A Avenue and Director and former President of New Westwin Ventures
Surrey, B.C. Inc.
Daniel Geronazzo(1) Director Barrister & Solicitor in private practice for past
1634 Westlake Drive 35 years.
Christina Lake, B.C.
Wendell R. Anderson Director Attorney since 1960; presently counsel with
720 Baker Building Larkin, Hoffman, Daly & Lindgren Ltd. of
Minneapolis, Minnesota Bloomington, Minnesota, Director of numerous
corporations and foundations including National
City Bank Corporation, Fingerhut Corporation and
the University of Minnesota Board of Regents.
Eugene A. Hodgson(1) Director Self-employed management consultant.
802 - 1020 Harwood Street, Previously Director of Corporate Development at
Vancouver, B.C. Intrawest Corporation for five years. Currently
Director of the Vancouver Board of Trade and
Chair of its communications committee. Former
Vice-President of Island Jetfoil Corporation.
Currently treasurer of the Liberal Party of
Canada (BC). Held a number of positions in
both the BC and NWT governments.
Robert F. Taylor Director Corporate advisor and director. Formerly
213 - 5555 Elbow Drive S.W. Chief Operating Officer director of Shell Canada Limited, President of
Calgary, Alberta Shell Canada Products Limited and Executive
Vice-President of Shell Canada Resources.
Currently a Governor of the Glenbow-Alberta
Institute
Page 37
<PAGE>
Dr. Sadayappa Durairaj Director President of Pacifica Hospital Inc. Cardiologist
575 Palmerstone, La Canada with Sierra Medical Clinic.
Flintridge, California
Andrew Lee, Secretary Controller Chartered Accountant with Morgan & Company
3746 W. 20th Avenue Chartered Accountants from 1992 to 1997.
Vancouver, B.C. Chartered Accountant with Doane Raymond and predecessor
V6S 1E8 firm from 1983 to 1992.
</TABLE>
(1) Members of Audit Committee.
Edward Halimi is the President and Chief Executive Officer of the Company
and has served in those capacities since October 18, 1993. Mr. Halimi is
the developer of the Turbodyne System. He spent 11 years working with
FerroPlast Corporation, an international company specializing in the
engineering and manufacture of diesel engines, pumps, electric motors and
farm equipment. As a Vice-President, Mr. Halimi worked in the engineering
and manufacturing divisions in the Middle East and Europe and was
responsible for the home building and housing operations in the United
States. Mr. Halimi was also the President and Chief Executive Officer of
Technodyne Corporation, a manufacturer of heat management and temperature
control units and he is currently the Chief Executive Officer of Biosonics
Corporation, a research and development company in the fields of
ultrasonics, vibration control and semi-conductor research and electronics.
Leon E. Nowek is a director of the Company and has an accounting background
and is responsible for corporate finance, financial reporting and
regulatory compliance. He was appointed as a director of the Company in
October, 1993. Mr. Nowek has held the following positions with reporting
issuers in British Columbia during the past five years:
a. Director of New Westwin Ventures Inc. from December 1988 to present,
President from December 1988 to April 1, 1996;
b. Director of Consolidated Redding Exploration Corp. from November 1988
to present and Secretary from January 1993 to present;
c. Director and Secretary of Connect Intertel Media Inc. from December
1988 to July 1992. Director from April 1993 to November, 1995;
d. Director and Secretary of Astic Ventures Inc. from November 1984 to
May 1992; and
e. Director of White Hawk Ventures Inc. from February 1987 to October
1992. Secretary from January 1993 to September 1993.
Daniel Geronazzo is a director of the Company. He was appointed as a
director on January 24, 1995. Mr. Geronazzo is an attorney in the Province
of British Columbia and has been in private legal practice for the past 35
years.
Mr. Anderson is a director of the Company. He was appointed as a director
on November 20, 1995. Mr. Anderson received his Doctor of Law Degree from
the University of Minnesota Law School in 1960. He has been in private
practise since 1960 and is presently of counsel with the firm of Larkin,
Hoffman, Daly and Lindgren Ltd. of Bloomington, Minnesota. Mr. Anderson
has held several positions of public office. From 1959 to 1963 he was a
state representative from Minnesota and served as state senator from 1963
to 1971. In 1971 Mr. Anderson was elected as Governor of the State of
Minnesota. In 1977 Mr. Anderson became a United States Senator from the
State of Minnesota. He held office for a period of two years. During his
term, he served on such committees as the environment and public works
committee, the budget committee, the natural resources committee and armed
services committee. Mr. Anderson currently serves as a director of
numerous corporations and foundations including National City Bank
Corporation, Fingerhut Corporation and the University of Minnesota Board of
Regents.
Page 38
<PAGE>
Eugene A. Hodgson is a director of the Company. Mr. Hodgson is a self-
employed management consultant and is also a director of New Westwin
Ventures Inc. Mr. Hodgson was previously the Director of Corporate
Development at Intrawest Corporation, a company listed on the Toronto Stock
Exchange, for a period of five years. Mr. Hodgson is currently a Director
of the Vancouver Board of Trade and Chair of its Communications Committee.
He is also currently the treasurer of the Liberal Party of Canada (British
Columbia). He was also the Vice President of corporate Affairs of the
Island Jetfoil Corporation. Mr. Hodgson has held a number of positions in
both the British Columbia and Northwest Territorial governments.
Robert F. Taylor is a director of the Company. Mr. Taylor was appointed a
director on July 15, 1996. Mr. Taylor was appointed Chief Operating
Officer of the Company as of January 1, 1997. Mr. Taylor is a chartered
accountant and is a member of the Institute of Chartered Accountants of
Alberta, Canada. Mr. Taylor recently retired from Shell Canada Limited
where he had been a director since 1992 and from Shell Canada Products
Limited, where he had been President since 1993. Mr. Taylor served with
Shell in various capacities since 1967 in Calgary, Toronto and London,
England. Mr. Taylor is currently a director of McTay Holdings Limited, a
private company. Mr. Taylor is a Governor of the Glenbow-Alberta Institute
and a Trustee of the Duke of Edinburgh's Commonwealth Study Conference.
Sadayappa Durairaj is a cardiologist and businessman based in California.
He obtained his Medical degree from Madural Medical College in India in
1966 and has been certified by both the American Board of Internal Medicine
and the Canadian Board of Internal Medicine and Cardiology. Currently he
is the President and C.E.O of the Pacifica Hospital and Sierra Medical
Clinic. Dr. Durairaj also serves as associate Clinical Professor of
Medicine at USC Los Angeles. Dr. Durairaj was Chairman and founder of
Pacific Baja Light Metals Holding Inc. which was acquired by the Company on
September 5, 1996. Dr. Durairaj is also Chairman of Brentwood Bank
(California) and VSK Ferro Alloys (India).
Directors may be appointed at any time and are then re-elected annually by
the stockholders. Directors receive no compensation for serving as such,
other than stock options. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
Edward M. Halimi and Leon E. Nowek presently devote 100% of their business
time to the Company. Daniel D. Geronazzo, Richard W. Donaldson, Wendell R.
Anderson, Dr. Sadayappa Durairaj and Robert F. Taylor devote such
percentage of their time to the business of the Company as is required by
the Company. Eugene A. Hodgson devotes a majority of his business time to
the business of the Company.
Andrew Lee was appointed controller of the Company as of January 1, 1997.
Mr. Lee was appointed Secretary of the Company as of April 25, 1997. Mr.
Lee is a member of the Institute of Chartered Accountants of British
Columbia. Prior to joining the Company, Mr. Lee practised as a chartered
accountant with Morgan & Company in Vancouver, British Columbia. Mr. Lee
devotes his full time as controller of the Company.
Directors of the Company also serve as directors of other companies.
Accordingly, it may occur that business opportunities will be offered to
both the Company and such other companies. As a result there may be
situations which involve a conflict of interest. In that event, the
directors would not be entitled to vote at meetings of directors which
evoke any such conflict. The directors will attempt to avoid dealing with
such other companies in situations where conflicts might arise and will at
all times use their best efforts to act in the best interest of the
Company.
None of the directors, officers and promoters of the Company are, or have
been within the past five years, directors, officers or promoters of other
reporting issuers which, during the period they held such position, were
struck from the Register of Companies by the British Columbia Registrar of
Companies or other similar authority, or whose securities were the subject
of a cease-trading order or suspension order for a period of more than 30
consecutive days, other than Leon E. Nowek who is a former director of
Connect Intertel Media Inc (formerly Medsana Medical
Page 39
<PAGE>
Systems Inc.) which was the subject of a cease trading order in British
Columbia for failure to file financial statements during the period when
Mr. Nowek was a director.
None of the directors, officers or promoters of the Company have been,
within the past ten years, the subject of any penalties or sanctions by a
court or securities regulatory authority relating to the trading of
securities, the promotion, formation or management of a publicly traded
issuer or involving theft or fraud.
EXECUTIVE COMPENSATION
1. COMPENSATION OF NAMED EXECUTIVE OFFICERS
----------------------------------------
The following table discloses the compensation paid by the Company during
the previous three financial years to its Chief Executive Officer and its
"Named Executive Officers", as that term is defined in applicable
securities legislation:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND YEAR ANNUAL COMPENSATION LONG TERM COMPENSATION ALL OTHER
PRINCIPAL ============================= ===================================== COMPEN-
POSITION SALARY BONUS OTHER AWARDS PAYOUTS SATION($)
($) ($) ANNUAL =====================================
(U.S.) COMPEN- SECURITIES RESTRICTED LTIP
SATION ($) UNDER SHARES OR PAYOUTS($)
OPTIONS/ RESTRICTED
SARS SHARE/UNITS
GRANTED (#) ($)
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ralph Maloof 1996 $120,000 nil nil nil nil nil nil
Vice-President,
Chief of 1995 $120,000 nil nil 200,000 nil nil nil
Engineering of
Turbodyne 1994 n/a n/a n/a n/a n/a n/a n/a
Systems, Inc.
1993 n/a n/a n/a n/a n/a n/a n/a
David Willett 1996 $122,000 nil nil 35,000 nil nil nil
Vice-President
of Electronics 1995 N/A N/A N/A N/A N/A N/A N/A
and Controller
of Turbodyne 1994 n/a n/a n/a n/a n/a n/a n/a
Systems, Inc.
1993 n/a n/a n/a n/a n/a n/a n/a
Doriah Page(1) 1996 $105,000 nil nil nil nil nil nil
Vice-President
of 1995 $105,000 nil nil 100,000 nil nil nil
Transportation,
Engineering and
Emission 1994 n/a n/a n/a n/a n/a n/a n/a
Technology &
Compliance of 1993 n/a n/a n/a n/a n/a n/a n/a
Turbodyne
Systems, Inc.
Page 40
<PAGE>
Edward M.(2) 1996 $60,000 nil nil nil nil nil nil
Halimi 1995 $60,000(1) nil nil 500,000 nil nil nil
President 1994 $60,000 nil nil nil nil nil nil
1993 nil nil nil nil nil nil nil
William 1996 123,000 nil nil nil nil nil nil
Woolenweber 1995 40,000 nil nil 50,000 nil nil nil
1994 n/a n/a n/a n/a n/a n/a n/a
</TABLE>
(1) Ms. Page is entitled to be paid a bonus by Turbodyne Systems equal to
1% of the gross invoice price of all products sold by Turbodyne
Systems for the urban bus retrofit market within the United States.
(2) The Company's compensation committee is currently reviewing the
remuneration paid to Mr. Halimi and reports that his remuneration will
increase substantially in 1997.
The following table discloses the particulars of options or stock
appreciation rights ("SARs") granted during the preceding financial year to
the Company's Chief Executive Officer and its Named Executive Officers:
OPTION/SAR GRANTS
DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS/ MARKET VALUE OF
SECURITIES UNDER SAR'S GRANTED TO EXERCISE OR BASE SECURITIES UNDERYLING
OPTIONS/SARS EMPLOYEES IN PRICE OPTIONS/SARS ON THE DATE
NAME YEAR GRANTED (#) FINANCIAL YEAR ($/SECURITY) OF GRANT($/SECURITY) EXPIRATION DATE
=============== ==== ================ ================== ================ ======================== ==============
<S> <C> <C> <C> <C> <C> <C>
Edward M. Halimi 1996 Nil Nil N/A N/A N/A
President 1995 500000 32.5% $0.52 $0.52 January 31, 1997
Ralph P. Maloof 1996 Nil Nil N/A N/A
1995 200000 13.0% $4.75 $4.75 August 17, 1997
Dorriah L. Page 1996 Nil Nil N/A N/AN/A
1995 100000 6.5% $1.65 $1.65 April 20, 1997
David Wilett 1996 35000 1.6% $7.13 $7.13 Feb. 27, 1998
William 1996 Nil N/A N/A N/A N/A
Wollenweber 1995 50,000 N/A N/A N/A N/A
</TABLE>
Page 41
<PAGE>
The following table discloses the particulars of stock options exercised
during the preceding financial year by the Company's Chief Executive
Officer and its Named Executive Officers:
AGGREGATED OPTION/SAR EXERCISES
DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised in
UNEXERCISED THE MONEY OPTIONS/
SECURITIES OPTIONS/SARS AT FY- SARS AT FY-END ($)
ACQUIRED ON AGGREGATE VALUE END(#) (EXERCISABLE/ (EXERCISABLE
NAME YEAR EXERCISE (#) REALIZED($) UNEXERCISABLE) UNEXERCISABLE)
================= ==== ============ =============== =================== =======================
<S> <C> <C> <C> <C> <C>
Edward M. Halimi 1995 499000 $2,229,907 1000 $4,480
President 1996 1000 $11,330 Nil Nil
Ralph P. Maloof 1995 Nil Nil 200000 $50,000
1996 Nil Nil 200000 $1,250,000
Dorriah L. Page 1995 Nil Nil 100000 $335,000
1996 20000 $114,500 80000 $748,000
David Willett 1996 Nil Nil 35000 $135,000
William Wollenweber 1996 Nil Nil 50,000 262,000
</TABLE>
Other than options to purchase shares of the Company which are granted to
the Company's directors from time to time, the Company does not have any
arrangements pursuant to which directors are remunerated by the Company or
its subsidiaries for their services as directors.
2. COMPENSATION OF DIRECTORS
-------------------------
The Company is party to a management services agreement with Seeds
Investment Corporation ("Seeds") whereby the Company pays to Seeds a total
of $2,500 per month in consideration of Seeds providing the management
services of Leon E. Nowek to the Company. During the fiscal year ended
December 31, 1996 a total of $30,000 was paid or is payable to Seeds
pursuant to this agreement. Seeds is a private British Columbia company
controlled by Leon E. Nowek, a director of the Company.
Pursuant to an agreement between the Company and Centrepoint Equities Inc.
("Centrepoint"), the Company pays Centrepoint $2,500 per month in
consideration of Centrepoint providing office space and secretarial and
reception services to the Company. During the fiscal year ended December
31, 1996 a total of $30,000 was paid or is payable to Centrepoint pursuant
to this agreement. Centrepoint is a non-reporting British Columbia
company, the shares of which are owned by Leon E. Nowek, a director of the
Company.
The Company's compensation committee is currently reviewing the
remuneration paid to Seeds Investment Corporation and reports that this
remuneration will increase substantially in 1997. As of the date of this
prospectus, the Compensation Committee had not completed its review or made
any recommendations.
Page 42
<PAGE>
The Company has paid a total of $78,318.46 in consulting fees to Eugene
Hodgson since January 1, 1996 in connection with consulting services
provided by Mr. Hodgson for the acquisition of Pacific Baja. The Company
has paid a total of $9,000 in consulting fees to Leon Nowek since January
1, 1996 in connection with accounting services provided by Mr. Nowek. The
Company has paid a total of (U.S.) $2,000 in consulting fees to Wendell
Anderson since January 1, 1996. Except as noted above, the Company did not
pay any amounts as remuneration to Mr. Hodgson, Mr. Nowek or Mr. Anderson
during its last fiscal year.
3. INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS TO THE COMPANY
------------------------------------------------------------
<TABLE>
<CAPTION>
Amount
Largest Amount Outstanding as Amount
Involvement of Outstanding at December Outstanding as
Name and Principal Issuer or During 1996 31, 1996 at May 31, Security for
Position Subsidiary ($) ($) 1997 ($) Indebtedness
(a) (b) (c) (d) (e) (f)
================== ============= ============ ============= ============== ============
<S> <C> <C> <C> <C> <C>
EDWARD M. HALIMI LOAN FROM
PRESIDENT THE COMPANY $112,984 $112,984 $137,000 NIL
</TABLE>
With the exception of Edward M. Halimi, no director or senior officer of
the Company, or its subsidiaries, or any associate or affiliate of any such
director or senior officer is or has been indebted to the Company or any of
its subsidiaries at any time during the Company's last completed financial
year or since the beginning of the Company's current financial year.
STOCK OPTIONS AND OTHER RIGHTS TO PURCHASE SECURITIES
The following table sets forth certain information relating to options to
purchase common shares of the Company which are outstanding as June 6,
1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Market
Value Market
No. of Exercise on Date Value on
Name Type Shares Price Expiry Date of Grant June 6/97
- --------------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS
- -------
GROUP (i)
- ----------
Executive Officers Options 200,000 $9.85 Jan 6/99 $1,970,000 $1,250,000
as a Group Options 200,000 $9.85 Jan 6/99 $1,970,000 $1,250,000
(5 Executive Options 50,000 $6.25 June 6/02 $312,500 $312,500
Officers) Options 150,000 $6.25 June 6/02 $937,500 $937,500
Options 50,000 $9.00 Sept 3/98 $450,000 $312,500
Directors who are not Options 50,000 $6.25 June 6/02 $312,500 $312,500
Executive Officers as Options 50,000 $7.13 Feb 27/98 $356,500 $312,500
Group Options 73,000 $4.66 Dec 27/97 $349,500 $456,250
(4 Directors) Options 80,000 $9.85 Jan 6/99 $788,000 $500,000
- -------------------------------------------------------------------------------------------------
Page 43
<PAGE>
Market
Value Market
No. of Exercise on Date Value on
Name Type Shares Price Expiry Date of Grant June 6/97
- -----------------------------------------------------------------------------------------------
Options 50,000 $6.25 June 6/02 $ 312,500 312,500
Options 20,000 $6.25 June 6/02 $ 125,000 $ 125,000
Options 23,000 $6.25 June 6/02 $ 143,750 $ 143,750
GROUP (ii)
- -----------
Executive Officers of Options 50,000 $6.25 Mar 3/02 $312,500 $ 312,500
all Subsidiaries of the Options 195,000 $4.75 Aug 17/97 $926,250 $1,218,750
Company as a group Options 35,000 $4.75 Aug 17/97 $166,250 $ 218,750
and who are not Options 59,000 $4.66 Dec 27/97 $274,940 $ 368,750
persons referred to in Options 25,000 $4.66 Dec 27/97 $116,500 $ 456,250
Group (i) Options 35,000 $7.13 Feb 27/98 $249,550 $ 218,750
(11 Executive Officers) Options 50,000 $6.25 June 6/02 $312,500 $ 312,500
Options 15,000 $9.00 Sept 3/98 $143,250 $ 93,750
Options 10,000 $9.00 Sept 12/98 $ 95,500 $ 63,500
Options 50,000 $9.00 Sept 12/98 $477,500 $ 312,500
Options 75,000 $6.25 June 6/02 $468,750 $ 468,750
Options 125,000 $6.25 June 6/02 $781,250 $ 781,250
Directors of Subsidiaries Options 50,000 $9.00 Sept 12/98 477,500 $ 312,500
who are not Executive
Officers and who are not
persons referred to in
Group (i)
(1 Director)
GROUP (iii)
- -----------
All other employees of Options 15,000 $4.20 July 28/97 $ 63,000 $ 93,750
the Company, as a group Options 9,000 $4.66 Dec 27/97 $107,100 $ 56,250
Options 50,000 $7.13 Feb 27/98 $356,500 $ 312,500
Options 11,000 $7.13 Feb 27/98 $ 78,430 $ 68,750
Options 75,000 $6.25 June 6/02 $468,750 $ 468,750
Options 50,000 $6.25 June 6/02 $312,500 $ 312,500
Options 50,000 $6.25 June 6/02 $312,500 $ 312,500
Options 100,000 $6.25 June 6/02 $625,000 $ 625,000
GROUP (iv)
- ----------
All other employees of Options 10,400 $7.13 Feb 27/98 $106,950 $ 65,000
Subsidiaries of the Options 10,000 $7.13 Feb 27/98 $ 71,300 $ 62,500
Company, as a group Options 100,000 $7.13 Feb 27/98 $713,000 $ 625,000
Options 5,000 $7.13 Feb 27/98 $ 35,650 $ 31,250
Options 142,000 $9.00 Sept 3/98 $1,356,100 $ 887,500
Options 195,000 $9.00 Sept 3/98 $1,862,250 $1,218,750
Page 44
<PAGE>
- -----------------------------------------------------------------------------------------------
Market
Value Market
No. of Exercise on Date Value on
Name Type Shares Price Expiry Date of Grant June 6/97
- -----------------------------------------------------------------------------------------------
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 25,000 $6.25 Sept 6/02 $156,250 $156,2580
Options 20,000 $6.25 Sept 6/02 $125,000 $ 125,000
Options 10,000 $6.25 Sept 6/02 $ 62,500 $ 62,500
Options 10,000 $6.25 Sept 6/02 $ 62,500 $ 62,500
Options 2,500 $6.25 Sept 6/02 $ 15,625 $ 15,625
Options 2,500 $6.25 Sept 6/02 $ 15,625 $ 15,6258
Options 3,000 $6.25 Sept 6/02 $ 18,750 $ 18,750
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 100,000 $6.25 Sept 6/02 $625,000 $ 625,000
Options 25,000 $6.25 Sept 6/02 $156,250 $ 156,250
Options 15,000 $6.25 Sept 6/02 $ 93,750 $ 93,70
Options 75,000 $6.25 Sept 6/02 $168,750 $ 468,750
Options 5,000 $6.25 Sept 6/02 $ 31,250 $ 31,250
Options 3,000 $6.25 Sept 6/02 $ 18750 $ 18,750
Options 10,000 $6.25 Sept 6/02 $ 62,500 $ 62,500
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 10,000 $6.25 Sept 6/02 $ 62,500 $ 32,500
Options 50,000 $6.25 Sept 6/02 $312,500 $ 312,500
Options 2,500 $6.25 Sept 6/02 $ 15,625 $ 15,325
Options 25,000 $6.25 Sept 6/02 $156,250 $ 156,250
GROUP (v)
- ---------
All other persons or Options 15,000 $4.20 July 28/97 $ 93,750 $ 93,750
companies Options 190,000 $4.66 Dec 22/97 $1,187,500 $1,187,500
Options 150,000 $7.13 Feb 27/98 $1,069,500 $ 937,500
Options 20,000 $7.13 Feb 27/98 $ 142,600 $ 125,000
Options 208,000 $9.00 Sept 3/98 $1,986,400 $1,300,000
Options 75,000 $9.00 Sept 3/98 $ 716,250 $ 468,750
Warrants Warrants 33,333 $9.00 Sept 3/98 $ 318,330 $ 208,331
</TABLE>
SECURITIES HELD IN ESCROW OR POOL
The Series C Special Warrants, Series C Common Shares and Series C Ordinary
Warrants are subject to pooling arrangements restricting the transfer of
these securities and these securities will only be released from the
pooling arrangements on the earlier of 30 days after the date a final
receipt for this prospectus is issued by the British Columbia Securities
Commission and the Ontario Securities Commission and August 1, 1997.
There are 4,150,000 shares held in escrow by Montreal Trust Company of
Canada, 510 Burrard Street, Vancouver, British Columbia, V6C 3B9, subject
to the direction or determination of the Vancouver Stock Exchange. The
terms of the escrow are governed by an escrow agreement dated March 7, 1994
between the Company, Montreal Trust
Page 45
<PAGE>
Company of Canada, March Technologies Inc. and Leon Nowek (the "Escrow
Agreement"). The escrow restrictions provide that the shares may not be
traded in, dealt with in any manner whatsoever or released, nor may the
Company, its transfer agent or escrow holder make any transfers or record
any trading of the shares without the consent of the Vancouver Stock
Exchange.
The holders of the escrow shares are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Shareholder Designation of Class Number of Securities Percentage of
held in escrow Class
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March Technologies Inc.(1) Common Shares 3,250,000 13.37%
L.N. Family Holdings Inc.(2) Common Shares 900,000 3.70%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) All of the voting shares of this company are beneficially owned by
Edward Halimi, President, Chief Executive Officer and Director of the
Company.
(2) All of the voting shares of this company are beneficially owned by
Leon E. Nowek, Chief Financial Officer and Director of the Company.
Leon E. Nowek transferred his interest in the 900,000 escrow shares to
L.N. Family Holdings Inc. by agreement dated June 20, 1995.
(3) Based on 24,310,612 shares issued and outstanding on May 31, 1997.
The Company issued the 4,125,000 escrow shares at a price of $0.01 per
common share at the time of the completion of the Company's reverse
takeover of Turbodyne Systems (the "Reverse Take Over"). The Company's
escrow shares described above can only be released in compliance with Local
Policy Statement 3-07 of the British Columbia Securities Commission. Under
this Local Policy Statement, releases of escrow shares shall be made on the
basis of one share for each $0.343 of "Cumulative Cash Flow" of the Company
on a consolidated basis where:
"Cumulative Cash Flow" means at any time, the aggregate Cash Flow of
the Company up to that time from a date no earlier than the Company's
financial year-end and immediately preceding the date of the
completion of the Reverse Take Over, net of any negative Cash Flow.
"Cash Flow" means the net income or loss of the Company before tax,
adjusted to add the following expenses:
(a) depreciation;
(b) amortization of goodwill and amortization of research and
development, excluding general and administrative costs;
(c) expended research and development costs, excluding general and
administrative costs;
(d) any other amounts permitted or required by the British Columbia
Securities Commission.
The provisions of the Escrow Agreement provide that any performance shares
beneficially owned by Mr. Halimi or Mr. Nowek will be retained by March
Technologies, Inc. or L.N. Family Holdings Inc.,as the case may be, upon
Mr. Halimi or Mr. Nowek ceasing to be a principal of the Company, as the
term "principal" is defined in Local policy Statement 3-07. There is no
obligation of the shareholders to surrender their shares to the Company
upon the death or bankruptcy of Mr. Nowek or Mr. Mr. Halimi or upon Mr.
Nowek or Mr. Halimi ceasing to be a principal of the Company.
Page 46
<PAGE>
PRINCIPAL SHAREHOLDERS
To the knowledge of the signatories hereto, only the following persons
beneficially own, directly or indirectly, more than 10% of the voting
shares of the Company:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Name and Designation Type of Number of Percentage
address of class ownership securities owned of class
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward M. Halimi Common Shares Beneficial (1) 3,266,900 13.44(2)
- ------------------------------------------------------------------------------------------
</TABLE>
(1) These shares are registered in the name of March Technologies Inc., a
private company owned and controlled by Mr. Halimi, and
are held in escrow by Montreal Trust Company of Canada.
(2) Based on 24,310,612 common shares outstanding as of May 31, 1997.
The following table sets forth the number of shares beneficially owned,
directly or indirectly, by all directors and senior officers of the
Company and its subsidiaries, as a group:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Designation of Class Number of Securities Owned Percentage of Class
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Shares 4,665,111 19.19%(1)
Series A Special Warrants 50,000 1.21%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on 34,310,612 common shares outstanding as of May 31, 1997.
DILUTION
The following table sets forth the dilution per Common Share to be incurred
by holders of Series "A" Special Warrants based on the consolidated balance
sheet of the Company as at December 31, 1996 after giving effect to the
exercise of the Series "A" Special Warrants. This table does not include
potential dilution resulting from the exercise of the Series A Ordinary
Warrants.
PER
COMMON SHARE
------------
Issue Price: $5.00
Consolidated net tangible book
value as at December 31, 1996
before giving effect to this
offering (1): ($0.21)
Increase in consolidated net
tangible book value attributable
to this offering (2): $0.68
Consolidated net tangible book
value at December 31, 1996
adjusted for this offering: $0.47
Dilution to investors: $4.53
Percentage of dilution in
relation to Issue Price (3): 90.6%
Page 47
<PAGE>
(1) Calculated on the basis of 23,580,098 common shares outstanding.
(2) Includes the proceeds of $18,135,000 from the sale of the Series "A"
Special Warrants less the estimated issue expenses of $615,000.
(3) Calculated on the basis of 23,580,098 common shares outstanding.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as disclosed herein, management and the directors of the Company
do not have any material interest in any transactions or proposed
transactions which have materially affected or would affect the Company or
its subsidiaries, except insofar as they are holders of common shares and
options to purchase common shares.
Edward M. Halimi, a director of the Company, transferred all assets
comprising the Turbodyne Technology, as of the date of the transfer, to
Turbodyne Systems in consideration for the issue to Halimi of 100 common
shares of Turbodyne Systems, being all of the issued and outstanding shares
of Turbodyne Systems. Mr. Halimi entered into an employment agreement with
Turbodyne Systems on completion of the acquisition. The Company acquired
all of the issued and outstanding shares in Turbodyne Systems from Halimi
pursuant to an agreement dated July 15, 1993 and amended by amendment
agreements dated October 1, 1993 and December 31, 1993 whereby the Company
issued 1,000,000 common shares of the Company to Halimi. The Company also
issued to Mr. Halimi a total of 3,250,000 escrow shares on completion of
the acquisition by the Company of Turbodyne Systems. See "Securities Held
in Escrow or Pool".
Michael Joyce is party to an employment agreement with Pacific Baja Light
Metals and the Company dated September 5, 1996 whereby he is employed as
President of Pacific Baja Light Metals. The employment agreement has a
three year term. Mr. Joyce is paid a base salary of $12,500 per month plus
an annual cash bonus based on the annual net operating profit of Pacific
Baja Light Metals. The maximum bonus payable is 150% of base salary which
is earned upon the annual net operating profit of Pacific Baja Light Metals
exceeding $5,500,000 (U.S.). Mr. Joyce is also entitled to receive options
to purchase 50,000 shares of the Company upon the completion of each
anniversary of the execution of the employment agreement.
The consulting services of Lennart Renberg are provided to Pacific Baja
Light Metals pursuant to a consulting agreement between Pacific Baja, the
Company and Lykar Specialties, Inc. (the "Consultant") dated September 5,
1996. The consulting agreement has a three year term. Pacific Baja pays a
base consulting fee for Mr. Renberg's services equal to $12,500 per month
plus an annual bonus based on the annual net operating profit of Pacific
Baja Light Metals. The maximum bonus payable is 150% of base salary and is
earned upon the annual net operating profit of Pacific Baja Light Metals
exceeding $5,500,000(U.S.). Options to purchase 50,000 shares of the
Company are also to be issued to the Consultant upon each anniversary of
the term of the consulting agreement.
Each of Dr. Sadayappa Durairaj, a director of the Company, Michael Joyce,
President of Pacific Baja Light Metals, and Lennart Rennberg, a director of
Pacific Baja Light Metals, are principals of Baja Pacific Properties, the
landlord of the Ensenada facility leased by Pacific Baja Light Metals,
referred to under "Business and Property".
PROMOTERS
By virtue of the definition set out in the applicable securities
legislation, Leon E. Nowek and Edward M. Halimi are promoters of the
Company.
See "Executive Compensation" and "Stock Options and Other Rights to
Purchase Securities" for details of money paid to and stock options granted
to the promoters of the Company.
Page 48
<PAGE>
See "Securities Held in Escrow" and "Interest of Management and Others in
Material Transactions" for details of shares issued to the promoters of the
Company.
MATERIAL CONTRACTS AND DOCUMENTS
The only contracts which have been entered into by the Company and its
subsidiaries and which can reasonably be regarded as presently material are
the following:
1. Acquisition Agreement and amendment thereto with Pacific Baja and the
Principal Shareholders referred to under "Business and Property".
2. Agency Agreement with Yorkton Securities Inc., Sprott Securities
Limited and Wellington West Capital Inc. referred to under "Plan of
Distribution".
2. Series A Special Warrant Indenture dated June 14, 1996 between the
Company and the Trustee referred to under "Plan of Distribution".
3. Series A Ordinary Warrant Indenture dated June 14, 1996 between the
Company and the Trustee referred to under "Plan of Distribution".
4. Agency Agreement with Yorkton Securities Inc. dated October 31, 1996.
5. Series C Special Warrant Indenture dated December 6, 1996 between the
Company and the Trustee.
6. Series C Ordinary Warrant Indenture dated December 6, 1996 between the
Company and the Trustee.
8. Option Agreements referred to under "Stock Options and Other Rights to
Purchase Securities".
9. Escrow Agreement dated March 7, 1994 between the Company, the Trustee,
March Technologies Inc. and Leon Nowek referred to under "Securities
of the Company Held in Escrow or Pool".
10. Series A Special Warrant Subscription Agreements pursuant to which the
purchasers acquired the Series A Special Warrants, referred to under
"Plan of Distribution".
11. Agreement between Turbodyne Systems, Inc. and Grand Performance
Technologies, Inc. referred to under "Business and Property".
12. Lease between Pacific Baja Light Metals and New England Mutual Life
Insurance, referred to under "Business and Property".
13. Lease between Pacific Baja Light Metals and Baja Pacific Properties,
referred to under "Business and Property".
14. Line of Credit Agreement between Optima Wheel and Wells Fargo Bank,
referred to under "Management Discussion and Analysis of Financial
Conditions and Operating Results".
15. Line of Credit Agreement between Pacific Baja Light Metals and Wells
Fargo Bank, referred to under "Management Discussion and Analysis of
Financial Conditions and Operating Results".
Page 49
<PAGE>
16. Line of Credit Agreement between Pacific Baja Light Metals and TST
Inc., referred to under "Management Discussion and Analysis of
Financial Condition and Operating Results".
17. Guarantee of the Company in favour of Wells Fargo Bank, referred to
under "Management Discussion and Analysis of Financial condition and
Operating Results".
18. Guarantee of the Company in favour of TST, Inc., referred to under
""Management Discussion and Analysis of Financial condition and
Operating Results".
19. Employment Agreement between Pacific Baja Light Metals, the Company
and Michael Joyce dated the 5th day of September, 1996, referred to
under "Interest of Management and Others in Material Transactions".
20. Consulting Agreement between Pacific Baja Light Metals, the Company
and Lykar Specialties, Inc. dated the 5th day of September, 1996,
referred to under "Interest of Management and Others in Material
Transactions".
21. Agreement dated April 4, 1997 between the Company and Burson-
Marstellar, referred to under "Business and Property".
22. Agreement in Principle between Turbodyne Systems, Inc. and Kuhnle,
Kopp & Kausch AG dated for reference as of the 11th day of April,
1997.
Copies of these agreements, or the relevant provisions thereof, will be
available for inspection at the head office of the Company or at the office
of O'Neill & Company, 12th Floor, 1190 Hornby Street, Vancouver, British
Columbia, during normal business hours during the course of distribution
and for a period of 30 days thereafter.
LEGAL MATTERS
The Company is a party to an action commenced in the Supreme Court of
British Columbia on October 2, 1996 by Brad Holt seeking specific
performance and/or damages for breach of an alleged agreement by the
Company to grant to Brad Holt options to purchase an aggregate of 650,000
common shares of the Company at prices varying from $3.50 per share to
$7.50 per share. The Company has filed a defence denying the existence of
the agreement and, in the alternative, alleging that the agreement was
replaced by a subsequent agreement granting Brad Holt options on only
100,000 shares of the Company. The Company's management are of the view
that the claim is without merit.
With the exception of the action commenced by Brad Holt, the Company and
its subsidiaries are not a party with respect to any material legal
proceedings, no legal proceedings by the Company are contemplated and the
Company yhis not aware of any possible material legal proceedings by other
parties against the Company.
Certain legal matters in connection with the Series A Special Warrant
Offering will be passed upon for the Company by O'Neill & Company.
OTHER MATTERS
The Company has entered into a private placement engagement agreement dated
June 17, 1997 with GEM Advisors, Inc. ("GEMA") a member of the Global
Emerging Markets Group ("GEM") for the placement of convertible preferred
shares and warrants with GEM or accredited investors introduced by GEMA.
Page 50
<PAGE>
The Company proposes to issue Class A Preference Shares pursuant to the
private placement agreement which will be issued at a price equal to par
and will be convertible into common shares at any time during the period
commencing four months from closing and ending three years from closing at
the lesser of:
1. A fixed price equal to 110% of the bid price of the common shares at
the time of closing, or
2. A floating price varying from 80% to 90% (depending on time
outstanding) of the 10-day average closing bid price of the Company's
common shares at the time of conversion.
The preference shares will be deemed to be converted three years from
closing.
In conjunction with the issuance of the preference shares, warrants will be
issued entitling the holders to purchase for a period of three years, at
the fixed price described above, common shares having a value of 33 1/3% of
the amount of the funding. The convertible preference shares will have a
dividend rate of 7% per annum payable in cash or common shares (at the
Company's option) at the time of conversion.
The Company has the option to redeem the preference shares and warrants in
consideration for:
i. a cash payment equal to the value of the common shares issuable
upon conversion based on the lesser of 110% of the bid price of
the Company's shares at the date of closing or 80% of the 10 day
average closing bid price at the time of conversion; and
ii. a warrant at 110% of the bid price of the Company's shares at the
date of closing to purchase a number of common shares equal in
value, based on 110% of the bid price of the Company's shares at
the date of closing, to the preference shares and warrants
redeemed, with a term expiring concurrently with that of the
original preference shares.
Funding is expected to take place in two tranches, with the first tranche
of US $2,500,000 expected to close no later than July 15, 1997 and the
second tranche of US $2,500,000 to close at a date to be mutually agreed
approximately 120 days after the first closing. The proceeds will be used
by the Company for working capital. The Company will pay a fee equal to 3%
of the gross proceeds raised to GEM which will be paid from the gross
proceeds raised.
As a condition of funding, the Company will be required to delist it shares
from the Vancouver Stock Exchange. The shares will continue to trade on the
NASDAQ Small Cap Market. The Company is also required to file a
registration statement with the United States Securities and Exchange
Commission for the common shares underlying the preference shares and
warrants and to use commercially reasonable efforts to cause the
registration statement to be effective on or before October 27, 1997.
The financing is subject to completion of satisfactory due diligence
investigations by GEM and the execution of formal legal documents by the
Company and the investors. There is no assurance the financing will be
completed.
AUDITORS, REGISTRAR, TRANSFER AGENT AND WARRANT AGENT
Morgan & Company, Chartered Accountants, of 1730 - 700 West Georgia Street,
Vancouver, British Columbia, V7Y 1A1, are the auditors of the Company.
Montreal Trust Company of Canada is the registrar and transfer agent for
the common shares at its principal transfer office in Vancouver, British
Columbia. Montreal Trust Company of Canada is also the Warrant Agent and
registrar for the Series A Special Warrants and the Series A Ordinary
Warrants at its principal transfer office in Vancouver, British Columbia.
Page 51
<PAGE>
STATUTORY RIGHTS OF RESCISSION AND WITHDRAWAL
Securities legislation in several of the provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase
securities within two business days after receipt or deemed receipt of a
prospectus and any amendment. In several of the provinces, securities
legislation further provides a purchaser with remedies for rescission or
damages where the prospectus or any amendment contains a misrepresentation
or is not delivered to the purchaser, provided that such remedies for
rescission or damages are exercised by the purchaser within the time limit
prescribed by the securities legislation of the purchaser's province. The
purchaser should refer to any applicable provisions of the securities
legislation of the purchaser's province for the particulars of these rights
or consult with a legal advisor.
CONTRACTUAL RIGHT OF ACTION FOR RESCISSION
In the event that a holder of a Series A Special Warrant, who acquires
Series A Common Shares and Series A Ordinary Warrants upon the exercise of
the Series A Special Warrants as provided for in this prospectus, is or
becomes entitled under applicable securities legislation to the remedy of
rescission by reason of this prospectus or any amendment thereto containing
a misrepresentation, such holder shall be entitled to rescission not only
of the holder's exercise of the Series A Special Warrants but also of the
private placement pursuant to which the Series A Special Warrants were
initially acquired, and shall be entitled in connection with such
rescission to a full refund of all consideration paid to the Company on the
acquisition of the Series A Special Warrants. In the event such holder is
a permitted assignee of the interest of the original Series A Special
Warrant subscriber, such permitted assignee shall be entitled to exercise
the rights of rescission and refund granted hereunder as if such permitted
assignee was such original subscriber. The foregoing is in addition to any
other right or remedy available to a holder of Series A Special Warrants
under section 114 of the SECURITIES ACT (British Columbia), section 130 of
the SECURITIES ACT (Ontario), section 141 of the SECURITIES ACT (Manitoba),
comparable provisions of other applicable securities legislation, or
otherwise at law.
Page 52
<PAGE>
TURBODYNE TECHNOLOGIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Revised)
<PAGE>
[LETTERHEAD OF MORGAN & COMPANY]
AUDITORS' REPORT
To the Shareholders of
Turbodyne Technologies Inc.
We have audited the revised consolidated balance sheets of Turbodyne
Technologies Inc. as at December 31, 1996 and 1995 and the revised
consolidated statements of operations and deficit and cash flows for the
periods ended December 31, 1996, 1995, 1994 and 1993. These revised
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these revised
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall revised financial statement presentation.
In our opinion, these revised consolidated financial statements present
fairly, in all material respects, the financial position of the Company as
at December 31, 1996 and 1995 and the results of its operations and the
changes in its cash flows for the periods ended December 31, 1996, 1995,
1994 and 1993 in accordance with generally accepted accounting principles.
As required by the British Columbia Company Act, we report that, in our
opinion, these principles have been applied on a consistent basis.
In our report dated February 14, 1997, except for the last paragraph of
Note 5(A) which is as of March 12, 1997, we reported that in our opinion
the consolidated financial statements presented fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and
1995 and the results of its operations and the changes in its cash flows
for the years then ended in accordance with generally accepted accounting
principles. Subsequent to March 12, 1997, the Company has revised these
consolidated financial statements as explained in Note 13. Therefore, our
report dated February 14, 1997, except for the last paragraph of Note 5(A)
which is as of March 12, 1997, has been withdrawn.
Vancouver, B.C. Chartered Accountants
February 14, 1997, except for the last
paragraph of Note 5(A) which is as of March 12, 1997,
Note 2, Note 13 and Note 14(a) which are as of
May 14, 1997 and Notes 14(b), 14(c), 14(d),
and 14(e), which are as of June 17, 1997.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- ------------
(revised)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 4,304 $ 309
Accounts receivable 8,161 51
Advances receivable 113 113
Inventories (Note 3) 4,730 -
Prepaid expenses and deposits 1,166 93
Deferred tax asset 341 -
--------- --------
18,815 566
CAPITAL ASSETS (Note 4) 15,703 638
PRODUCT DEVELOPMENT COSTS 8,705 3,771
GOODWILL (Note 2) 21,234 -
OTHER 38 227
--------- --------
$ 64,495 $5,202
========= ========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 6,169 $ 251
Notes payable (Note 5) 1,286 223
Current portion of long term debt 1,396 9
--------- --------
8,851 483
LONG TERM DEBT (Note 6) 7,211 20
DEFERRED INCOME TAX 1,455 -
SHARE SUBSCRIPTIONS RECEIVED - 463
--------- --------
17,517 966
--------- --------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 30,438 7,139
SPECIAL WARRANTS (Note 8) 21,928 -
DEFICIT (5,461) (2,903)
CUMULATIVE TRANSLATION ADJUSTMENT 73 -
--------- --------
46,978 4,236
--------- --------
$ 64,495 $5,202
========= ========
</TABLE>
Approved by the Board of Directors:
/S/ /S/
- ----------------------------- --------------------------
Leon E. Nowek Eugene A. Hodgson
<PAGE>
TURBODYNE TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION> Period from
Date of
Incorporation
Year ended Year ended Year ended April 3, 1993
December 31, December 31, December 31, to December 31,
1996 1995 1994 1993
------------ ------------ ------------ -------------
(revised)
<S> <C> <C> <C> <C>
NET SALES $ 19,007 $ - $ - $ -
COST OF GOODS SOLD 16,498 - - -
------------ ------------ ----------- -------------
GROSS PROFIT 2,509 - - -
OPERATING EXPENSE 5,061 1,528 936 112
------------ ------------ ----------- -------------
OPERATING LOSS (2,552) (1,528) (936) (112)
------------ ------------ ----------- -------------
NON OPERATING ITEMS
Interest income 373 - - -
Interest expense (491) - - -
Other 56 - - -
Amortization of
goodwill (545) - - -
------------ ------------ ----------- -------------
(607) - - -
------------ ------------ ----------- -------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (3,159) (1,528) (936) (112)
INCOME TAXES RECOVERED 601 - - -
------------ ------------ ----------- -------------
NET LOSS FOR THE PERIOD (2,558) (1,528) (936) (112)
DEFICIT, BEGINNING OF
PERIOD (2,903) (1,375) (112) -
------------ ------------ ----------- -------------
(5,461) (2,903) (1,048) (112)
NET ASSET DEFICIENCY OF
LEGAL PARENT AT DATE
OF REVERSE TAKE-OVER
TRANSACTION - - (327) -
------------ ------------ ----------- -------------
DEFICIT, END OF PERIOD $(5,461) $(2,903) $(1,375) $(112)
------------ ------------ ----------- -------------
LOSS PER SHARE $(0.12) $(0.11) $(0.10) $(0.02)
------------ ------------ ----------- -------------
</TABLE>
<PAGE>
TURBODYNE TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share information)
<TABLE>
<CAPTION>
Period from
Date of
Incorporation
Year ended Year ended Year ended April 3, 1993
December 31, December 31, December 31, to December 31,
1996 1995 1994 1993
----------- ----------- ------------ --------------
(revised)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Loss for the period $ (2,558) $(1,528) $ (936) $ (112)
Add non cash items
Amortization of
goodwill 545 - - -
Depreciation 1,046 6 1 -
-------- -------- -------- -------
(967) (1,522) (935) (112)
Change in non cash
working capital items (4) (338) 47 335
-------- -------- ------- -------
(971) (1,860) (888) 223
-------- -------- ------- -------
FINANCING ACTIVITIES
Proceeds from debt
obligations 4,279 253 120 -
Repayment of debt
obligations (2,098) (46) (75) -
Net borrowings under
line of credit
arrangements (275) - - -
Issue of common shares 22,836 4,323 1,669 1,147
Issue of special
warrants 21,928 - - -
Shares subscriptions
received - 462 - -
-------- -------- ------- -------
46,670 4,992 1,714 1,147
-------- -------- ------- -------
INVESTING ACTIVITIES
Acquisition of
subsidiary operations (32,370) - - -
Net asset deficiency of
legal parent at date
of reverse take-over
transaction - - (327) -
Capital assets (net of
depreciation
allocated to product
development costs) (4,475) (579) (4) (45)
Product development
costs (4,821) (2,017) (494) (1,326)
Other (38) (227) -
-------- -------- ------- -------
(41,704) (2,823) (825) (1,371)
-------- -------- ------- -------
NET INCREASE IN CASH 3,995 309 1 (1)
CASH, BEGINNING OF PERIOD 309 - (1) -
-------- -------- ------- -------
CASH, END OF PERIOD $ 4,304 $ 309 $ - $ (1)
-------- -------- ------- -------
</TABLE>
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
NATURE OF OPERATIONS
The Company was incorporated under the Company Act of the Province of
British Columbia, Canada, and was continued under the Canada Business
Corporations Act on December 3, 1996. The Company is engaged in the
following business operations through its U.S. subsidiaries:
i) the manufacture of aluminum cast automotive products, including
engine components and specialty wheels; and
ii) the development of products to enhance performance and reduce
emissions of internal combustion engines.
1. SIGNIFICANT ACCOUNTING POLICIES
The Company follows accounting principles generally accepted in
Canada when preparing its consolidated financial statements.
a) Consolidation
These financial statements include the accounts of the Company
and its wholly owned U.S. subsidiaries, Turbodyne Systems, Inc.
and Pacific Baja Light Metals Corp. All significant intercompany
accounts and transactions have been eliminated in consolidation.
b) Cash and Cash Equivalents
For the purpose of reporting cash flows, the Company considers
all time deposits, certificates of deposit and highly liquid debt
instruments with original maturities of three months or less to
be cash equivalents.
c) Inventories
Inventories are stated at the lower of cost or market. For the
materials portion of inventories, the cost is determined using
the LIFO (last-in, first-out) method. For the other components
of inventories (labour and overhead) the cost is determined using
the FIFO (first-in, first-out) method.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Depreciation
Property, plant and equipment is recorded at its historical cost
and is being depreciated using the straight-line method over
their estimated useful lives. Leasehold improvements are
depreciated over the lesser of their useful lives or the life of
the lease. The following is a summary of depreciable life by
asset type:
Building 30 years
Furniture and fixtures 5 - 10 years
Machinery and equipment 7 - 15 years
Transportation equipment 5 years
Leasehold improvements 8 - 10 years
e) Product Development Costs
The Company is deferring all engineering, design consulting and
other costs directly related to the ongoing development and
commercialization of its Turbodyne System to be amortized against
related revenues when production commences.
f) Goodwill
Goodwill, representing the excess of acquisition costs of shares
over the assigned value of net assets acquired, is being
amortized on a straight line basis over 20 years. On an annual
basis, using estimated future net cash flows as a measure of
recoverability, the Company evaluates whether there is a
permanent impairment in the value of the unamortized portion of
goodwill. Any impairment in the value of goodwill is written
off against earnings.
g) Leases
Leases are classified as capital or operating leases. Leases
which transfer substantially all of the benefits and risks
incident to ownership of property are accounted for as capital
leases. Assets acquired under capital leases are amortized on a
straight-line method over five years. All other leases are
accounted for as operating leases and the related lease payments
are charged to expense as incurred.
h) Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet
financial instruments, approximate their fair values. These
financial instruments include cash, accounts receivable, advances
receivable, accounts payable and accrued liabilities, bank credit
lines and other conventional debt financing.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Non-Monetary Transactions
Shares of common stock of the Company issued for non-monetary
consideration are valued at the quoted market price per share at
the close of trading on the day of completion of the transaction
except for those circumstances where, in the opinion of the
Company and due to the nature of the transaction, the trading
price does not fairly represent the value of the transaction. In
such circumstances, the value of the shares is determined based
on the estimated fair value of the consideration received.
j) Foreign Currency Translation
The financial statements of Pacific Baja Light Metals Corp., a
self-sustaining foreign subsidiary, are translated using the
current method whereby the balance sheet is translated at year
end exchange rates and revenues and expenses at the average
exchange rate for the period. Adjustments arising from the
translation of the subsidiary's financial statements are included
as a separate component of shareholders' equity.
The financial statements of Turbodyne Systems, Inc., a fully
integrated foreign subsidiary, are translated using the temporal
method whereby monetary assets and liabilities are translated at
year end rates, non-monetary items at historical rates and
expenses at the average rate for the year. Gains or losses from
exchange translations are included in the results of operations.
2. BUSINESS ACQUISITION
Effective July 2, 1996, the Company acquired all the issued and
outstanding shares of Pacific Baja Light Metals Corp. ("Pacific
Baja"). This acquisition has been accounted for using the
purchase method with the results of operations of Pacific Baja
Light Metals Corp. for the period subsequent to July 2, 1996
being included in these consolidated financial statements.
Pacific Baja is a manufacturer and distributor of after-market
automotive wheels, compressor housings and manifolds, to
wholesale distributors and original equipment manufacturers in
the United Sates and abroad.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
2. BUSINESS ACQUISITION (Continued)
Details of this acquisition are as follows:
Fair value of net assets acquired:
Net working capital $ 2,098
Capital assets 11,749
Long term debt (1,635)
Deferred income taxes (1,394)
-------
Net tangible assets 10,818
Goodwill 20,887
-------
Cost of the acquisition $ 31,705
========
Consideration:
Cash resources $ 16,320
Common shares issued (3,076,923 common
shares with a deemed fair market
value of $5.00 per share) 15,385
-------
$ 31,705
========
3. INVENTORIES
1996 1995
------- -------
Finished goods $ 1,794 $ -
Work in progress 893 -
Raw materials 2,043 -
------- -------
$ 4,730 $ -
======= =======
4. CAPITAL ASSETS
1996 1995
------- -------
Land $ 95 $ -
Buildings 25 -
Furniture and fixtures 343 149
Machinery and equipment 12,542 241
Transportation equipment 618 91
Leasehold improvements 2,642 116
------- -------
16,265 597
Less accumulated depreciation (1,280) ( 73)
------- -------
14,985 524
Machinery under construction 469 -
Patents and trademarks 249 114
------- -------
$ 15,703 $ 638
======== =======
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
4. CAPITAL ASSETS (Continued)
The Company was committed to purchase manufacturing machinery at
December 31, 1996 of $195.
Of the property, plant and equipment listed above, the assets
located at the production facility in Ensenada, Mexico have a net
book value of approximately $5,108 (1995 - $4,678).
5. NOTES PAYABLE
1996 1995
------- ------
(A) Lines of credit $ 6,080 $ -
Less amounts reclassified
as long-term debt 4,794 -
------- -----
1,286 -
------- -----
(B) Promissory note - 11
(C) Short term interest free loan - 212
------- -----
$ 1,286 $ 223
======= =======
(A) The Company's subsidiary, Pacific Baja, has an $8,000 U.S. line
of credit agreement with a bank, secured by all receivables,
inventory and equipment. The borrowings bear interest at LIBOR
(5.55% at December 31, 1996) plus 2% or prime (8.25% at December
31, 1996). The note is due November 1998 and is annually
reviewed for a continuing two year commitment. Advances are
limited to 30% of eligible inventory (up to a maximum of $2,500)
and 80% of eligible accounts receivable and contains a seasonal
over advance up to $500 from April through July each year.
Management has classified the portion of the lines of credit that
are not expected to be repaid during 1997 as long-term.
At December 31, 1996, the Company was in violation of certain
liquidity ratios and net worth covenants. Subsequent to December
31, 1996, the bank waived these violations through June 30, 1997,
and the bank has agreed to amend the covenants so that the
Company is anticipated to be in compliance with all covenants
through at least January 1, 1998.
(B) Promissory note, repayable at $517 per month, including interest
at 10% per annum.
(C) Short term interest free loan, secured by the personal guarantee
of two of the Company's directors. As additional consideration
for the loan, the Company issued 233,333 shares at a deemed value
of $0.36 per share and agreed to pay a royalty of $5 U.S. on each
Turbodyne unit sold to a maximum of $1 million U.S. A finder's
fee of 116,667 common shares at a deemed value of $0.36 per share
was issued in connection with the loan.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
6. LONG TERM DEBT
1996 1995
-------- -------
Notes payable to a bank, interest at
prime rate (8.25% at December 31,
1996) plus 1% with monthly instalments
of $49, including interest,
secured by equipment, maturing
September 1997. $ 1,372 $ -
Notes payable, interest ranging from
7% to 15%, with monthly instalments
of $106, including interest,
secured by equipment, maturing at
various dates through 1999. 2,252 -
Long-term portion of lines of credit 4,794
Other 22 29
Capital lease obligations 167 -
-------- -------
8,607 29
Less: current portion 1,396 9
-------- -------
$ 7,211 $ 20
======== =======
Aggregate maturities of long-term debt for the years ending December 31,
are as follows:
1997 $ 1,510
1998 $ 5,898
1999 $ 863
2000 $ 85
2001 $ 251
The Company leases various equipment under the terms of a capital lease.
The following is a schedule of future minimum lease payments over the life
of the lease:
1997 $ 54
1998 59
1999 45
2000 32
2001 15
-----
205
Less amount representing interest
ranging from 9.3% to 11.3% 38
-----
Balance of obligation $ 167
=====
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars, except share amounts)
(revised)
7. SHARE CAPITAL
a) Authorized
100,000,000 Common shares without par value
100,000,000 Class A preference shares with a par value of $10
(none issued)
100,000,000 Class B preference shares with a par value of $50
(none issued)
b) Issued and Outstanding Common Shares
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Number of Number of
Shares Amount Shares Amount
------------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balance, beginning of
the year 16,542,121 $ 7,139 10,663,052 $2,816
Issued for cash
Private placements
(net of share issue
costs and finder's
fees of $164,060
(1995 - $400,318) 469,497 2,252 3,367,213 2,680
Exercise of
warrants 2,840,557 3,464 666,423 481
Exercise of
incentive stock
options 651,000 2,198 1,168,500 869
Issued on acquisition
of subsidiary
(Note 2) 3,076,923 15,385 - -
Issued for loan bonus - - 258,333 94
Issued for debt
settlement - - 301,933 157
Issued for finder's
fees - - 116,667 42
Balance, end of the
year 23,580,098 $ 30,438 16,542,121 $7,139
========== ======== ========== =======
</TABLE>
c) Of the Company's issued and outstanding shares 4,150,000 are held
in escrow to be released in accordance with a formula based on
cumulative cash flow of the Company.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars, except share amounts)
(revised)
7. SHARE CAPITAL (Continued)
d) As at December 31, 1996, the Company had outstanding share
purchase warrants entitling the holders to acquire 339,730 common
shares at exercise prices of $4.35 to $9.50 per share.
e) As at December 31, 1996, the Company had outstanding directors and
employees incentive stock options to acquire 2,300,500 common
shares at exercise prices of $1.65 to $9.00 per share.
8. SPECIAL WARRANTS
On July 2, 1996 the Company completed a private placement of
3,750,000 Series "A" special warrants at a price of $5.00 per
special warrant for net proceeds of $17,976,595 after deducting
costs of the issue. Commission paid to the brokers was 10% of the
gross proceeds and the brokers elected to receive the commission in
special warrants (375,000 Series "A" Special Warrants issued).
Each Series "A" special warrant can be exercised into one unit of
the Company for no additional consideration. Each unit consists of
one common share and one non transferable share purchase warrant.
The share purchase warrant will entitle the holder to purchase one
common share at $5.50 per share until July 2, 1997.
On December 7, 1996 the Company completed a brokered private
placement of 500,000 Series "C" special warrants at a price of
$9.00 per special warrant for net proceeds of $3,951,196 after
deducting costs of the issue. Each "C" special warrant can be
exercised into one unit of the Company for no additional
consideration. Each unit consists of one common share and one-half
of one non-transferable share purchase warrant. Each whole Series
"C" share purchase warrant will entitle the holder to purchase one
common share at $9.50 per share for a period of one year.
Commissions paid to the broker was 10% of the gross proceeds and
the broker elected to receive the commission in cash.
The Company has undertaken to use its best efforts to file and
obtain a receipt for a prospectus qualifying the distribution of
the Series "A" and "C" units on the exercise of the Series "A" and
"C" special warrants, within 90 days following the closing date of
the Series "C" special warrants. In the event that the prospectus
is not receipted in the 90 day period, then the Series "C" units
will consist of one common share and one share purchase warrant.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
9. INCOME TAXES
At December 31, 1996, the Company has approximately $11,750 in net
operating loss carryforwards available to offset future taxable
income. These carryforwards, if unused, will expire from 2001 to
2010. The potential income tax benefits related to these items
have not been reflected in the accounts.
10. COMMITMENTS
a) Consulting Commitments
The Company has entered into consulting commitments for
assistance in management development, international marketing,
licensing and financing, technical and educational services.
The commitment under these contracts for the next five years is
as follows:
1997 $ 429
1998 $ 199
1999 $ 180
2000 $ 180
2001 $ 180
Certain of the consulting agreements are payable for a total of
$16 U.S. per month and continue indefinitely until either party
terminates the agreement in writing with advance notice ranging
from two to three months.
b) Lease Commitments
The Company's subsidiaries lease certain factory and office
premises in California, U.S.A. and Ensenada, Mexico until
September, 2006. The annual rents of the premises consist of a
minimum rent plus realty taxes and utilities. Minimum rents
payable for the premises for the next five years is as follows:
1997 $ 646
1998 $ 717
1999 $ 736
2000 $ 750
2001 $ 457
The Company's head office and Turbodyne development factory
premises are rented on a month to month basis.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
11. RELATED PARTY TRANSACTIONS
a) The Company made payments to related parties as follows:
1996 1995
----- -----
Project management fees $ 82 $ 80
Consulting fees $ 86 $ -
Management fees $ 30 $ 30
Rent and administrative services $ 176 $ 30
b) The following amounts are due from (to) related parties:
1996 1995
----- -----
Advances receivable from a
director, interest free and
payable on demand $ 113 $ 113
===== =====
12. SEGMENTED INFORMATION
The Company manufactures and distributes, on credit terms
determined for each customer, after-market automotive wheels,
compressor housings, and manifolds to wholesale distributors and
original equipment manufacturers and castings prepared to customer
specifications on a contract basis. Operations are considered to
be in one geographical area - North America.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
NET SALES
After-market automotive wheels $ 9,799 $ -
Compressor housings and manifolds 9,208 -
--------- --------
$ 19,007 $ -
========= ========
GROSS PROFIT
After-market automotive wheels $ 1,309 $ -
Compressor housings and manifolds 1,200 -
--------- --------
$ 2,509 $ -
========= ========
GENERAL OPERATING COSTS
Manufacture of aluminum cast
automotive products 2,666 -
Development of Turbodyne products 3,002 1,528
--------- --------
$ 5,668 $ 1,528
========= ========
LOSS BEFORE PROVISION FOR INCOME TAXES (3,159) (1,528)
INCOME TAXES RECOVERED 601 -
--------- --------
NET LOSS $ (2,558) $ (1,528)
========= =========
</TABLE>
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
12. SEGMENTED INFORMATION (Continued)
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
DEPRECIATION
After-market automotive wheels $ 348 $ -
Compressor housings and manifolds 630 -
Turbodyne products 68 6
-------- --------
$ 1,046 $ 6
======== ========
IDENTIFIABLE ASSETS
After-market automotive wheels $ 21,996 $ -
Compressor housings and manifolds 26,779 -
Turbodyne products 15,720 5,202
-------- --------
$ 64,495 $ 5,202
======== ========
</TABLE>
13. REVISION TO FINANCIAL STATEMENTS
The Company has revised the accounting for the acquisition of
Pacific Baja Light Metals Holding Inc. ("Pacific Baja") by
increasing the value assigned to the common share component of the
consideration paid by the Company in connection with this
acquisition. This revision, which is in accordance with generally
accepted accounting principles, reflects the fair market value of
the shares issued as consideration for the Company's acquisition of
Pacific Baja. The Company had previously accounted for the
acquisition using a purchase price of $20,400 based on the fair
market value of the net assets of Pacific Baja resulting in the
assignment of $4,080 to the common share component of the
consideration paid by the Company. The effect of using the fair
market value of the Company's common shares issued results in the
assignment of $15,385 to the common share component of the
consideration paid by the Company. This revision results in an
increase in goodwill and share capital in the amount of $11,305 and
an increase in amortization of goodwill and net loss for the year,
and deficit of $262.
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1996:
a) The Company has withdrawn its originally issued December 31,
1996 consolidated financial statements and has issued
revised December 31, 1996 consolidated financial statements
as detailed in Note 13.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
(revised)
14. SUBSEQUENT EVENTS (Continued)
b) The Company has issued 297,014 common shares for cash
consideration of $1,801,680 as a result of the exercise of
share purchase warrants.
c) The Company has issued 520,000 common shares for cash
consideration of $2,164,395 as a result of the exercise of
incentive stock options.
d) The Company has granted the following incentive stock
options:
Number of Shares Exercise Price Expiry Date
---------------- -------------- -----------
480,000 $ 9.85 January 6, 1999
1,511,500 $10.15 March 3, 1999
e) The Company has entered into a private placement engagement
agreement, subject to the agent's due diligence and the
preparation of acceptable documentation, which proposes the
issue of up to U.S. $5,000,000 of convertible preferred
shares in two tranches, with the first tranche of U.S.
$2,500,000 expected to close by July 15, 1997, and the
second tranche of U.S. $2,500,000 to close within 120 days
of the first closing. The convertible preferred shares will
have a dividend rate of 7% per annum payable in cash or
common shares (at the Company's option) at the time of
conversion. The convertible preferred shares are
convertible into common shares at any time during the period
commencing four months from closing and ending three years
from closing at the lessor of, a fixed price equal to 110%
of the market price of the common shares at the time of
closing, or a floating price varying from 80% to 90%
(depending on time outstanding) of the 10 day average price
of the Company's common shares at the time of conversion.
In conjunction with the issue of the preferred shares, the
Company will issue warrants entitling the holders to
purchase, for a period of three years, at the fixed price
described above, common shares having a value of 33 1/3% of
the convertible preferred shares issued.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
MARCH 31, 1997
--------------
(Unaudited - Prepared by Management)
<PAGE>
<TABLE>
<CAPTION>
TURBODYNE TECHNOLOGIES INC.
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands of dollars)
(unaudited)
MARCH 31, MARCH 31,
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
CURRENT
Cash $ 2,040 $ 2,212
Accounts Receivable 10,057 62
Advances Receivable 184 71
Inventories 7,983 -
Prepaid expenses and deposits 2,053 144
--------- ---------
22,317 2,489
PROPERTY, PLANT AND EQUIPMENT 17,526 763
PRODUCT DEVELOPMENT COSTS 10,415 4,618
GOODWILL 20,871 -
OTHER 356 393
--------- ---------
$ 71,485 $ 8,263
========= =========
LIABILITIES
CURRENT
Accounts payable and accrued
Liabilities $ 9,504 $ 295
Notes payable 624 9
Current portion of long term debt 1,290 28
--------- ---------
11,418 332
LONG TERM DEBT 10,091 100
SHARE SUBSCRIPTIONS RECEIVED - 303
DEFERRED INCOME TAX 1,095 -
--------- ---------
22,604 735
========= =========
SHAREHOLDERS' EQUITY
SHARE CAPITAL 33,362 10,973
SPECIAL WARRANTS 21,928 -
DEFICIT (6,591) (3,445)
CUMULATIVE TRANSLATION ADJUSTMENT 182 -
--------- ---------
48,881 7,528
--------- ---------
$ 71,485 $ 8,263
========= =========
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
TURBODYNE TECHNOLOGIES INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
-------------------------------------------------
(In thousands of dollars, except per share information)
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 12,359 $ -
COST OF GOODS SOLD 9,288 -
---------- ----------
GROSS PROFIT 3,071 -
---------- ----------
OPERATING EXPENSES
Advertising 160 10
Bad debts 29 -
Bank charges and exchange, net (25) (5)
Consulting fees 357 45
Customs 36 -
Depreciation 91 4
Filing and transfer fees 14 21
Fiscal agency fees 68 41
Insurance 128 -
Investor relations 115 26
Management fees - 8
Occupancy 82 8
Office administration and sundry 314 83
Printing 41 2
Professional fees 590 109
Salaries and benefits 963 90
Telephone 52 17
Travel and business development 349 83
---------- ----------
3,364 542
---------- ----------
OPERATING LOSS (293) (542)
---------- ----------
NON OPERATING ITEMS
Interest Income 21 -
Interest Expense (208) -
Amortization of goodwill (363) -
---------- ----------
(550) -
---------- ----------
LOSS BEFORE PROVISIONS FOR INCOME TAXES (843) (542)
PROVISION FOR INCOME TAX 287 -
---------- ----------
NET LOSS FOR THE PERIOD (1,130) (542)
DEFICIT, BEGINNING OF PERIOD (5,461) (2,903)
---------- ----------
DEFICIT, END OF PERIOD $ (6,591) $ (3,445)
========== ==========
LOSS PER SHARE $ (0.05) $ (0.03)
========== ==========
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
TURBODYNE TECHNOLOGIES INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands of dollars)
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Loss for the period $ (1,130) $ (542)
Add non cash items
Amortization 363 -
Depreciation 635 3
--------- --------
(132) (539)
Change in non cash working
capital items (2,682) 23
--------- ---------
(2,814) (516)
--------- ---------
FINANCING ACTIVITIES
Proceeds from debt obligations 1,187 102
Repayment of debt obligations (385) (216)
Net borrowings under line of credit
Arrangements 1,310 -
Issue of common shares 2,924 3,674
Issue of special warrants - -
--------- ---------
5,036 3,560
--------- ---------
INVESTING ACTIVITIES
Capital assets (net of depreciation
Allocated to project development
Costs) (2,410) (243)
Project development costs (1,758) (732)
Other (318) (166)
--------- ---------
(4,486) (1,141)
--------- ---------
NET (DECREASE) INCREASE IN CASH (2,264) 1,903
CASH, BEGINNING OF PERIOD 4,304 309
--------- ---------
CASH, END OF PERIOD $ 2,040 $ 2,212
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TURBODYNE TECHNOLOGIES INC.
---------------------------
CONSOLIDATED SHARE CAPITAL INFORMATION NOTE
-------------------------------------------
(In thousands of dollars, except per share information)
(unaudited)
3. SHARE CAPITAL
(a) Authorized:
100,000,000 Common shares without par value
100,000,000 Class A preference shares with a par value of $10
(none issued)
100,000,000 Class B preference shares with a par value of $50
(none issued)
Issued and Outstanding Common Shares:
March 31, December 31,
1997 1996
----------------------- ---------------------
Number of Number of
Shares Amount Shares Amount
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, beginning of
the period 23,580,098 $30,438,092 16,542,121 $7,139,209
Issued for cash
Private Placements
(net of share issue
costs and finder's
fees of $ nil
(1996 - $164,060)) - - 469,497 2,252,467
Exercise of Warrants 203,368 1,149,101 2,840,557 3,463,631
Exercise of incentive
stock options 266,100 1,121,943 651,000 2,198,170
Issued on acquisition of
subsidiary - - 3,076,923 15,384,615
Allocated, not issued on
exercise of warrants 93,646 652,579 - -
---------- ----------- ---------- -----------
Balance, end of the
Period 24,143,212 $33,361,715 23,580,098 $30,438,092
========== =========== ========== ===========
</TABLE>
Page 3
<PAGE>
PACIFIC BAJA LIGHT METALS
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1995
<PAGE>
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS 1
- ----------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6-16
- ----------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENT SCHEDULE 17
- ----------------------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and qualifying accounts
- allowance for doubtful accounts 18
- ----------------------------------------------------------------
<PAGE>
[LETTERHEAD FOR McGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS
To the Board of Directors
Pacific Baja Light Metals Holding, Inc.
Santa Fe Springs, California
We have audited the accompanying consolidated balance sheets of Pacific
Baja Light Metals Holding, Inc. and Subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for the years ended December 31, 1995, 1994 and 1993.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Baja Light Metals Holding, Inc. and Subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for the
years ended December 31, 1995, 1994 and 1993 in conformity with generally
accepted accounting principles.
As described in No. 14 to the consolidated financial statements, the
Company changed its method of accounting for "free" rent and for recording
the benefits realized for net operating loss carryforwards arising prior to
the date of the quasi-reorganization.
/S/
______________________
Anaheim, California
May 15, 1996
Page 1
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- -----------------------------------------------------------------------------------------------------
Current Assets
<S> <C> <C>
Cash $ 279,000 $ 39,000
Accounts receivable, less allowance
for doubtful accounts of $97,000
in 1995 and $30,000 in 1994
(Notes 4 and 9) 4,358,000 3,333,000
Inventories (Notes 2 and 4) 3,080,000 2,526,000
Prepaid expenses 201,000 464,000
Deferred tax asset (Note 6) 193,000 357,000
--------------------------------------------------
Total current assets 8,111,000 6,719,000
Property, Plant and Equipment,
net (Notes 3 and 4) 7,978,000 5,466,000
Other Assets 29,000 28,000
--------------------------------------------------
$ 16,118,000 $ 12,213,000
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable (Note 4) $ 3,480,000 $ 2,218,000
Current maturities of
long-term debt (Note 4) 762,000 462,000
Accounts payable 3,619,000 2,942,000
Accrued compensation 610,000 565,000
Accrued other 659,000 189,000
--------------------------------------------------
Total current liabilities 9,130,000 6,376,000
-------------------------------------------------
Long-Term Debt, less current
maturities (Note 4) 1,161,000 922,000
--------------------------------------------------
Deferred Tax Liability (Note 6) 1,016,000 919,000
--------------------------------------------------
Commitments (Notes 5 and 7)
Stockholders' Equity (Notes 6 and 7)
Common stock, no par value;
authorized 5,000,000 shares;
issued and outstanding
1,131,247 shares 2,386,000 2,386,000
Additional paid-in capital 492,000 492,000
Retained earnings, since
January 1, 1992 1,933,000 1,118,000
---------------------------------------------------
4,811,000 3,996,000
---------------------------------------------------
$ 16,118,000 $ 12,213,000
===================================================
See Notes to Consolidated Financial Statements.
</TABLE>
Page 2
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Note 9) $ 28,986,000 $ 19,392,000 $ 13,871,000
Cost of Goods Sold (Note 14) 23,333,000 15,583,000 11,370,000
-----------------------------------------------------------
Gross profit 5,653,000 3,809,000 2,501,000
Operating Expenses 3,644,000 2,608,000 1,533,000
-----------------------------------------------------------
Operating income 2,009,000 1,201,000 968,000
Nonoperating Income (Expense)
Interest (expense) (Note 4) (519,000) (355,000) (293,000)
Other 16,000 17,000
-----------------------------------------------------------
Income before income
taxes (Note 2) 1,506,000 863,000 675,000
Income Tax Expense (Notes 6 and 14) 691,000 383,000 430,000
-----------------------------------------------------------
Net income $ 815,000 $ 480,000 $ 245,000
===========================================================
See Notes to Consolidated Financial Statements.
</TABLE>
Page 3
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Retained
Earnings
Additional Since
Common Paid-In January 1,
Stock Capital 1992 Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,311,000 $ 16,000 $ 393,000 $ 2,720,000
Issuance of 7,500 shares of
common stock with a stated
value of $10 a share 75,000 - - 75,000
Net income,
December 31, 1993 - - 245,000 245,000
Additional paid-in capital
arising from "free" rent
(Note 14) - 180,000 - 180,000
--------------------------------------------------------------------------------
Balance, December 31, 1993 2,386,000 196,000 638,000 3,220,000
Net income,
December 31, 1994 - - 480,000 480,000
Utilization of net operating loss
carryovers (Note 6) - 116,000 - 116,000
Additional paid-in capital
arising from "free" rent
(Note 14) - 180,000 - 180,000
--------------------------------------------------------------------------------
Balance, December 31, 1994 2,386,000 492,000 1,118,000 3,996,000
Net income - - 815,000 815,000
--------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2,386,000 $ 492,000 $ 1,933,000 $ 4,811,000
================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
Page 4
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net $ 815,000 $ 480,000 $ 245,000
cash provided by operating activities:
Depreciation 927,000 662,000 526,000
Deferred income taxes 262,000 367,000 348,000
Rent expense recorded for "free" rent - 180,000 180,000
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivables (1,025,000) (598,000) (213,000)
Inventories (554,000) (471,000) (441,000)
Prepaid expenses 265,000 (282,000) (5,000)
Increase in:
Accounts payable 677,000 313,000 277,000
Accrued expenses 515,000 290,000 26,000
Other 34,000 - 17,000
------------------------------------------------------------------------
Net cash provided by
operating activities 1,916,000 941,000 960,000
------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment (3,493,000) (1,632,000) (1,342,000)
Other 16,000 (49,000) 42,000
------------------------------------------------------------------------
Net cash (used in)
investing activities (3,477,000) (1,681,000) (1,300,000)
------------------------------------------------------------------------
Cash Flows from Financial Activities
Net borrowings under line of credit agreements 1,262,000 318,000 650,000
Proceeds from long-term borrowings 1,475,000 473,000 236,000
Proceeds from issuance of common stock - - 75,000
Principal payments on long-term borrowings (936,000) (51,000) (718,000)
------------------------------------------------------------------------
Net cash provided by
financing activities 1,801,000 740,000 243,000
------------------------------------------------------------------------
Net increase (decrease)
in cash 240,000 - (97,000)
Cash
Beginning 39,000 39,000 136,000
------------------------------------------------------------------------
Ending $ 279,000 $ 39,000 $ 39,000
========================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
Page 5
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT POLICIES
NATURE OF BUSINESS:
The Company manufactures and distributes in the United States, on credit
terms determined for each customer, goods in the following two segments:
1) after-market automotive wheels; 2) compressor housings and manifolds to
wholesale distributors and original equipment manufacturers and castings
prepared to customer specifications on a contract basis.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and two 100% owned subsidiaries (Optima Wheel, Inc. and Baja Pacific Light
Metals, Inc.) and one 96% owned subsidiary (Baja Oriente S.A. de C.V.).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS:
For the purpose of reporting cash flows, the Company considers all time
deposits, certificates of deposit and highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost of market. For the materials
portion of inventories, the cost is determined using the LIFO (last-in,
first-out) method during 1995 and 1994. During 1993, the cost of the
materials portion of the inventory was determined using the FIFO (first-in,
first-out) method (see Note 2). For the other components of inventories
(labor and overhead) the cost is determined using the FIFO (first-in,
first-out) method.
Page 6
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT POLICIES (CONTINUED)
DEPRECIATION:
Property, plant and equipment is recorded at its historical cost and is
being depreciated using the straight-line method over their estimated
useful lives. Leasehold improvements are depreciated over the lesser of
its useful life or the life of the lease. The following is a summary of
depreciable life by asset type:
- ---------------------------------------------------------------------------
Building 30 years
Furniture and fixtures 5 - 10 years
Machinery and equipment 7 - 15 years
Transportation equipment 5 years
Leasehold improvements 8 - 20 years
INCOME TAXES:
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it if more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
FOREIGN OPERATIONS:
Baja Oriente S.A. de C.V. operates in Ensenada, Mexico and its functional
currency is the U.S. dollar. The foreign currency gain for 1995, 1994 and
1993 is approximately $7,000, $79,000, and $10,000, respectively, and is
included in operating expenses. Subsequent to December 31, 1995, the
exchange rate has changed from approximately 7.684 Mexican Pesos to $1.00
U.S. at December 31, 1995 to approximately 7.419 Mexican Pesos to $1.00
U.S. at May 15, 1996.
The net monetary liabilities denominated in Mexican Pesos as of December
31, 1995 is $322,000 (in U.S. dollars).
Page 7
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board (FASB) Statement No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair
value information about financial interments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value or
other valuation market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instruments for which
it is practicable to estimate that value:
NOTES PAYABLE: The fair value of the Company's notes payable is
estimated based on the current rates offered to the Company for debt of
the same remaining maturities with similar collateral requirements. For
variable rate instruments, the fair market value approximates the
carrying value. For fixed rates instruments, the market value
approximates the carrying value based upon the maturity date of these
instruments and their risk factors.
SENIORITY PREMIUMS AND SEVERANCE PAYMENTS:
Seniority premiums, to which employees located in Mexico are entitled upon
retirement after fifteen years or more of service, in accordance with the
Mexican Federal Labor Law, are recognized as expenses in the years in which
services are rendered, based on Company estimates.
Any other payments to which employees may be entitled in the event of
separation, disability or death are charged to operations in the year in
which paid.
Page 8
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 1,187,000 $ 751,000
Work-in-process 484,000 766,000
Raw materials 1,409,000 1,009,000
------------------- ---------------
$ 3,080,000 $ 2,526,000
=============== =============
</TABLE>
During 1994, the method of determining the cost of the materials portion of
inventories was changed from the first-in, first-out (FIFO) method to the
last-in, first-out (LIFO) method. The change was made because management
believes the statement of income would more clearly report operations by
matching current costs with current revenue.
The use of the LIFO method of determining the cost of the materials portion
of inventories had the effect of decreasing reported inventories at
December 31, 1995 and 1994 by $384,000 and $416,000 and increasing
(decreasing) net income before income taxes for 1995 by $32,000 and 1994 by
(416,000) as compared to what they would have been under the FIFO method.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 60,000 $ 60,000
Buildings 60,000 60,000
Furniture and fixtures 238,000 136,000
Machinery and equipment 8,161,000 6,144,000
Transportation equipment 266,000 217,000
Leasehold improvements 2,535,000 1,296,000
------------- --------------
11,320,000 7,913,000
Less accumulated depreciation 3,342,000 2,447,000
--------------- ---------------
$ 7,978,000 $ 5,466,000
============= ==============
</TABLE>
Of the property, plant and equipment listed above, the assets located at
the production facility in Ensenada, Mexico, have a net book value of
approximately $4,678,000 and $3,676,000 at December 31, 1995 and 1994,
respectively.
Page 9
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable:
Line of credit (A) $ 2,040,000 $ 1,721,000
Line of credit (B) 1,440,000 497,000
-------------- ---------------
$ 3,480,000 $ 2,218,000
============== ===============
</TABLE>
(A) As of December 31, 1995, Optima Wheels, Inc. has a $3,000,000 line of
credit agreement with a bank, secured by all receivables, inventory
and equipment. The borrowings bear interest at the bank's prime rate
(8.5% at December 31, 1995) plus 1% and are limited to 30% of eligible
inventory and 80% of eligible accounts receivable. The agreement
expires in September 1996; is guaranteed by certain stockholders; and
contains certain liquidity and net worth covenants.
(B) At December 31, 1995, Baja Pacific Light Metals Holding, Inc. has a
$1,500,000 line of credit agreement with a bank, secured by all
receivables, inventory and equipment. The borrowings bear interest at
the bank's prime rate (8.5% at December 31, 1995) plus 1% and are
limited to 80% of eligible accounts receivable. The agreement expires
in September 1996; is guaranteed by certain stockholders; and contains
certain liquidity and net worth covenants. At December 31, 1995,
Pacific Baja Light Metals Holding, Inc. was in violation of certain
covenants.
Page 10
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM DEBT:
Notes payable, interest ranging from 8.6% to 14.4,
with monthly installments of $22,403, including
interest, secured by equipment, maturing at various
dates through 2000. $ 760,000 $ 531,000
Notes payable to a bank, interest at prime rate (8.5%
at December 31, 1995) plus 1%, with monthly
installments of $13,889, including interest, secured
by equipment, maturing September 1997. 292,000 459,000
Notes payable, interest ranging from 7% to 15%, with
monthly installments of $29,829, including interest,
secured by equipment, maturing at various dates
through 1999. 265,000 -
Note payable, interest at 8%, principle, due December 31, 1997. 250,000 368,000
Note payable to a bank, interest at prime rate (8.5% at
December 31, 1995) plus 1%, with monthly installments
of $5,694, including interest, secured by equipment,
maturing September 1998. 188,000 -
Note payable to stockholder due on demand, interest at 10%,
unsecured, interest payable annually. 93,000 -
Other 75,000 26,000
--------------------------------------------
1,923,000 1,384,000
Less current maturities 762,000 462,000
--------------------------------------------
$ 1,161,000 $ 922,000
============================================
Aggregate maturities of long-term debt as of December 31, 1995 are as
follows: 1996 $762,000; 1997 $684,000; 1998 $243,000; 1999 $170,000; 2000
$64,000 (total $1,923,000).
During 1995, 1994 and 1993, approximately $103,000, $18,000 and $34,000,
respectively, in interest was incurred on the notes payable to
stockholders.
</TABLE>
Page 11
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTION
The Company leases its California facility under a lease agreement which
expires in 2001. This agreement requires the Company to pay all property
taxes, normal maintenance and insurance on the property and contains a five
year renewal option. The Company leases its facilities in Ensenada, Mexico
from certain stockholders of the Company on a month-to-month operating
lease requiring monthly payments of $15,000 beginning in 1995. The Company
recorded rent expense of $15,000 per month for 1993 and 1994, offset by
increases to paid-in capital for the estimated fair value of the "free
rent" (Note 14). The Company is in the process of entering into a
long-term lease on this facility. At December 31, 1995, the Company has
leasehold improvements with a net book value of $1,622,000 on the Ensenada
facility. These leasehold improvements are being amortized over an 8 - 20
year period due to management's belief that the Company will be able to
enter into a satisfactory long-term lease arrangement and remain in this
facility long enough to recover the leasehold improvements.
Rent expense for 1995, 1994 and 1993 was approximately $517,000; $368,000
and $303,000, respectively (including $180,000 per year on the Ensenada
facility).
The total minimum lease commitments at December 31, 1995 is as follows:
1996 through 2000 $304,000 per year and thereafter $101,000 (total
$1,621,000).
NOTE 6. INCOME TAX MATTERS
The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 348,000 $ 16,000 $ 3,000
Deferred 262,000 367,000 348,000
Foreign 81,000 - 79,000
-------------------------------------------------------
$ 691,000 $383,000 $ 430,000
=======================================================
</TABLE>
Total tax expense differs from the expected tax expense due to the
following:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 512,000 $293,000 $ 230,000
State taxes, net of federal tax benefit 90,000 63,000 51,000
Foreign taxes 81,000 - 79,000
Nondeductibility of "free" rent - 61,000 61,000
Other 8,000 (34,000) 9,000
--------------------------------------------------
$ 691,000 $383,000 $ 430,000
==================================================
</TABLE>
Page 12
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 6. INCOME TAX MATTERS (Continued)
Net deferred income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Inventories $ 71,000 $ 47,000
Net operating loss carryovers - 214,000
Reserves for doubtful accounts 39,000 12,000
Accrued expenses 32,000 49,000
Investment tax credit 51,000 35,000
----------- -----------
Total current deferred tax asset $ 193,000 $ 357,000
============ ============
Long-Term Deferred Tax Liability, property,
plant and equipment $ 1,016,000 $ 919,000
============ ============
</TABLE>
On January 1, 1992, the Company affected a quasi reorganization. Benefits
realized from the net operating loss carryforwards arising prior to the
date of the quasi reorganization are recorded as additions to paid-in
capital in the year recognized in net deferred tax assets. During 1994,
$116,000 of these benefits were realized. The Company has no unused
operating loss carryforwards at December 31, 1995. The investment tax
credit carryforward of $51,000 expires in 2005.
NOTE 7. STOCK OPTIONS
Officers, stockholders and employees of the Company have unexpired options
to purchase 92,000 shares of common stock of the Company. All options are
currently exercisable except for an option to purchase 75,000 shares at $1
which are exercisable upon sale of the Company (see Note 10). The
remaining options were granted at prices ranging from $3 to $10 per share,
which approximated the market value at the dates of the grants.
In addition, the Company has granted an option to its president to purchase
shares of company stock at $3 per share. The agreement calls for options
to be issued totaling 5,000 shares for each $1 per share sales price of the
Company. These options are issuable only upon sale of the Company. If the
sale discussed in Note 10 is completed, the agreement will require options
to be issued totaling approximately 110,000 shares.
Options for 5,000 shares at $7 per share were granted during 1994. No
options were granted in 1995 or 1993. No options were exercised or expired
during 1995; 1994; or 1993.
Page 13
<PAGE>
NOTE 8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest for 1995; 1994 and 1993 totaled $624,000;
$297,000 and $276,000, respectively. Cash payments for income taxes for
1995; 1994 and 1993 totaled $96,000; $3,000 and $37,000, respectively.
NOTE 9. CONCENTRATIONS
MAJOR CUSTOMERS:
Net sales for 1995, 1994 and 1993 include sales to two customers that
accounted for more than 10% of the net sales of the Company. During 1995,
sales to these two customers amounted to $7,651,000 and $7,178,000,
respectively. Accounts receivable from these customers at December 31,
1995 was $270,000 and $962,000, respectively. During 1994, sales to these
two customers amounted to $5,034,000 and $4,699,000, respectively.
Accounts receivable from these customers at December 31, 1994 was $422,000
and $555,000, respectively. During 1993, sales to these two customers
amounted to $944,000 and $2,644,000, respectively.
COLLECTIVE BARGAINING AGREEMENTS:
The Company participates in collective bargaining agreements with unionized
employees in its Ensenada, Mexico facility. Eighty percent of the
Company's total labor force is covered by the agreements. None of the
agreements are due to expire within one year.
NOTE 10. SUBSEQUENT EVENT AND ACQUISITION AGREEMENT
On March 15, 1996, the Company signed an acquisition agreement to merge
with a company that is publicly traded on the Vancouver stock exchange.
Management believes that there are no differences in the significant
accounting policies used in the preparation of the Company's financial
statements under United States versus Canadian generally accepted
accounting principles.
NOTE 11. RECLASSIFICATIONS
Certain items on the financial statements for the years ended December 31,
1994 and 1993 have been reclassified to be consistent with the
classifications of the year ended December 31, 1995. These
reclassifications had no effect on net income or net stockholders' equity.
Page 14
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 12. QUASI-REORGANIZATION
The Company effected a quasi-reorganization as of January 1, 1992 at which
time the Company eliminated a deficit of $1,312,000.
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENT
In 1995, the FASB issued Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." Statement No. 123, establishes financial accounting and
reporting standards for stock-based employee compensation plans such as
stock option plans. The Statement generally suggests, but does not
require, employee stock-based compensation transactions be accounted for
based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable. An
enterprise may continue to follow the requirements of Accounting Principles
Board (APB) Opinion No. 25, for employee based transactions, which does not
require compensation to be recorded if the consideration to be received is
at least equal to the fair value at the measurement date. If an enterprise
elects to follow APB Opinion No. 25, it must disclose the proforma effects
on net income as if compensation were measured in accordance with the
suggestions of Statement No. 123. All stock based transactions with
nonemployees entered into after December 15, 1995 must be accounted for at
the fair value of the instrument. The Company has not yet determined if it
will continue to follow APB Opinion No. 25, for employee based
transactions, or will adopt Statement No. 123. The Company does not
believe adoption of this pronouncement in 1996 will have a material impact
on the financial statements.
NOTE 14. ACCOUNTING CHANGE
In 1995, the Company changes its method of accounting for the "free" rent
provided on its Ensenada facility. In 1994 and 1993, the Company was not
charged rent on its Ensenada facility which is owned by certain
stockholders of the Company and did not record rent expense for this "free"
rent. In 1995, the Company changed its method of accounting and recorded
$180,000 in 1994 and 1993 in rent expense (the estimated fair value of the
leased facilities) offset by an increase in paid-in capital.
In addition, the Company changed its method of accounting for tax benefits
arising prior to the date quasi-reorganization. Previously the Company
recorded the benefit realized from the net operating loss carryforwards as
a reduction of income tax expense. The Company changed it method of
accounting to record these benefits realized as additions to paid-in
capital.
Page 15
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 15. SEGMENT INFORMATION
The Company manufactures and distributes in the United States, on credit
terms determined for each customer, goods in the following two segments:
1) after-market automotive wheels; 2) compressor housings and manifolds to
wholesales distributors and original equipment manufacturers and castings
prepared to customer specifications on a contract basis. Below is a
tabulation of the Company's business segment information for the past three
years:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Aftermarket automotive wheels $ 17,262,000 $ 12,956,000 $ 10,009,000
Compressor housings and manifolds 11,724,000 6,436,000 3,862,000
------------ ------------- -------------
$ 28,986,000 $ 19,392,000 $ 13,871,000
============= ============== =============
Gross Profit
Aftermarket automotive wheels $ 3,077,000 $ 1,749,000 $ 1,666,000
Compressor housings and manifolds 2,576,000 2,060,000 1,015,000
------------- ------------- -------------
$ 5,653,000 $ 3,809,000 $ 2,681,000
============= ============== =============
Operating Income
Aftermarket automotive wheels $ 1,388,000 $ 440,000 $ 593,000
Compressor housings and manifolds 621,000 761,000 375,000
------------- ------------- -------------
$ 2,009,000 $ 1,201,000 $ 968,000
============= ============= =============
Depreciation Expense
Aftermarket automotive wheels $ 475,000 $ 365,000 $ 300,000
Compressor housings and manifolds 452,000 297,000 226,000
------------ ------------- -------------
$ 927,000 $ 662,000 $ 526,000
============ ============= =============
Identifiable Assets
Aftermarket automotive wheels $ 7,868,000 $ 7,822,000 $
Compressor housings and manifolds 7,821,000 4,255,000
------------ ------------- -------------
$ 15,689,000 $ 12,077,000 $
============= ============= =============
Capital Expenditures
Aftermarket automotive wheels $ 2,625,000 $ 1,195,000 $ 1,022,000
Compressor housings and manifolds 868,000 437,000 320,000
------------ ------------- -------------
$ 3,493,000 $ 1,632,000 $ 1,342,000
============= ============== ===============
</TABLE>
Page 16
<PAGE>
[LETTERHEAD FOR McGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Pacific Baja Light Metals, Holding, Inc.
Santa Fe Springs, California
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken
as a whole.
/S/
______________________
Anaheim, California
May 15, 1996
Page 17
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR
DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Write Offs Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Years Ended December 31,
1993 $ - $ 95,000 $ (26,000) $ 69,000
========================================================================================
1994 $ 69,000 $ 111,000 $ (150,000) $ 30,000
========================================================================================
1995 $ 30,000 $ 84,000 $ (17,000) $ 97,000
========================================================================================
</TABLE>
Page 18
<PAGE>
PACIFIC BAJA LIGHT METALS
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
(REVIEWED)
JUNE 30, 1996
<PAGE>
CONTENTS
Page
- -----------------------------------------------------------------------
INDEPENDENT ACCOUNTANT'S REPORT 1
- -----------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheet 2
Consolidated statements of income and retained earnings 3
Consolidated statements of cash flows 4
Notes to consolidated financial statements 5-12
- -----------------------------------------------------------------------
<PAGE>
[LETTERHEAD FOR McGLADREY & PULLEN, LLP]
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Pacific Baja Light Metals Holdings, Inc.
La Mirada, California
We have reviewed the accompanying consolidated balance sheet of Pacific
Baja Light Metals Holdings, Inc. and subsidiaries as of June 30, 1996, and
the related consolidated statements of income, retained earnings and cash
flows for the six months ended June 30, 1996 and June 30, 1995, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All of
the information included in these financial statements is the
representation of the management of Pacific Baja Light Metals Holdings,
Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less
in scope than an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them
to be in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company was acquired by Turbodyne Technologies,
Inc. in a transaction that closed September 5, 1996.
/S/ McGladrey & Pullen, LLP
Anaheim, California
August 30, 1996, except for the merger discussed in
Note 1 and the lease agreement discussed in Note 5
as to which the date is September 5, 1996 and the
last paragraph under notes payable in Note 4 as to
which the date is November 1, 1996.
Page 1
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
SEE ACCOUNTANT'S REPORT
<S> <C>
ASSETS (Note 4)
- -----------------------------------------------------------------------------------
Current Assets
Cash $ 441,000
Accounts receivable, less allowance for doubtful
accounts of $97,000 6,722,000
Inventories (Note 2) 2,585,000
Prepaid expenses 657,000
Deferred tax asset (Note 6) 193,000
------------------
TOTAL CURRENT ASSETS 10,598,000
Property, Plant and Equipment, net (Note 3) 8,135,000
-------------------
$ 18,733,000
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------
Current Liabilities
Notes payable (Note 4) $ 4,485,000
Current maturities of long-term debt (Note 4) 572,000
Accounts payable 3,533,000
Accrued compensation 417,000
Accrued other 261,000
Income taxes payable 1,105,000
------------------
TOTAL CURRENT LIABILITIES 10,373,000
------------------
Long-Term Debt, less current maturities (including
$76,000 due to stockholders) (Note 4) 630,000
------------------
Deferred Tax Liability (Note 6) 1,025,000
-------------------
Commitments and Contingencies (Note 5)
Stockholders' Equity (Note 7)
Common stock, no par value; authorized 5,000,000
shares; issued and outstanding 1,131,247 shares 2,386,000
Additional paid-in capital 492,000
Retained earnings, since January 1, 1992 3,827,000
-------------------
6,705,000
-------------------
$ 18,733,000
===================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 2
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
SEE ACCOUNTANT'S REPORT
<S> <C> <C>
INCOME 1996 1995
- --------------------------------------------------------------------------------------------------
Net Sales $ 20,024,000 $ 14,661,000
Cost of Goods Sold 14,892,000 11,671,000
----------------- ----------------
GROSS PROFIT 5,132,000 2,990,000
Operating Expenses (Note 7) 1,686,000 1,563,000
----------------- ----------------
OPERATING INCOME 3,446,000 1,427,000
Nonoperating Income (Expense)
Interest expense (including $4,000 in 1996
and $17,000 in 1995 paid to stockholders') (248,000) (232,000)
Other (41,000) (89,000)
----------------- --------------
INCOME BEFORE INCOME TAXES 3,157,000 1,106,000
Income Tax Expense (Note 6) 1,263,000 442,000
----------------- ---------------
NET INCOME $ 1,894,000 $ 664,000
================= ================
RETAINED EARNINGS
- -----------------------------------------------------------------------------------------------
Balance, beginning of period $ 1,933,000 $ 1,118,000
Net income 1,894,000 664,000
----------------- --------------
Balance, end of period $ 3,827,000 $ 1,782,000
================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
SEE ACCOUNTANT'S REPORT
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,894,000 $ 664,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 553,000 418,000
Deferred income taxes 9,000 (15,000)
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivables (2,364,000) (1,051,000)
Inventories 495,000 (954,000)
Prepaid expenses (456,000) (316,000)
Increase (decrease) in:
Accounts payable (86,000) 562,000
Accrued expenses (591,000) 405,000
Income taxes payable 1,105,000 442,000
Other 29,000 28,000
------------------ ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 588,000 183,000
------------------ ---------------
Cash Flows from Investing Activities, net cash (used in)
purchase of property, plant and equipment (710,000) (1,199,000)
------------------ ---------------
Cash Flows from Financial Activities
Net borrowings under line of credit agreements 1,005,000 1,157,000
Proceeds from long-term borrowings 771,000 -
Principal payments on long-term borrowings (1,492,000) (63,000)
------------------ ---------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 284,000 1,094,000
------------------ ---------------
NET INCREASE IN CASH 162,000 78,000
Cash
Beginning 279,000 39,000
------------------ ---------------
Ending $ 441,000 $ 117,000
================== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT POLICIES
NATURE OF BUSINESS:
The Company manufactures and distributes, on credit terms determined for
each customer, after-market automotive wheels, compressor housings, and
manifolds to wholesale distributors and original equipment manufacturers in
the United States and castings prepared to customer specifications on a
contract basis. For the six months ending June 30, 1996 sales of the
after-market automotive wheel product line totaled approximately
$13,665,000 and the related gross profit was approximately $2,650,000.
For the six months ending June 30, 1996 sales of the compressor housings,
and manifolds to wholesale distributors and original equipment
manufacturers totaled approximately $6,359,000 and the related gross profit
was approximately $ 2,482,000.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
MERGER:
On September 5, 1996, Pacific Baja Light Metals Holdings, Inc. (Holdings)
stockholders' exchanged their stock in Holdings for $12,000,000 in cash and
3,076,923 shares of common stock in Turbodyne Technologies, Inc. No
adjustments have been made to these financial statements to effect this
acquisition price nor any other "push down" adjustments.
ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and it's three wholly-owned subsidiaries (Optima Wheels, Inc., Baja
Pacific, Inc. and Baja Oriente S.A. de C.V.). All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
For the purpose of reporting cash flows, the Company considers all time
deposits, certificates of deposit and highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Page 5
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost or market. For the materials
portion of inventories, the cost is determined using the LIFO (last-in,
first-out) method. For the other components of inventories (labor and
overhead) the cost is determined using the FIFO (first-in, first-out)
method.
DEPRECIATION:
Property, plant and equipment is recorded at its historical cost and is
being depreciated using the straight-line method over their estimated
useful lives. Leasehold improvements are depreciated over the lesser of
its useful life or the expected life of the lease. The following is a
summary of depreciable life by asset type:
- ---------------------------------------------------------------------------
Building 30 years
Furniture and fixtures 5 - 10 years
Machinery and equipment 7 - 15 years
Transportation equipment 5 years
Leasehold improvements 8 - 10 years
INCOME TAXES:
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
FOREIGN OPERATIONS:
Baja Oriente S.A. de C.V. operates in Ensenada, Mexico and its functional
currency is the U.S. dollar. The gain from remeasurement of the financial
statements of Baja Oriente S.A. de C.V. into U.S. dollars for the six
months ended June 30, 1996 and June 30, 1995 is approximately $7,000 for
each period and is included in operating expenses.
The net amount of monetary liabilities denominated in Mexican Pesos as of
June 30, 1996 is $380,000 (U.S. dollars).
Page 6
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board (FASB) Statement No. 107, "DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS", requires disclosure of fair
value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The methods and assumptions used by the Company in estimating the fair
value of notes payable is based on the current rates offered to the Company
for debt of the same remaining maturities with similar collateral
requirements. For variable rate instruments, the fair market value
approximates the carrying value. For fixed rate instruments, the fair
market value approximates the carrying value as the maturity date of these
instruments is short-term.
SENIORITY PREMIUMS AND SEVERANCE PAYMENTS:
Seniority premiums, to which employees located in Mexico are entitled upon
retirement after fifteen years or more of service, in accordance with the
Mexican Federal Labor Law, are recognized as expenses in the years in which
services are rendered, based on Company estimates.
Any other payments to which employees may be entitled in the event of
separation, disability or death are charged to operations in the year in
which paid.
CONCENTRATION OF RISKS:
The Company participates in collective bargaining agreements with unionized
employees in its Ensenada, Mexico facility. Eighty percent of the
Company's total labor force is covered by the agreements. None of the
agreements are due to expire within one year.
The Company maintains its cash account in one commercial bank. The amount
on deposit at June 30, 1996 exceeded the insurance limits of the Federal
Deposit Insurance Corporation by approximately $617,000.
Page 7
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 1. Nature of Business and Significant Accounting Policies (Continued)
QUASI-REORGANIZATION:
The Company effected a quasi-reorganization as of January 1, 1992 at which
time the Company eliminated a retained earnings deficit of $1,312,000.
ACCOUNTING DEVELOPMENTS:
In 1995, the FASB issued Statement No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." Statement No. 123, established financial accounting and
reporting standards for stock-based employee compensation plans such as a
stock purchase plan. The Statement generally suggests, but does not
require, stock-based compensation transactions with employees be accounted
for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable. An
enterprise may continue to follow the requirements of Accounting Principles
Board (APB) Opinion No. 25, which does not require compensation to be
recorded if the consideration to be received is at least equal to the fair
value at the measurement date. If an enterprise elects to follow APB
Opinion No. 25, it must disclose the pro forma effects on net income as if
compensation were measured in accordance with the suggestion of Statement
No. 123. Nonemployee stock-based transactions occurring after December 15,
1995 must be accounted for the fair value of the securities issued or the
services received, whichever is more reliably measurable. The Company does
not anticipate that the adoption of Statement No. 123 will have a material
impact on the financial statements.
In March 1995, the FASB issued Statement No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF." Statement No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
identifiable intangibles to be disposed of. Statement No. 121 will first
be required for the Company's year ending December 31, 1997. Based on its
preliminary analysis, the Company does not anticipate that the adoption of
Statement No. 121 will have a material impact on the financial statements.
RECONCILIATION TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
There are no differences in the significant accounting policies used in
the preparation of the Company's financial statements under United States
versus Canadian generally accepted accounting principles.
NOTE 2. INVENTORIES
- ---------------------------------------------------------------------------
Finished goods $ 778,000
Work-in-process 748,000
Raw materials 1,059,000
-----------------
$ 2,585,000
=================
Page 8
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 2. INVENTORIES (CONTINUED)
The use of the LIFO method of determining the cost of the materials portion
of inventories had the effect of decreasing reported inventories at June
30, 1996 by $460,000 and increasing (decreasing) net income before income
taxes for the six months ended June 30, 1996 and 1995 by ($56,000) and
$-0-, respectively, as compared to what they would have been under the FIFO
method.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------------------------
Land $ 60,000
Buildings 60,000
Furniture and fixtures 133,000
Machinery and Equipment 8,797,000
Transportation equipment 287,000
Leasehold Improvements 2,692,000
------------------
12,029,000
Less accumulated depreciation 3,894,000
------------------
$ 8,135,000
==================
Of the property, plant and equipment listed above the assets located at the
production facility in Ensenada, Mexico have a net book value of
approximately $4,917,000 at June 30, 1996.
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE:
- ---------------------------------------------------------------------------
Line of credit (A) $ 3,239,000
Line of credit (B) 1,246,000
-------------------
$ 4,485,000
===================
(A) As of June 30, 1996, Optima Wheel, Inc. has a $3,500,000 line of
credit agreement with a bank, secured by all receivables, inventory
and equipment. The borrowings bear interest at the bank's prime rate
(8.25% at June 30, 1996) plus 1% and are limited to 30% of eligible
inventory and 80% of eligible accounts receivable. The agreement
expires in September 1996, is guaranteed by certain stockholders and
contains certain liquidity and net worth covenants.
Page 9
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(B) At June 30, 1996, Baja Pacific Light Metals Holdings, Inc. (Holdings)
has a $1,500,000 line of credit agreement with a bank, secured by all
receivables, inventory and equipment. The borrowings bear interest at
the bank's prime rate (8.25% at June 30, 1996) plus 1% and are limited
to 80% of eligible accounts receivable. The agreement expires in
September 1996, is guaranteed by certain stockholders and contains
certain liquidity and net worth covenants.
These notes were renewed on November 1, 1996 for a period of two years and
are now guaranteed by Turbodyne Technologies, Inc., the parent Company. As
of June 30, 1996, the Company was in violation of certain Debt Covenants
relating to working capital requirements.
LONG-TERM DEBT:
- ---------------------------------------------------------------------------
Notes payable to a bank, interest at
prime rate (8.25% at June 30,
1996) plus 1%, with monthly installments
of $13,889, including interest, secured
by equipment, maturing September 1997. $ 362,000
Notes payable, interest ranging
from 7% to 15%, with monthly
installments of $29,829, including
interest, secured by equipment,
maturing at various dates through 1999. 764,000
Note payable, due on demand,
interest at 10%, unsecured interest
payable annually. 76,000
-----------------
1,202,000
Less current maturities 572,000
-----------------
$ 630,000
=================
NOTE 5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTION
The Company leases its California facility under a lease agreement which
expires in 2001. This agreement requires the Company to pay all property
taxes, normal maintenance and insurance on the property and contains a
five-year renewal option. The Company leased its facilities in Ensenada,
Mexico from certain stockholder's of the Company on a month-to-month
operating lease requiring monthly payments of $15,000. The Company was in
the process of entering into a long-term lease on this facility. On
September 6, 1996, the Company entered into an operating lease agreement
expiring in September with certain stockholder's of Turbodyne Technologies,
Inc. requiring monthly payments of which start at $15,000 and increase
annually.
Rent expense for the six months ended June 30, 1996 and 1995 was
approximately $282,000 and $277,000, respectively (including $90,000 and
$75,000, respectively, on the Ensenada facility).
Page 10
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTION (CONTINUED)
The total minimum lease commitments for the years ending June 30 are as
follows: 1997 $534,000; 1998 $534,000; 1999 $534,000; 2000 $534,000; 2001
$483,000 and thereafter $1,150,000 (total $3,769,000).
NOTE 6. INCOME TAX MATTERS
The components of the provision for income tax are as follows:
1996 1995
- -------------------------------------------------------------------
Current $ 1,254,000 $ 457,000
Deferred 9,000 (15,000)
-------------- ---------------
$ 1,263,000 $ 442,000
============== ===============
Net deferred income taxes consist of the following at June 30, 1996:
- ------------------------------------------------------------------------
Deferred Tax Assets
Inventories $ 70,000
Reserves for doubtful accounts 40,000
Accrued expenses 33,000
Investment tax credit carryforward 50,000
------------
$ 193,000
============
Long-Term Deferred Tax Liability, property,
plant and equipment $ 1,025,000
============
The investment tax credit carryforward of $50,000 expires in 2005.
Page 11
<PAGE>
PACIFIC BAJA LIGHT METALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANT'S REPORT
- ---------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND SUBSEQUENT EVENT
The Company has options outstanding to certain stockholders and employees
to purchase 17,000 shares of common stock at an average price of
approximately $4.35 per share. In addition, pursuant to agreements dated
February 1993 and October 1994, certain stockholders were previously
granted options to purchase shares of common stock upon the sale of the
Company. The number of option shares was contingent upon the selling price
of the Company. No options were granted, exercised or expired during the
periods ended June 30, 1996 and 1995.
On September 5, 1996, the date of the finalization of the sale of the
Company, certain stockholders of Holdings, whose options were contingent
upon the sale of the Company, were granted and simultaneously exercised
stock options for 175,000 shares with an exercise price of $375,000. Upon
granting these options, the Company recorded compensation expense for
$1,610,000 which represents the difference between the fair market value of
the shares received over the option price. These options were exercised
concurrent with the merger described in Note 1.
In addition, certain members of management of Holdings exercised options
that had been previously granted. Upon exercising these options, these
members of management received 17,000 shares of Holdings for $74,000.
NOTE 8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest in 1996 and 1995 were $248,000 and $231,00,
respectively. Cash payments for income taxes in 1996 and 1995 were
$451,000 and $15,000, respectively.
NOTE 9. CONCENTRATIONS
Net sales for the six months ended June 30, 1996 and June 30, 1995 include
sales to two customers that accounted for more than 10% of the net sales of
the Company. Sales to these two customers during the period ended June 30,
1996 totaled $6,219,000 and $4,397,000, respectively, and during the period
ended June 30, 1995 totaled $3,296,000 and $3,093,000, respectively.
Accounts receivable from these customers were $2,144,000 and $1,629,000,
respectively, at June 30, 1996 and $794,000 and $1,303,000, respectively,
at June 30, 1995.
Page 12
<PAGE>
CERTIFICATE OF THE ISSUER
The foregoing constitutes full, true and plain disclosure of all material
facts relating to the securities offered by this Prospectus as required by
Part 7 of the SECURITIES ACT (British Columbia), Part XV of the SECURITIES
ACT (Ontario), Part VII of the SECURITIES ACT (Manitoba) and the respective
regulations thereunder.
DATE: JUNE 25, 1997
TURBODYNE TECHNOLOGIES INC.
/S/ EDWARD M. HALIMI /S/ LEON E. NOWEK
- ------------------------------- -------------------------------
EDWARD M. HALIMI LEON E. NOWEK
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
ON BEHALF OF THE BOARD OF DIRECTORS:
/S/ EUGENE A HODGSON /S/ DANIEL D. GERONAZZO
- ------------------------------- -------------------------------
EUGENE A. HODGSON DANIEL D. GERONAZZO
DIRECTOR DIRECTOR
THE PROMOTERS:
/S/ EDWARD M. HALIMI /S/ LEON E. NOWEK
- ------------------------------- -------------------------------
EDWARD M. HALIMI LEON E. NOWEK
PROMOTER PROMOTER
<PAGE>
CERTIFICATE OF THE AGENTS
TO THE BEST OF OUR KNOWLEDGE, INFORMATION AND BELIEF THE FOREGOING
CONSTITUTES FULL, TRUE AND PLAIN DISCLOSURE OF ALL MATERIAL FACTS RELATING
TO THE SECURITIES OFFERED BY THIS PROSPECTUS AS REQUIRED BY PART 7 OF THE
SECURITIES ACT (BRITISH COLUMBIA), PART XV OF THE SECURITIES ACT (ONTARIO),
PART VII OF THE SECURITIES ACT (MANITOBA) AND THE RESPECTIVE
REGULATIONS HEREUNDER.
DATE: JUNE 25, 1997
YORKTON SECURITIES INC. SPROTT SECURITIES LIMITED
PER: /S/ JOHN McCOACH PER: /S/ JACK MUIR
----------------------- --------------------------
WELLINGTON WEST CAPITAL INC.
PER: /S/ CHARLIE SPIRING
-----------------------
THE FOLLOWING INCLUDES THE NAME OF EVERY PERSON OR COMPANY HAVING AN
INTEREST, EITHER DIRECTLY OR INDIRECTLY, TO THE EXTENT OF NOT LESS THAN 5%
IN THE CAPITAL OF:
YORKTON SECURITIES INC.: YORKTON HOLDINGS LIMITED
SPROTT SECURITIES LIMITED: E.S. SPROTT AND R.D. BARNES
WELLINGTON WEST CAPITAL INC.: THE SPIRING FAMILY TRUST, CROCUS
INVESTMENT FUND, W.N. SILICZ
