<PAGE>
As filed with the Securities and Exchange
Commission on October 1, 1998 Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TURBODYNE TECHNOLOGIES INC.
(Exact name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 3110 95-4699061
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
21700 Oxnard Street, Suite 1550, Woodland Hills, California 91367 (818) 593-2282
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
Leon Nowek
Vice-Chairman
21700 Oxnard Street, Suite 1550, Woodland Hills, California 91367
(818) 593-2282
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------------
Copies to:
Julie M. Kaufer, Esq.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90067-3010
(310) 728-3200
Approximate date of commencement of proposed sale to the public. From time to
time after the effective date of this Registration Statement, as the selling
stockholders shall determine.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
- ----------------------------- -------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock, par value 409,189 $5.34 $2,185,070.00 $645.00
$0.001 per share
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 and based upon the
average of the high and low prices of the shares of Common Stock of the
Registrant on the Nasdaq SmallCap Market on September 25, 1998.
(2) Pursuant to Rule 429 of the Rules and Regulations of the Securities and
Exchange Commission promulgated under the Securities Act of 1933, as
amended, this Registration Statement contains a Prospectus that also
relates to 5,000,000 shares of Common Stock (the "Previously Registered
Shares") registered by the Registrant's Registration Statement on Form F-1
(File No. 333-7932) declared effective on December 29, 1997. A filing fee
of $6,850.00 previously was paid by the Registrant in connection with the
registration of the Previously Registered Shares.
The Prospectus contained in this Registration Statement relates to and
constitutes a Post-Effective Amendment to the Registration Statement on Form F-1
(No. 333-7932) of Turbodyne Technologies Inc. and is intended to be the combined
prospectus referred to in Rule 429 of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall become effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such date as
the Securities and Exchange Commission shall determine.
<PAGE>
TURBODYNE TECHNOLOGIES INC.
CROSS REFERENCE SHEET
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FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
-------------------------------- ---------------------------------
<S> <C>
1. Forepart of the Registration Facing Page; this Cross-Reference
Statement and Outside Front Cover Sheet; Outside Front Cover Page of
Page of Prospectus . . . . . . . . . . . . Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus. . . . . . . . . . . . Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges . . Prospectus Summary; Risk Factors
4. Use of Proceeds. . . . . . . . . . . . . . *
5. Determination of Offering Price. . . . . . *
6. Dilution . . . . . . . . . . . . . . . . . *
7. Selling Security Holders . . . . . . . . . Selling Stockholders
8. Plan of Distribution . . . . . . . . . . . Plan of Distribution
9. Description of Securities to be
Registered . . . . . . . . . . . . . . . . Description of Capital Stock
10. Interests of Named Experts and
Counsel. . . . . . . . . . . . . . . . . . *
11. Information With Respect to the
Registrant
(a) Description of Business. . . . . . . Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business
(b) Description of Property. . . . . . . Business -- Properties
(c) Legal Proceedings. . . . . . . . . . Business -- Legal Proceedings
(d) Market Price, Dividends and Outside Front Cover Page of
Related Stockholder Matters. . . . . Prospectus; Risk Factors;
Dividend Policy; Description of
Capital Stock
(e) Financial Statements . . . . . . . . Financial Statements
(f) Selected Financial Data. . . . . . . Selected Financial Data
(g) Supplementary Financial
Information. . . . . . . . . . . . . *
(h) Management's Discussion and
Analysis of Financial
Condition and Results of
Operations . . . . . . . . . . . . . Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i) Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure . . . . . . Accountants
(j) Directors and Executive
Officers . . . . . . . . . . . . . . Management
(k) Executive Compensation . . . . . . . Management
(l) Security Ownership of Certain
Beneficial Owners and
Management . . . . . . . . . . . . . Principal Stockholders
(m) Certain Relationships and
Related Transactions . . . . . . . . Certain Transactions
12. Disclosure of Commission Position
on Indemnification For Securities
Act Liabilities. . . . . . . . . . . . . . *
</TABLE>
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* Omitted because the item is negative or inapplicable.
<PAGE>
PROSPECTUS Subject to Completion, Dated September 29, 1998
5,409,189 Shares
TURBODYNE TECHNOLOGIES INC.
Common Stock, $0.001 par value per share
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This Prospectus relates to the offer and sale by certain Selling
Stockholders (the "Selling Stockholders") of up to 4,742,522 common shares
(the "Series A Shares"), $0.001 par value per share (the "Common Stock") of
Turbodyne Technologies Inc., a Delaware corporation ("Turbodyne" or the
"Company") issued upon conversion of 10,000 shares of Series A Preferred
Stock, $0.001 par value per share (the "Series A Preferred Stock"). See
"Selling Stockholders." This Prospectus also relates to the offer and sale
by certain Selling Stockholders of up to 666,667 additional shares of Common
Stock (the "Warrant Shares" and together with the Series A Shares, the
"Shares") issuable upon exercise of warrants (the "Warrants"). The Series A
Preferred Stock and the Warrants were issued by the Company in September 1997
in private placement transactions to persons the Company reasonably believes
to be accredited investors pursuant to exemptions from registration under the
Securities Act of 1933, as amended (the "Securities Act"). At the date
hereof, all shares of the Series A Preferred Stock have been converted into
shares of Common Stock at the lesser of a fixed price or a floating price, as
described under "Plan of Distribution." The Warrants are immediately
exercisable at $5.00 per share and expire on September 19, 2000. See "Plan
of Distribution."
The Company will not receive any proceeds from this offering. The
aggregate proceeds to the Selling Stockholders from the sale of the Shares
will be the offering price of the Shares sold, less applicable agents'
commissions and underwriters' discounts, if any. The Company will pay all
expenses incident to the preparation and filing of a registration statement
for the Shares under the federal securities laws, as well as certain other
expenses incident to the registration and sale of the Shares. The Selling
Stockholders, or their pledges, donees, transferees or other successors in
interest that receive the Shares, may sell the Shares from time to time on
terms to be determined at the time of sale, either directly or through
agents, dealers or underwriters designated from time to time. To the extent
required, the number of Shares to be sold, the offering price thereof, the
names of each Selling Stockholder and each agent, dealer and underwriter, if
any, and any applicable commissions or discounts with respect to a particular
offering will be set forth in an accompanying Prospectus Supplement. See
"Plan of Distribution."
The Common Stock of the Company is listed for quotation on the Nasdaq
SmallCap Market and on the Easdaq Market, each under the symbol "TRBD." On
September 23, 1998, the closing sale price of the Common Stock, as reported
on the Nasdaq SmallCap Market, was $5.75 per share.
AN INVESTMENT IN THE SECURITIES REGISTERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6.
THE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold until
the registration statement filed with the Securities and Exchange Commission
is effective. The prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
The date of this Prospectus is September ___, 1998
<PAGE>
CURRENCY TRANSLATION
In this Prospectus, unless otherwise indicated, all dollar amounts are
stated in United States dollars. References to "Cdn.$" are to Canadian
dollars. Certain dollar amounts set forth in this Prospectus, as indicated,
are in Canadian dollars, and for the convenience of the reader, where
indicated this Prospectus contains translations of certain Canadian dollar
amounts into U.S. dollars at specified rates. These translations should not
be construed as representations that the Canadian dollar amounts actually
represent U.S. dollar amounts or could be, or could have been, converted into
U.S. dollars at the rate indicated or at any other rate. Unless otherwise
indicated, the translations of Canadian dollars into U.S. dollars have been
made at the rate of Cdn.$1.57=U.S.$1.00, the noon buying rate in New York
City for cable transfers of Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York on August 31, 1998. This rate
may differ from the actual rate that may have been in effect at the times
amounts were included in the financial information discussed herein regarding
the Company and its subsidiaries.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Prior to July 27, 1998, the
Company was a foreign private issuer and filed reports and other information
with the Commission pursuant to the requirements applicable to foreign
private issuers. Reports and other information filed by the Company are
available for inspection and copying at the Public Reference Room maintained
by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. Interested parties may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Company also files electronic versions of these documents with the Commission
through the Commissions' Electronic Data Gathering Analysis and Retrieval
(EDGAR) system. The Commission maintains a world wide web site at
http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock being
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained herein concerning the provision of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with
the Commission. The Registration Statement, including exhibits thereto, may
be inspected without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or
any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or the Selling
Stockholders. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy to any person in any jurisdiction in which
such offer or solicitation would be unlawful or to any person to whom it is
unlawful. Neither the delivery of this Prospectus nor any offer or sale made
hereunder shall, in any circumstances, create any implication that there has
been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
The Common Stock of the Company is listed for trading on the Nasdaq
SmallCap Market and on the Easdaq Market, each under the symbol "TRBD."
Reports and other information concerning the Company may be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
This Prospectus incorporates documents by reference relating to the
Company which are not presented herein or delivered herewith. These
documents relating to the Company (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference) are
available to any person, including any beneficial owner, to whom this
Prospectus is delivered, upon written or oral request, without charge, to
Turbodyne Technologies Inc., 21700 Oxnard Street, Suite 1550, Woodland Hills,
California 91367, Attention: Chief Financial Officer, Telephone Number
(818) 593-2282.
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONTAINED HEREIN AND IN
THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, ALSO
CONTAINED HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES
HEREIN TO THE "COMPANY" AND TO "TURBODYNE" REFER TO TURBODYNE TECHNOLOGIES
INC. AND ITS CONSOLIDATED SUBSIDIARIES. THIS PROSPECTUS AND THE DOCUMENTS
INCORPORATED IN THIS PROSPECTUS CONTAIN FORWARD LOOKING STATEMENTS, WHICH ARE
INHERENTLY UNCERTAIN. ACTUAL RESULTS MAY DIFFER FROM THOSE DISCUSSED IN SUCH
FORWARD LOOKING STATEMENTS FOR THE REASONS, AMONG OTHERS, DISCUSSED IN "RISK
FACTORS."
THE COMPANY
Turbodyne, a Delaware corporation, engineers, develops, manufactures and
markets proprietary products designed to enhance performance and reduce
emissions of internal combustion engines (the "Engine Technology Division")
and manufactures aluminum cast automotive products, including engine
components and speciality wheels (the "Light Metals Division"). The Company
has developed a patented technology (the "Turbodyne Technology") designed to
optimize air flow to internal combustion engines resulting in efficient fuel
combustion in both diesel and gasoline engines. The Company has incorporated
the Turbodyne Technology into its two primary products: the Turbopac-TM- and
the Dynacharger-TM- (collectively, the "Turbodyne Products").
The Company also is an established manufacturer of precision aluminum
cast and machined products primarily for the automotive industry (the "Light
Metals Division"). Through a wholly owned subsidiary, the Company
manufactures several critical engine components and assemblies including
intake manifolds, oil pans, rocket arm covers, turbocharger and compressor
housings for OEMs in the automotive industry and aluminum wheels for the
automotive aftermarket. The Company also manufactures all of the engineered
aluminum components for the Turbodyne Products.
RECENT DEVELOPMENTS
On April 7, 1998, the United States Environmental Protection Agency
certified the Detroit Diesel Corporation emission upgrade kit, which
incorporates the Turbodyne Technology through the use of a Turbopac-TM-, as
an acceptable solution to reduce emissions of diesel buses under the EPA's
Urban Bus Retrofit/Rebuild Program. The Company and Detroit Diesel
Corporation, a major global diesel engine producer with a world wide
marketing and distribution network, have entered into a contract for the
production of the Turbopac product.
In September 1997, the Company entered into a Supply Agreement with
Navistar International Transportation Corp. ("Navistar") for an initial five
year term. Pursuant to the terms of the Supply Agreement, Navistar shall
purchase from the Company all of its original equipment and service
requirements for engine aluminum castings as they exist on the effective date
of the contract. The Company anticipates that the Navistar contract will
result in significant revenues and profitability to the Company through
fiscal 2002. See "Business of the Company--Pacific Baja Business."
DOMESTICATION
Effective July 24, 1998, Turbodyne Technologies Inc., a Canadian federal
corporation, domesticated into the State of Delaware. As a result, the
Company is no longer a foreign private issuer, as defined under the
Securities Act and the Exchange Act, and currently files reports, proxy and
information statements and other information pursuant to the Commission's
rules applicable to domestic issuers.
The Company's principal executive office is located at 21700 Oxnard
Street, Suite 1550, Woodland Hills, California 91367, and its telephone
number is (818) 593-2282.
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE ACT AND SECTION
27A OF THE SECURITIES ACT. THE WORDS "EXPECT", "ESTIMATE", "ANTICIPATE",
"PREDICT", "BELIEVE" AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN A
NUMBER OF PLACES IN THIS FILING AND INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, OR ITS DIRECTORS OR OFFICERS
WITH RESPECT TO, AMONG OTHER THINGS (a) TRENDS AFFECTING THE FINANCIAL
CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY, AND (b) THE BUSINESS AND
GROWTH STRATEGIES OF THE COMPANY. READERS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED IN THIS PROSPECTUS, FOR THE REASONS, AMONG
OTHERS, SET FORTH BELOW.
NO HISTORY OF PRODUCT SALES; PRIOR LOSSES.
None of the Turbodyne Products are commercially produced except for the
Turbopac-TM- 1500 product and limited commercial production of the
Turbopac-TM- 2500 product. The other models of the Turbopac-TM- product and
all models of the Dynacharger-TM- product remain in various stages of
development. There can be no assurance that the other Turbopac-TM- models
and Dynacharger-TM- products will be developed timely or that they will be
commercially accepted. The failure of the Turbopac-TM- and Dynacharger-TM-
products to achieve commercial success would have a material adverse effect
on the business, operating results and financial condition of the Company.
The Company reported net losses of $2,603,000, $5,563,000, $13,185,000
and $7,769,000 for the fiscal years ended December 31, 1995, 1996, 1997, and
the six month period ended June 30, 1998, respectively. At June 30, 1998,
the Company had an accumulated deficit of $32,005,000. There is no assurance
that the Company will report net income in any future year or period. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
PRODUCT DEVELOPMENT
The Company expects to complete final design of the Dynacharger-TM-
product in the third fiscal quarter of 1998 and has commenced only limited
commercial production of certain of the Turbopac-TM- models. Historically,
the Company has encountered unexpected delays in development due to
undetected design defects or changes to specifications and may continue to
experience such delays. These delays could increase the cost of development
of these products and affect the timing of commercial production and
shipment. The Company's revenue in fiscal 1998 will depend to a significant
degree on sales of the Company's Turbopac-TM- product, which was commercially
introduced in the third quarter of 1997. If the Company encounters problems
in the application of the Turbopac-TM- product or any other new products, its
business and prospects could be materially and adversely affected. Moreover,
the Company does not expect to commence production of the Dynacharger-TM-
product until it has entered into joint venture relationships with reliable
manufacturers of turbochargers. The inability or failure to form these
relationships timely, or at all, will negatively affect potential sales of
the Dynacharger-TM- product and could have a material adverse effect on the
business of the Company.
Substantial start-up costs associated with the introduction of new
products could cause the Company to incur operating losses or experience a
reduced level of profitability in periods following their introduction.
There can be no assurance that any new product will receive market acceptance
or that the product can be sold at a profit. Additionally, both the
Dynacharger-TM- and certain of the Turbopac-TM- models have undergone only
limited testing; consequently, once commercially introduced, each product
could require additional refinement. Moreover, in the event government
standards regarding emissions are increased, the Company may need to modify
its design and improve the Turbodyne Technology to meet these new standards,
which may require significant expenditures and delay production of the
Turbodyne Products. Any delay in commercial production or additional
refinement to these products could result in a material adverse effect on the
business, operating results and financial condition of the Company.
LONG TESTING PERIODS
The Company has entered into, and expects to continue to enter into,
relationships with OEMs and with parties in the aftermarket installation
sector in an effort to market the Turbodyne Products. These parties
typically engage in testing programs concerning the Company's products that
last for a period between three to five years. The Company may provide
certain products to these parties free of charge or at a reduced rate. In
addition, management devotes a significant amount of time and attention to
pursuing these programs in an effort to obtain purchase orders for the
products tested. These parties
6
<PAGE>
are under no obligation to purchase the Company's products during these
testing periods and following their evaluations, may determine not to
purchase any products from the Company. Alternatively, these parties may
request modifications to existing products in order to satisfy specific
regulations imposed in the countries in which such parties operate.
Accordingly, the Company may expend a significant amount of time and devote
substantial resources to these testing programs which may not result in any
sales or if purchase orders are obtained, it may occur many years following the
commencement of the related testing program.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
The Company has experienced, and in the future may experience,
significant fluctuations in quarterly operating results that have been and
may be caused by many factors including: introduction or enhancement of
products by the Company and its competitors, customer demand for the
Company's products, development and marketing expenses relating to the
introduction of new products or enhancements of existing products, timing of
certification of certain products by the U.S. Environmental Protection Agency
and other environmental regulatory organizations, results from third parties
participating in pilot programs involving the Company's products, changes or
anticipated changes in pricing by the Company or its competitors, the mix of
products sold and the gross margins attributable to such products, industry
and technology developments, product delays or other product quality
problems, currency fluctuations, the timing of orders from customers, order
cancellations, delays in shipment and other developments and decisions
including the timing and extent of development expenditures, other
unanticipated operating expenses and general economic conditions. Moreover,
sales of aftermarket wheel products typically peak in the spring of each
year. The Company expects that its operating results will continue to
fluctuate significantly in the future as a result of these and other factors.
A substantial portion of the Company's costs and expenses is related to
costs of engineering services and other personnel costs, product development,
facilities and marketing programs. The level of spending for these costs and
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues. If revenues are below
expectations, the Company's quarterly and annual operating results will be
adversely effected, which could have a material adverse effect the Company's
results of operations.
COMPETITION
The business environment in which the Company operates is highly
competitive and subject to rapid technological change. Certain of the
Company's existing and potential competitors have greater financial,
marketing, technological and other resources than the Company. The Company
believes that no products technologically similar to the Company's
Turbopac-TM- and Dynacharger-TM- products have been sold. However, Turbodyne
may face future competition from the development of related technologies that
improve the performance of internal combustion engines and/or reduce
emissions that are not encompassed by the patents held by the Company, the
issuance of patents to other companies which may inhibit the Company's
ability to develop certain products encompassed by such patents and
improvement to existing technologies. If such techniques are developed and
are commercially successful, they may reduce available market share to the
Company or make the Turbodyne Products less attractive or obsolete, each of
which will have a material adverse effect on the business of the Company. In
addition, a relatively small number of OEMs hold a significant share of the
automotive market and the determination of an OEM not to incorporate the
Turbopac-TM- products into its product line may cause the Company to expend
additional amounts to gain market share and/or significantly reduce the
available market share to the Company.
The Company has determined to follow a strategy of aggressive product
development and enhancement and patent support to protect a competitive
position to the extent practicable. However, there can be no assurance that
the market will determine that the Turbodyne Products are superior to
existing or subsequently developed competitive products, that the Company
will obtain significant market share or that the Company will be able to
adapt to evolving markets and technologies, develop new products or achieve
or maintain technological advantages.
PROPRIETARY PROTECTION
The Company has filed patent applications in the United States and in
certain foreign jurisdictions relating to the Turbodyne System, the
Turbopac-TM- product and the Dynacharger-TM- product. Certain patents have
been issued and other applications are in various stages of review at the
U.S. or foreign patent office. Application for a patent offers no assurance
that a patent will be issued or issued without material modification.
Moreover, there can be no assurance that patents will be issued, or that
issued patents will not be circumvented or invalidated, that proprietary
information can be maintained as such or that the Company will be able to
achieve or maintain a technological advantage. The Company could incur
substantial costs in seeking enforcement of its patent rights against
infringement or the unauthorized use of its proprietary technology by others
or in defending itself against similar claims of others. Insofar as the
Company relies on trade secrets and proprietary
7
<PAGE>
know-how to achieve and maintain a competitive position, there can be no
assurance that others may not independently develop similar or superior
technologies or gain access to the Company's trade secrets or know-how.
PRICING STRATEGY
The Company has developed a pricing strategy and price lists for its
Turbodyne Products in relation to retail selling prices of indirectly
competitive products and on estimated costs of producing the Turbodyne
Products. Market acceptance of the Turbodyne Products will be heavily
dependent on the pricing policy established by the Company and the
cost-benefit to the user of the Turbodyne Products. There is no assurance
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 Turbodyne Products. If the Company's current price lists are
not accepted by the market, the Company may have to decrease its prices which
will result in lower margins and could have a material adverse effect on the
results of operations of the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends on the skills and efforts of its management
team and engineering staff, including its Chairman of the Board of Directors
and developer of the Turbodyne Technology, Mr. Edward M. Halimi and its
President and Chief Executive Officer, Mr. Walter Ware. The Company has entered
into an employment agreement with Mr. Halimi and has agreed to the terms of an
agreement with Mr. Ware each with terms expiring in 2008. The Company does not
maintain any insurance on the lives of its senior management or scientific
staff. As the Company continues to grow, it will continue to hire, appoint or
otherwise change senior management and members of its engineering staff. There
can be no assurance that the Company will be able to retain its executive
officers and key personnel or attract additional qualified members to management
in the future. The loss of services of Mr. Halimi, Mr. Ware or of any key
employee could have a material adverse effect upon the Company's business.
See "Directors and Officers of the Registrant" and "Compensation of Directors
and Officers."
RELOCATION OF MANUFACTURING FACILITIES
The Company is in the process of relocating and modernizing its
manufacturing facilities from La Mirada, California to Ensenada, Mexico.
During the first six months of fiscal 1998, the Company completed the
relocation of all wheel machining operations and expects to complete the
relocation of the remaining automotive engine components foundry and
machining operations by the end of the 1998 fiscal year. In connection with
the relocation of the wheel machining operations, the Company incurred
expenses in excess of management's projections and experienced delays in the
relocation process. The Company may continue to experience substantial costs
and delays in connection with the relocation of the automotive engine
components foundry and machining operations which may adversely affect the
Company's results of operations and profitability.
TECHNOLOGICAL CHANGE
The industries in which the Company competes have been characterized by
rapid and significant technological change. Accordingly, the Company's
ability to compete in its markets may depend in large part not only on the
success of the initial introduction of the Turbopac-TM- product and the
Dynacharger-TM- product, but also on the success in enhancing these products
and developing new products. Moreover, changes in manufacturing technology
could require the Company to make significant expenditures on new plant and
equipment in order to remain competitive, all of which could adversely affect
the Company's operating costs and results of operations. There can be no
assurance that the Company will succeed in enhancing existing products or
developing new products or that any of its products will not be rendered
obsolete or uneconomical by technological advances made by others. The
Company's future sales and profitability will depend on its ability to
continue to develop and market new and improved products that can achieve
significant market acceptance.
DECLINE IN SALES OF AFTERMARKET WHEEL PRODUCTS
Sales of aftermarket wheel products have continued to decline in recent
years. Aftermarket wheel products represented over 60% of sales of the Light
Metals Division for the six months ended December 31, 1996, 47% of sales of
the Light Metals Division for the fiscal year ended December 31, 1997 and 38%
of sales of the Light Metals Division for the six months ended June 30, 1998.
The Company is aggressively pursuing a strategy to meet the growing OEM
demand for precision cast aluminum components and assemblies for several
reasons including to compensate for the decreased sales in aftermarket
8
<PAGE>
wheel products. The Company believes that sales attributable to aftermarket
wheel products will continue to decline which could have a material adverse
effect on the business and results of operation of the Company.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
Revenues attributable to the Light Metals Division accounted for 100% of
the revenues of the Company in each of fiscal 1996 and 1997 and accounted for
substantially all of the Company's revenues for the six months ended June 30,
1998. The majority of sales attributable to the Light Metals Division are to
approximately five customers. These five purchasers accounted for
approximately 80% of net sales in fiscal 1996 and 1997 and in the six months
ended June 30, 1998. The loss of any major customer, a significant decrease
in product shipment to, an inability to collect amounts owing from, a
deterioration of the relationship with or any change in the financial
condition of any of these customers could have a material adverse effect on
the business and operating results of the Company.
CUSTOMER PREFERENCES
Certain of the products of the Light Metals Division are subject to short
term changes in consumer preferences and demands. If consumer preferences
change, existing products or products under development may become
unmarketable which could adversely effect the sales and results of operations
of the Company.
INTERNATIONAL RISKS
A significant amount of the production in the Light Metals Division takes
place at the Ensenada, Mexico facility and is imported into the United States
under favorable trade agreements existing between the governments of the
United States and Mexico. Changes in the provisions of these trade
arrangements and in North American trade agreements generally could adversely
affect the production costs and profitability of the Light Metals Division.
In addition, changes in the foreign exchange rates for the Mexican Peso and
the US Dollar or changes in economic and political conditions, import and
export controls, tariffs, and other regulatory requirements could adversely
affect certain operating costs and the results of operations of the Company.
RAW MATERIALS
Although there are many potential suppliers of aluminum, the Company
currently relies on a single source of supply for approximately 70% of its
aluminum. Accordingly, the Company is vulnerable to the possible business
interruption of a supplier, and could experience temporary delays or
interruptions while an alternative supplier is procured. Such delays, if
encountered for an extended period, could have a material adverse effect on
the Company's business and results of operations. Additionally, the Company
purchases the raw aluminum material for its products at market prices.
Changes in demand and price of aluminum could reduce its margins on its cast
aluminum products as the cost of these products is fixed under contract in
advance of production and could affect the Company's ability to deliver
products pursuant to its contractual commitments. If the margins on its cast
aluminum products decrease or it is unable to complete its contractual
obligations, the Company's results of operations could be materially
adversely effected.
RUSSIAN FINANCIAL MARKETS
The Russian economy recently has experienced severe volatility in both
financial and currency markets despite the monetary support and financing
provided by the International Monetary Fund. The Russian ruble has been
allowed to devalue significantly and generally lacks convertibility into
other currencies. Political reforms in Russia continue to be instituted by
its current President, but the pace of reform is slowing and the recent
dismissal of a significant number of government leaders by the Russian
President has contributed to continuing political instability. These
developments have been accompanied by a substantial decline in the Russian
stock market.
It is uncertain whether stability will return to the Russian financial
markets. Increased economic difficulties in Russia could have an impact on
any potential sales of the Company's products into the Russian market,
including sales under its agreement with TransBusiness Group of Moscow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Six Months Ended June 30, 1998 and 1997."
9
<PAGE>
VOLATILITY OF STOCK PRICE.
The price of the Company's Common Stock has been and may continue to be
subject to wide fluctuations in response to a number of events and factors,
such as quarterly variations in results of operations, announcements of new
technological innovations or purchase orders for the Turbodyne Products,
changes in financial estimates and recommendations by securities analysts,
the operating and stock price performance of other companies that investors
may deem comparable to the Company, and news relating to trends in the
Company's markets. In addition, the stock market in general, and the market
for high technology stocks in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price
of the Company's Common Stock, regardless of the Company's operating
performance.
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE STOCK
As of September 23, 1998, approximately 48,111,525 shares of
Common Stock will be outstanding assuming the exercise of all outstanding
options and warrants. Although some of these options and warrants are
exercisable at prices which may exceed the current prevailing market prices
of the Company's Common Stock, their existence could potentially limit the
scope of increases in the market value of the Company's Common Stock which
might otherwise be realized. The terms on which the Company may obtain
additional financing during the respective terms of these outstanding stock
options and warrants may be adversely affected by their existence. The
holders of such stock options and warrants may exercise such securities at
times when the Company might be able to obtain additional capital through one
or more new offerings of securities or other forms of financing on terms more
favorable than those provided by such stock options and warrants.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock and no cash
dividends are expected to be paid on the Common Stock in the foreseeable
future. Any future determination to declare or pay dividends will be at the
discretion of the Board of Directors of the Company and will be dependent on
the Company's results of operations, financial condition, contractual and
legal restrictions and other factors deemed relevant by the Board of
Directors.
10
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the Company for the years ended
December 31, 1997, 1996 and 1995 and the balance sheet data for the Company
at December 31, 1997 and 1996 are derived from, and should be read in
conjunction with, the audited Financial Statements and Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the
Company for the years ended December 31, 1994 and 1993 and the balance sheet
data for the Company at December 31, 1995, 1994 and 1993 are derived from the
audited financial statements not included in this Prospectus. The financial
data for the six month periods ended June 30, 1998 and 1997 are derived from
unaudited consolidated financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which Turbodyne considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results
for the six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending December 31,
1998. The data set forth below are qualified in their entirety by, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus.
Financial data are given for the period commencing April 30, 1993, the
effective date of the transfer of the assets comprising the Turbodyne
Technology to Turbodyne Systems from Edward M. Halimi. The Company's
financial statements for the six months ended June 30, 1998 and the fiscal
year ended December 31, 1997 have been prepared according to United States
Generally Accepted Accounting Principles ("US GAAP"). The Company's
financial statements for the six months ended June 30, 1997 and the fiscal
year ended December 31, 1996 and the Company's statement of operations data
for the fiscal year ended December 31, 1995 included herein previously were
prepared in accordance with Canadian Generally Accepted Accounting Principles
("CDN GAAP") and have been restated to conform with US GAAP and are stated in
United States dollars. The Company's balance sheet data for the fiscal year
ended December 31, 1995 and the Company's financial statements for the
fiscal year ended December 31, 1994 and the period from April 30, 1993 to
December 31, 1993 included herein have been prepared in accordance with CDN
GAAP and are stated in Canadian dollars.
<TABLE>
<CAPTION>
(In Thousands, Except Share Data)
FOR THE SIX MONTHS ENDED
FOR THE FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------------------- --------------------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales $39,165 $13,944 Nil Nil Nil $20,750 $20,153
Gross Profit 6,839 1,843 Nil Nil Nil 3,216 4,437
Net Loss (13,185) (5,563) (2,603) (936) (112) (7,769) (4,189)
Net Loss per Common Share (.58) (.33) (.46) (.18) (.10) (0.23) (0.26)
BALANCE SHEET DATA:
Working Capital (Deficit) $8,530 $7,026 $83 ($426) ($336) $22,003 $11,253
Total Assets 49,726 39,441 5,202 1,899 1,371 64,611 49,726
Long Term Liabilities 10,022 5,265 483 Nil Nil 13,017 10,022
Total Liabilities 18,883 11,727 966 458 336 21,885 18,883
Shareholders Equity 30,843 27,714 4,236 1,441 1,035 42,726 30,843
Number of Shares Outstanding 29,961,612 23,580,098 16,542,121 10,663,052 1,078,052 40,034,423 29,961,612
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The financial data for the six month periods ended June 30, 1998 and 1997
are derived from unaudited consolidated financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which Turbodyne considers necessary for a fair presentation of the
financial position and the results of operations for these periods.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire fiscal year
ending December 31, 1998.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales for the six months ended June 30, 1998 increased to $20,750,000
from $20,153,000 for the six months ended June 30, 1997, an increase of
$597,000 or 3%. Sales in this period were primarily attributable to the
Light Metals Division. Sales attributable to the Engine Technology Division
were minimal during these periods.
The less than expected sales for the first six months of 1998 primarily
is the result of weaker than expected aftermarket wheel orders. The
aftermarket demand for wheels has been forecasted to be a slow-growth or
declining market as a result of the OEMs providing more custom wheels on
production cars. This has been a driving force for the Light Metals
Division's strategy to aggressively pursue the growing OEM demand for
precision cast aluminum components and assemblies for engine application.
Aftermarket wheel products represented over 60% of the Light Metals
Divisions sales in the last six months of 1996, with engine components
representing slightly less than 40%. For the fiscal year 1997 engine
components grew to 47% of sales and aftermarket wheels declined to 53%. In
the first six months of 1998 engine components have increased to 62% of
sales, while aftermarket wheels have declined to only 38%.
Although the automotive components segment of the Light Metals Division
grew faster than expected in the first six months of the year, it did not
grow fast enough to offset the decline in the aftermarket wheel segment. The
Company expects a continued growth in the automotive components segment of
its business and a continued decline in the aftermarket wheel segment as a
percentage of its total business. This is a forward looking statement
however and actual results may differ. For example, if the Company's
strategy to pursue the growing OEM demand for precision cast aluminum
components and assemblies is not successful, the automotive engine components
segment may not continue to grow as expected.
Even though the aftermarket wheel segment is not a growing business, the
Company believes that it is financially advantageous to remain in that
industry and accordingly has developed a plan designed to ensure that
Turbodyne obtains a significant and profitable market share position as one
of the leading remaining wheel producers.
Profitability of the Light Metals Division is affected by seasonal
factors as sales of aftermarket wheel products typically peak in the spring
of each year while operating costs continue throughout the year and by
increasing aluminum costs as the prices of its cast aluminum products are
fixed under contract in advance of production. See "Risk Factors--Potential
Fluctuations in Quarterly Results and Seasonality" and "Risk Factors--Raw
Materials."
Cost of goods sold consists primarily of material and labor costs
attributable to the Light Metals Division. Cost of goods sold for the six
months ended June 30, 1998 increased to $17,534,000 from $15,716,000 for the
six months ended June 30, 1997, an increase of $1,818,000 or 11.6%. Cost of
goods sold as a percentage of net sales for the six months ended June 30,
1998 increased to 84.5% from 78% for the six months ended June 30, 1997. The
increase in costs of goods sold is attributable primarily to the relocation
of all wheel production to the new Ensenada, Mexico plant, a slower start to
Turbodyne's North American wheel sales and increased manufacturing costs at
the La Mirada plant to meet increasing customer production schedules for the
automotive components segment of the business.
During the first six months of 1998, the Light Metals Division incurred
costs and expenses attributable to the modernization and relocation of all
existing aluminum foundry and machining operations currently in place in its
La Mirada, California facility to its newly acquired facility in Ensenada,
Mexico. The Company expects that the modernization and
12
<PAGE>
relocation will result in significant improvements in the quality of its
products, greater productivity and reduced costs. In addition, the Company
anticipates that the new facility will provide the Company with adequate
capacity to meet current production volume and expected growth from both new
third party customers as well as increased production for the Turbodyne
Products. These are forward looking statements however and actual results
may differ. For example, if the modernization and relocation of the
manufacturing operations of the Company does not timely occur or if the costs
associated with these activities exceed management's expectations, the
Company's results of operations may be adversely effected. The Company
believes that its investment in modernization and relocation of the aluminum
foundry and machining operations to Ensenada is essential to support the
expected growth in both the engine technology and light metals divisions over
at least the next three years.
Phase I of the relocation which consists of the relocation and
modernization of all wheel machining operations from the existing La Mirada
facility to the newly acquired facility in Ensenada was completed during the
first six months of 1998. The Company expects that Phase II, the final phase
of the relocation to Ensenada, which consists of the relocation and
modernization of the remaining automotive engine components foundry and
machining operations located in La Mirada to the new Ensenada facility, will
be completed by the end of the fourth quarter of fiscal 1998. These are
forward looking statements however and actual results may differ. For example,
if the set up of operations in the new facility in not completed timely, the
Company may incur additional costs of production and its results of operations
may be adversely effected.
The Company experienced an acceleration of orders in the automotive
engine components segment in the first six months of 1998. These orders were
received by the Company prior to the relocation of its automotive components
manufacturing operations to the Company's new Ensenada facility and therefore
the Company incurred extraordinary costs to ensure the customer orders were
timely met.
The Company also incurred costs in the first six months of 1998 due to a
ramp up of production activities relating to the Turbopac 2500 product line
to satisfy the Company's commitments under its contract with Detroit Diesel.
The Company continues to ramp up production activities relating to the
Turbopac product line during the third fiscal quarter in preparation for
further shipments pursuant to its contract with Detroit Diesel and the
purchase order from, and initial deliveries to, the TransBusiness Group of
Moscow, Russia. The first shipment to the TransBusiness Group currently is
anticipated to begin in the fourth fiscal quarter of 1998. This is a forward
looking statement however and actual results may differ. For example, if the
financing arrangements with respect to the TransBusiness purchase order are
not finalized or if other conditions to the placement of a purchase order
with the Company are not met, then the Company may not commence shipment to
the TransBusiness Group in the fourth fiscal quarter. See "Risk Factors -
Russian Financial Markets."
Gross profit for the six months ended June 30, 1998 decreased to
$3,216,000 from $ 4,437,000 for the six months ended June 30, 1997, a
decrease of $1,221,000, or 27.5%.
Selling, research, general and administrative expenses for the six months
ended June 30, 1998 increased to $10,376,000 from $8,626,000 for the six
months ended June 30, 1997, an increase of $1,750,000, or 20.3%. Selling,
research, general and administrative expenses as a percentage of sales
increased to 50% from 42.8% for the comparable six month periods. These
increases primarily are attributable to additional expenses associated with
overseas travel in conjunction with the Company's pursuit of strategic
relationships. Also, the Company incurred additional expenses associated
with start-up costs related to the Navistar machining work, increased
training for the new labor force and lower than expected yield rate while
launching the new product lines. The increase was also attributable to
finalizing the Turbopac 1500 and 2500 models, final validation testing of the
Turbopac 2500 model, on-going development of the Dynacharger product and
preparing for full scale commercial production of the Turbopac 2500 and 1500
models. Research and development costs also included the operation of the
Company's quality control laboratory at Turbodyne Systems. Based on the
Company's historical expenditures related to research and development and its
current development goals, the Company anticipates for the foreseeable
future, research and development expenses will continue to be significant.
Loss from operations for the six months ended June 30, 1998 increased
$2,971,000 or 70.9% over the comparable period a year earlier.
13
<PAGE>
Other income and expense consists primarily of interest expense on bank
operating lines of credit and equipment finance contracts. Interest expense
for the six months ended June 30, 1998 increased $210,000 or 56.6% over the
comparable period a year earlier. The increase was primarily attributable to
additional borrowings and financing for property and equipment purchases.
Net loss for the six months ended June 30, 1998 increased $2,741,000 or
54.5% over the comparable period a year earlier, due to items mentioned above.
YEAR ENDED DECEMBER 31, 1997 AND 1996
Net sales for the fiscal year ended December 31, 1997 (the "1997 Fiscal
Year") increased to $39,165,000 from $13,944,000 for the fiscal year ended
December 31, 1996 (the "1996 Fiscal Year"), an increase of $25,221,000, or
181%. The sales in both years were attributable entirely to the Light Metals
Division. The increase is largely attributable to the inclusion of the
financial results of the Light Metals Division for the entire 1997 Fiscal
Year as compared to the 1996 Fiscal Year in which the financial results of
the Light Metals Division were included commencing July 2, 1996, the
effective date of the acquisition of the Light Metals Division. For the
1997 Fiscal Year and the 1996 Fiscal Year, respectively, of the total sales
attributable to the Light Metals Division, sales of aftermarket wheel
products accounted for sales of $20,691,000 and $8,560,000, respectively, and
sales of cast aluminum products, including compressor housings and manifolds,
accounted for sales of $18,474,000 and $5,384,000, respectively. The net
sales for the 1997 Fiscal Year also include sales of $2,258,000 related to
the Navistar machining business conducted pursuant to the Navistar contract.
See "Business--Light Metals Division--Material Supply Agreements."
Cost of goods sold consists primarily of material and labor costs
attributable to the Light Metals Division. Costs of goods sold for the 1997
Fiscal Year increased to $32,326,000 from $12,101,000 for the 1996 Fiscal
Year, an increase of $20,225,000, or 167%. The cost of goods sold in each of
these years was attributable solely to the Light Metals Division. The
increase primarily is due to the inclusion of the financial results of the
Light Metals Division for the entire 1997 Fiscal Year as compared to the 1996
Fiscal Year in which the financial results of the Light Metals Division were
included commencing July 2, 1996, the effective date of the acquisition of
the Light Metals Division. Of the total cost of goods sold attributable to
the Light Metals Division, cost of goods sold related to the aftermarket
wheel products accounted for $16,701,000 and cost of goods sold related to
the cast aluminum products, including compressor housings and manifolds,
accounted for $15,074,000.
Cost of goods sold as a percentage of net sales was 83% and 87% for the
1997 Fiscal Year and the 1996 Fiscal Year, respectively.
Gross profit for the 1997 Fiscal Year increased to $6,839,000 from
$1,843,000 for the 1996 Fiscal Year, an increase of $4,996,000, or 271%.
Gross profit for these years also was attributable solely to the Light Metals
Division. Of the gross profit attributable to the Light Metals Division,
sales of aftermarket wheel products accounted for gross profits of $3,990,000
and sales of cast aluminum products, including compressor housings and
manifolds, accounted for a gross profit of $3,400,000.
Research and development costs increased to $6,609,000 in the 1997 Fiscal
Year from $3,622,000 in the 1996 Fiscal Year, an increase of $2,987,000, or
83%. This increase was primarily attributable to finalizing the Turbopac-TM-
1500 and 2500 models, final testing of the Turbopac-TM- 2500 model, on-going
development of the Dynacharger-TM- product and preparing for full scale
commercial production of the Turbopac-TM- 1500 model. Research and
development costs also included the operation of the Company's quality
control laboratory at Turbodyne Systems. Based on the Company's historical
expenditures related to research and development and its current development
goals, the Company anticipates for the foreseeable future, research and
development expenses will continue to be significant.
Selling, general and administrative expenses increased to $12,373,000 for
the 1997 Fiscal Year from $4,159,000 in the 1996 Fiscal Year, an increase of
$8,214,000, or 197%. The increase in operating expenses was largely due to
the addition of the operating expenses associated with the Light Metals
Division as well as additional expenses relating to increased product
development efforts, including expenses associated with overseas travel in
conjunction with the Company's pursuit of strategic relationships and the
designation of its Common Stock on the Easdaq Market. See "Business--Engine
Technology Division--Marketing Efforts and Joint Venture Relationships."
Also, the Company incurred
14
<PAGE>
additional expenses associated with start-up costs related to the Navistar
machining work, increased training for the new labor force hired and more
than expected scrapping and recasting of new product lines to obtain the
necessary quality levels.
Other income and expense consists primarily of interest expense on bank
operating lines of credit and equipment finance contracts.
The Company recorded a net loss of $13,185,000 in the 1997 Fiscal Year
and a net loss of $5,563,000 in the 1996 Fiscal Year for the reasons set
forth above.
YEAR ENDED DECEMBER 31, 1996 AND 1995
Net sales for the 1996 Fiscal Year increased to $13,994,000 from nil in
all prior years. These sales are attributable solely to the sales recorded
by the Light Metals Division for the period from July 2, 1996 to December 31,
1996. Cost of goods sold increased to $12,101,000 from nil in all prior years
and also was solely attributable to the cost of goods sold reported by the
Lights Metals Division for the period from July 2, 1996 to December 31, 1996.
The Company recorded a gross profit of $1,893,000 which also was
attributable solely to the Light Metals Division. Of the total sales
attributable to the Light Metals Division sales of aftermarket wheel products
accounted for sales of $7,188,000 and sales of cast aluminum products,
including compressor housings and manifolds, accounted for sales of
$6,806,000. Of the gross profit attributable to the Light Metals Division,
sales of aftermarket wheel products accounted for gross profits of $960,000
and sales of cast aluminum products, including compressor housings and
manifolds, accounted for a gross profit of $933,000. Increased labor costs
resulted from the Light Metals Division's increased 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.
Research and development costs increased to $3,622,000 in fiscal 1996
from $1,421,000 in fiscal 1995, an increase of $2,201,000, or 155%. This
increase was attributable solely to product development costs incurred by
Turbodyne Systems and primarily to the finalization of development of the
Turbopac-TM- 1500 model and preparing for its full scale commercial
production and ongoing development of the Turbopac-TM- 2500 model and the
Dynacharger-TM- product. Product development costs included establishing a
quality control laboratory at Turbodyne Systems, designing an electronic
controller unit for the Turbopac-TM- products and continuing development and
evaluation of the Turbopac-TM- and Dynacharger-TM- 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-TM- and Dynacharger-TM-
products.
Selling, general and administrative expenses for fiscal 1996 increased to
$4,159,000 from $1,182,000 in fiscal 1995, an increase of $2,977,000 or 252%.
This increase is primarily attributable to the consolidation of operating
expenses, including salaries, for the Light Metals Division for the period
from July 2, 1996 to December 31, 1996. In addition, in 1996, Turbodyne
Systems increased salaries payable to several of its vice-presidents.
LIQUIDITY AND CAPITAL RESOURCES
15
<PAGE>
The Company's balance sheet has strengthened from December 31, 1997 to
June 30, 1998. Cash on hand has increased by $10.2 million to $11.1 million.
Total current assets have increased by $13.5 million or 77.6% to $30.9
million, while total assets of the Company have increased by $14.9 million or
30% to $64.6 million. Current liabilities have remained flat at $8.9
million resulting in a very strong Current Ratio of 3.48 compared to 1.96 on
December 31, 1997. Both the debt to equity and debt to assets ratios
improved from 61% to 51% and from 38% to 33.9%, respectively. Total
shareholders' equity increased by $11.9 million or 38.5% to $42.7 million.
The Company's operations have been financed principally through a
combination of private and public sales of equity and debt securities,
borrowings under a bank credit facility, exercise of outstanding options and
warrants and cash flows from the operations of the Light Metals Division. At
June 30, 1998, the principal source of liquidity for the Company was
$11,127,000 of cash as compared to $949,000 at December 31, 1997.
Cash used in operating activities for the six months ended June 30, 1998
and 1997, was $8,415,000 and $6,791,000, respectively, primarily as a result
of net losses from operations and the finance of the increase in accounts
receivable and inventory.
Cash used in investing activities for the six months ended June 30, 1998,
and 1997, was $3,042,000 and $3,113,000, respectively, resulting primarily
from the purchase of property and equipment.
Cash provided by financing activities for the six months ended June 30,
1998 and 1997 was $21,961,000 and $7,552,000, respectively, resulting
primarily from the sale of equity and convertible debt securities, exercise
of outstanding options and warrants as well as bank borrowings.
The Company believes that funds generated from the Light Metals Division,
existing working capital, and its existing financing activities will be
sufficient to satisfy its anticipated operating requirements for at least the
next twelve months.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company
has commenced a review of the possible effect of the Year 2000 problem on the
computer and other systems used by the Company. As part of this program, the
Company will be contacting each of the vendors it uses and requesting that
each vendor certify to the Company that it is Year 2000 complaint, or is
taking action to ensure that its products or services will be Year 2000
complaint before January 1, 2000. The Company expects to complete this
vendor review process in the second quarter of 1999. To date, the Company
has not identified any internal systems that present a material risk of not
being Year 2000 ready, or for which a suitable alternative cannot be
implemented. Based on the results of its internal and external review to
date, which in large part solely addresses the readiness of the Company's
computer systems, the Company does not believe that any significant financial
expenditure or investments will be required by the Company to conduct its
business from January 1, 2000 forward. There can be no assurance, however,
that there will not be delay in, or increased costs associated with the
implementation of any alternatives, and the inability to implement such
changes could have an adverse effect on future results of operations.
Moreover, the Company's vendors may indicate that they anticipate problems
associated with Year 2000 issues which, in turn, may adversely affect the
Company's operations and profitability.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 did not have a material
impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for public business
enterprises to report information about operating segments in annual
financial statements and selected information in the notes thereto. SFAS No.
131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS No. 131 need not be
applied to interim financial statements in the year of adoption, but
comparative information is required in the second year of application. The
Company believes that the adoption of SFAS No. 131 will not have a material
impact on the Company's financial reporting.
In 1998, the FASB issued Statement of Financial Statements No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 modifies the accounting for derivative and hedging
activities and
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is effective for fiscal years beginning after December 15, 1999. The Company
believes that the adoption of SFAS No. 133 will not have a material impact on
the Company's financial reporting.
In 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use." The
Company believes that the adoption of SOP 98-1 will not have a material
impact on the Company's financial reporting.
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BUSINESS OF THE COMPANY
GENERAL
Turbodyne Technologies Inc. (the "Company" or "Turbodyne"), a Delaware
corporation, engineers, develops, manufactures and markets proprietary
products designed to enhance performance and reduce emissions of internal
combustion engines (the "Engine Technology Division") and manufactures
aluminum cast automotive products, including engine components and speciality
wheels (the "Light Metals Division"). The Company has developed a patented
technology (the "Turbodyne Technology") designed to optimize air flow to
internal combustion engines resulting in efficient fuel combustion in both
diesel and gasoline engines. The Company has incorporated the Turbodyne
Technology into its two primary products: the Turbopac-TM- and the
Dynacharger-TM- (collectively, the "Turbodyne Products").
In addition to enhancing engine performance of internal combustion
engines, the Turbodyne Technology has proved to reduce the production, and
the emission, of harmful pollutants. On April 7, 1998, the United States
Environmental Protection Agency certified the Detroit Diesel Corporation
emission upgrade kit, which incorporates the Turbodyne Technology through the
use of a Turbopac-TM-, as an acceptable solution to reduce emissions of
diesel buses under the EPA's Urban Bus Retrofit/Rebuild Program. The Company
and Detroit Diesel Corporation, a major global diesel engine producer with a
world wide marketing and distribution network, have entered into the
Company's first commercial contract, and the Company received its first
purchase order, for the production of the Turbopac product.
The Company also is an established manufacturer of precision aluminum
cast and machined products primarily for the automotive industry. Through a
wholly owned subsidiary, the Company manufactures several critical engine
components and assemblies including intake manifolds, oil pans, rocket arm
covers, turbocharger and compressor housings for OEMs in the automotive
industry and aluminum wheels for the automotive aftermarket. The Company
also manufactures all of the engineered aluminum components for the Turbodyne
Products.
CORPORATE STRUCTURE
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. Effective December 3, 1996, the Company continued from British Columbia
to the Canadian federal jurisdiction under the CANADA BUSINESS CORPORATIONS
ACT. On July 24, 1998, the Company continued into the State of Delaware under
Section 388 of the Delaware General Corporation Law. See "-- Domestication."
The address of the principal corporate office of the Company is 21700
Oxnard Street, Suite 1550, Woodland Hills, California, 91367.
The Company conducts the business of the Engine Technology Division
through its wholly owned subsidiary Turbodyne Systems, Inc., a Nevada
corporation ("Turbodyne Systems") and conducts the business of the Light
Metals Division through its wholly owned subsidiary Pacific Baja Light Metals
Corp. ("Pacific Baja"), a Wyoming corporation, and through the subsidiaries
of Pacific Baja.
DOMESTICATION
Effective July 24, 1998, Turbodyne Technologies Inc., a Canadian federal
corporation, domesticated into the State of Delaware and, accordingly, the
Company is subject to the rules and regulations of that State. The Company
files reports, proxy statements and other materials with the Securities and
Exchange Commission under its rules and regulations applicable to domestic
issuers.
The Company continues to be deemed to be a reporting issuer under the
securities legislation applicable in each of the Canadian Provinces of
British Columbia, Manitoba and Ontario. The Company's status as a reporting
issuer in each of these provinces is not affected by the domestication of the
Company to the State of Delaware. The Company is required to continue to
comply with the obligations imposed by this securities legislation as a
reporting issuer in each province. These obligations include the requirement
to make filings of the Company's financial statements, proxy circulars,
shareholder information, material change reports and United States Securities
and Exchange Commission filings with the
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securities commissions of the Provinces of British Columbia, Manitoba and
Ontario, all in accordance with the requirements of the applicable securities
legislation.
ENGINE TECHNOLOGY DIVISION
Turbodyne Systems develops products to enhance performance and reduce
emissions of internal combustion engines. The Turbodyne Technology is
designed to optimize air flow to internal combustion engines resulting in
efficient fuel combustion in both diesel and gasoline engines.
Turbodyne Systems was acquired by the Company pursuant to an agreement
between the Company and Edward M. Halimi, the Chairman of the Board of
Directors, dated July 15, 1993, as amended. The Company issued 1,000,000
shares of Common Stock to Mr. Halimi in consideration for all of the issued
and outstanding shares of Turbodyne Systems, which served as reimbursement to
Mr. Halimi for costs incurred to date to develop the Turbodyne Technology, as
well as 3,250,000 additional shares of Common Stock of the Company held in
escrow which may be released based on the Company's cash flow. The initial form
of the Turbodyne Technology was developed by Mr. Halimi prior to the acquisition
of Turbodyne Systems by the Company.
THE TURBODYNE TECHNOLOGY
The Turbodyne Technology is an advanced airflow management technology
developed to improve the performance of internal combustion engines by
increasing airflow to the cylinders. Optimized airflow, combined with
efficient fuel flow, results in more efficient combustion in the cylinders
which, in turn, results in increased engine power, faster acceleration and
reduced harmful engine emissions.
In order for efficient combustion to take place in an internal combustion
engine, both air and fuel must be present within each individual cylinder at
precisely the correct ratio for the specific condition of load and speed.
While engineers attempt to design engines to ensure optimal combustion,
variations in the air to fuel ratio persist resulting in intervals of
inefficient combustion especially during rapid acceleration or deceleration
and on cold start up. These variations result in inconsistent engine power,
fuel wastage and emissions.
The two principal products in the marketplace designed to solve this
problem are superchargers and turbochargers. A supercharger is essentially
an air compressor, which is mechanically driven by the engine and supplies
increased airflow to the engine. Although superchargers solve most of the
air to fuel ratio problems they are incapable of providing optimum airflow
for the wide range of engine speeds and loads within which engines must
operate. Moreover, superchargers are expensive, deplete engine power and
increase fuel consumption. Turbochargers perform a similar function as
superchargers by delivering increased airflow to the cylinders. Unlike
superchargers, however, turbochargers are driven through the flow of exhaust
gases exiting the engine cylinders. Although turbochargers solve many of the
efficiency and fuel consumption problems associated with superchargers they
do not work efficiently except at relatively high engine speeds and loads.
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
rotate at relatively high speeds (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 driving cycle, increases fuel
consumption and maintenance problems and causes an increase in emissions due
to the incorrect air to fuel ratio. Although turbochargers provide adequate
airflow during peak operating periods, they actually exacerbate the problems
during the turbo lag period.
The Turbodyne Technology incorporates a three phase alternating current
permanent magnetic brushless electric motor and an electronic power converter
that changes the automotive D.C. power into three phase alternating power.
The Turbodyne Technology also includes a microprocessor controller managed
feedback circuit to control the speed and power that the motor provides to
the given compressor based upon the algorithm provided by the engine
manufacturer and the sensors incorporated into the engine system.
The Turbodyne Technology can be applied as a stand alone electronic
supercharger (the Turbopac-TM-) or integrated into an existing turbocharger
design (the Dynacharger-TM-) as a performance enhancement module.
PRODUCTS
TURBOPAC-TM-
The Turbopac-TM- product employs a high speed, electronically controlled
permanent, magnetic, brushless electric motor which runs continuously once
the engine has started, providing increased airflow to optimize the air to
fuel ratio. The
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Turbopac-TM- essentially serves as an electronic supercharger. The Company
believes that one of the most significant aspects of the Turbopac-TM- is that
it allows the Company to target much larger international markets because of
its application to both turbocharged and non-turbocharged engines, compared
to the Dynacharger which is applicable solely to turbocharged engines.
The four separate Turbopac-TM- models under various stages of design and
production and which may be installed on either turbocharged or
non-turbocharged engines are as follows:
(1) the Turbopac-TM- 1200 model for non-turbocharged two stroke or four
stroke gasoline engines installed in motorcycles, water-ski jets and
snowmobiles;
(2) the Turbopac-TM- 1500 model for cars, performance vehicles and light
trucks with turbocharged or non-turbocharged gasoline or diesel
engines and with displacements up to 3.5 liters;
(3) the Turbopac-TM- 2200 model for cars, performance vehicles and light
trucks with either turbocharged or non-turbocharged gasoline or
diesel engines with displacements greater than 3.5 liters; and
(4) the Turbopac-TM- 2500 model for heavy duty trucks and buses for
either turbocharged or non-turbocharged diesel engines.
DYNACHARGER-TM-
The Dynacharger-TM- is Turbodyne Systems's newest product. It
essentially is the Turbopac-TM- motor module incorporated into a
turbocharger. The Dynacharger-TM- was developed primarily as a result of
feedback from evaluations conducted 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. The
Dynacharger-TM- can be interchangeable with an original equipment
turbocharger, thus making it appropriate for sale to both the OEM market and
the aftermarket. Turbochargers incorporating the Dynacharger-TM- products
can be installed on both turbocharged and non-turbocharged diesel and
gasoline engines.
Turbodyne Systems also has commenced design of a variation to the
Dynacharger-TM- described as a Motor-Assisted Variable Geometry Turbocharging
System ("Motorassist"). The Motorassist is a Dynacharger-TM- with a valve
system to concentrate exhaust gases resulting in faster turbine acceleration.
The Company anticipates that design of the Motorassist will be complete and
development for testing purposes will commence in the fourth fiscal quarter
of 1998.
STATUS OF PRODUCT DEVELOPMENT
The Company has commenced commercial production of the Turbopac-TM- 1500
model at its facility in Carpinteria, California. The Company completed
final design of the Turbopac-TM- 2500 model and following execution of its
sales and marketing agreement with Detroit Diesel Corporation ("Detroit
Diesel"), see "--Marketing Efforts and Joint Venture Relationships" below,
commenced commercial production at its facility in Carpinteria, California.
Pacific Baja produces housings for Turbodyne Systems' prototype products
which are then assembled at the Carpinteria facility. Pacific Baja has
commenced commercial production of the housings for each of the Turbopac-TM-
1500 and 2500 models.
The Company has completed final design and commenced limited commercial
production of each of the Turbopac-TM- 1200 and 2200 models for testing
purposes.
Turbodyne Systems expects to complete specification and design for the
Dynacharger-TM- product by the end of the third fiscal quarter of 1998.
Production of the Dynacharger-TM- is contingent on the formation of strategic
relationships with manufacturers of turbochargers. The Company is pursuing
the development of these relationships and does not expect to commence
production of the Dynacharger-TM- until these relationships are in place. No
assurance can be given that these relationships will be formed, that the
Dynacharger-TM- will be produced and if produced that it will be commercially
successful. See "Risk Factors--Product Development."
Turbodyne Systems' limited production to date has served to meet the
requirements of Detroit Diesel, limited aftermarket European passenger car
market as well as other potential customers and testing agencies retained by
the Company undertaking evaluations of the Turbodyne Products. These
evaluations primarily are for the purpose of allowing
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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.
At June 30, 1998, Turbodyne Systems had spent approximately $16,259,000
developing the Turbodyne System, and the Turbopac-TM- and
Dynacharger-TM- products. Management anticipates that it will continue to
expend significant amounts in connection with research and development
efforts in order to bring all Turbopac-TM- models and the Dynacharger-TM-
product into full scale commercial production. See "Risk Factors--Product
Development."
MARKETING EFFORTS AND JOINT VENTURE RELATIONSHIPS
TURBOPAC-TM- PRODUCTS
The Company markets the Turbopac-TM- products in both the OEM sector and
the aftermarket installation sector. In the fourth fiscal quarter of 1997,
pursuant to an arrangement with Detroit Diesel Corporation and in accordance
with the United States Environmental Protection Agency Urban Bus Program (the
"U.S. EPA Urban Bus Program"), the Company's Turbopac-TM- 2500 models were
installed on city buses in Toledo, Ohio, Riverside, California and Milwaukee,
Wisconsin. Following the successful installation of these Turbopac-TM-
products, Milwaukee Transit requested and received from the United States
Environmental Protection Agency (the "EPA") approval to equip ten additional
buses with the Turbopac-TM- 2500 model. In April 1998, the EPA certified the
Detroit Diesel Corporation emission upgrade kit, which includes the
Turbopac-TM- 2500 model, under the Urban Bus Retrofit/Rebuild Program.
Following approval by the EPA, in April 1998, the Company entered into a five
year sales and marketing agreement with Detroit Diesel pursuant to which
Detroit Diesel will exclusively market the Turbopac-TM- product as part of
its mechanical engine rebuild kit for the EPA Urban Bus Program. In June
1998, pursuant to the terms of the Agreement, the Company delivered the
initial stocking order consisting of 100 Turbopacs-TM- to Detroit Diesel. The
Company established a goal to have the Turbopac-TM- product installed on
approximately 2600 buses by the end of fiscal 1998. However, due to delays
in orders by Detroit Diesel Corporation under the Agreement and to the longer
than expected time periods relating to purchase decisions by many bus
properties that had indicated a strong interest in purchasing the
Turbopac-TM- 2500 models once certified by the EPA, the Company has modified
its goal to 1500 buses.
The Company has entered into an agreement in principle with Kuhnle, Kopp
and Kausche AG ("3K"), dated April 11, 1997, for the design, development and
manufacture of a prototype line of turbochargers incorporating the Turbodyne
Technology and manufactured by 3K. It is anticipated that the prototype
turbochargers will be developed for 3K's major customers in the European
automotive market. 3K is the largest manufacturer of turbochargers in
Germany.
The agreement in principle contemplates the formation of a joint venture
pursuant to which the Company will grant to the joint venture an exclusive
license of the Turbodyne Technology for the design, manufacture and sale of
motor-driven turbochargers in Europe for auto and truck manufacturers and
such other territories as the parties may agree. 3K will have overall
responsibility for marketing and sales of the joint venture products through
3K's established distributor and dealer network. The Company will not
receive any royalty from its license to the joint venture and will
participate in joint venture profits to be shared pursuant to a formula based
on cost contributions. 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 three years after termination of the joint venture relationship, in
consideration for the payment of a royalty in an amount to be agreed upon by
the parties.
There is no assurance that the agreement in principal between the Company
and 3K will result in the execution of a joint venture agreement between the
Company and 3K. In addition, there is no assurance that a joint venture
between the Company and 3K would achieve sales of the turbocharger
incorporating the Turbodyne Technology or that the Company would ever realize
any profits from the joint venture. See "Risk Factors--Long Testing Periods."
The Company currently is involved in several additional testing programs
which the Company hopes will result in additional strategic relationships.
In the first quarter of fiscal 1998, Turbopacs-TM- were installed on six
transit buses in Sao Paulo and Curtiba, Brazil and to date, have exceeded all
of the air quality and fuel economy objectives pursuant to that program by as
much as 100%. The Company also entered into an agreement with Ralphs Grocery
Company pursuant to which Turbopac low-emission systems have been installed
on representative engines of Ralphs Grocery Company's truck fleet.
The Company also provides each Turbopac-TM- product to OEMs, including
Navistar, AlliedSignal, Volkswagen and MAN, for testing to demonstrate the
superior performance and marketability of the Turbopac-TM- products to these
manufacturers. These evaluation programs typically are long-term and,
accordingly, the Company does not anticipate additional contracts with OEMs
for its Turbopac-TM- products in the near term. The Company hopes to enter
into joint venture
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manufacturing agreements similar to that with Detroit Diesel with other OEMs
who agree to purchase the Turbopac-TM- products.
DYNACHARGER-TM- PRODUCT
The Company intends to pursue evaluation programs with OEMs upon final
design of the Dynacharger-TM- product. As with the Turbopac-TM- products,
the Company intends to secure OEM supply contracts pursuant to which the
Dynacharger-TM- products will be incorporated directly into OEM products as
performance enhancement modules. See "Risk Factors--Product Development."
GEOGRAPHICAL MARKET
Initially, the Company is targeting the aftermarkets in North America,
South America and Europe, as well as, OEMs in the United States and Europe
involved in automobile and truck and related parts manufacture. The ultimate
consumers of these products may be located worldwide.
COMPETITION
While the Company believes there are no products directly competitive to
the Turbodyne Products, 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-TM- products is expected from improvements
and refinements to conventional internal combustion engines which may result
in increased fuel efficiency and decreased emissions. The cost of
incorporating these improvements and refinements into existing internal
combustion engines may be less than the cost of installing a Turbopac-TM-
product. In addition, OEMs and consumers may more readily accept
improvements and modifications to existing technology than a new technology.
Competition for the Dynacharger-TM- products is expected from
improvements and refinements to existing turbocharger technology which may be
less expensive than turbochargers incorporating the Dynacharger-TM- products.
In addition, OEMs and consumers may be more willing to accept improvements
and refinements to existing turbocharger technology than turbochargers
installed with the Dynacharger-TM- product.
Both the Turbopac-TM- and Dynacharger-TM- products may realize
competition from existing products manufactured by OEMs who do not
incorporate Turbodyne Products into their final products. A relatively small
number of OEMs have a significant share of the automotive market and
accordingly an OEM's determination not to incorporate the Turbodyne Products
into its product lines could pose a significant barrier to entry to the
Company. See "Risk Factors--Competition."
IMPACT OF GOVERNMENT REGULATION
As pollution standards increase, the automotive market is expected to
increase its demand for technical improvements to existing internal
combustion engine technology in order to meet these standards. Accordingly,
an imposition of increased pollution standards by government regulatory
agencies is expected to cause an increase in demand for the Turbodyne
Products, assuming these products have been commercially developed and
accepted.
In the United States, emissions standards for diesel engines are imposed
by the US Environmental Protection Agency (the "EPA") and by other regulatory
agencies such as the California Air Resources Board ("CARB"). In April 1998,
the Company received certification by the EPA for the Detroit Diesel emission
reduction kit, which includes the Turbopac-TM- 2500 model, under the Urban
Bus Retrofit/Rebuild Program. There can be no assurance that the government
will not increase emission standards to a level that the Turbodyne Products
currently do not satisfy, in which event, the Company may be required to
expend significant amounts to develop and incorporate the technology
necessary to meet these standards. Any such expenditure and any delays in
product development or sales as a result of more stringent emission standards
could have a material adverse effect on the results of operations of the
Company. See "Risk Factors--Product Development."
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PROPRIETARY PROTECTION OF PRODUCTS
As of August 31, 1998, the Company owns nine patents and has 19 patent
applications pending with the U.S. Patent Office. The Company's patents and
patent applications encompass the construction of the Turbopac and
Dynacharger products, as well as, a variety of new turbocharging and
supercharging systems designed to enhance the performance of existing engines
through retrofitting and to enable OEM manufacturers to obtain improved
performance from new equipment.
Turbodyne Systems has made additional patent applications with respect
to its technology and for recognition of each of the patent applications for
the Turbopac-TM- and Dynacharger-TM- products with each country that is a
party to the PCT in order to secure international patent protection of the
Turbodyne Technology.
Turbodyne Systems' policy is to diligently defend any infringement of
its patents. To date, Turbodyne Systems has not encountered any challenges
and is not aware of any potential challenges to 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. See "Risk
Factors--Proprietary Protection."
Turbodyne Systems also requires all employees, consultants and persons
or companies involved in the testing of Turbodyne Systems' products to
execute confidentiality agreements and to agree to keep confidential all
proprietary information with respect to Turbodyne Systems' products.
DEVELOPMENT COSTS TO DATE
Since the acquisition of the Turbodyne Technology, Turbodyne Systems
primarily has engaged in the research and development of products that
incorporate the Turbodyne Technology. The Company concentrates the business
of Turbodyne Systems exclusively on research and development of products
incorporating the Turbodyne Technology. Turbodyne Systems intends to engage
in research and development of additional products incorporating the
Turbodyne Technology. The research and development costs incurred during the
six months ended June 30, 1998 and for the fiscal years ended December 31,
1997, 1996 and 1995 were $3,125,000, $6,609,000, $3,622,000 and $1,421,000,
respectively.
LIGHT METALS DIVISION
Pacific Baja is an established manufacturer of aluminum cast products
primarily for the automotive industry. Pacific Baja manufactures
turbocharger and compressor housings for OEMs in the automotive industry and
aluminum wheels for the automotive aftermarket. Pacific Baja also
manufactures, on a contract basis, the housings for the Turbodyne products
manufactured by Turbodyne Systems.
The Company acquired Pacific Baja effective July 2, 1996 pursuant to an
acquisition agreement between the Company, Pacific Baja Holding, Inc.
("Pacific Baja Holding") and the principal shareholders of Pacific Baja
Holding (the "Acquisition Agreement"). The Company acquired all of the
issued and outstanding shares of Pacific Baja Holding for total consideration
consisting of a cash payment of $12,000,670 and the issuance of 3,076,923
shares of common stock of the Company.
The principal purpose of the Pacific Baja 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 are comprised of precision automotive parts,
including cast aluminum components manufactured by Pacific Baja. Through the
acquisition of Pacific Baja, the Company acquired a proven manufacturer for
the Turbodyne Products. In addition, the acquisition brought to the Company
personnel experienced in manufacturing and who have contacts with
turbocharger manufacturers and potential customers for the Turbodyne Products.
PRODUCTS
Pacific Baja manufactures and markets permanent mold and sand aluminum
castings, both machined and raw, for the automotive aftermarket as well as
automotive and industrial OEMs. Pacific Baja has three operating units:
Optima Wheel, Baja Pacific and Baja Oriente.
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CUSTOM WHEELS
Pacific Baja, 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 of Pacific Baja's
custom wheel sales are private label brands produced for other wheel
manufacturers and distributors with the remaining forty percent marketed
under the 'Optima Wheels' brand name to approximately 25 wholesale
distributors located throughout the United States. Optima Wheel is not a
dominant aftermarket supplier of aluminum custom wheels and has determined on
a going forward basis not to expend significant efforts in connection with
marketing and sales of its custom wheels. In recent years, sales of
aftermarket wheel products have declined and management expects that revenues
from these products will continue to decline as existing and new companies
obtain additional market share. Management intends to minimize the risk of
revenue loss to the Company by focusing its efforts to increase revenues in
the non-wheel, industrial products areas. See "Risk Factors--Decline in
Sales of After-Market Wheel Products" and "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Six Months Ended
June 30, 1998 and 1997."
NON-WHEEL ALUMINUM COMPONENTS
Pacific Baja, 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.
Pacific Baja, through Baja Oriente's facility located in Ensenada, Baja
California, Mexico, casts and machines permanent mold aluminum parts. Baja
Oriente is incorporated under Mexican law and is 100% beneficially owned by
Pacific Baja. 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 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 its products in U.S. currency and
accordingly is protected against fluctuations in the exchange rate of the
Mexican peso in respect of its purchases of raw materials.
NEW PRODUCT DEVELOPMENT
Pacific Baja develops new products in order to respond to customer
requests 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's new product development activities among
its various product lines are as follows:
CUSTOM WHEELS
Pacific Baja does not design new and unproven custom aluminum road
wheels. Pacific Baja solicits market information from its customers and
attends auto shows to determine which styles are popular, and uses its
CAD/CAM system to make new molds and manufacture those wheels. Pacific Baja
typically manufactures approximately ten new wheel products annually.
However based on many factors, including but not limited to, technological
developments and customer demands, Pacific Baja may change the number of new
wheels produced annually.
NON-WHEEL ALUMINUM COMPONENTS
Pacific Baja has implemented a strategy to develop relationships with
OEMs in addition to AlliedSignal and Navistar (see "-- Material Supply
Agreements" immediately below) in the automotive industry to provide new
non-wheel aluminum components as a means to expand its product line. New
products developed by Pacific Baja start as short-run prototypes. Once these
products are accepted by the OEM, production begins at a higher volume.
There can be no assurance that Pacific Baja will be successful in
establishing relationships with additional OEMs or if established that
Pacific Baja will develop new products or that any new products developed
will be commercially accepted or profitable to Pacific Baja. See "Risk
Factors--Technological Change" and "Risk Factors--Customer Preferences."
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MATERIAL SUPPLY AGREEMENTS
Baja Oriente 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. Pursuant to its
agreement with AlliedSignal, Pacific Baja 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 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 commenced on January
1, 1994 for an initial three year term. Pursuant to a letter agreement,
Pacific Baja and AlliedSignal extended the supply agreement for an additional
three year term commencing on January 1, 1997 and expiring on December 31,
1999.
Effective September 1, 1997, the Company entered into a Supply Agreement
with Navistar International Transportation Corp. ("Navistar") for an initial
five year term. Pursuant to the terms of the Supply Agreement, Navistar is
obligated to purchase from the Company all of its original equipment and
service requirements for engine aluminum castings as they exist on the
effective date of the contract. The anticipated volume of products to be
purchased from the Company were based on Navistar's review of its past usage
and projected market forecasts and Navistar is not required to purchase any
minimum quantity under the contract. Navistar will negotiate with the
Company in good faith with regard to placing new production business with the
Company although there is no obligation to do so. During the term of the
contract, the Company may not manufacture or sell the products covered by the
contract to any other party absent the written consent of Navistar.
Management anticipates that the Navistar contract will result in significant
revenues and profitability to the Company through fiscal 2002.
MANUFACTURING
Pacific Baja performs short run foundry and prototype production,
manufactures products such as manifolds, compressor housings, and pedestals
and manufactures aluminum cast custom wheels at its Ensenada foundries. The
Ensenada foundries perform manufacturing activities ranging from casting to
heat treating, powder painting, finished machining, and packaging.
ENSENADA FOUNDRY
Pacific Baja operates an aluminum permanent mold foundry at Ensenada,
Baja California, Mexico, which occupies approximately 120,000 square feet.
The Ensenada facility serves as Pacific Baja's 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's La Mirada
facility. The Ensenada facility also houses one of the operating units of
Pacific Baja, which manufactures aluminum components under contract for
AlliedSignal and Navistar and casts, machines, and ships manifolds directly
to AlliedSignal's assembly plant in Mexicali, Mexico and casts, machines and
ships compressor housings and pedestals and other components to their
Torrance, California facility.
In December 1997, Pacific Baja purchased manufacturing facilities
located in Ensenada, Mexico from Louisiana-Pacific Corporation. These
facilities consist of two buildings comprising approximately 130,000 total
square feet. The Company has commenced the modernization and relocation of
all existing aluminum foundry and machining operations currently in place in
its La Mirada, California facility to the new Ensenada facility. During the
first six months of 1998, the Company completed Phase I of the relocation
which consisted of the relocation and modernization of all wheel machining
operations from La Mirada to Ensenada. The Company expects to complete the
final phase of the relocation, consisting of the relocation and modernization
of the remaining automotive engine components foundry and machining
operations by the end of the fourth fiscal quarter of 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Six Months Ended June 30, 1998 and 1997" for additional
discussion regarding the Company's relocation to the new Ensenada facility.
Pacific Baja commenced operations at these new facilities during Phase I of
the relocation process in February 1998 and as of June 30, 1998 employs
approximately 75 persons at these facilities. All of the Company's Mexican
facilities are certified to the QS 9000 quality standard, the most stringent
quality standard in the United States automotive industry. The Company
believes that the Ensenada Foundry together with the additional manufacturing
facilities purchased from Louisiana-Pacific Corporation will provide adequate
space for the Company's manufacturing needs through fiscal 1999. As of July
21, 1998, Pacific Baja employed approximately 558 persons at its Ensenada
facilities with two production shifts and one maintenance shift operating
five and one half days a week.
25
<PAGE>
LA MIRADA FOUNDRY
Pacific Baja operates a sand and permanent mold 100,000 square foot
foundry facility at La Mirada, California. In addition, Pacific Baja's
corporate offices and distributing facility are located in the La Mirada
building. The La Mirada facility receives semi-finished custom wheels,
shipped from the Ensenada foundry, which are finished, packaged, and prepared
for shipment to Pacific Baja private label customers and Optima Wheel
distributors. The La Mirada facility also facilitates limited short-run and
prototype aluminum casting production for customers and serves as Pacific
Baja's `feeder' operation for longer run production in Ensenada, Mexico. As
of July 21, 1998, Pacific Baja employed approximately 195 persons at its La
Mirada facility working two shifts, five days a week. The Company
anticipates that the majority of the manufacturing activities currently
performed at the La Mirada facility will be transferred to the Ensenada
facility during fiscal 1998, which the Company anticipates will result in
substantial savings in fiscal 1999 and thereafter.
Pacific Baja outsources the chrome plating and polishing of its custom
wheels due to the presence of hazardous materials associated with this
process and the resulting risk of environmental liabilities.
SUPPLIERS
The raw materials used in Pacific Baja's production of cast aluminum
custom wheels for the automotive aftermarket and cast aluminum parts for
automotive and industrial OEMs consist primarily of aluminum and sand.
Aluminum ingots are purchased from aluminum suppliers such as TST Inc., Vista
Corporation and Noranda Corp. 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 typically
net 60 day terms. Pacific Baja does not expect any disruption in its ability
to obtain aluminum in the foreseeable future. See "Risk Factors--Raw
Materials."
Sand is used in manufacturing the cores that are placed within permanent
molds prior to pouring aluminum and is used in sand aluminum castings
produced by Pacific Baja. Pacific Baja purchases approximately 90% of its
sand from one supplier. However, in the event this supplier is unable to
meet the needs of Pacific Baja, the Company does not anticipate any
significant additional cost or time delays to procure sand from another party.
Pacific Baja's facilities in Ensenada, Mexico are supplied with raw
materials which are purchased in, and delivered from, the United States.
This arrangement is intended to help insulate Pacific Baja from adverse
foreign exchange fluctuations.
COMPETITION
Pacific Baja faces significant competition in both the cast aluminum
wheels automotive aftermarket industry and cast aluminum product industry.
The barriers to entry to the aluminum foundry business are not prohibitive as
capital costs are less than those associated with steel mills in large part
because foundry operations incorporate minimal high technology.
CAST ALUMINUM WHEELS FOR AUTOMOTIVE AFTERMARKET
Pacific Baja faces competition in the United States from approximately
85 wheel companies of which approximately one-third have manufacturing
capability. In addition, the Company faces competition from OEMs, many of
whom provide custom wheels on production cars. Pacific Baja limits its sales
of aftermarket wheels primarily to the North American automotive market.
While the Company believes there are competitors with significant market
share, to the Company's knowledge, there is no one company with over 20%
share in this market.
CAST ALUMINUM PRODUCTS FOR OEMS
The sales of the cast aluminum products to OEMs by Pacific Baja
currently is limited to OEMs operating within the United States. Pacific
Baja faces competition in the cast aluminum product manufacturing industry
from a large number of competitors which have greater revenues and financial
resources than Pacific Baja. Barriers to entry for the cast aluminum product
industry for automotive and industrial OEMs are significantly higher than the
barriers to entry for cast aluminum wheels as OEMs impose high standards of
quality control. The Company's Mexican manufacturing facilities provide
Pacific Baja with a cost advantage over competitors with operations in the
United States.
26
<PAGE>
PROPERTIES
The principal United States corporate office of the Company is located
in leased premises at 21700 Oxnard Street, Suite 1550, Woodland Hills,
California 91367. The office is approximately 5,400 square feet. The term
of the lease expires on August 31, 2002. The Company's monthly rent for the
first two and one half years of the lease term is approximately $10,000 and
increases to approximately $11,000 for the duration of the lease term.
The Company leases office space located at Suite 510, 1090 West Pender
Street, Vancouver, British Columbia, which space, prior to the Company's
domestication, served as its principal corporate offices. The office is
approximately 2,000 square feet and is leased for a three-year term
commencing June 1, 1997. The Company's annual rent is Cdn. $30,212. See
"Certain Transactions with Directors and Executive Officers." The Company
intends to sublease this office.
Turbodyne Systems' production and assembly facilities are located in
leased premises at 6155 Carpinteria Avenue, Carpinteria, California 93013.
The facilities are approximately 28,000 square feet on 3.17 acres of
land and are subleased on a month to month basis from American Appliance
Inc., a private company controlled by Mr. Halimi. The term of the lease
between American Appliance Inc. and its landlord expires on January 30, 2005.
The Company's monthly rent is $16,850 plus operating costs, including taxes,
insurance and utilities. See "Certain Transactions with Directors and
Executive Officers."
Pacific Baja's La Mirada facility is located in leased premises at 15300
Valley View Avenue, La Mirada, California 90638. The facility is
approximately 95,000 square feet. The facility is leased from New England
Mutual Life Insurance Company for a 75 month term expiring March 31, 2001.
The rent payable by Pacific Baja is approximately $24,000 per month,
inclusive of taxes and operating expenses.
One of Pacific Baja's Mexican manufacturing facilities is located in
leased premises at #700 Miramar Y Calle, 18 Ensenada, Baja California,
Mexico. The facility is approximately 120,000 square feet and is leased from
Baja Pacific Properties, an affiliate of the Company, for a ten year term
expiring September 5, 2005. The monthly rent is $15,000, inclusive of taxes
and operating expenses, and increases 5% per annum during each subsequent
year of the lease. See "Certain Transactions with Directors and Executive
Officers."
The Company's other Mexican manufacturing facility is located at KM
100.5 Carretera Tinana - Ensenada, El Sauzel De Rodriguez, 22760 Ensenada,
B.C., Mexico and consists of two buildings comprising approximately 130,000
total square feet. The Company purchased these facilities in December 1997.
LEGAL PROCEEDINGS
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
Mr. Holt options to purchase an aggregate of 650,000 shares of Common Stock
of the Company at prices varying from Cdn. $3.50 per share to Cdn. $7.50 per
share. The Company has filed a defense denying the existence of the agreement
and, in the alternative, alleging that the agreement was replaced by a
subsequent agreement granting Mr. Holt options to purchase 100,000 shares of
the Common Stock of the Company at a price of Cdn. $2.00 per share.
The Company is a party to an action filed in December 1997 in the Santa
Barbara Superior Court by Leigh Walker-Pena against Vincent Scalice and the
Company. The complaint alleges, as against the Company, that officers and
directors of the Company told plaintiffs that the Company's stock was going
to be listed on Nasdaq, that the price of the stock would increase
substantially and that these statements were false and misleading and
constituted intentional or negligent misrepresentations. The Company
answered the complaint, has denied all of the claims and has asserted
affirmative defenses.
Grand Technologies, Inc., Douglas Harry Hibler, George Fencl, and
Preston Tyree (the "Grand Plaintiffs") submitted an action for arbitration
against the Company, Turbodyne Systems, Inc., Pacific Baja Light Metals,
Corp., Pacific Baja Light Metals, Inc., Optima Wheels, Inc., Leon Nowek,
Edward Halimi and Harry Moll (the "Grand Defendants"). The action alleges
claims for breach of contract, breach of purchase order, unjust enrichment,
fraud, negligent misrepresentation, promissory estoppel, unfair business
practice, extortion and RICO in connection with an alleged agreement between
the Company and certain of the Grand Plaintiffs to form a company to market
and distribute certain products of the Company, including the Turbopac. The
Grand Plaintiffs request compensatory and punitive damages in unspecified
amounts. On September 25, 1998, the Grand Defendants advised the arbitrator
that there is no jurisdiction with respect to the Grand Defendants that did
not sign the contract at issue and that claims brought by or against these
parties are not proper. In addition, the Company has denied all claims and
submitted affirmative defenses. The Company anticipates that the arbitrator
will respond to the jurisdictional issues raised by the Grand Defendants in
the latter half of October.
Arbitration proceedings have been commenced by two of the former
shareholders of Pacific Baja Holdings as a consequence of the failure of the
Company to qualify the resale in British Columbia of 25% of the shares of
Common Stock issued to the former shareholders of Pacific Baja Holdings in
connection with the acquisition of Pacific Baja by the Company. The Company
has reached an agreement in principle with the former shareholders of Pacific
Baja to compensate them for the failure to file a prospectus in British
Columbia to qualify the resale of these shares of Common Stock. The two
former shareholders of Pacific Baja have withdrawn the arbitration
proceedings.
27
<PAGE>
Other than the claims of the former shareholders of Pacific Baja
Holdings, the Company believes that each of the claims against the Company
noted above are without merit and intends vigorously to defend against them.
With the exception of the actions identified above, the Company and its
subsidiaries are not a party with respect to any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of July 31, 1998:
<TABLE>
<CAPTION>
NAME AND POSITION AGE COMMENCEMENT OF SERVICES
----------------- --- ------------------------
<S> <C> <C>
Robert Taylor (1) 58 July 12, 1996
Director
Walter F. Ware 55 October 1, 1997
President and Chief Executive Officer
Edward M. Halimi 53 October 18, 1993
Chairman of the Board
Leon E. Nowek (1) 41 October 18, 1993
Vice Chairman, Secretary and Director
Daniel Geronazzo (1)(2)(3) 67 January 24, 1995
Director
Dr. Sadayappa Durairaj 54 September 16, 1996
Director
Wendell R. Anderson (2)(3) 65 November 20, 1995
Director
Khal A. Kader 25 July 6, 1998
Chief Financial Officer
Duane Rosenheim 65 June 16, 1998
Chief Operating Officer
</TABLE>
- ---------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Stock Option Committee
EDWARD M. HALIMI is Chairman of the Board of Directors. From October 18,
1993 to March 11, 1998, Mr. Halimi served as President and Chief Executive
Officer of the Company. Mr. Halimi developed the Turbodyne Technology which
is incorporated into the Company's two primary products. Mr. Halimi 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. From 1988 to 1991, Mr. Halimi was the President and Chief
Executive Officer of Technodyne Corporation, a manufacturer of heat
management and temperature control units and since 1989 serves as
28
<PAGE>
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 Vice Chairman, Secretary and a director of the Company
and is responsible for business development activities as well as regulatory
affairs. Mr. Nowek was appointed as a director of the Company in October
1993, as Vice Chairman in February 1998 and as Secretary in July 1998. From
June 1995 to February 1998, Mr. Nowek served as the Company's Chief Financial
Officer. Prior thereto, since July 1993, Mr. Nowek was an independent
management consultant.
WENDELL R. ANDERSON is a director of the Company. Mr. Anderson is an
attorney with the firm of Larkin, Hoffman, Daly and Lindgren Ltd. of
Bloomington, Minnesota and has been practicing law since 1963. Mr. Anderson
has held several positions of public office. From 1959 to 1963 Mr. Anderson
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. At that time, he was the nation's youngest governor. 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 various
committees including the environment and public works committee, the budget
committee, the natural resources committee and armed services committee. Mr.
Anderson serves as a director of FingerHut Companies Inc., a database
marketing company listed on the New York Stock Exchange which sells a broad
range of products through catalogs, direct marketing and the Internet,
National City Bancorp, a Nasdaq listed company and ECOS Group, Inc., a
company listed on the OTC Bulletin Board and involved in waste management
services.
SADAYAPPA DURAIRAJ is a director of the Company. Mr. 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. Since 1994, he has served as the President
and Chief Executive Officer 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
Holdings which was acquired by the Company effective July 2, 1996. Dr.
Durairaj is also Chairman of Brentwood Bank (California) and VSK Ferro Alloys
(India).
DANIEL GERONAZZO is a director of the Company. Mr. Geronazzo was an
attorney in private practice located in the Province of British Columbia for
the past 35 years.
ROBERT F. TAYLOR is a director of the Company. Mr. Taylor served as
Chief Operating Officer of the Company from January 1, 1997 to June 30, 1997.
Mr. Taylor is a chartered accountant and is a member of the Institute of
Chartered Accountants of Alberta, Canada. Mr. Taylor was appointed a
director and president of Shell Canada Products ("Shell") in 1993 and has
served in various capacities with Shell since 1967 in Calgary, Toronto and
London, England. Mr. Taylor retired from Shell in 1996. Mr. Taylor is a
director and member of the Audit Committees of Pembina Pipeline Income Fund
and WestCastle Energy Trust, each of which company trades on the Toronto
Stock Exchange.
WALTER F. WARE was appointed Chief Executive Officer and President of
the Company effective March 11, 1998. Prior thereto, since October 1997, Mr.
Ware served as the Company's Chief Operating Officer. Mr. Ware has served as
a director of the Company since December 1, 1997. From October 1995 to
September 1997, Mr. Ware served as Senior Vice President and Corporate
Officer of Detroit Diesel Corporation and as a director of several of its
subsidiary corporations. Prior thereto, Mr. Ware served in several senior
management positions with the Garrett Automotive Group division of Allied
Signal Corporation including Group Vice President, North American Automotive
Operations, Managing Director Garrett Automotive - Europe and Chief Technical
Officer.
KHAL KADER was appointed Controller of the Company in July 1998 and
became Chief Financial Officer of the Company later that month. Prior to
joining the Company, since 1994, Mr. Kader practiced as a certified public
accountant with KPMG Peat Marwick LLP in Los Angeles, California. Mr. Kader
is a member of the Institute of Certified Public Accountants.
DUANE ROSENHEIM was appointed Chief Operating Officer of the Company in
June 1998. Prior thereto, and for the past six years, Mr. Rosenheim was an
independent consultant working primarily with the Company to develop its
prototype product which has been incorporated into the Turbopac-TM- and
Dynacharger-TM- products. Prior thereto, Mr. Rosenheim served in several
positions at the Delco Electronics Division of General Motors
29
<PAGE>
Corporation including Quality Engineering Manager and Manager of the Quality,
Manufacturing and Operations Administration Departments.
BOARD MEETINGS AND COMMITTEES
The Board of Directors has an Audit Committee, a Compensation Committee
and a Stock Option Committee. The Audit Committee currently consists of
Messrs. Nowek, Geronazzo and Taylor. The Audit Committee recommends the
engagement of the Company's independent public accountants, reviews the scope
of the audit to be conducted by such independent public accountants, and
meets with the independent public accountants and the Chief Financial Officer
of the Company to review matters relating to the Company's financial
statements, the Company's accounting principles and its system of internal
accounting controls, and reports its recommendations as to the approval of
the financial statements of the Company to the Board of Directors. One
meeting of the Audit Committee was held during the year ended December 31,
1997.
The Compensation Committee currently consists of Messrs. Geronazzo and
Anderson. The Compensation Committee is responsible for considering and
making recommendations to the Board of Directors regarding executive
compensation. Two meetings of the Compensation Committee were held during
the year ended December 31, 1997.
The Stock Option Committee currently consists of Messrs. Geronazzo and
Anderson. The Stock Option Committee is responsible for administering the
Company's stock option and executive incentive compensation plans. Two
meetings of the Stock Option Committee were held during the year ended
December 31, 1997.
The Board of Directors held 10 meetings and acted by written consent on
11 occasions during fiscal 1997. No director attended less than 75% of all
the meetings of the Board of Directors and those committees on which he or
she served in fiscal 1997.
COMPENSATION OF DIRECTORS
Directors are reimbursed for reasonable out-of-pocket expenses in
connection with attendance at Board of Director and Committee meetings, and
are periodically granted options to purchase shares of the Common Stock of
the Company at the discretion of the Compensation Committee. Directors are
not otherwise provided any remuneration for their services as directors of
the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, Mr. Nowek, Vice Chairman
of the Board and Secretary, served as a member of the Company's Stock Option
Committee. The Company has paid Mr. Nowek approximately $40,000 as
reimbursement for relocation expenses from Canada to California, has loaned
Mr. Nowek $225,000 in connection with the purchase of his home in California
and has advanced to Mr. Nowek approximately $96,500 against his salary. For
a more detailed description of each of these transactions, please see
"Certain Transactions with Directors and Executive Officers." Other than as
noted immediately above, the Company has no interlocking relationships
involving any of its Compensation Committee or Stock Option Committee members
which would be required by the Securities and Exchange Commission to be
reported in this Prospectus, and no officer or employee of the Company
currently serves on its Compensation Committee.
30
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as
to each of the other four most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive
Officers"), information concerning all compensation paid for services to the
Company in all capacities for each of the three years ended December 31
indicated below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Number of
Fiscal Year ------------------- Securities
Ended Underlying All Other
Name and Principal Position (1) December 31, Salary Bonus Options Compensation
------------------------------- ------------ ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Edward M. Halimi (3) . . . . . 1997 $180,000 $162,000 200,000 $ -
Chairman of the Board 1996 60,000 - - -
1995 60,000 - 500,000 -
Leon E. Nowek (4) . . . . . . . 1997 $162,000 $145,800 200,000 -
Vice-Chairman of the Board 1996 CDN 30,000 - - -
and Secretary 1995 CDN 30,000 - - -
</TABLE>
- ----------------------
(1) For a description of the employment contract between certain officers and
the Company, see "Employment Contracts," below.
(2) Mr. Halimi served as Chief Executive Officer of the Company from October
1993 to March 1998. Currently, Mr. Halimi serves as Chairman of the Board.
(3) Mr. Nowek served as Chief Financial Officer of the Company from June 1995
to February 1998. Currently, Mr. Nowek serves as Vice-Chairman of the
Board and Secretary of the Company.
31
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding the grant of
stock options made during the fiscal year ended December 31, 1997 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable Value
At Assumed
Rate of Stock Price
Number Of Appreciation for
Securities Percent Of Total Option Term(1)
Underlying Options Granted -----------------------
Option To Employees In Exercise Or Expiration
Name Granted(2) Fiscal Year(3) Base Price(4) Date 5% 10%
---- ---------- -------------- ------------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Edward M. Halimi . . . . . . . 200,000 8% $3.50 1/6/2002 $ 440,000 $ 1,116,000
Leon E. Nowek . . . . . . . . . 200,000 8% $3.50 1/6/2002 440,000 1,116,000
</TABLE>
- ----------------------
(1) The potential realizable value is based on the assumption that the Common
Stock appreciates at the annual rate shown (compounded annually) from the
date of grant until the expiration of the option term. These amounts are
calculated pursuant to applicable requirements of the Commission and do not
represent a forecast of the future appreciation of the Company's Common
Stock.
(2) These options are immediately exercisable upon grant.
(3) Options covering an aggregate of 2,594,000 shares were granted to eligible
persons during the fiscal year ended December 31, 1997.
(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares, subject to certain conditions.
STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the exercise of stock options during the fiscal
year ended December 31, 1997, the number of shares of Common Stock underlying
stock options held at fiscal year end and the value of options held at fiscal
year end based upon the last reported sales price of the Common Stock on the
Nasdaq Small Cap Market on December 31, 1997 ($3.88 per share).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at in-the-Money Options at
Acquired Value December 31, 1997 December 31, 1997
on Exercise Realized ------------------------------ ------------------------------
Name ----------- -------- Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward M. Halimi . . . . . - $ - 200,000 - $776,000 $ -
Leon E. Nowek . . . . . . . - - 200,000 - 776,000 -
</TABLE>
32
<PAGE>
EMPLOYMENT CONTRACTS
Edward M. Halimi and Leon E. Nowek each is a party to an employment
agreement dated August 1, 1997, as amended on January 27, 1998,
(respectively, the "Halimi Agreement" and the "Nowek Agreement" and together
the "Employment Agreements") between each officer, the Company and Turbodyne
Systems. Mr. Halimi initially was employed as President and Chief Executive
Officer of the Company and Turbodyne Systems. Effective March 11, 1998, Mr.
Halimi, the Company and Turbodyne Systems agreed, pursuant to the terms of
the Halimi Agreement, to change Mr. Halimi's position to Chairman of the
Board and to modify his duties and responsibilities accordingly. Mr. Nowek
initially was employed as Chief Financial Officer of the Company and
Turbodyne Systems. Effective February 1998, Mr. Nowek, the Company and
Turbodyne Systems agreed, pursuant to the terms of the Nowek Agreement, to
change Mr. Nowek's position to Vice Chairman of the Company and Turbodyne
Systems. Pursuant to the terms of the Employment Agreements, Mr. Halimi and
Mr. Nowek are paid an annual salary of $180,000 and $162,500, respectively,
and are entitled to an annual cash bonus of up to 150% of their respective
base salaries based on the consolidated net operating income (before taxes)
of the Company, Turbodyne Systems or Pacific Baja, whichever is greater.
Each Employment Agreement also provides that in each year of the term of the
Employment Agreement, the Company shall grant to the officer options to
purchase 200,000 shares of Common Stock in accordance with the Company's
stock option plan then in effect. Each officer and the members of their
respective families are entitled to participate in any life and disability
insurance, pension, dental, medical, pharmaceutical, hospitalization, health
insurance and any other employee benefit programs as may be provided from
time to time by the Company. Each Employment Agreement is for a ten year
term and will renew for successive one year periods unless one party to the
Employment Agreement provides written notice of its election not to renew at
least 30 days prior to the expiration of the initial term or any successive
one year terms. Each officer may terminate his Employment Agreement at any
time upon three months prior written notice of his intention to so terminate.
In the event that either officer is terminated by the Company without
"cause," as defined in the Employment Agreement, he is entitled to receive
the compensation that otherwise would have been payable to him from the date
of termination to the expiration date of the then current term.
The Board of Directors has resolved to enter into a five year employment
agreement with Mr. Walter Ware, pursuant to which Mr. Ware will be entitled
to receive an annual base salary equal to $180,000 plus an annual cash bonus
based on the net operating profit of the Company and its subsidiaries. The
maximum bonus will be 150% of base salary. Mr. Ware will be entitled to
participate in share option plans, share purchase plans, bonus plans and
other financial assistance plans at the discretion of the Board of Directors
of the Company.
CERTAIN TRANSACTIONS WITH
DIRECTORS AND EXECUTIVE OFFICERS
Turbodyne Systems subleases its Carpinteria facility from American
Appliance, Inc., a private company controlled by Mr. Halimi, Chairman of the
Board of Directors of the Company. The lease is on a month to month basis
and the monthly rent is equal to $16,850.
In March 1998, the Company completed a $1.0 million secured bridge loan
with Quest Ventures Ltd (the "Quest Loan"). In connection with the
financing, the Company issued 37,500 shares of Common Stock, valued at $2.50
per share, to Leon Nowek, the Vice Chairman and a director of the Company, in
exchange for his agreement to personally guarantee the Quest Loan.
Pacific Baja leases one of its facilities in Ensenada from Baja Pacific
Properties, a company in which Dr. Sadayappa Durairaj, a director of the
Company, owns approximately 19% of the outstanding shares. The lease is for
a ten year term, expiring in September 2005 and the monthly rent is equal to
$15,000.
Pursuant to the terms of the Employment Agreement between the Company
and Leon E. Nowek, the Company loaned $225,000 to Mr. Nowek in connection
with the purchase of his home. The loan bears no interest and is repayable
on the earlier to occur of the sale of Mr. Nowek's home and the termination
of Mr. Nowek's employment agreement. At June 15, 1998, there was $225,000
outstanding under this loan.
Pursuant to the terms of the Employment Agreement between the Company
and Leon E. Nowek, the Company paid approximately $40,000 to Mr. Nowek as
reimbursement of relocation expenses incurred by him in connection with his
move to Los Angeles, California.
33
<PAGE>
The Company agreed to loan up to $234,850 to Walter F. Ware, the
President and Chief Executive Officer of the Company, in connection with the
purchase of his home. The loan bears no interest and is repayable on the
earlier to occur of the sale of Mr. Ware's home and the termination of Mr.
Ware's employment with the Company. At September 1, 1998, there was $100,000
advanced under this loan.
The Company has agreed to reimburse Mr. Ware for relocation expenses
incurred by him in connection with his move to Santa Barbara, California.
The Company pays to Wendell R. Anderson, a director of the Company, a
consultant fee of $3,500 per month in connection services rendered by Mr.
Anderson relating to project development.
The Company is paying to Eugene Hodgson, a former director of and
consultant to, the Company, an aggregate of $25,000 over a six month period
ending on September 30, 1998 in connection with Mr. Hodgson's former services
as a consultant to the Company.
The Company has advanced an aggregate of $243,000 to Edward M. Halimi
($134,000), Chairman of the Board, Leon Nowek ($96,500), Vice Chairman of the
Board and Walter Ware ($12,500), President and Chief Executive Officer.
These advances are against salaries and bonuses, bear no interest and are
payable on demand by the Company.
The Company has paid an aggregate of $178,400 to Robert Taylor, Eugene
Hodgson, Wendell Anderson and Daniel Geronazzo, each a current or former
director of the Company, in connection with consulting services rendered by
each of them to the Company.
See "Employment Contracts" for a description of employment agreements
between the Company and certain of its officers.
34
<PAGE>
OTHER INFORMATION
PRINCIPAL STOCKHOLDERS
The following table sets forth as of July 31, 1998 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the
outstanding shares of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all of the
Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each such person has the sole voting and investment power with
respect to the shares owned. The address of each person listed is in care of
the Company, 21700 Oxnard Street, Suite 1550, Woodland Hills, California
91367, unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Name and Address Beneficially Owned (1) Percent (1)
---------------- ---------------------- -----------
<S> <C> <C>
Edward M. Halimi(2) . . . . . . . . . . . . . . . . . 3,450,000 8.48%
Leon E. Nowek(3) . . . . . . . . . . . . . . . . . . 1,100,000 2.7
Wendell R. Anderson(4) . . . . . . . . . . . . . . . 200,000 *
Sadayappa Durairaj(5) . . . . . . . . . . . . . . . . 774,000 1.91
Daniel Geronazzo(6) . . . . . . . . . . . . . . . . . 115,000 *
Robert Taylor(7) . . . . . . . . . . . . . . . . . . 30,000 *
Walter F. Ware(8) . . . . . . . . . . . . . . . . . . 205,000 *
Khal A. Kader . . . . . . . . . . . . . . . . . . . . 500 *
Duane Rosenheim . . . . . . . . . . . . . . . . . . . - *
Directors and executive officers
as a group (9 persons)(2)(3)(4)(5)(6)(7)(8) . . . . . 5,874,500 14.21%
</TABLE>
- -----------
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or
the power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the date
as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of Common Stock actually outstanding at
September 30, 1998.
(2) Consists of (a) 3,250,000 escrow shares held in the name of March
Technologies Inc., a private company controlled by Mr. Halimi and (b)
200,000 shares of Common Stock reserved for issuance upon exercise of stock
options which are or will become exercisable on or before September 30,
1998.
(3) Consists of (a) 900,000 escrow shares held in the name of L.N. Family
Holdings, Inc., a company controlled by Mr. Nowek and (b) 200,000 shares of
Common Stock reserved for issuance upon exercise of stock options which are
or will become exercisable on or before September 30, 1998.
(4) Consists of 200,000 shares of Common Stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or before
September 30, 1998.
(5) Includes 100,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are or will become exercisable on or before
September 30, 1998.
35
<PAGE>
(6) Includes 100,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are or will become exercisable on or before
September 30, 1998.
(7) Consists of 30,000 shares of Common Stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or before
September 30, 1998.
(8) Includes 200,000 shares of Common Stock reserved for issuance upon exercise
of stock options which are or will become exercisable on or before
September 30, 1998.
NATURE OF TRADING MARKET
The common shares of the Company were listed on the Vancouver Stock
Exchange in British Columbia, Canada from March 8, 1994 to July 19, 1997 and
since March 26, 1997 have been listed for quotation on the Nasdaq SmallCap
Market. Since July 30, 1997, the common shares also have been listed for
quotation of the Easdaq Market.
VANCOUVER STOCK EXCHANGE
The following table sets forth the reported high and low prices for the
common shares as quoted over the Vancouver Stock Exchange on a quarterly
basis for the most recent two fiscal years.
<TABLE>
<CAPTION>
YEAR AND MONTH HIGH* LOW*
- ------------------------------------------- --------- --------
<S> <C> <C>
July 1, 1997 to July 19, 1997 $ 6.05 $ 5.41
April 1, 1997 to June 30, 1997 11.65 5.00
January 1, 1997 to March 31 1997 12.50 9.20
October 1, 1996 to December 31, 1996 12.35 9.70
July 1, 1996 to September 30, 1996 12.80 9.00
April 1, 1996 to June 30, 1996 15.00 8.50
January 1, 1996 to March 31, 1996 12.88 4.90
</TABLE>
- --------------------
* As quoted by the Vancouver Stock Exchange. Expressed in Canadian dollars.
36
<PAGE>
NASDAQ SMALLCAP MARKET
The following table sets forth the reported high and low prices for the
common shares as quoted on the Nasdaq SmallCap Market on a quarterly basis
since March 26, 1997, the date the common shares of the Company were listed
on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
YEAR AND MONTH HIGH* LOW*
- ----------------------------------------- --------- ---------
<S> <C> <C>
April 1, 1998 to June 30, 1998 $ 10.81 $ 3.75
January 1, 1998 to March 31, 1998 4.47 2.03
October 1, 1997 to December 31, 1997 5.50 2.72
July 1, 1997 to September 30, 1997 6.37 3.56
April 1, 1997 to June 30, 1997 8.38 3.50
March 27, 1997 to March 31, 1997 9.38 8.00
</TABLE>
- --------------------
* As quoted by the Nasdaq SmallCap Market.
At September 15, 1998, there were 187 holders of record of the Common
Stock of the Company.
DIVIDENDS ON COMMON STOCK
To date, the Company has not paid any dividends on the Common Stock.
The Company's policy at the present time is to retain earnings for corporate
purposes. The payment of dividends in the future will depend on the earnings
and financial condition of the Company and such other factors as the Board of
Directors of the Company may consider appropriate. Since the Company is
currently in an expansion stage, it is unlikely that earnings will be
available for the payment of dividends in the foreseeable future.
37
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder and
(i) the number of Warrant Shares owned by each Selling Stockholder as of July
15, 1998, (ii) the amount of Common Stock owned by each Selling Stockholder
as of July 15, 1998, and (iii) the maximum amount of Common Stock which may
be offered for the account of such Selling Stockholder under this Prospectus.
None of the Selling Stockholders has held any position or office or has had
any other material relationship with the Company, its predecessors or its
affiliates within the past three years.
<TABLE>
<CAPTION>
Common
Number Stock Common
of Owned Stock Percentage of
Name of Selling Warrant Prior to the Offered Outstanding
Stockholder Shares Offering(1) Hereby Common Stock
- --------------------------------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C>
CC Investments LDC 52,000 52,000 *
Lionheart Global Appreciation 207,425 207,425 *
Parthanon Investment Corporation 37,500 37,500 37,500 *
Successway Holdings, Ltd. - 139,935 139,935 *
Fisher Capital Ltd.(2) 252,850 262,600 262,600 *
Wingate Capital Ltd.(2) 136,150 141,400 141,400 *
ORD, L.L.C.(2) 40,000 40,000 40,000 *
</TABLE>
- -------------------
* Less than 1%.
(1) The information is provided as of July 15, 1998 and assumes the exercise
by the Selling Stockholders of all Warrants.
(2) Citadel Limited Partnership is the managing general partner of NP
Partners (formerly Nelson Partners ("Nelson")) and the trading manager of
each of Olympus Securities, Ltd. ("Olympus"), Fisher Capital Ltd., Wingate
Capital Ltd. and ORD, L.L.C. (collectively, the "Citadel Entities") and
consequently has voting control and investment discretion over securities
held by the Citadel Entities. The ownership information for each of the
Citadel Entities does not include the ownership information for the other
Citadel Entities. The ownership information listed in the table above also
does not include 36,620 shares of Common Stock beneficially owned by Nelson
and 75,270 shares of Common Stock beneficially owned by Olympus. Citadel
Limited Partnership and each of the Citadel Entities disclaims beneficial
ownership of the securities held by the other Citadel Entities.
The Selling Stockholders may, pursuant to this Prospectus, offer all or
some portion of the Common Stock that they acquired upon conversion of the
Series A Preferred Stock or exercise of the Warrants. Accordingly, no
estimate can be given as to the amount of the Common Stock that will be held
by the Selling Stockholders upon termination of any such sales. In addition,
the Selling Stockholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Series A Preferred Stock or
their Warrant Shares since the date on which they provided the information
regarding their Series A Preferred Stock, Warrant Shares and Common Stock in
transactions exempt from the registration requirements of the Securities Act.
See "Plan of Distribution."
The Selling Stockholders may from time to time offer and sell pursuant
to this Prospectus any or all of the Common Stock issuable upon conversion of
the Series A Preferred Stock or exercise of the Warrants. The term Selling
Stockholder includes the holders listed in any Supplement hereto and the
beneficial owners of the Series A Preferred Stock, the Warrants and their
transferees, pledges, donees or other successors. Any such Supplement will
contain certain information with respect to the Selling Stockholders and the
respective number of shares of Common Stock beneficially owned by each
Selling Stockholder that may be offered pursuant to this Prospectus. Such
information will be obtained from the Selling Stockholder.
38
<PAGE>
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the shares of Common Stock of the Company
offered by this Prospectus may not simultaneously engage in market making
activities with respect to the shares of Common Stock of the Company during
the applicable "cooling off" periods prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Stockholder will need to comply with applicable provisions of the Exchange
Act and the rules and regulations thereunder including, without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
shares of Common Stock by the Selling Stockholders. Regulation M contains
certain limitations and prohibitions intended to prevent issuers and selling
security holders and other participants in a distribution of securities from
conditioning the market through manipulative or deceptive devices to
facilitate the distribution.
PLAN OF DISTRIBUTION
On September 8, 1997 and September 19, 1997, the Company completed the
sale of an aggregate of 10,000 shares of Series A Preferred Stock pursuant to
those certain Convertible Series A Preferred Stock Purchase Agreements (the
"Purchase Agreements") dated September 8, 1997 and September 19, 1997 between
Turbodyne and certain of the Selling Stockholders. This transaction resulted
in gross proceeds of U.S. $10 million and net proceeds of U.S. $9.6 million to
the Company.
In connection with sale of the Series A Preferred Stock, the Company
issued warrants to purchase an aggregate of 666,667 shares of Common Stock to
the Company's investment banker and its designees. Each warrant is
immediately and fully exercisable at $5.00 per share. The warrants expire on
September 19, 2000.
At the date hereof, all shares of Series A Preferred Stock have been
converted into an aggregate of 4,742,522 shares of Common Stock.
The Common Stock offered hereby may be sold from time to time to
purchasers directly by the Selling Stockholders or by their pledges, donees,
transferees or other successors in interest. Alternatively, the Selling
Stockholders may from time to time offer the shares of Common Stock to or
through underwriters, broker/dealers or agents, who may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Selling Stockholders or the purchasers of shares of Common Stock for whom
they may act as agents. The Selling Stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of shares of
Common Stock may be deemed to be "underwriters" within the meaning of the
Securities Act and any profit on the sale of the shares of Common Stock by
them and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act.
The shares of Common Stock offered hereby may be sold from time to time
in one or more transactions at fixed prices, at prevailing market prices at
the time of sale, any varying prices determined at the time of sale or at
negotiated prices. The sale of the shares of Common Stock may be effected
in transactions (which may involve crosses or block transactions) on any
national or international securities exchange or quotation services on which
the shares of Common Stock may be listed or quoted at the time of sale, (ii)
in the over-the-counter market, (iii) in transactions otherwise than on such
exchanges or in the over-the-counter market or (iv) through the writing of
options. At the time a particular offering of the shares of Common Stock is
made, a Prospectus Supplement, if required, will be distributed which will
set forth the aggregate amount and type of shares of Common Stock being
offered and the terms of the offering, including the name or names of any
underwriters, broker/dealers or agents, any discounts, commissions and other
terms constituting compensation from the Selling Stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker/dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the shares of Common Stock will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the shares of Common Stock may not be
offered or sold unless they have been registered or qualified for sale in
such jurisdictions or any exemption from registration or qualification is
available and is complied with.
The Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the shares of Common Stock
by the Selling Stockholders. The foregoing may affect the marketability of
the shares of Common Stock.
39
<PAGE>
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the shares will be paid by the Company, including, without
limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling
Stockholders will pay all underwriting discounts and selling commissions, if
any. The Selling Stockholders will be indemnified by the Company against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000
shares of Common Stock, par value $.001 per share, and 1,000,000 shares of
Preferred Stock, par value $.001 per share.
COMMON STOCK
As of September 15, 1998, there were 41,226,097 shares of Common Stock
outstanding held of record by approximately 187 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on
by the stockholders. Subject to preferences that may be applicable to
outstanding shares of Preferred Stock, if any, the holders of Common Stock
are entitled to receive ratably such dividends as may be declared from time
to time by the Board of Directors out of funds legally available therefor.
In the event of the liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights
of the Preferred Stock outstanding. The Common Stock has no preemptive,
conversion, subscription or other rights. There are no redemption or sinking
funds provisions applicable to the Common Stock. The outstanding shares of
Common stock are fully paid and non-assessable.
The Company is a reporting issuer in British Columbia and, accordingly,
is governed by securities laws and regulations applicable in British
Columbia. Additionally, from March 8, 1994 to July 19, 1997, the Common Stock
was listed on the Vancouver Stock Exchange and for such period, the Company
was subject to the policies of such exchange. Certain regulations of the
British Columbia SECURITIES ACT set forth distinctions between "free trading
common shares" and common shares required to be placed in escrow or in a
"pool." Free trading common shares are not subject to any restrictions on
resale, and can be traded without regulatory approval. Free trading shares
are generally qualified by way of prospectus and issued to the public.
Conversely, shares issued by way of "private placement" to certain investors
and not to the public, are usually subject to a one-year hold period and
cannot be traded until the relevant hold period has expired. Once the hold
period expires, the shares would the become free trading shares. Under the
British Columbia SECURITIES ACT, a listed company is entitled to sell
"performance shares" to its principals at a minimum price of $0.01 per share
on its original organization, or if the company is inactive, then upon a
reverse takeover transaction or a substantial corporate reorganization,
provided that the number of performance shares not exceed 65% of the
company's shares then outstanding. The principals of the company receiving
performance shares must pay for the performance shares at the price approved
by the board of directors of the Company and the Vancouver Stock Exchange.
The shares are then placed in escrow with the company's escrow agent and
released in accordance with certain earnings performance criteria to be met
by the company. Any of these escrow shares that are not released within 10
years of issuance are canceled.
The Company issued the performance shares at a price of $0.01 per share
at the time of the completion of the Company's reverse takeover of Turbodyne
Systems. The performance shares are subject to an escrow agreement dated
March 17, 1994 among the Company, Montreal Trust Company of Canada Limited,
as escrow agent, and March Technologies Inc. and Leon E. Nowek, as principals
of the Company. The Company's performance shares are to be released in
compliance with Local Policy Statement 3-07 ("Local Statement") of the
British Columbia Securities Commission. Under the 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;
40
<PAGE>
(b) amortization of goodwill and amortization of research and
development, excluding general and administrative costs;
(c) expending research and development costs, excluding general and
administrative costs;
(d) any other amounts permitted or required by the British Columbia
Securities Commission.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares
of Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon such Preferred Stock,
including dividend rights, conversion rights, terms of redemption,
liquidation preference sinking fund terms and the number of shares
constituting any series or the designation of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock could have the effect of delaying,
deferring or preventing a change in control of the Company.
On September 8, 1997 and September 19, 1997, the Company completed the
sale of an aggregate of 10,000 shares of Series A Preferred Stock. All
outstanding shares of Series A Preferred Stock have been converted into an
aggregate of 4,742,522 shares of Common Stock. See "Plan of Distribution."
WARRANTS
In connection with the execution of the Series A Stock Purchase
Agreements, the Company issued warrants to purchase 666,667 shares of Common
Stock of the Company at $5.00 per share (the "Warrants"). The Warrants were
issued to the Company's investment banker and its designees as partial
consideration for services rendered in connection with the Series A Preferred
Stock financing and are exercisable until September 19, 2000.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides that the Company's
Board of Directors is classified into three classes of directors. The
Certificate of Incorporation also provides that all stockholder action must
be effected at a duly called meeting of stockholders and not by a consent in
writing. In addition, the Company's Certificate of Incorporation and Bylaws
provide that only the Company's Chairman of the Board, Chief Executive
Officer, President or a majority of the members of the Company's Board of
Directors may call a special meeting of stockholders. In addition, directors
may not be removed without cause. The Company also has the authority to
issue one or more series of "blank check" preferred stock. See "Preferred
Stock." These provisions of the Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions also may have the effect
of preventing changes in the management of the Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of
business combinations with a person or affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquires 85% or more of the outstanding voting stock
of the corporation in the same transaction that makes it an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3 of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
41
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Neill & Company, Barristers & Solicitors, of Suite
1880, 1055 West Georgia Street, Vancouver, British Columbia V6E 3P3.
ACCOUNTANTS
On January 28, 1998, the Company appointed KPMG Peat Marwick LLP
("KPMG") to replace Morgan & Company, Chartered Accountants ("Morgan") as
independent auditors of the Company. Morgan resigned as the Company's
auditors on the same date. The decision to engage KPMG as the Company's
independent auditors was approved by the Company's board of directors.
There were no reportable disagreements with Morgan nor any reportable
events, in each case within the meaning of Rule 304 of Regulation S-K of the
Securities and Exchange Commission. The report of Morgan on the Company's
consolidated financial statements for the years ended December 31, 1996 and
1995 contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principle.
There was no similar reservation by Morgan with respect to any interim
financial information for any subsequent period preceding the effective date
of the Company's change in accountants.
The consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations, stockholders' equity and cash flows for the fiscal year
ended December 31, 1997 included in this Prospectus have been included herein in
reliance upon the report of KPMG Peat Marwick, independent public accountants.
The consolidated balance sheet as of December 31, 1996 and 1995 and the
consolidated statements of operations, stockholders' equity and cash flows for
the fiscal years ended December 31, 1996 and 1995 included in this Prospectus
have been included herein in reliance upon the report of Morgan and Company,
chartered accountants.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F-10
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997. . . . . F-25
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . F-26
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Notes to Condensed Financial Statements. . . . . . . . . . . . . . . . . . . . F-28
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . F-33
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Turbodyne Technologies Inc.:
We have audited the accompanying consolidated balance sheet of Turbodyne
Technologies Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Turbodyne Technologies Inc. as of and
for the years ended December 31, 1996 and 1995, prior to any restatement,
were audited by other auditors whose report dated February 14, 1997 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Turbodyne
Technologies Inc. and subsidiaries as of December 31, 1997 and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, due to the
change in reporting currency, effective from January 1, 1998, the
accompanying 1996 and 1995 consolidated financial statements have been
restated to the new reporting currency of the United States dollar.
We also audited the adjustments that were applied to restate the 1996 and
1995 consolidated financial statements to U.S. generally accepted accounting
principles and the change in reporting currency. In our opinion, such
adjustments are appropriate and have been properly applied.
/s/ KPMG Peat Marwick
Los Angeles, California
April 3, 1998, except for the last paragraph
of note 11 and the last paragraph of
note 12, which are as of April 30, 1998.
F-2
<PAGE>
AUDITOR'S 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, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995. 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 required 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 its cash
flows for the years ended December 31, 1996 and 1995 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.
/s/ Morgan & Company
February 14, 1997, except for the last paragraph Chartered Accountants
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
F-3
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------------------- ----------------------
<S> <C> <C>
Current assets:
Cash $ 949,000 3,143,000
Trade accounts receivable, less allowance for doubtful
accounts of $78,000 in 1997 and $181,000 in 1996 9,214,000 5,959,000
Employee advances receivable (note 10) 568,000 82,000
Inventories (note 2) 5,469,000 3,453,000
Prepaid expenses and other current assets 1,191,000 851,000
---------------------- ----------------------
Total current assets 17,391,000 13,488,000
Property and equipment, at cost, net (note 3) 18,122,000 11,290,000
Goodwill, net 13,740,000 14,528,000
Other assets 473,000 135,000
---------------------- ----------------------
$ 49,726,000 39,441,000
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------------- -------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 4) $ 607,000 1,346,000
Current maturities of obligations under capital
leases (note 6) 1,035,000 611,000
Accounts payable 5,283,000 2,875,000
Accrued liabilities 1,850,000 1,630,000
Income taxes payable 86,000 --
------------ -----------
Total current liabilities 8,861,000 6,462,000
Long-term debt, less current maturities (note 4) 8,155,000 4,095,000
Obligations under capital leases, less current
maturities (note 6) 1,867,000 1,170,000
------------ -----------
18,883,000 11,727,000
------------ -----------
Stockholders' equity (notes 7, 8 and 11):
Class A preferred stock, no par value. Authorized
100,000,000 shares; none issued -- --
Class B preferred stock, no par value. Authorized
100,000,000 shares; none issued -- --
Preferred stock, no par value. Authorized and
issued 10,000 Series One Class A, 7% cumulative
convertible 9,604,000 --
Common stock, no par value. Authorized
100,000,000 shares; issued and outstanding
29,961,612 shares in 1997 and 23,580,098 shares
in 1996 -- --
Additional paid-in capital 45,290,000 22,599,000
Special warrants -- 16,007,000
Cumulative currency translation adjustment 22,000 (204,000)
Accumulated deficit (24,073,000) (10,688,000)
------------ -----------
Total stockholders' equity 30,843,000 27,714,000
Commitments and contingencies (note 6)
Subsequent events (note 11)
Liquidity (note 12)
------------ -----------
$ 49,726,000 39,441,000
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Net sales $ 39,165,000 13,944,000 --
Cost of goods sold 32,326,000 12,101,000 --
-------------------- ------------------- -------------------
Gross profit 6,839,000 1,843,000 --
Selling, research, general and administrative expenses 18,982,000 7,781,000 2,603,000
-------------------- ------------------- -------------------
Loss from operations (12,143,000) (5,938,000) (2,603,000)
Other expense (income):
Interest expense, net 770,000 360,000 --
Other, net 66,000 (315,000) --
-------------------- ------------------- -------------------
Loss before income taxes (12,979,000) (5,983,000) (2,603,000)
Income tax expense (benefit) (note 5) 206,000 (420,000) --
-------------------- ------------------- -------------------
Net loss $ (13,185,000) (5,563,000) (2,603,000)
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Net loss per common share:
Basic loss per share $ (.58) (.33) (.46)
Diluted loss per share (.58) (.33) (.46)
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Weighted average shares used for basic and diluted loss
per share 22,685,000 16,641,000 5,656,000
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------ ------------------------------ ADDITIONAL
SHARES AMOUNT SHARES AMOUNT PAID-IN
CAPITAL
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 10,663,052 $ -- -- $ -- 2,387,000
Private placement of common stock,
net of expenses 3,367,213 -- -- -- 1,968,000
Issuance of common stock for loan
bonus 258,333 -- -- -- 69,000
Issuance of common stock for finder's
fees 116,667 -- -- -- 31,000
Issuance of common stock for debt
settlement 301,933 -- -- -- 115,000
Exercise of warrants 666,423 -- -- -- 353,000
Exercise of stock options 1,168,500 -- -- -- 638,000
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1995 16,542,121 -- -- -- 5,561,000
Private placement of common stock,
net of expenses 469,497 -- -- -- 1,644,000
Private placement of special
warrants, net of expenses -- -- -- -- --
Exercise of warrants 2,840,557 -- -- -- 2,528,000
Exercise of stock options 651,000 -- -- -- 1,605,000
Issuance of common stock on
acquisition of subsidiary 3,076,923 -- -- -- 11,261,000
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1996 23,580,098 -- -- -- 22,599,000
Private placement of preferred stock,
net of expenses -- -- 10,000 9,604,000 --
Conversion of Series A and Series C
special warrants, net of expenses 4,625,000 -- -- -- 15,659,000
Exercise of warrants 1,002,014 -- -- -- 4,089,000
Exercise of stock options 754,500 -- -- -- 2,401,000
Translation adjustment -- -- -- -- --
Issuance of stock options to
nonemployees for services -- -- -- -- 542,000
Net loss -- -- -- -- --
Preferred stock dividends declared -- -- -- -- --
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1997 29,961,612 $ -- 10,000 $9,604,000 45,290,000
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
<CAPTION>
CUMULATIVE
CURRENCY NET
SPECIAL TRANSLATION ACCUMULATED STOCKHOLDERS'
WARRANTS ADJUSTMENT DEFICIT EQUITY
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 -- (130,000) (2,522,000) (265,000)
Private placement of common stock,
net of expenses -- -- -- 1,968,000
Issuance of common stock for loan
bonus -- -- -- 69,000
Issuance of common stock for finder's
fees -- -- -- 31,000
Issuance of common stock for debt
settlement -- -- -- 115,000
Exercise of warrants -- -- -- 353,000
Exercise of stock options -- -- -- 638,000
Translation adjustment -- 287,000 -- 287,000
Net loss -- -- (2,603,000) (2,603,000)
----------- -------- ----------- -----------
Balance at December 31, 1995 -- 157,000 (5,125,000) 593,000
Private placement of common stock,
net of expenses -- -- -- 1,644,000
Private placement of special
warrants, net of expenses 16,007,000 -- -- 16,007,000
Exercise of warrants -- -- -- 2,528,000
Exercise of stock options -- -- -- 1,605,000
Issuance of common stock on
acquisition of subsidiary -- -- -- 11,261,000
Translation adjustment -- (361,000) -- (361,000)
Net loss -- -- (5,563,000) (5,563,000)
----------- -------- ----------- -----------
Balance at December 31, 1996 16,007,000 (204,000) (10,688,000) 27,714,000
Private placement of preferred stock,
net of expenses -- -- -- 9,604,000
Conversion of Series A and Series C
special warrants, net of expenses (16,007,000) -- -- (348,000)
Exercise of warrants -- -- -- 4,089,000
Exercise of stock options -- -- -- 2,401,000
Translation adjustment -- 226,000 -- 226,000
Issuance of stock options to
nonemployees for services -- -- -- 542,000
Net loss -- -- (13,185,000) (13,185,000)
Preferred stock dividends declared -- -- (200,000) (200,000)
----------- -------- ----------- -----------
Balance at December 31, 1997 -- 22,000 (24,073,000) 30,843,000
----------- -------- ----------- -----------
----------- -------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,185,000) (5,563,000) (2,603,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and
equipment 2,695,000 5,163,000 40,000
Loss on sale of equipment 76,000 -- --
Stock compensation 542,000 -- 215,000
(Increase) decrease in operating assets:
Trade accounts receivable (3,255,000) 806,000 --
Employee advances receivable (486,000) (82,000) (82,000)
Inventories (2,016,000) (868,000) --
Prepaid expenses and other current
assets (340,000) 541,000 (224,000)
Other assets (338,000) (135,000) (25,000)
Increase (decrease) in operating liabilities:
Trade accounts payable 2,408,000 (1,947,000) (104,000)
Accrued expenses 20,000 605,000 --
Income taxes payable 86,000 -- --
------------ ----------- ----------
Net cash used in operating
activities (13,793,000) (1,480,000) (2,783,000)
------------ ----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (6,910,000) (5,983,000) (389,000)
Proceeds from sale of property, plant and
equipment 42,000 -- --
Acquisition of subsidiary, less cash acquired
of $441,000 -- (11,559,000) --
------------ ----------- ----------
Net cash used in investing
activities (6,868,000) (17,542,000) (389,000)
------------ ----------- ----------
</TABLE>
(Continued)
F-8
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from long-term borrowings $ 3,321,000 956,000 152,000
Repayments under capital lease obligations (826,000) (440,000) --
Issuance of special warrants -- 16,007,000 --
Issuance of common stock -- 1,644,000 1,968,000
Proceeds from exercise of stock options and
warrants 6,490,000 4,133,000 991,000
Net proceeds from preferred stock issue 9,604,000 -- --
Issuance costs paid (348,000) -- --
-------------------- ------------------- -------------------
Net cash provided by financing
activities 18,241,000 22,300,000 3,111,000
-------------------- ------------------- -------------------
Effect of exchange rate changes on cash 226,000 (361,000) 287,000
-------------------- ------------------- -------------------
Net increase (decrease) in cash (2,194,000) 2,917,000 226,000
Cash at beginning of year 3,143,000 226,000 --
-------------------- ------------------- -------------------
Cash at end of year $ 949,000 3,143,000 226,000
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 882,000 366,000 62,000
Income taxes 120,000 718,000 --
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Supplemental disclosure of noncash investing and
financing activities:
Issuance of notes for financing of capital
leases
Issuance of common stock in connection with $ 1,947,000 835,000 --
acquisition of subsidiary -- 11,261,000 --
Preferred stock dividends declared 200,000 -- --
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Turbodyne Technologies Inc. and subsidiaries (the Company) was incorporated
under the Company Act of the Province of British Columbia, Canada and was
continued under the Canada Business Corporation Act on December 3, 1996.
The Company manufactures aluminum cast automotive products, including
engine components and specialty wheels, and develops products to enhance
performance and reduce emissions of internal combustion engines.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Turbodyne Systems, Inc.,
Turbodyne U.K. Ltd. and Pacific Baja Light Metals Corp. (Pacific Baja). All
material intercompany accounts and transactions have been eliminated in
consolidation.
BASIS OF PRESENTING FINANCIAL STATEMENTS
Effective July 18, 1997, the Company formally delisted its shares from
trading on the Vancouver Stock Exchange. On March 24, 1997, the Company's
shares became listed on the Nasdaq Small Capital Market and continues to
trade in that market. As a result, effective January 1, 1998, the Company
changed its reporting currency from the Canadian (Cdn$) to the U.S. dollar
(U.S.$). Accordingly, the consolidated financial statements for 1996 and
1995 have been restated to the new reporting currency of U.S.$.
The accompanying consolidated financial statements are presented in
accordance with U.S. generally accepted accounting principles.
Additionally, a cumulative translation adjustment has been included as a
separate component of stockholders' equity reflecting the translation of
the Cdn$ reporting currency consolidated financial statements to the newly
adopted and retroactively applied U.S.$ reporting currency. This cumulative
translation adjustment will remain as a separate component of stockholders'
equity.
INVENTORIES
Inventories are valued at the lower of cost or market. For the materials
portion of inventories, the cost is determined using the last-in, first-out
(LIFO) method. For the other components of inventories (labor and
overhead), the cost is determined using the first-in, first-out (FIFO)
method.
F-10
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is computed using
the straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings 30 years
Machinery and equipment 7 to 15 years
Furniture and fixtures 5 to 10 years
Transportation equipment 5 years
Leasehold improvements Length of lease, not to exceed economic life
</TABLE>
LONG-LIVED ASSETS
It is the Company's policy to report long-lived assets at amortized cost.
As part of an ongoing review of the valuation and amortization of
long-lived assets, management assesses the carrying value of such assets if
facts and circumstances suggest that they may be impaired. The Company
assesses the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121. As a result, the
Company has determined that its long-lived assets are not impaired as of
December 31, 1997, 1996 and 1995.
GOODWILL
Goodwill is associated with the purchase of Pacific Baja on July 2, 1996 by
the Company and is being amortized on a straight-line basis over 20 years.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the balance over the remaining life can be recovered
through undiscounted future operating cash flows of the Company's
operations. Accumulated amortization was $1,182,000 and $394,000 at
December 31, 1997 and 1996, respectively.
FOREIGN OPERATIONS
Baja Oriente S.A. de C.V., a wholly owned subsidiary of Pacific Baja,
operates in Ensenada, Mexico and its functional currency is the U.S.$. The
loss from remeasurement of the financial statements of Baja Oriente S.A. de
C.V. into U.S.$ for the years ended December 31, 1997 and 1996 is $125,000
and $43,000, respectively, and is included in cost of goods sold in the
accompanying consolidated financial statements.
RECOGNITION OF REVENUE AND SIGNIFICANT CUSTOMERS
The Company recognizes revenue upon shipment of product. The Company had
sales to two significant customers constituting approximately 39% and 24%
and 30% and 27%, respectively, of net sales in 1997 and 1996, respectively.
Additionally, these customers comprised 31% and 23% and 43% and 19%,
respectively, of accounts receivable at December 31, 1997 and 1996,
respectively. The loss of either of these customers could have a material
adverse effect on the Company.
F-11
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes which recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards (FAS) No. 128, "Earnings per Share." FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) and became effective for both interim and annual
periods ending after December 15, 1997. All prior period EPS have been
restated to conform with the provisions of FAS 128. The adoption of FAS 128
did not have a material impact on the Company's loss per share
calculations.
For the years ended December 31, 1997, 1996 and 1995, options and warrants
to purchase 5,103,500, 2,640,230 and 4,272,290 common stock, respectively,
at prices ranging from $.37 to $6.48 were outstanding during the years but
were not included in the computation of diluted EPS because the options
would have an antidilutive effect on net loss per share. Other than
deducting preferred stock dividends of $200,000 in 1997 to arrive at loss
attributable to common stockholders, no other adjustments were made for
purposes of per share calculations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash, trade accounts receivable, employee
advances receivable, accounts payable and accrued expenses approximate the
carrying values because of the short maturities of these instruments.
The fair values of the Company's capital lease obligations and long-term
debt approximate their carrying values as each instrument bears interest at
market rates.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123), effective January
1, 1996, and has elected to continue to measure compensation cost under
APBO No. 25 and comply with the pro forma disclosure requirements of FAS
123. The adoption of FAS 123 has had no impact on the Company's financial
position or results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred. Research and development costs
aggregated $6,609,000, $3,622,000 and $1,421,000 for 1997, 1996 and 1995,
respectively.
F-12
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the 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.
(2) INVENTORIES
Inventories are comprised of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Raw materials $ 2,123,000 1,491,000
Work in process 686,000 652,000
Finished goods 2,660,000 1,310,000
------------------- -------------------
$ 5,469,000 3,453,000
------------------- -------------------
------------------- -------------------
</TABLE>
The use of the LIFO method in determining the cost of the materials portion
of inventories had the effect of decreasing reported inventories at
December 31, 1997 and 1996 by $136,000 and $118,000, respectively.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Construction in progress $ 583,000 343,000
Land and buildings 3,735,000 101,000
Machinery and equipment 12,226,000 10,586,000
Transportation equipment 593,000 564,000
Furniture and fixtures 416,000 295,000
Leasehold improvements 3,627,000 2,430,000
Equipment under capital leases 3,675,000 1,797,000
------------------- -------------------
24,855,000 16,116,000
Less accumulated depreciation and
amortization 6,733,000 4,826,000
------------------- -------------------
Net property, plant and
equipment $ 18,122,000 11,290,000
------------------- -------------------
------------------- -------------------
</TABLE>
F-13
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Of the property, plant and equipment listed above, the assets located at
the production facilities in Ensenada, Mexico have a net book value of
approximately $9,242,000 and $3,729,000 at December 31, 1997 and 1996,
respectively.
Accumulated depreciation on assets under capital leases amounted to
$457,000 and $145,000 at December 31, 1997 and 1996, respectively.
(4) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
Revolving bank lines of credit (A) $ 8,144,000 4,439,000
Notes payable to bank, principal of $15,625 plus interest payable
monthly at prime (8.50% at December 31, 1997) plus .25% through
October 1, 1998, with the remaining principal due
November 1, 1998 547,000 --
Notes payable to bank, with monthly installments of $35,862 plus interest
payable monthly at prime plus 1%, maturing at various dates
through June 2000 -- 1,002,000
Other 71,000 --
-------------------- --------------------
Total long-term debt 8,762,000 5,441,000
Less current maturities 607,000 1,346,000
-------------------- --------------------
Long-term debt, excluding current maturities $ 8,155,000 4,095,000
-------------------- --------------------
-------------------- --------------------
</TABLE>
(A) The Company's wholly owned subsidiary, Pacific Baja, has a revolving
line of credit with a bank permitting borrowings up to $10 million,
secured by all receivables and inventory. The borrowings bear
interest at the Company's option at LIBOR (5.84% at December 31,
1997) plus 2% or at prime (8.50% at December 31, 1997). The line of
credit expires June 1, 1999.
The Company was not in compliance with the tangible net worth covenant
related to its debt facilities at December 31, 1997, but has received the
appropriate waiver through January 1, 1999.
The aggregate maturities of long-term debt for years subsequent to December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 607,000
1999 8,151,000
2000 4,000
-------------------
$ 8,762,000
-------------------
-------------------
</TABLE>
F-14
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) INCOME TAXES
Income tax expense is comprised of the following for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ 160,000 63,000 --
State 46,000 8,000 --
------------------- ------------------- -------------------
206,000 71,000 --
------------------- ------------------- -------------------
Deferred:
Federal -- (483,000) --
State -- (8,000) --
------------------- ------------------- -------------------
-- (491,000) --
------------------- ------------------- -------------------
$ 206,000 (420,000) --
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 differed from the amounts computed by applying the statutory
Federal income tax rate of 35% to earnings before income taxes as a result
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Computed "expected" income tax benefit $ (4,628,000) (2,094,000) (911,000)
State income taxes, net of Federal benefit 30,000 -- --
Losses with no U.S. tax benefit 1,473,000 401,000 256,000
Nondeductible goodwill 321,000 162,000 --
Change in valuation allowance 2,419,000 1,412,000 902,000
Other 591,000 119,000 (247,000)
-------------------- ------------------- -------------------
Total income tax expense
(benefit) $ 206,000 -- --
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
F-15
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 215,000 185,000
Inventory-related items 53,000 53,000
Alternative minimum tax credit 72,000 --
Net operating loss carryover - state 412,000 150,000
Net operating loss carryover - Federal 5,134,000 2,947,000
------------------- -------------------
Gross deferred tax assets 5,886,000 3,335,000
Less valuation allowance (4,732,000) (2,314,000)
------------------- -------------------
Deferred tax assets, net of valuation allowance 1,154,000 1,021,000
Deferred tax liabilities - basis of fixed assets (1,154,000) (1,021,000)
------------------- -------------------
Net deferred tax assets $ -- --
------------------- -------------------
------------------- -------------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Management believes it is not likely that the Company will
realize the benefits of these deductible differences at December 31, 1997.
Accordingly, a valuation allowance has been provided for the total net
deferred tax assets.
(6) COMMITMENTS AND CONTINGENCIES
LEASES
The Company's subsidiaries lease certain factory and office premises in
California and Ensenada, Mexico under noncancelable operating leases
expiring through September 2006. The Company leases one of its facilities
in Mexico from certain stockholders of the Company. Rental expense for
1997, 1996 and 1995 was approximately $1,050,000, $464,000 and $204,000,
respectively, of which $180,000, $195,000 and $0, respectively, was paid to
the Company's stockholder.
The Company is obligated under capital lease agreements for certain
equipment and vehicles. The leases are due in monthly installments at
various dates through August 2002.
F-16
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Minimum future rental commitments under the operating leases and future
minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------- -------------------
<S> <C> <C>
Year ending December 31:
1998 $ 1,255,000 984,000
1999 1,042,000 1,006,000
2000 540,000 954,000
2001 370,000 498,000
2002 131,000 325,000
Thereafter -- 960,000
-------------------- -------------------
Total future minimum lease payments 3,338,000 $ 4,727,000
-------------------
-------------------
Less amounts representing interest (at rates ranging from 8.35%
to 16.41%) 436,000
--------------------
Present value of net minimum capital lease payments
2,902,000
Less current maturities of obligations under capital leases 1,035,000
--------------------
Obligations under capital leases, excluding current
maturities $ 1,867,000
--------------------
--------------------
</TABLE>
The Company has entered into consulting commitments for assistance in
management development, international marketing, licensing and financing,
technical and educational services.
Future commitments under these contracts as of December 31, 1997 were:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 74,000
1999 56,000
2000 42,000
2001 42,000
2002 42,000
-------------------
$ 256,000
-------------------
-------------------
</TABLE>
In addition to the above, the Company has other consulting agreements which
are payable on a month-to-month basis for a total of $91,000 per month and
continue indefinitely until either party terminates the agreement in
writing with advance notice ranging from one to three months.
F-17
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
LITIGATION
The Company is currently involved in various collection claims and legal
actions arising in the ordinary course of business. Management does not
believe that disposition of these matters will have a material effect on
the Company's financial position or results of operations.
(7) STOCK OPTIONS
On March 3, 1997, the Company established an incentive stock option plan
(the Stock Option Plan). Under the plan, the Company may grant options to
its directors, officers and employees for up to 2,840,000 shares of common
stock. The exercise price of each option shall be determined by the Stock
Option Committee but shall in no instance be less than the fair market
value of the shares of the Company, determined as the average closing price
of the common shares of the Company for the ten days trading preceding the
date of grant. The option's maximum term is ten years. The Stock Option
Committee shall determine the grant date of any option.
Options granted under the Stock Option Plan to participants, other than the
President, Chief Executive Officer, the Chief Financial Officer, Secretary
and any directors of the Company or its subsidiaries, shall be subject to a
vesting formula. The vesting formula will provide that options shall vest
equally over a three-year period commencing on the date of the grant so
that the options can only be exercised as to an aggregate of 33.3% in the
first year, 66.6% in the second year and 100% in the third year and each
year thereafter. No options granted to an employee of the Company or an
affiliate of the Company shall be exercisable until the optionee has been
employed by the Company or affiliate for a period of six months. The
directors have the discretion to waive the vesting requirements at their
discretion in appropriate circumstances.
The following summarizes information relating to stock options during 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
NONEMPLOYEES EMPLOYEES
---------------------------- -------------------------- -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES
- ---------------------------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 25,000 $5.25 2,275,500 $4.55 2,300,500
Granted 485,000 4.70 2,594,000 4.67 3,079,000
Exercised -- -- 754,500 2.06 754,500
Forfeited -- -- 493,500 5.75 493,500
------- --------- ---------
Outstanding at end of year 510,000 4.73 3,621,500 4.78 4,131,500
Options exercisable at end of
year 231,950 4.75 2,984,665 4.78 3,216,615
Weighted average fair value of
options granted during the
year -- 3.50 -- 3.45 --
------- ----- --------- ----- ---------
------- ----- --------- ----- ---------
</TABLE>
F-18
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------
NONEMPLOYEES EMPLOYEES
-------------------------- --------------------------- -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES
- -------------------------------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 30,000 $1.15 1,591,500 $2.73 1,621,500
Granted 25,000 5.25 1,305,000 5.76 1,330,000
Exercised 30,000 1.15 621,000 2.42 651,000
Forfeited -- -- -- -- --
Outstanding at end of year 25,000 5.25 2,275,500 4.55 2,300,500
Options exercisable at end of
year 25,000 5.25 2,275,500 4.55 2,300,500
Weighted average fair value of
options granted during the
year -- 1.67 -- 3.11 --
-------- ------ --------- ----- ---------
-------- ------ --------- ----- ---------
<CAPTION>
1995
--------------------------------------------------------------------------
NONEMPLOYEES EMPLOYEES
-------------------------- ------------------------- -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES
- -------------------------------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of
year -- $ -- 190,000 $ .38 190,000
Granted 30,000 1.15 2,510,000 1.93 2,540,000
Exercised -- -- 1,168,500 .53 1,168,000
Forfeited -- -- -- -- --
Outstanding at end of year 30,000 1.15 1,531,500 2.73 1,561,500
Options exercisable at end of
year 30,000 1.15 1,531,500 2.73 1,561,500
Weighted average fair value of
options granted during the
year -- .63 -- 1.18 --
--------- ------- --------- --------- ---------
--------- ------- --------- --------- ---------
</TABLE>
F-19
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
------------------------------------------------------ ------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF SHARES AVERAGE
EXERCISE PRICES OUTSTANDING SHARES EXERCISE PRICE REMAINING TERM EXERCISABLE EXERCISE PRICE
------------------- ------------------- --------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
$3.00 to $3.50 335,000 $ 3.30 1.43 335,000 $ 3.30
4.50 to 5.00 3,305,000 4.70 4.07 2,390,115 4.67
5.00 to 6.50 491,500 6.29 .69 491,500 6.29
------------------- -------------------
3.50 to 6.50 4,131,500 4.77 3.48 3,216,615 4.78
------------------- ---------- ---------- ------------------- ------
------------------- ---------- ---------- ------------------- ------
</TABLE>
The per share weighted average fair value of stock options granted during
1997, 1996 and 1995 was $3.48, $3.22 and $1.17, respectively, on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: 1997, 1996 and 1995 expected dividend yield
0%; expected volatility of 106%; risk-free interest rate of between 5.08%
and 7.20% and expected life equal to 80% of the full term of 2 to 5 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined based upon the fair value
of the stock options at the grant date consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net loss:
As reported $ (13,185,000) (5,563,000) (2,603,000)
Pro forma (20,687,000) (9,619,000) (5,553,000)
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Basic and diluted loss per
share:
As reported $ (.58) (.33) (.46)
Pro forma (.91) (.58) (.98)
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
(8) STOCKHOLDERS' EQUITY
SPECIAL WARRANTS
On July 2, 1996, the Company completed a private placement of 3,750,000
Series "A" Special Warrants at a price of $5.00 (Cdn$) per special warrant.
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 common stock for no additional
consideration. Each unit consists of one common stock and one
nontransferable stock purchase warrant. The stock purchase warrants entitle
the holder to purchase one common stock at $5.50 (Cdn$) per stock until
July 2, 1997.
F-20
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1997, all of the Series "A" Special Warrants were exercised for an
aggregate of 4,125,000 shares of common stock and stock purchase warrants
for the purchase of an additional 4,125,000 shares. Total net proceeds of
$12,943,000, received upon the issuance of these special warrants less
issuance costs, were transferred to paid-in capital. During 1997, 705,000
of the Series "A" stock purchase warrants were exercised for common stock
for total proceeds of $2,791,800. The remaining Series "A" stock purchase
warrants expired during 1997.
On December 6, 1996, the Company completed a brokered private placement of
500,000 Series "C" Special Warrants at a price of $9.00 (Cdn$) per special
warrant. Each Series "C" Special Warrant can be exercised into one unit of
the Company for no additional consideration. Each unit consists of one
common stock and one stock purchase warrant. Each Series "C" stock purchase
warrant will entitle the holder to purchase one common stock at $9.50
(Cdn$) per share for a period of one year. During 1997, a warrant amendment
was signed to change the exercise price of the Series "C" stock purchase
warrant from $9.50 (Cdn$) to $4.50 (U.S.$) and extend the exercise date of
the Series "C" Special Warrants and Series "C" stock purchase warrant.
During 1997, all of the Series "C" Special Warrants were exercised into
common stock with stock purchase warrants for an aggregate of 500,000
common stock and stock purchase warrants. Total net proceeds of $2,845,000,
received upon the issuance of these special warrants, were transferred to
paid-in capital. At December 31, 1997, 272,000 Series "C" stock purchase
warrants were outstanding with holders resident in Ontario. All remaining
warrants expired during 1997.
STOCK PURCHASE WARRANTS
At December 31, 1997, the client had 972,000 stock purchase warrants
outstanding. These warrants were issued in connection with private
placements and other means of financing. The holders of these warrants are
entitled to receive one share of common stock of the Company for one
warrant exercised. The warrants have exercise prices ranging from $4.50 to
$5.00 and expiration dates between June 1998 and September 2000.
PREFERRED STOCK
On September 19, 1997, the Company completed a private placement of 10,000
shares of Series One Convertible Class A Preference stock, no par value
(the Class A Preferred), for net proceeds of $9,604,000. Conversion of the
Class A Preferred stock into common stock is at the option of the holder
for any or all the outstanding stock after January 8, 1998 or at the option
of the Company after September 8, 2000. Each share of the Class A Preferred
stock may be converted into common stock at a conversion price based on a
floating price formula. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, holders of the Class A Preferred
stock shall be paid the redemption price plus all accrued dividends to the
date of liquidation, dissolution or winding up of affairs before any
payment to other stockholders. These shares have no voting rights and have
a redemption price of $1,000 per share, together with accrued and unpaid
dividends thereon. Redemption of these stocks is at the option of the
Company. Dividends on the Class A Preferred stock is cumulative and at the
rate of 7% per annum payable in cash or common stock at the date of
conversion. Total accrued dividends at December 31, 1997 amounted to
$200,000.
F-21
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Subsequent to December 31, 1997, all the holders of the Class A Preferred
stock elected to exercise the conversion rights under this class of shares
and have presented the Company with notices to convert. The $10 million
face value amounts were converted into 4,742,522 common shares. The total
stock issued on conversion also includes the payout of 7% cumulative
dividends in the form of additional common stock. Dividends paid out for
the Class A Preferred stock amounted to $356,000.
SHARES IN ESCROW
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.
(9) ACQUISITION
Effective July 2, 1996, the Company acquired all the issued and outstanding
shares of Pacific Baja for $12,000,000 in cash and 3,076,923 shares of
common stock in the Company. The acquisition has been accounted for using
the purchase method with the results of operations of Pacific Baja for the
period subsequent to July 2, 1996 being included in these consolidated
financial statements. The excess of the acquisition costs over the fair
value of net assets acquired is included in and has been allocated to
goodwill. Goodwill is amortized on a straight-line basis over a 20-year
period.
Pacific Baja is a manufacturer and distributor of aftermarket automotive
wheels, compressor housings and manifolds to wholesale distributors and
original equipment manufacturers in the United States and abroad.
(10) RELATED PARTY TRANSACTIONS
The Company made payments to related parties as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Project management fees $ 324,000 59,000 58,000
Consulting fees 470,000 62,000 --
Management fees -- 22,000 22,000
Rent and administrative services 360,000 127,000 22,000
------------------- ------------------- -------------------
$ 1,154,000 270,000 102,000
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
The following amounts are due from related parties:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
<S> <C> <C>
Advances receivable from directors interest free
and payable on demand $ 243,000 82,000
Housing loans receivable from directors 325,000 --
-------------------- -------------------
$ 568,000 82,000
-------------------- -------------------
-------------------- -------------------
</TABLE>
F-22
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) SUBSEQUENT EVENTS
On February 5, 1998, the Company completed a financing with the sale of
$1.5 million of 3% Subordinated Convertible Debentures due on February 4,
2000. On March 23, 1998, the debenture holder elected to convert the
debentures into 671,444 common stocks at a conversion price of $2.24.
On February 27, 1998, the stockholders of the Company approved the
continuation of Turbodyne Technologies Inc. from Canadian jurisdiction to
domestication under State of Delaware incorporation law.
On March 1, 1998, the Company completed a $1 million secured bridge loan
with a venture capital firm. The loan bears interest at 1% per month
(12.68% annualized) and is due on May 29, 1998 or earlier. In connection
with the financing, the Company issued a bonus of 75,000 common stocks to
the venture capital firm and 75,000 common stocks to the guarantors of this
loan. The deemed price set on these shares is $2.50 per stock.
On March 10, 1998, the Company granted 400,000 stock options under the
Company's 1997 Stock Option Plan at exercise prices of $2.00 and $2.35.
These stock options were all exercised during March 1998 for total proceeds
of $870,000.
On March 11, 1998, the Company granted 370,000 stock options under the
Company's 1997 Stock Option plan to consultants at an exercise price of
$2.35. The Company also granted 800,000 stock options to several executives
at an exercise price of $2.35, exercisable on or before March 11, 2003. Of
the stock options issued to the consultants, 350,000 were exercised for
total proceeds of $823,000.
On March 12, 1998, the Company agreed to amend the exercise price of
3,097,000 previously granted stock options from various prices to $3.50.
On March 24, 1998, the Company completed the sale of $1.5 million financing
of 8% Subordinated Convertible Debentures due March 23, 2000. The
Subordinated Convertible Debentures are convertible at the option of the
holder into the Company's common stock. The holder may convert up to 50% of
the face amount of the debenture at any time after May 7, 1998 and up to
100% after June 6, 1998.
On March 24, 1998, the Company granted 1,627,000 stock options to
consultants and employees at an exercise price of $3.50, exercisable on or
before March 24, 2003.
During April 1998, a total of 1,453,250 stock options with exercise prices
ranging from $3.36 to $6.48 were exercised for total proceeds to the
Company of $5,929,000.
(12) LIQUIDITY
The Company has experienced losses from operations resulting in an
accumulated deficit as of December 31, 1997. The Company also used
$13,793,000 to fund operating activities during 1997. Through December 31,
1997, the Company has raised $19,415,000 through debt and equity offerings.
In order to sustain operations and carry out management's growth plans for
the future, the Company will require additional debt and equity financing
in amounts sufficient to carry on operating activities through January 1,
1999.
F-23
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
As described in note 11, the Company has generated approximately $11.6
million from various financing and the exercise of stock options through
April 30, 1998. Management is currently contemplating additional financing
from outside sources and has written offers for equity and/or debt
financings in amounts sufficient to fund future operations. Management
believes that their existing cash flow from financing activities and
additional financing presently being offered to the Company will be more
than sufficient to meet their cash flow requirements through January 1,
1999. However, there is no assurance that the additional financing will be
consummated.
F-24
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash 11,127,000 949,000
Trade accounts receivable, net 10,807,000 9,214,000
Employee advances receivable 834,000 568,000
Inventories 7,243,000 5,469,000
Prepaid expenses and other current assets 860,000 1,191,000
----------- -----------
Total current assets 30,871,000 17,391,000
Property, Plant and Equipment, at cost, net 19,771,000 18,122,000
Goodwill, net 13,366,000 13,740,000
Other Assets 603,000 473,000
----------- -----------
64,611,000 49,726,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long term debt 486,000 607,000
Current maturities of obligations under capital leases 712,000 1,035,000
Accounts payable 5,326,000 5,283,000
Accrued liabilities 2,320,000 1,850,000
Income taxes payable 24,000 86,000
----------- -----------
Total current liabilities 8,868,000 8,861,000
Long term debt, less current maturities 10,008,000 8,155,000
Obligations under capital leases, less current maturities 3,009,000 1,867,000
----------- -----------
21,885,000 18,883,000
----------- -----------
Stockholders' Equity:
Class A preferred stock, no par value
Authorized 100,000,000 shares; none issued - -
Class B preferred stock, no par value
Authorized 100,000,000 shares; none issued - -
Preferred stock, no par value. Authorized
and issued 10,000 Series One Class A, 7%
cumulative convertible - 9,604,000
Common stock, no par value. Authorized
100,000,000 shares; issued and outstanding
40,034,423 shares in 1998 and 29,961,612
shares in 1997 - -
Additional paid in capital 74,765,000 45,290,000
Cumulative other comprehensive income (34,000) 22,000
Accumulated deficit (32,005,000) (24,073,000)
----------- -----------
Total Stockholders' Equity 42,726,000 30,843,000
----------- -----------
64,611,000 49,726,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
1998 1997 1998 1997
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 11,024,000 11,108,000 $ 20,750,000 20,153,000
Cost of goods sold 9,233,000 8,919,000 17,534,000 15,716,000
------------------------------ -----------------------------
Gross profit 1,791,000 2,189,000 3,216,000 4,437,000
Selling, research, general and administrative expenses 5,226,000 4,776,000 10,376,000 8,626,000
------------------------------ -----------------------------
Loss from operations (3,435,000) (2,587,000) (7,160,000) (4,189,000)
Other expense (income):
Interest expense, net 296,000 223,000 581,000 371,000
Other, net 4,000 (10,000) 4,000 (21,000)
------------------------------ -----------------------------
Loss before income taxes (3,735,000) (2,800,000) (7,745,000) (4,539,000)
Income tax expense 16,000 257,000 24,000 489,000
------------------------------ -----------------------------
Net loss $ (3,751,000) (3,057,000) $ (7,769,000) (5,028,000)
------------------------------ -----------------------------
------------------------------ -----------------------------
Net loss per common share:
Basic loss per share $ (0.11) (0.15) $ (0.23) (0.26)
Diluted loss per share (0.11) (0.15) (0.23) (0.26)
------------------------------ -----------------------------
------------------------------ -----------------------------
Weighted average shares used for basic and diluted
loss per share 34,736,000 20,250,000 33,704,000 19,709,000
------------------------------ -----------------------------
------------------------------ -----------------------------
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
F-26
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,769,000) (5,028,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 1,767,000 1,388,000
Stock compensation 375,000 --
(Increase) decrease in operating assets:
Trade accounts receivable (1,593,000) (2,556,000)
Employee advances receivable (266,000) (150,000)
Inventories (1,774,000) (3,314,000)
Prepaid expenses and other current assets 331,000 (143,000)
Other assets (130,000) (301,000)
Increase (decrease) in operating liabilities:
Trade accounts payable 43,000 3,465,000
Accrued expenses 663,000 (521,000)
Income taxes payable (62,000) 369,000
-------------- --------------
Net cash used in operating activities (8,415,000) (6,791,000)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (3,042,000) (3,113,000)
-------------- --------------
Net cash used in investing activities (3,042,000) (3,113,000)
-------------- --------------
Cash flows from financing activities:
Net proceeds from long-term borrowings $ 2,551,000 3,845,000
Proceeds from subordinated convertible debentures 3,000,000 --
Proceeds from exercise of stock options and warrants 16,299,000 3,806,000
Issuance costs paid (159,000) (99,000)
-------------- --------------
Net cash provided by financing activities 21,691,000 7,552,000
-------------- --------------
Effect of exchange rate changes on cash (56,000) (25,000)
-------------- --------------
Net increase (decrease) in cash 10,178,000 (2,377,000)
Cash at beginning of period 949,000 3,143,000
-------------- --------------
Cash at end of period $ 11,127,000 766,000
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 644,000 377,000
Income taxes -- 119,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE>
TURBODYNE TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Turbodyne Technologies Inc., a Delaware corporation, and subsidiaries (the
Company) manufactures aluminum cast automotive products, including engine
components and specialty wheels, and develops products to enhance performance
and reduce emissions of internal combustion engines.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
Turbodyne Systems, Inc., Turbodyne U.K. Ltd. and Pacific Baja Light Metals
Corp. (Pacific Baja). All material intercompany accounts and transactions
have been eliminated in consolidation.
Effective July 18, 1997, the Company formally delisted its shares from
trading on the Vancouver Stock Exchange. On March 24, 1997, the Company's
shares became listed on the Nasdaq Small Capital Market and continued to
trade in that market. As a result, effective January 1, 1998, the Company
changed its reporting currency from the Canadian dollar (Cdn$) to the U.S.
dollar (U.S.$). Accordingly, the unaudited condensed consolidated financial
statements for the six months and three months ended June 30, 1997 have been
restated to the new reporting currency of U.S.$.
Additionally, a cumulative translation adjustment of $56,000 has been
included as other comprehensive income in stockholders' equity reflecting the
translation of the Cdn$ reporting currency consolidated financial statements
to the newly adopted and retroactively applied U.S.$ reporting currency.
There are no other items of comprehensive income in the six months ended June
30, 1998. The adoption of Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") did not have a
material impact on the Company's unaudited condensed consolidated financial
statements.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting
principles. These unaudited consolidated financial statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1998. For further information refer to the consolidated
financial statements and
F-28
<PAGE>
footnotes thereto included in the Company's annual report on Form 20-F for
the year ended December 31, 1997.
GOODWILL
Goodwill is associated with the purchase of Pacific Baja on July 2, 1996 by
the Company and is being amortized on a straight-line basis over 20 years.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the balance over the remaining life can be recovered
through undiscounted future operating cash flows of the Company's operations.
Accumulated amortization was $1,556,000 and $1,182,000 at June 30, 1998 and
December 31, 1997, respectively.
RECOGNITION OF REVENUE AND SIGNIFICANT CUSTOMERS
The Company recognizes revenue upon shipment of product. The Company had
sales to three significant customers constituting approximately 47%, 15% and
12% and 44%, 17% and 12%, respectively, of net sales for the six months and
three months ended June 30, 1998, respectively. The Company had sales to two
significant customers constituting approximately 29% and 23% and 28% and 23%,
respectively, of net sales for the six months and three months ended June 30,
1997, respectively. Additionally, these customers comprised 41%, 14% and
13% and 31%, 23% and 12%, respectively, of accounts receivable at June 30,
1998 and December 31, 1997, respectively. The loss of any of these customers
could have a material adverse effect on the Company.
EARNINGS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. For the six months ended June 30, 1998 and 1997, options
and warrants to purchase 6,074,502 and 8,193,333 common stock, respectively,
at prices ranging from $2.35 to $8.50 were outstanding during the periods but
were not included in the computation of diluted loss per share because the
options and warrants would have an antidilutive effect on net loss per share.
RESEARCH AND DEVELOPMENT
Research and development costs related to present and future products are
charged to operations in the year incurred. Research and development costs
aggregated $3,125,000 and $3,136,000 for the six months ended June 30, 1998
and 1997, respectively, and $1,719,000 and $1,240,000 for the three months
ended June 30, 1998 and 1997, respectively.
NOTE 2. INVENTORIES
Inventories are comprised of the following at June 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
1998 1997
------------ ---------------
<S> <C> <C>
Raw materials $ 3,049,000 2,123,000
Work in process 1,932,000 686,000
Finished goods 2,262,000 2,660,000
------------ ---------------
$ 7,243,000 5,469,000
------------ ---------------
------------ ---------------
</TABLE>
F-29
<PAGE>
NOTE 3. LONG-TERM DEBT
Long-term debt at June 30, 1998 and December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revolving bank lines of credit (A) $ 10,000,000 8,144,000
Notes payable to bank, principal of $15,625 plus interest payable
monthly at prime plus .25% through October 1, 1998, with
the remaining principal due November 1, 1998 453,000 547,000
Other 41,000 71,000
------------- -------------
Total long-term debt 10,494,000 8,762,000
Less current maturities 486,000 607,000
------------- -------------
Long-term debt, excluding current maturities $ 10,008,000 8,155,000
------------- -------------
------------- -------------
</TABLE>
(A) The Company's wholly owned subsidiary, Pacific Baja, has a revolving line
of credit with a bank permitting borrowings up to $10 million, secured by
all receivables and inventory. The borrowings bear interest at the
Company's option at LIBOR plus 2% or at prime. The line of credit expires
June 1, 1999. The Company is a guarantor on this line of credit.
The Company was not in compliance with all of its financial covenants related
to its debt facilities at June 30, 1998, but has received an appropriate
waiver from its lender.
NOTE 4. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
On March 3, 1997, the Company established an incentive stock option plan (the
Stock Option Plan). Under the plan, the Company may grant options to its
directors, officers and employees for up to 2,840,000 shares of common stock.
The exercise price of each option shall be determined by the Stock Option
Committee but shall in no instance be less than the fair market value of the
shares of the Company, determined as the average closing price of the common
shares of the Company for the ten days trading preceding the date of grant.
The option's maximum term is ten years. The Stock Option Committee shall
determine the grant date of any option.
Options granted under the Stock Option Plan to participants, other than the
Chairman, President, Chief Executive Officer, the Chief Financial Officer,
Secretary and any directors of the Company or its subsidiaries, shall be
subject to a vesting formula. The vesting formula will provide that options
shall vest equally over a three-year period commencing on the date of the
grant so that the options can only be exercised as to an aggregate of 33.3%
in the first year, 66.6% in the second year and 100% in the third year and
each year thereafter. No options granted to an employee of the Company or an
affiliate of the Company shall be exercisable until the optionee has been
employed by the Company or affiliate for a period of six months. The
directors have the discretion to waive the vesting requirements at their
discretion in appropriate circumstances.
At June 30, 1998, the Company had 5,357,066 stock options outstanding. The
holders of these options are entitled to receive one share of common stock of
the Company for one option exercised. The options have exercise prices
ranging from $3.28 to $8.50 and expiration dates between August 1998 and
April 2003.
F-30
<PAGE>
Subsequent to June 30, 1998, a total 1,044,800 stock options with exercise
prices ranging from $3.23 to $6.15 were exercised for total proceeds to the
Company of $3,739,000.
SPECIAL WARRANTS
On July 2, 1996, the Company completed a private placement of 3,750,000
Series "A" Special Warrants at a price of $5.00 (Cdn$) per special warrant.
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 common stock for no additional consideration. Each unit
consists of one common stock and one nontransferable stock purchase warrant.
The stock purchase warrant entitles the holder to purchase one share of
common stock at $5.50 (Cdn$) until July 2, 1997.
During 1997, all of the Series "A" Special Warrants were exercised for an
aggregate of 4,125,000 shares of common stock and stock purchase warrants for
the purchase of an additional 4,125,000 shares. Total net proceeds of
$12,943,000, received upon the issuance of these special warrants less
issuance costs, were transferred to paid-in capital. During 1997, 705,000 of
the Series "A" stock purchase warrants were exercised for common stock for
total proceeds of $2,791,800. The remaining Series "A" stock purchase
warrants expired in 1997.
On December 6, 1996, the Company completed a brokered private placement of
500,000 Series "C" Special Warrants at a price of $9.00 (Cdn$) per special
warrant. Each Series "C" Special Warrant can be exercised into one unit of
the Company for no additional consideration. Each unit consists of one
common stock and one stock purchase warrant. Each Series "C" stock purchase
warrant will entitle the holder to purchase one common stock at $9.50 (Cdn$)
per share for a period of one year. During 1997, a warrant amendment was
signed to change the exercise price of the Series "C" stock purchase warrant
from $9.50 (Cdn$) to $4.50 (U.S.$) and extend the exercise date of the Series
"C" Special Warrants and Series "C" stock purchase warrant.
During 1997, all of the Series "C" Special Warrants were exercised into
common stock with stock purchase warrants for an aggregate of 500,000 common
stock and stock purchase warrants. Total net proceeds of $2,845,000,
received upon the issuance of these special warrants, were transferred to
paid-in capital. For the six months ended June 30, 1998, 272,000 Series "C"
stock purchase warrants were exercised for common stock. At June 30, 1998,
no Series "C" stock purchase warrants were outstanding.
STOCK PURCHASE WARRANTS
At June 30, 1998, the Company had 717,436 stock purchase warrants
outstanding. These warrants were issued in connection with private placements
and other means of financing. The holders of these warrants are entitled to
receive one share of common stock of the Company for one warrant exercised.
The warrants have exercise prices ranging from $3.50 to $5.00 and expiration
dates between December 1998 and March 2003.
PREFERRED STOCK
On September 19, 1997, the Company completed a private placement of 10,000
shares of Series One Convertible Class A Preference stock, no par value (the
Class A Preferred), for net proceeds of $9,604,000. Conversion of the Class
A Preferred stock into common stock is at the option of the holder for any or
all the outstanding stock after January 8, 1998 or at the option of the
Company after September 8, 2000. Each share of the Class A Preferred stock
may be converted into common stock at a conversion price based on a floating
price formula. In the event of any liquidation, dissolution or winding up of
the affairs of the Company, holders of the Class A Preferred stock shall be
paid the redemption price plus all accrued dividends to the date of
liquidation, dissolution or winding up of affairs before any payment to other
stockholders. These shares have
F-31
<PAGE>
no voting rights and have a redemption price of $1,000 per share, together
with accrued and unpaid dividends thereon. Redemption of these shares is at
the option of the Company. Dividends on the Class A Preferred stock is
cumulative and at the rate of 7% per annum payable in cash or common stock at
the date of conversion.
During 1998, all the holders of the Class A Preferred stock elected to
exercise the conversion rights under this class of shares. The $10 million
face value amounts were converted into 4,742,522 common shares. The total
stock issued on conversion also includes the pay-out of 7% cumulative
dividends in the form of additional common stock. Dividends paid out for the
Class A Preferred stock amounted to $356,000.
SHARES IN ESCROW
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.
F-32
<PAGE>
Schedule II
TURBODYNE TECHNOLOGIES INC.
Valuation and Qualifying Accounts
Three-year period ended December 31, 1997
<TABLE>
<CAPTION>
Balance at
beginning of Balance at
Description period Additions Deductions end of period
- ------------------------------------ ------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts 0 0 0 0
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31, 1996
Allowance for doubtful accounts 0 181,000 0 181,000
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31, 1997
Allowance for doubtful accounts 181,000 131,000 234,000 78,000
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-33
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses to be paid by the Registrant in connection with
this offering are as follows:
<TABLE>
<S> <C>
SEC registration fee $ 687.00
Nasdaq SmallCap Additional Listing Fee $ 4,092.00
Printing and engraving expenses $ 0
Accounting fees and expenses $ 15,000
Legal fees and expenses $ 10,000
Transfer Agent and Registrar fees $ 0
Miscellaneous $ 2,221.11
Total $ 32,000.00
</TABLE>
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of the Company's Certificate of Incorporation and Article
Eleven of its Bylaws provide for the indemnification by the Company of each
director, officer and employee of the Company to the fullest extent permitted
by the Delaware General Corporation Law, as the same exists or may hereafter
be amended. Section 145 of the Delaware General Corporation Law provides in
relevant part that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Delaware Court of Chancery or such
other court shall deem proper. Delaware law further provides that nothing in
the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
Article Nine of the Company's Certificate of Incorporation provides that
a director of the Company shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things:
breach of the duty of loyalty; acts or omissions not in
1
<PAGE>
good faith or which involve intentional misconduct or a knowing violation of
the law; unlawful payment of dividends; and transactions from which the
director derived an improper personal benefit.
The Company has entered into separate agreements (the " Agreements")
with certain of its directors and officers (the "Indemnitees") providing for
the Indemnitees' indemnification on substantially identical terms. Pursuant
to the terms and conditions of the Agreements, the Company agrees to
indemnify, to the maximum extent permitted by California law, each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer arising from or growing
out of services rendered to the Company, or any subsidiary, pursuant to the
terms of the Agreement, provided, however, that Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 8, 1997 and September 19, 1997, the Company completed the
sale of an aggregate of 10,000 shares of Series One Convertible Class A
Preference Shares (the "Series A Preferred Stock") and warrants (the
"Warrants") to purchase 666,667 shares of the Company's Common Stock. The
purchase price for each share of Series A Preferred Stock was U.S. $1,000.
The Series A Preferred Stock was issued to various investors identified to
the Company by Global Emerging Markets ("GEM"), an investment banking firm.
Pursuant to its engagement with the Company, GEM received a fee equal to 3%
of the gross proceeds of the financing and the Warrants. Each holder of
Series A Preferred Stock and Warrant represented that it (i) acquired the
securities for its own account with the present intention of holding such
securities for investment purposes only and not with a view to, or for sale
in connection with, any distribution of such securities (other than a
distribution in compliance with all applicable federal and state securities
laws); (ii) it is an experienced and sophisticated investor and has such
knowledge and experienced in financial and business matters that it is
capable of evaluating the relative merits and the risks of an investment in
the securities and of protecting its own interests in connection with the
transaction at issue; (iii) it is willing to bear and is capable of bearing
the economic risk of an investment in the securities; (iv) the Company made
available, prior to the date of the Stock Purchase Agreement or the Warrant
Agreement, respectively, to it the opportunity to ask questions of the
Company and its officers, and to receive from the Company and its officers
information concerning the terms and conditions of the securities and the
Stock Purchase Agreement or Warrant Agreement, respectively, and to obtain
any additional information with respect to the Company, its business,
operations and prospects, as reasonably requested by it; and (v) it is an
"accredited investor' as that term is defined under Rule 501 of Regulation D
promulgated by the Commission under the Securities Act. The issuance and
sale of the Series A Preferred Stock and the Warrants was made in reliance on
Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
On February 5, 1998, the Company completed the sale of $1.5 million of
3% Subordinated Convertible Debentures due on February 4, 2000 (the "3%
Debentures"). On March 24, 1998, the Company completed the sale of $1.5
million of 8% Subordinated Convertible Debentures due March 23, 2000 (the "8%
Debentures" and together with the 3% Debentures, the "Debentures"). The 3%
Debenture is convertible with respect to fifty percent (50%) of the face
amount of the 3% Debenture at any time after May 7, 1998 (forty-five (45)
days following the date of the 3% Debenture) and with respect to one hundred
percent (100%) of the face amount of the Debenture at any time after June 6,
1998 (seventy-five (75) days following the date of the 8% Debenture) into
shares of Common Stock at the following Conversion Price: the lower of: (i)
83% of the average NASDAQ closing bid price for the five days prior to
conversion; or (ii) 120% of the closing bid price on NASDAQ on March 23rd
1998. The Debentures are convertible into shares of the Company's common
stock, no par value, Each purchaser represented that (i) neither it nor any
of the investors on whose behalf the purchaser may purchase and hold
Debentures (the "Investors") is a "U.S. person" as that term is defined in
Rule 902(o) of Regulation S, and neither the purchaser nor any Investor is an
entity organized or incorporated under the laws of any foreign jurisdiction
by any "U.S. person" principally for the purpose of investing in securities
not registered under the Securities Act, (ii) the Debentures were not offered
to the purchase or to any Investor in the United States and at the time of
execution of the Subscription Agreement and of any offer to the purchaser or
to the Investors to purchase the Debentures hereunder, the Subscriber and
each such Investor was physically outside the United States; (ii) the
purchaser is purchasing the Securities for its own account and not on behalf
of or for the benefit of any U.S. person and the sale and resale of the
Debentures or
2
<PAGE>
the Shares have not been prearranged with any buyer in the United States;
(iii) the purchaser and to the best knowledge of the purchaser each
distributor, if any, participating in the offering of the Securities, has
agreed and the purchaser hereby agrees that all offers and sales of the
Securities prior to the expiration of a period commencing on the Closing of
all Debentures offered and ending forty-five (45) days thereafter (the
"Restricted Period") shall not be made to U.S. persons or for the account or
benefit of U.S. persons and shall otherwise be made in compliance with the
provisions of Regulation S. The purchaser also represented that it had not
been engaged or acted as or on behalf of a distributor or dealer (and is not
an affiliate of a distributor or dealer) with respect to the transaction.
The issuance and sale of the Debentures was made in reliance on Regulation S
of the Securities Act as a transaction that occurred outside of the United
States.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
See Exhibit Index immediately following the signature page.
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
Item 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question
3
<PAGE>
whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
such issue.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Woodland Hills, California, on this
23rd day of September, 1998.
LEON NOWEK
By: /s/ Leon E. Nowek
-----------------------------
Leon E. Nowek
Vice Chairman
We, the undersigned officers and directors of Turbodyne Technologies
Inc. hereby severally constitute and appoint Leon Nowek and Edward Halimi,
and each of them, our true and lawful attorney-in-fact, with full power to
him in any and all capacities, to sign any and all amendments to this
Registration Statement on Form S-1 (including any post-effective amendments
thereto), and including a new registration statement filed pursuant to Rule
462 of the Securities Act and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- -------------------------- ------------------
<S> <C> <C>
/s/ Edward M. Halimi
- --------------------------- September 23, 1998
Edward M. Halimi Chairman of the Board
/s/ Leon E. Nowek
- --------------------------- Vice Chairman, Secretary September 23, 1998
Leon E. Nowek and Director
/s/ Khal A. Kader
- --------------------------- Chief Financial Officer September 23, 1998
Khal A. Kader
/s/
- --------------------------- September , 1998
Daniel Geronazzo Director
/s/ Wendell R. Anderson
- --------------------------- September 23, 1998
Wendell R. Anderson Director
/s/ Robert Taylor
- --------------------------- September 23, 1998
Robert Taylor Director
/s/ Sadayappa Durairaj
- --------------------------- September 23, 1998
Sadayappa Durairaj Director
/s/ Walter F. Ware
- --------------------------- Chief Executive Officer, September 23, 1998
Walter F. Ware President and Director
</TABLE>
5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- ------- ------------------- -----
<S> <C> <C>
3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Registrant's Form 10-Q for the fiscal
quarter ended June 30, 1998.
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit
3.2 to Registrant's Form 10-Q for the fiscal quarter ended June
30, 1998.
4.1 Form of Convertible Preferred Stock Purchase Agreement.
Incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form F-1 (File No. 333-7932).
4.2 Form of Registration Rights Agreement. Incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form F-1 (File No. 333-7932).
4.3 Form of Redemption Warrant. Incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement on Form F-1
(File No. 333-7932).
5.1 Opinion of Troop Steuber Pasich Reddick & Tobey, LLP.
10.1 Intentionally Omitted.
10.2 Sub-Lease between American Appliance, Inc. and Carole D. King
dated December 1, 1994 for Carpinteria Property. Incorporated
herein by reference to Exhibit 3(iii) to the Company's
Registration Statement on Form 20-F filed on September 18, 1996.
10.3 Distribution Agreement between Turbodyne Systems and Granatelli
Performance, Inc. Incorporated herein by reference to Exhibit
3(iv) to the Company's Registration Statement on Form 20-F filed
on September 18, 1996.
10.4 Acquisition Agreement between the Company, Pacific Baja Light
Metals Holding Inc., and Lennart Renberg, Michael Joyce,
Sadayappa Durairaj Family Trust, Naresh Saxens and Mugerdish
Balabanian dated March 15, 1996. Incorporated herein by
reference to Exhibit 3(v) to the Company's Registration Statement
on Form 20-F filed on September 18, 1996.
10.5 Amendment Agreement between the Company, Pacific Baja Light
Metals Holding Inc., and Lennart Renberg, Michael Joyce,
Sadayappa Durairaj Family Trust, Naresh Saxens and Mugerdish
Balabanian dated June 14, 1996. Incorporated herein by reference
to Exhibit 3(vi) to the Company's Registration Statement on Form
20-F filed on September 18, 1996.
10.6 Employment Agreement between Pacific Baja Light Metals, the
Company and Michael Joyce dated September 5, 1996. Incorporated
herein by reference to Exhibit 3(ix) to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 1996,
as amended.
10.7 Consulting Agreement between Pacific Baja Light Metals, the
Company and Lykar Specialties, Inc. dated September 5, 1996.
Incorporated herein by reference to Exhibit 3(x) to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
1996, as amended.
10.8 Agreement in Principle between Turbodyne Systems, Inc. and
Kuhnle, Kopp & Kausch AG dated April 11, 1997. Incorporated
herein by reference to Exhibit 3(xi) to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 1996,
as amended.
6
<PAGE>
10.9 Supply Agreement between Baja Oriente and AlliedSignal dated
September 1, 1994. Incorporated herein by reference to Exhibit
3(xii) to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 1996, as amended.
10.10 Employment Agreement dated August 1, 1997 between the Company and
Edward Halimi, as amended. Incorporated by reference to Exhibit
3(xiii) to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 1997.
10.11 Employment Agreement dated August 1, 1997 between the Company and
Leon Nowek, as amended. Incorporated by reference to Exhibit
3(xix) to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 1997.
23.1 Consent of Morgan and Company, Chartered Accountants.
23.2 Consent of KPMG Peat Marwick.
24.1 Power of Attorney (included on signature page).
</TABLE>
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* To be filed by amendment.
7
<PAGE>
[LETTERHEAD]
October 1, 1998
Turbodyne Technologies Inc.
21700 Oxnard Street, Suite 1550
Woodland Hills, California 91367
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
filed by Turbodyne Technologies Inc. (the "Company") with the Securities and
Exchange Commission in order to register under the Securities Act of 1933, as
amended, up to 409,189 shares (the "Shares") of Common Stock, par value $0.001
per share, of the Company, which are issuable upon exercise of certain warrants.
Subject to compliance with applicable state securities and "Blue Sky" laws,
we are of the opinion that the Shares have been duly authorized, and upon
issuance in conformity with and pursuant to the related warrant agreements and
the Certificate of Incorporation of the Company, and receipt by the Company of
the exercise price therefor as specified in the warrant agreements, the Shares
will be legally and validly issued, fully paid and non-assessable.
We consent to the inclusion in this Registration Statement on Form S-1 of
this opinion and to the reference to our firm under the caption "Legal Matters."
Respectfully submitted,
/s/ Troop Steuber Pasich Reddick & Tobey
Troop Steuber Pasich
Reddick & Tobey LLP
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our audit report dated 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 on the revised
consolidated financial statements of Turbodyne Technologies Inc. for the
years ended December 31, 1996 and 1995 in the Company's Registration
Statement on Form S-1, when such financial information is read in conjunction
with the financial statements referred to in our report.
Vancouver, Canada
/s/ Morgan & Company
October 1, 1998 Chartered Accountants
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Turbodyne Technologies Inc.
The audits referred to in our report dated April 3, 1998, included the related
financial statement schedule as of December 31, 1997 and for each of the years
in the three-year period ended December 31, 1997, included in the registration
statement. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such
financial statement schedule taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to the use of our reports included herein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Los Angeles, California
September 25, 1998
