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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number: 0-21391
TURBODYNE TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
INAPPLICABLE
(Translation of Registrant's name into English)
CANADA FEDERAL JURISDICTION
(Jurisdiction of incorporation or organization)
SUITE 510, 1090 WEST PENDER STREET
VANCOUVER, BRITISH COLUMBIA, CANADA V6E 2N7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON SHARES WITHOUT PAR VALUE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
Indicate the number of outstanding shares of each of the registrant's classes of
capital or common stock as of the close of the period covered by the annual
report: Common shares without par value: 29,961,612 as at December 31, 1997.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
----- -----
Except as otherwise noted, all dollar amounts are presented in United States
dollars.
Exchange Rates: At June 1, 1998, the exchange rate of Canadian dollars into
United States dollars was $1.4568 Canadian to $1.00 United States.
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TABLE OF CONTENTS
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PAGE
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ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 4. CONTROL OF COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. NATURE OF TRADING MARKET . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS . . . 16
ITEM 7. TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 9. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . 27
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . 29
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES . . . . . 30
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS . . . . . . . . . . . . . 30
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED . . . . . . . . . . . . . . . 31
ITEM 15. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . 31
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 17. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 18. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS. . . . . . . . . . . . . . . . . . . . 32
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Turbodyne Technologies Inc. (the "Company" or "Turbodyne"), a Canadian
federal corporation, engineers, develops, manufactures and markets proprietary
products designed to enhance performance and reduce emissions of internal
combustion engines (the "Engine Enhancement Business") and manufactures aluminum
cast automotive products, including engine components and speciality wheels (the
"Automotive Components Business"). 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 by the
filing of Articles of Continuation.
The address of the principal corporate office of the Company in the United
States is 21700 Oxnard Street, Suite 1550, Woodland Hills, California, 91367.
The address of the principal corporate office of the Company in Canada is Suite
510, 1090 West Pender Street, Vancouver, British Columbia, V6E 2N7. The address
of the registered and records office of the Company is Suite 1880, 1055 West
Georgia Street, Vancouver, British Columbia Canada V6E 3P3.
The Company conducts the Engine Enhancement Business through its wholly
owned subsidiary Turbodyne Systems, Inc., a Nevada corporation ("Turbodyne
Systems") and conducts the Automotive Components Business through its wholly
owned subsidiary Pacific Baja Light Metals Corp. ("Pacific Baja"), a Wyoming
corporation, and through the subsidiaries of Pacific Baja.
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DOMESTICATION
The Board of Directors of the Company has authorized the domestication
of the Company into the State of Delaware. Following the domestication, the
Company will exist as a Delaware corporation and be subject to the rules and
regulations of that State. Additionally, the Company will no longer qualify
as a "foreign private issuer" under the Securities Act of 1933, as amended
(the "Securities Act") and under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and accordingly will file reports, proxy
statements and other materials with the Securities and Exchange Commission
under its rules and regulations applicable to domestic issuers.
Following the domestication of the Company into Delaware, the Company will
continue 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 will be 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 securities
commissions of the Provinces of British Columbia, Manitoba and Ontario, all in
accordance with the requirements of the applicable securities legislation.
ENGINE ENHANCEMENT BUSINESS
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. 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
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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 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
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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 "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statements -- 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 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 December 31, 1997, Turbodyne Systems had spent approximately $13,134,000
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 "Item 9. Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Cautionary Statements --
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,
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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 has established a goal to have the Turbopac-TM-product installed on
approximately 2600 buses by the end of fiscal 1998.
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.
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 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.
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See "Item 9. Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Cautionary Statements -- 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
refinement 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 "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statements -- 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 "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statements -- Product Development."
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PROPRIETARY PROTECTION OF PRODUCTS
A U.S. patent application was made by Edward M. Halimi, as inventor, in
1993 for Turbodyne Systems' original Turbodyne Systems product. Mr. Halimi
assigned the patent application to Turbodyne Systems pursuant to an asset
purchase agreement between Mr. Halimi and Turbodyne Systems dated August 18,
1993. Turbodyne Systems has been advised by the U.S. Patent Office that all
claims in respect of this patent application have been approved. Turbodyne
Systems has submitted final drawings to the Patent Office and has paid the
patent issuance fee required for the issue of the formal patent. The issue
of the formal patent is subject only to the acceptance by the Patent Office
of the final drawings. No royalty is payable in respect of this patent. The
patent will expire 17 years from the date of formal issuance.
Two U.S. patent applications were submitted by Edward M. Halimi, William
Woollenweber and Ralph Maloof, as co-inventors, in 1995 in respect of
Turbodyne Systems' proprietary Dynacharger-TM- products. The U.S. Patent
Office has approved all claims with respect to the earlier of the patent
applications and has issued a formal patent in the name of the inventors
which expires on July 28, 2015. With respect to the second patent
application, the U.S. Patent Office has approved 40 out of 42 claims and has
issued a formal patent in the name of the inventors which expires on
September 18, 2015. The inventors have executed formal patent assignment
documents in favor of Turbodyne Systems for each of the issued patents.
Turbodyne Systems has agreed to pay a royalty to each of the inventors equal
to 1% of the gross revenues directly attributable to the Dynacharger-TM-
products, for a total royalty obligation equal to 3% of gross revenues.
Two U.S. patent applications were submitted in late 1995 by Edward M.
Halimi, William Woollenweber and Ralph Maloof, as inventors, in respect of
the Turbopac-TM- products and were re-filed with additional disclosed
embodiments in late 1996 in conjunction with international patent
applications filed pursuant to the Patent Cooperation Treaty (the "PCT").
Examination of the international patent applications has been requested by
Turbodyne Systems. The inventors have executed formal patent assignments in
favor of Turbodyne Systems in respect of these patent applications which have
been submitted to the U.S. Patent Office for registration. Turbodyne Systems
has agreed to pay a royalty to each of the inventors equal to 1.5% of gross
revenues directly attributable to the Turbopac-TM- products, for a total
royalty obligation equal to 4.5% of gross revenues.
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 "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statements -- 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
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Technology. The research and development costs incurred during the
fiscal years ended December 31, 1997, 1996 and 1995 were $6,609,000,
$3,622,000 and $1,421,000, respectively.
AUTOMOTIVE COMPONENTS BUSINESS
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.
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. As Optima Wheel is not a
dominant aftermarket supplier of aluminum custom wheels and does not expend
significant efforts in connection with marketing and sales of its custom
wheels, there is a risk that revenues from these products will 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.
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
8
<PAGE>
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 at the La
Mirada facility. Once these products are accepted by the OEM, production
begins at the higher volume foundry in Ensenada, Mexico.
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 "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition --Cautionary Statements -- Technological Change" and "Item 9.
Management's Discussion and Analysis of Results of Operations and Financial
Condition --Cautionary Statements -- Customer Preferences."
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,
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<PAGE>
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 manufactures products such as manifolds, compressor
housings, and pedestals at its Ensenada foundry, performs its short-run
foundry and prototype production in La Mirada, and manufactures aluminum cast
custom wheels at both locations. The La Mirada and Ensenada foundries
perform manufacturing activities ranging from casting to heat treating,
powder painting (Ensenada only), 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 Pacific Baja's Baja Pacific
operating unit, 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. As of December 31, 1997, Pacific Baja
employed approximately 486 persons at its Ensenada foundry with two
production shifts and one maintenance shift operating five and one half days
a week.
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 and will be used to expand Pacific Baja's manufacturing
capabilities in Mexico. Pacific Baja commenced operations at these new
facilities in February 1998 and currently 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.
LA MIRADA FOUNDRY
Pacific Baja operates a sand and permanent mold 95,000 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 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 December 31, 1997, Pacific Baja employed approximately 190 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.
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<PAGE>
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 "Item 9. Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Cautionary Statements -- 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 facility in Ensenada, Mexico is 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. The
competition in each industry segment is summarized as follows:
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. Pacific Baja limits its sales of aftermarket wheels primarily to
the North American automotive market. 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 Mexican manufacturing facility of Pacific Baja operated
by Baja Oriente provides Pacific Baja with a cost advantage over competitors
with operations in the United States.
ITEM 2. 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
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<PAGE>
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 principal Canadian corporate office of the Company is located in
leased premises at Suite 510, 1090 West Pender Street, Vancouver, British
Columbia. 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 "Item 13. Interest of Management in Certain Transactions." The
Company intends to sublease this office following its domestication into
Delaware. See "Item 1. Domestication."
Turbodyne Systems' production and assembly facilities are located in
leased premises at 6155 Carpinteria Avenue, Carpinteria California, USA
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 "Item 13. Interest of Management in Certain
Transactions."
Pacific Baja's California manufacturing 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 "Item 13. Interest of Management in Certain
Transactions."
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.
ITEM 3. 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.
In January 1998, the Company filed an action against a former executive
for, among other things, fraud, rescission and restitution, breach of
contract and defamation. The defendant has not yet responded to the
complaint but has made an administrative complaint to the Equal Employment
Opportunity Commission alleging gender discrimination. The Company has
responded to the EEOC inquiry and had denied each and all of the allegations.
The former executive has obtained a right-to-sue letter under the California
Fair Employment and Housing Act, but to date, the Company has not been served
with a complaint.
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
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<PAGE>
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.
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 common shares
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 common shares. The two former shareholders of
Pacific Baja have withdrawn the arbitration proceedings.
Other than the claims of the former shareholders of Pacific Baja
Holders, 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.
PART II
ITEM 4. CONTROL OF COMPANY
The following table sets forth, as of March 31, 1998, certain
information regarding the beneficial ownership of the Common Stock by owners
of 10% or more of the Common Stock and by all directors and officers as a
group.
<TABLE>
<CAPTION>
TITLE OF CLASS IDENTITY OF PERSON OF AMOUNT OWNED PERCENT OF CLASS
GROUP (1)
<S> <C> <C> <C>
Common Stock Edward M. Halimi 3,650,000(2) 10.06%
Chairman of the Board
Common Stock Directors and Officers as 7,013,357(3) 19.33%
a Group (10 persons)
</TABLE>
(1) Based upon 36,275,579 common shares issued and outstanding at March 31,
1998. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investment power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common
stock subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of March 31, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownerships of each other person.
(2) Consists of 3,250,000 escrow shares held in the name of March Technologies
Inc., a private company controlled by Mr. Halimi and 400,000 shares of
Common Stock reserved for issuance upon exercise of stock options which are
or will become exercisable on or before May 30, 1998.
(3) Includes 2,146,000 shares of Common Stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or before
May 30, 1998.
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<PAGE>
To the Company's knowledge, and except as disclosed herein, the Company
is not directly or indirectly owned or controlled by any other entity or by
any foreign government. There are no arrangements known to the Company the
operation of which may result in a future change of control of the Company.
ITEM 5. 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 periods.
<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.
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>
- --------------------
14
<PAGE>
* As quoted by the Nasdaq SmallCap Market.
15
<PAGE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Except as discussed under "Item 7. Taxation" below, the Company is not
aware of any Canadian federal or provincial laws, decrees, or regulations
that restrict the export or import of capital, including foreign exchange
controls, or that affect the remittance of dividends, interest or other
payments to non-Canadian holders of the common shares. The Company is not
aware of any limitations on the right of non-Canadian owners to hold or vote
the common shares imposed by Canadian federal or provincial law or by the
Articles of Continuation or the By-laws of the Company.
The INVESTMENT CANADA ACT (the "Act") is applicable to acquisitions of a
Canadian business by a non-Canadian person or entity. The Act provides,
among other things, for a review of an investment in the event of acquisition
of control in certain Canadian businesses in the following circumstances:
(a) if the investor is a non-Canadian and is not a member of a World Trade
Organization ("WTO") country, any direct acquisition having an asset value
exceeding $5,000,000 and any indirect acquisition having an asset value
exceeding $50,000,000;
(b) if the investor is a non-Canadian and is a WTO member, any direct
acquisition having an asset value exceeding $168,000,000, unless the
business is involved in uranium production, financial services,
transportation services or a cultural business. An indirect acquisition of
control by an investor who is a WTO investor is not reviewable unless the
value of the assets of the business located in Canada represents more than
50% of the asset value of the transaction, or the business is involved in
uranium production, financial services, transportation services or a
cultural business.
The Act provides that a non-Canadian investor can hold up to 1/3 of the
issued and outstanding capital of a Canadian corporation without being deemed
a "control person", and that a non-Canadian investor holding greater than 1/3
but less than 1/2 of the issued and outstanding capital of a Canadian
corporation is deemed to be a control person subject to a rebuttable
presumption to the contrary (i.e. providing evidence of another control or
control group holding a greater number of shares).
The Act provides for notification under the Act where a non-Canadian
investor acquires control, directly or indirectly, of a Canadian business
with assets under the thresholds for reviewable transaction. The
notification process consists of filing a notification form within 30 days
following the implementation of an investment.
ITEM 7. TAXATION
CANADIAN FEDERAL INCOME TAXATION
The following discussion is a summary of the principal Canadian federal
income tax considerations generally applicable to purchasers of the Company's
common shares ("Common Stock") who, for purposes of the Income Tax Act
(Canada) and Income Tax Regulations (the "Canadian Act"), deal at arm's
length with the Company, hold shares of Common Stock as capital property, are
not residents of Canada at any time when holding Common Stock and do not use
or hold and are not deemed to use or hold Common Stock in the course of
carrying on business in Canada and, in the case of insurers who carry on an
insurance business in Canada and elsewhere, do not hold Common Stock that is
effectively connected with an insurance business carried on in Canada. Such
a purchaser is referred to in this discussion as a "shareholder."
This summary is based on the current provision of the Canadian Act, the
regulations thereunder and the Canada-United States Income Tax Convention
(1980) (the "Treaty") as amended. This summary takes into account specific
proposals to amend the Canadian Act and the regulations thereunder publicly
announced by the Minister of
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<PAGE>
Finance prior to the date hereof and the Company's understanding of the
current published administrative and assessing practices of Revenue Canada,
Taxation. This summary does not take into account Canadian provincial income
tax laws or the income tax laws of any country other than Canada.
A shareholder of the Company will generally not be subject to tax
pursuant to the Canadian Act on a capital gain realized on a disposition of
Common Stock unless the Common Stock is "taxable Canadian property" to the
shareholder for purposes of the Canadian Act and the shareholder is not
eligible for relief pursuant to an applicable bilateral tax treaty. Under
proposals to amend the Canadian Act, the Common Stock will not be taxable
Canadian property to a shareholder provided that the Company is listed on a
prescribed Canadian or foreign stock exchange within the meaning of the
Canadian Act and provided that such shareholder, or persons with whom such
shareholder did not deal at arm's length (within the meaning of the Canadian
Act), or any combination thereof, did not own 25% or more of the issued
shares of any class or series of the Company at any time within five years
immediately preceding the date of disposition. In addition, the Treaty will
generally exempt a shareholder who is a resident of the United States for
purposes of the Treaty from tax in respect of a disposition of Common Stock
provided that the value of the shares of the Company is not derived
principally from direct or indirect real property interests (including
resource property) situated in Canada.
Under the Canadian Act, a disposition of shares that constitute taxable
Canadian property will give rise to a capital gain (or a capital loss) equal
to the amount by which the proceeds of disposition of such shares, net of any
cost of disposition, exceeds (or is less than) the adjusted cost base of such
shares to the shareholder. Generally, three quarters of any capital gain
realized by the shareholder on a disposition or deemed disposition of such
shares is included in computing his Canadian income for that year as a
taxable capital gain. Three quarters of any capital loss realized by a
shareholder on a disposition or deemed disposition of such a share in a
taxable year may generally be deducted from his Canadian taxable capital
gains for that year.
Under the Canadian Act, the disposition of a share by a shareholder may
occur or be deemed to occur in a number of circumstances including on sale or
gift of such share or upon the death of the shareholder.
The initial adjusted cost base of a share to a shareholder will be the
cost to him of that share. Under the Canadian Act, certain addition or
reduction adjustments may be required to be made to the cost base of a share.
The adjusted cost base of each common share of a corporation owned by a
shareholder at any particular time will be the average adjusted cost base to
him of all shares of the same class of that corporation owned by him at that
time.
Any dividend, including stock dividends, paid or credited, or deemed to
be paid or credited, by the Company to or for the benefit of a shareholder
will be subject to Canadian withholding tax at the rate of 25% on the gross
amount of the dividend, subject to the provisions of any applicable income
tax convention. Pursuant to the Treaty, the rate of withholding tax generally
will be reduced to 15% in respect of dividends paid to a shareholder who is a
resident of the United States for purposes of the Treaty and are further
reduced to 5% if the beneficial owner of the shares is a corporation that is
a resident of the United States for purposes of the Treaty owning at least
10% of the voting shares of the Company.
UNITED STATES TAXATION
For federal income tax purposes, an individual who is a citizen or
resident of the United States or a domestic corporation ("U.S. Taxpayer")
will recognize a gain or loss on the sale of the Company's Common Stock equal
to the difference between the proceeds from such sale and the adjusted cost
basis in the Common Stock. The gain or loss will be a capital gain or
capital loss if the Company's Common Stock is a capital asset in the hands of
the U.S. Taxpayer.
For federal income tax purposes, a U.S. Taxpayer will be required to
include in gross income dividends received on the Company's Common Stock. A
U.S. Taxpayer who pays Canadian tax on a dividend on the Common
17
<PAGE>
Stock will be entitled, subject to certain limitations, to a credit (or
alternatively, a deduction) against federal income tax liability. A domestic
corporation that owns at least 10% of the voting stock of the Company should
consult its tax advisor as to applicability of the dividends received
deduction or deemed paid foreign tax credit with respect to dividends paid on
the Company's Common Stock.
ITEM 8. 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 Report. 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 Report. 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 Report.
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 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 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, have been reconciled in accordance with US GAAP and are stated in
Canadian dollars. The financial condition and operating results for the
Company described for the period from January 1, 1996 to December 31, 1996
includes the financial condition and operating results of Pacific Baja from
July 2, 1996 to December 31, 1996.
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales $39,165 $13,944 Nil Nil Nil
Gross Profit 6,839 1,843 Nil Nil Nil
Net Loss ($13,185) ($5,563) ($2,603) ($936) ($112)
BALANCE SHEET DATA:
Working Capital
(Deficit) $8,530 $7,026 $83 ($426) ($336)
Total Assets 49,726 39,441 5,202 1,899 1,371
Long Term Liabilities 10,022 5,265 483 Nil Nil
Total Liabilities 18,883 11,727 966 458 336
Shareholders Equity 30,843 27,714 4,236 1,441 1,035
Number of Shares
Outstanding 29,961,612 23,580,098 16,542,121 10,663,052 1,078,052
</TABLE>
18
<PAGE>
EXCHANGE RATES OF THE CANADIAN DOLLAR
The following table sets forth, for the periods and dates indicated,
certain information concerning exchange rates of Canadian dollars to one U.S.
Dollar. All the figures shown represent noon buying rates for cable
transfers in New York City, certified for customs purposes by the Federal
Reserve Bank of New York. The source of this data is the Federal Reserve
Bulletin and Digest.
<TABLE>
<CAPTION>
Period Period End Average High Low
------ ---------- ------- ---- ---
<S> <C> <C> <C> <C>
December 1993 1.3255 1.2902 1.3443 1.2428
December 1994 1.4030 1.3659 1.4078 1.3103
December 1995 1.3655 1.3725 1.4238 1.3285
December 1996 1.3697 1.3632 1.3822 1.3310
December 1997 1.4288 1.3849 1.4398 1.3357
</TABLE>
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.
ITEM 9. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
From the date of the acquisition of the Turbodyne Technology in April
1993 to the completion of the acquisition of Pacific Baja, the Company was
engaged, through Turbodyne Systems, principally in researching and developing
products incorporating the Turbodyne Technology to enhance engine performance
and reduce emissions of internal combustion engines. During this period, the
Company commenced development of the Turbodyne System, the Turbopac-TM-
product and the Dynacharger-TM- product. In addition, the Company's research
and development activities resulted in the filing of the patent applications
in respect of the Turbodyne System and the Turbopac-TM- and Dynacharger-TM-
products. See "Item 1. Business of the Company -- Engine Enhancement
Business -- Proprietary Protection of Products." Turbodyne Systems undertook
low volume production of its products, for the purpose of testing and
evaluation with OEMs and major retrofit customers. The Company did not
record any revenues during this period and at December 31, 1997 had expended
$13,134,000 as research and development costs for the Turbodyne Products.
The development of the Turbodyne Products was financed during this period
primarily from private placement equity financings. The Company's financial
results for the period from July 2, 1996 to December 31, 1996 and thereafter
include the financial results of Pacific Baja.
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 Automotive
Components Business. The increase is largely attributable to the inclusion
of the financial results of Pacific Baja for the entire 1997 Fiscal Year as
compared to the 1996 Fiscal Year in which the financial results of Pacific
Baja were included commencing July 2, 1996, the effective date of the
acquisition of Pacific Baja. For the 1997 Fiscal Year and the 1996 Fiscal
Year,
19
<PAGE>
respectively, of the total sales attributable to the Automotive
Components Business, 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 "Item 1.
Description of Business -- Automotive Components Business --Material Supply
Agreements."
Pacific Baja's profitability 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 "Item 9. Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Cautionary Statements --
Potential Fluctuations in Quarterly Results and Seasonality" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Cautionary Statements -- Raw Materials."
Cost of goods sold consists primarily of material and labor costs
attributable to the Automotive Components Business. 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 Automotive Components
Business. The increase primarily is due to the inclusion of the financial
results of Pacific Baja for the entire 1997 Fiscal Year as compared to the
1996 Fiscal Year in which the financial results of Pacific Baja were included
commencing July 2, 1996, the effective date of the acquisition of Pacific
Baja. Of the total cost of goods sold attributable to the Automotive
Components Business, 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 Automotive
Components Business. Of the gross profit attributable to the Automotive
Components Business, 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 Automotive
Components Business 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 "Item 1.
Description of Business -- Engine Enhancement Business -- Marketing Efforts
and Joint Venture 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 hired and more than expected
scrapping and recasting of new product lines to obtain the necessary quality
levels.
20
<PAGE>
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 $13,944,000 from nil in
all prior years. These sales are attributable solely to the sales recorded
by Pacific Baja 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 Pacific Baja
for the period from July 2, 1996 to December 31, 1996. The Company recorded
a gross profit of $1,843,000 which also was attributable solely to the
Automotive Components Business. Of the total sales attributable to the
Automotive Components Business 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 $6,756,000. Of the
gross profit attributable to the Automotive Components Business, 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 $883,000. Increased labor costs resulted
from Pacific Baja'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 Pacific Baja 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 of the Company during the year was enhanced by the completion
of the Series A Special Warrant Offering and the Series C Special Warrant
Offering. See "Item 12. Options to Purchase Securities from Registrant or
Subsidiaries." The Company received cash proceeds from the Series A Special
Warrant Offering of $13,080,000, which was used primarily for the acquisition
of Pacific Baja and payment of expenses associated with that offering. The
Company received cash proceeds of $2,927,000 after completion of the Series C
Special Warrant Offering on December 6, 1996 which was used primarily to pay
operating expenses and product development costs and for working capital.
YEAR ENDED DECEMBER 31, 1995 AND 1994
During fiscal 1995 and 1994, the Company's sole business was the Engine
Enhancement Business as carried on by Turbodyne Systems. Turbodyne Systems
did not record any sales during these periods. The business activities
consisted of research and development of the Turbodyne System and the
Turbopac-TM- and Dynacharger-TM- products. Product development costs
increased to Cdn. $2,066,000 in fiscal 1995 from Cdn. $493,000 in fiscal
1994, an
21
<PAGE>
increase of Cdn. $1,573,000. Cumulative product development costs
prior to December 31, 1994 totaled Cdn. $1,754,000. Operating expenses
increased to Cdn. $1,527,000 in fiscal 1995 from Cdn. $936,000 in fiscal
1994, an increase of Cdn. $591,000 as the Company increased its product
development activities. Operating expenses included travel and business
development expenses of Cdn. $336,000 for fiscal 1995 compared to Cdn.
$245,000 for fiscal 1994, an increase of Cdn. $91,000. The travel and
business development expenses were incurred in connection with establishing
relationships and joint evaluation testing programs with potential OEM
manufacturers and establishing contacts with suppliers and manufacturers for
the Turbodyne Products.
The Company's business activities during 1995 and 1994 were financed
primarily from private placement financings of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At December 31, 1997, the Company had cash in the amount of $949,000 and
working capital equal to $8,530,000.
SERIES A PREFERRED STOCK FINANCING
In September 1997, the Company completed the sale of an aggregate of
10,000 shares of Series A Preferred Stock pursuant to certain Convertible
Series A Preferred Stock Purchase Agreements dated September 8, 1997 and
September 19, 1997 between the Company and various purchasers. This
transaction resulted in gross proceeds of $10,000,000 and net proceeds of
$9,604,000 to the Company.
DEBENTURE FINANCINGS
In February 1998, the Company completed the sale of $1,500,000
aggregate principal amount of 3% Subordinated Convertible Debentures (the "3%
Debentures"), which are convertible into shares of the Company's common
stock. The sale of the 3% Debentures resulted in net proceeds to the Company
of $1,425,000. In March 1998, the Company completed the sale of $1,500,000
aggregate principle amount of 8% Subordinated Convertible Debentures (the "8%
Debentures"), which are convertible into shares of the Company's common
stock. The sale of the 8% Debentures resulted in net proceeds to the Company
of $1,415,000.
PACIFIC BAJA LINE OF CREDIT
Pacific Baja has an operating line of credit facility with Wells Fargo
Bank in the maximum amount of $10,000,000. The outstanding balance of the
operating credit line of Pacific Baja as at December 31, 1997 was $8,144,000.
The Company is a guarantor of this line of credit.
CAPITAL REQUIREMENTS
The Company has experienced losses from operations resulting in an
accumulated deficit at December 31, 1997. The Company also used $13,793,000
to fund operating activities during 1997. The Company has generated
approximately $20.2 million from various financings and the exercise of stock
options and warrants through June 30, 1998.
The operating expenses of the Company are expected to increase as the
Company finalizes its preparations for commercial production of the Turbodyne
Products. The Company believes that its working capital will be sufficient
to fund its operating plan through fiscal 1998, exclusive of any funds which
may be available from the Automotive Components Business. The Company
intends to apply the cash flow from the Automotive Components Business to the
operation and expansion of that business.
The Company is using its best efforts to enter into contracts with OEMs
and major retrofitters for the incorporation of its Turbodyne Products. The
liquidity of the Company will be affected if the Company is unable to
finalize agreements with OEMs and major retrofitters for the incorporation of
its Turbodyne Products in new diesel
22
<PAGE>
engines and after-market diesel engine products or sell the Turbodyne
Products directly to aftermarket customers at commercially viable rates.
INFLATION
There were no significant inflationary trends that impacted the Company in
1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 130, Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes distributions to stockholders. The
Company believes that the adoption of SFAS 130 will not have a significant
impact on its financial statements and disclosures.
In June 1997, the FASB issued Statement of Financial Standards 131 ("SFAS
131"). SFAS 131, effective for fiscal years beginning after December 15,
1997, establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Early application is
permitted, but is not required, and comprehensive information for interim
periods in the initial year of application must be reported in statements for
interim periods in the second year of application. The Company believes that
the adoption of SFAS 131 will not have a significant impact on its financial
statements and disclosures.
CAUTIONARY STATEMENTS
This Report 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 Report, 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 and
$13,185,000 for the fiscal years ended December 31, 1995, 1996 and 1997,
respectively. At December 31, 1997, the Company had an accumulated deficit
of $24,073,000. There is no assurance that the Company will report net
income in any future year or period. See "Item 9. 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 by the end of the second 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.
23
<PAGE>
Additionally, both the Dynacharger-TM- and the Turbopac-TM- 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 affect on the
business, operating results and financial condition of the Company.
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.
24
<PAGE>
PROPRIETARY PROTECTION
The Company has filed patent applications in the United States and in
certain foreign jurisdictions relating to the Turbodyne Systems, the
Turbopac-TM- product and the Dynacharger-TM- product. Certain patents have
been issued in respect to the Dynacharger-TM- product and all 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 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 recently appointed 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 "Item 10.
Directors and Officers of the Registrant" and "Item 11. Compensation of
Directors and Officers."
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 Pacific Baja to make significant expenditures on new plant and
equipment in order to remain competitive, all of which could adversely affect
Pacific Baja'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
25
<PAGE>
and profitability will depend on its ability to continue to develop and
market new and improved products that can achieve significant market
acceptance.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
Revenues of Pacific Baja accounted for 100% of the revenues of the
Company in each of fiscal 1996 and 1997. The majority of Pacific Baja's
sales are to approximately five customers. These five purchasers accounted
for approximately 80% of net sales in fiscal 1996 and 1997. 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 Pacific Baja 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 Pacific Baja.
INTERNATIONAL RISKS
A significant amount of the Pacific Baja production 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 Pacific Baja. 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, Pacific Baja
currently relies on a single source of supply for approximately 70% of its
aluminum. Accordingly, Pacific Baja is vulnerable to the possible business
interruption of a supplier, and Pacific Baja could experience temporary
delays or interruptions while an alternative supplier is procured. Such
delays, if encountered for an extended period by Pacific Baja, could have a
material adverse effect on the Company's business and results of operations.
Additionally, Pacific Baja 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
Pacific Baja'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.
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<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table sets forth as of July 1, 1998 all directors and
executive officers of the Company, with each position and office held by them
in the Company, and the period of service as such:
<TABLE>
<CAPTION>
NAME AND POSITION AGE COMMENCEMENT OF SERVICES
----------------- --- ------------------------
<S> <C> <C>
Wendell R. Anderson 65 November 20, 1995
Consultant and Director
Dr. Sadayappa Durairaj 54 September 16, 1996
Director
Daniel Geronazzo 67 January 24, 1995
Director
Edward Halimi 53 October 18, 1998
Chairman of the Board
Khal Kader 25 July 6, 1998
Chief Financial Officer
Leon E. Nowek 41 October 18, 1993
Vice Chairman, Director and
Secretary
Robert F. Taylor 58 July 12, 1996
Director
Walter F. Ware 55 October 1, 1997
Chief Executive Officer,
President and Director
</TABLE>
Mr. 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 such
committees as the environment and public works committee, the budget
committee, the natural resources committee and armed services committee. Mr.
Anderson currently serves as a director of numerous corporations and
foundations including National City Bank Corporation and the University of
Minnesota Board of Trustees.
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. Currently he is 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).
27
<PAGE>
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.
Edward Halimi currently is Chairman of the Board of Directors. From
October 18, 1993 to March 11, 1998, he served as President and Chief
Executive Officer of the Company. Mr. Halimi developed the Turbodyne
Technology and the Turbodyne System. 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 Chief Executive Officer of Biosonics
Corporation, a research and development company in the fields of ultrasonics,
vibration control and semi-conductor research and electronics.
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.
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.
Prior thereto, since June 1995, Mr. Nowek served as the Company's Chief
Financial Officer.
Robert F. Taylor was appointed a director of the Company as of July 12,
1996 and 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.
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.
Directors may be appointed at any time and are then re-elected annually
by the stockholders of the Company. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board.
28
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
GENERAL
The Company does not compensate directors for acting solely as
directors. Except for reimbursement of reasonable out-of-pocket expenses in
connection with attendance at Board of Director and Committee meetings, and
as otherwise described below, the Company does not have any arrangements
pursuant to which directors are remunerated by the Company or its
subsidiaries for their services in their capacities as directors, other than
options to purchase shares of Common Stock of the Company which are granted
to the Company's directors from time to time.
DIRECTORS AND OFFICERS OF THE COMPANY
For the fiscal year ended December 31, 1997, the Company paid an
aggregate of $794,000 in compensation to all directors and officers as a
group and has not accrued any amounts in connection with pension, retirement
or other similar benefits for its directors and officers.
Edward M. Halimi and Mr. 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 of the Company 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 the 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.
29
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
OPTIONS TO PURCHASE COMMON SHARES
At June 24, 1998 the Company had outstanding options to purchase common
shares as follows:
<TABLE>
<CAPTION>
Number of Shares Exercise Price Expiration Date
---------------- -------------- ---------------
<S> <C> <C>
100,000 $4.75 Cdn August 17, 1999
78,000 $4.66 Cdn December 27, 1998
171,000 $3.50 US February 27, 1999
47,000 $9.00 Cdn September 12, 1998
10,000 $3.50 US September 3, 1998
430,000 $3.50 US January 6, 2002
800,000 $2.35 US March 11, 2003
287,000 $5.00 US October 8, 2002
701,768 $3.50 US October 8, 2002
50,000 $4.50 US March 3, 2002
610,008 $3.50 US March 3, 2002
1,063,090 $3.50 US March 24, 2003
1,102,500 $8.50 US April 30, 2003
</TABLE>
The officers and directors of the Company as a group hold an aggregate of
2,146,000 options to purchase common shares.
WARRANTS TO PURCHASE COMMON STOCK
At June 24, 1998, the Company has outstanding warrants to purchase shares
of the common stock of the Company as set forth below:
<TABLE>
<CAPTION>
Number of Shares Exercise Price Expiration Date
---------------- -------------- ---------------
Underlying Warrants
-------------------
<S> <C> <C>
30,769 $4.50 December 1, 1998
60,000 $4.00 March 25, 2003
526,666 $5.00 September 19, 2000
31,000 $4.50 June 30, 1998
100,000 $3.50 March 19, 2003
</TABLE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
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. See "Item 2. Properties."
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.
30
<PAGE>
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. See "Item 2. Properties."
Pursuant to the terms of the Employment Agreement between the Company
and Leon 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 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.
The Company loaned $234,850 to Mr. Ware 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 June 15, 1998, there was $100,000
outstanding 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 Anderson, a director of the Company, a
consultant fee of $3,500 per month in connection with services provided by
Mr. Anderson as a director of the Company and for additional project
development services.
The Company is paying to Mr. 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), 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 "Item 11. Compensation of Directors and Officers" for a description
of employment agreements between the Company and certain of its officers.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
The information called for by Item 14 is not applicable to the Company.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
The information called for by this Item 15 is not applicable to the
Company.
31
<PAGE>
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
The information called for by this Item 16 is not applicable to the
Company.
PART IV
ITEM 17. FINANCIAL STATEMENTS
See "Item 19. Financial Statements and Exhibits" for a list of the
Financial Statements of the Company included with this Report.
ITEM 18. FINANCIAL STATEMENTS
The information called for by this Item is not applicable to the Company.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) INDEX TO FINANCIAL STATEMENTS
(i) Audited Financial Statements of the Company:
- Independent Auditors' Report
- Auditor's Report
- Consolidated Balance Sheets at December 31, 1997 and 1996
- Consolidated Statements of Operations for the fiscal years ended
December 31, 1997, 1996 and 1995
- Consolidated Statements of Stockholders Equity for the fiscal
years ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
(b) EXHIBITS
1(a) Certificate of Incorporation of Dundee Resources Corp. dated May 18,
1983. Incorporated herein by reference to Exhibit 1(a) to the
Company's Registration Statement on Form 20-F filed on September 18,
1996.
1(b) Articles of Dundee Resources Corp. Incorporated herein by reference to
Exhibit 1(b) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(c) Memorandum of Dundee Resources Corp. Incorporated herein by reference
to Exhibit 1(c) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(d) Certificate of Name Change from Dundee Resources Corp. to Clear View
Ventures Inc. dated January 20, 1993. Incorporated herein by
reference to Exhibit 1(d) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(e) Amended Memorandum of Clear View Ventures Inc. Incorporated herein by
reference to Exhibit 1(e) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
32
<PAGE>
1(f) Certificate of Name Change from Clear View Ventures Inc. to Turbodyne
Technologies Inc. dated April 28, 1994. Incorporated herein by
reference to Exhibit 1(f) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(g) Amended Memorandum of the Company. Incorporated herein by reference
to Exhibit 1(g) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(h) Articles of the Company. Incorporated herein by reference to Exhibit
1(h) to the Company's Registration Statement on Form 20-F filed on
September 18, 1996.
1(I) Articles of Continuation of the Company. Incorporated herein by
reference to Exhibit 1(I) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(j) By-laws of the Company adopted upon Continuation. Incorporated herein
by reference to Exhibit 1(j) to the Company's Registration Statement
on Form 20-F filed on September 18, 1996.
1(k) Certificate of Continuation under the CANADA BUSINESS CORPORATIONS
ACT. Incorporated herein by reference to Exhibit 1(k) to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 1996, as amended.
2(a) Specimen Common Share Certificate. Incorporated herein by reference to
Exhibit 2(a) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
3(i) Employment Agreement between the Company and Edward M. Halimi.
Incorporated herein by reference to Exhibit 3(I) to the Company's
Registration Statement on Form 20-F filed on September 18, 1996.
3(ii) Management Agreement between the Company and Seeds Investment
Corporation. Incorporated herein by reference to Exhibit 3(ii)
to the Company's Registration Statement on Form 20-F filed on
September 18, 1996.
3(iii) 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.
3(iv) 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.
3(v) 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.
3(vi) 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.
33
<PAGE>
3(vii) Line of Credit Agreement between Optima Wheel and Wells Fargo
Bank dated September 1, 1995. Incorporated herein by reference
to Exhibit 3(vii) to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 1996, as amended.
3(viii) Line of Credit Agreement between Pacific Baja Light Metals and
Wells Fargo Bank dated September 1, 1995. Incorporated herein by
reference to Exhibit 3(viii) to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 1996, as
amended.
3(ix) 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.
3(x) 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.
3(xi) 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.
3(xii) 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.
3(xiii) Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Edward Halimi.
3(xiv) Employment Amendment Agreement dated January 27, 1998 to
Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Edward Halimi.
3(xv) Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Leon Nowek.
3(xvi) Employment Amendment Agreement dated January 27, 1998 to
Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Leon Nowek.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Morgan & Company, Chartered Accountants.
34
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Company certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TURBODYNE TECHNOLOGIES INC.
(COMPANY)
/s/ Leon Nowek
LEON NOWEK
VICE CHAIRMAN AND DIRECTOR
(AUTHORIZED SIGNATORY)
DATE: July 14, 1998
i
<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.
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.
<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
<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.
<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.
<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.
<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.
<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)
<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.
<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.
<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.
<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.
<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>
<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>
<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>
<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.
<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.
<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>
<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>
<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.
<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.
<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>
<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.
<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.
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C> <C>
1(a) Certificate of Incorporation of Dundee Resources Corp. dated May 18,
1983. Incorporated herein by reference to Exhibit 1(a) to the
Company's Registration Statement on Form 20-F filed on September 18,
1996.
1(b) Articles of Dundee Resources Corp. Incorporated herein by reference to
Exhibit 1(b) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(c) Memorandum of Dundee Resources Corp. Incorporated herein by reference
to Exhibit 1(c) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(d) Certificate of Name Change from Dundee Resources Corp. to Clear View
Ventures Inc. dated January 20, 1993. Incorporated herein by
reference to Exhibit 1(d) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(e) Amended Memorandum of Clear View Ventures Inc. Incorporated herein by
reference to Exhibit 1(e) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(f) Certificate of Name Change from Clear View Ventures Inc. to Turbodyne
Technologies Inc. dated April 28, 1994. Incorporated herein by
reference to Exhibit 1(f) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(g) Amended Memorandum of the Company. Incorporated herein by reference
to Exhibit 1(g) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
1(h) Articles of the Company. Incorporated herein by reference to Exhibit
1(h) to the Company's Registration Statement on Form 20-F filed on
September 18, 1996.
1(I) Articles of Continuation of the Company. Incorporated herein by
reference to Exhibit 1(I) to the Company's Registration Statement on
Form 20-F filed on September 18, 1996.
1(j) By-laws of the Company adopted upon Continuation. Incorporated herein
by reference to Exhibit 1(j) to the Company's Registration Statement
on Form 20-F filed on September 18, 1996.
1(k) Certificate of Continuation under the CANADA BUSINESS CORPORATIONS
ACT. Incorporated herein by reference to Exhibit 1(k) to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 1996, as amended.
2(a) Specimen Common Share Certificate. Incorporated herein by reference to
Exhibit 2(a) to the Company's Registration Statement on Form 20-F
filed on September 18, 1996.
3(i) Employment Agreement between the Company and Edward M. Halimi.
Incorporated herein by reference to Exhibit 3(I) to the Company's
Registration Statement on Form 20-F filed on September 18, 1996.
3(ii) Management Agreement between the Company and Seeds Investment
Corporation. Incorporated herein by reference to Exhibit 3(ii)
to the Company's Registration Statement on Form 20-F filed on
September 18, 1996.
ii
<PAGE>
3(iii) 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.
3(iv) 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.
3(v) 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.
3(vi) 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.
3(vii) Line of Credit Agreement between Optima Wheel and Wells Fargo
Bank dated September 1, 1995. Incorporated herein by reference
to Exhibit 3(vii) to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 1996, as amended.
3(viii) Line of Credit Agreement between Pacific Baja Light Metals and
Wells Fargo Bank dated September 1, 1995. Incorporated herein by
reference to Exhibit 3(viii) to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 1996, as
amended.
3(ix) 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.
3(x) 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.
3(xi) 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.
3(xii) 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.
3(xiii) Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Edward Halimi.
3(xiv) Employment Amendment Agreement dated January 27, 1998 to
Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Edward Halimi.
3(xv) Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Leon Nowek.
iii
<PAGE>
3(xvi) Employment Amendment Agreement dated January 27, 1998 to
Employment and Stock Incentive Agreement dated August 1, 1997
between the Company and Leon Nowek.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Morgan & Company, Chartered Accountants.
</TABLE>
iv
<PAGE>
EXHIBIT 3(XIII)
EMPLOYMENT AND STOCK INCENTIVE AGREEMENT
THIS AGREEMENT made as of the 1st day of August, 1997
BETWEEN:
TURBODYNE SYSTEMS, INC.,
------------------------
6155 Carpenteria Avenue
Carpenteria, California U.S.A. 93013
("TSI")
OF THE FIRST PART
AND:
TURBODYNE TECHNOLOGIES INC.,
----------------------------
Suite 510, 1090 West Pender Street
Vancouver, British Columbia, Canada
("Turbodyne")
OF THE SECOND PART
AND:
EDWARD M. HALIMI,
-----------------
163 Hot Springs Road
Montecito, California, U.S.A. 93108
("Halimi")
OF THE THIRD PART
WHEREAS:
A. Turbodyne and TSI wish to engage Halimi as the President and Chief
Executive Officer of each of Turbodyne and TSI.
B. Halimi has agreed to accept such engagement upon the terms and
conditions hereinafter set forth.
NOW THIS AGREEMENT WITNESSES that in consideration of the mutual promises,
covenants and agreements herein contained, the parties hereto agree as follows:
1. ENGAGEMENT OF EMPLOYEE
1.1 Turbodyne and TSI hereby employ Halimi in the positions of President
and Chief Executive Officer of each of Turbodyne and TSI for the term of this
Agreement and Halimi hereby accepts such retainer.
<PAGE>
1.2 During the term of this Agreement, Halimi shall perform all such acts
and do all such things as and when the same may be necessary to properly and
efficiently carry out the duties of President and Chief Executive Officer of
each of Turbodyne and TSI, and such duties shall include but shall not be
limited to:
(a) general responsibility for the supervision and management of day by
day operations of each of Turbodyne and TSI, subject to the policy
decisions made by the board of directors of Turbodyne;
(b) performing such other duties and observing such instructions as may be
reasonably assigned to him from time to time in his capacity of
President and Chief Executive Officer by the Board of Directors; and
(c) generally at all times abiding by all lawful directions given to him
by the Board of Directors of the Company.
1.3 Mr. Halimi agrees to devote his business time and efforts to carrying
out his duties under this Agreement up to approximately 40 business hours a
week. Turbodyne and TSI acknowledge and consent to Halimi devoting a portion of
his non-business time to Halimi's business interests which are not related to or
competitive with the business of Turbodyne or TSI, provided that such activities
are not in derogation to Halimi carrying out his duties under this Agreement.
1.4 With regard to the services to be performed by Halimi pursuant to
the terms of this Agreement, Halimi shall not be liable to TSI, Turbodyne, or
any subsidiary, or to any third party, for any acts or omissions in the
performance of the services on the part of Halimi, as long as said acts or
omissions of Halimi are provided or undertaken in good faith or do not
constitute willful misconduct. Halimi shall be entitled to rely on the items
set forth in Corporations Code Section 309(b). Turbodyne and TSI shall
defend, indemnify (to the maximum extent permitted by California law) and
hold Halimi and his agents and successors free and harmless from any and all
obligations, costs, claims, judgments, attorney's fees, attachments or any
other liability arising from or growing out of the services rendered to TSI,
Turbodyne, or any subsidiary, pursuant to the terms of this Agreement or in
any way connected with the rendering of the services specified in this such
services are provided or undertaken in good faith or do not constitute
willful misconduct. In addition, Halimi shall be entitled to the benefit of
the indemnity provisions of the By-laws of Turbodyne and TSI and where
applicable, the provisions of the CANADA BUSINESS CORPORATIONS ACT with
respect to Turbodyne and any provision of the Nevada Corporations Act General
Corporation Law with respect to TSI.
1.5 Turbodyne and TSI agree to indemnify and save harmless Halimi from any
liability incurred by Halimi as a result of a personal guarantee granted by
Halimi in favour of Turbodyne or TSI, provided that the granting of the
guarantee by Halimi has been approved by the board of directors of either
Turbodyne or TSI. Turbodyne and TSI agree that Halimi will be given
consideration for the granting of such personal guarantees in amounts not to
exceed industry standard customary fees for the granting of such guarantees. In
determining the consideration, the parties will consider the magnitude of the
guarantee and the risk associated with the guarantee.
2. REMUNERATION
2.1 Turbodyne agrees to pay Halimi during the term of this Agreement the
following salary and bonus amounts:
(a) A base salary of $15,000 US per month, payable in accordance with the
normal payroll schedule of TSI or Turbodyne; and
(b) an annual cash bonus based on the consolidated net operating income
(before taxes) of Turbodyne, TSI or Pacific Baja Light Metals Corp.
("Pacific Baja"), whichever is greater. In determining the
<PAGE>
iii
consolidated net operating income of TSI or Pacific Baja, no expenses
shall be considered in the determination of net operating income that
are not direct expenses of Pacific Baja or TSI, and no non-arms length
charges will be applied against the net operating income. Any
contracts with Turbodyne or any Turbodyne affiliate will be at arm's
length rates for this calculation. Such consolidated net incomes
shall be calculated on a calendar year basis during the term of this
agreement based on the annual audited financial statements of
Turbodyne. The cash bonus shall be determined based on the
consolidated net operating income (before taxes) of Turbodyne, TSI or
Pacific Baja Light Metals Corp., whichever is greater, in accordance
with the following schedule:
<TABLE>
<CAPTION>
CONSOLIDATED PERCENTAGE
NET PROFIT BASE SALARY
------------ ------------
<S> <C>
$0 or less 0%
$1 - $500,000 25%
$500,001 - $1,000,000 50%
$1,000,001 - $2,500,000 80%
$2,500,001 - $5,500,000 100%
$5,500,001 + 150%
</TABLE>
The cash bonus shall be paid on a quarterly basis within 30 days of
the end of each quarter, based on management prepared financial
statements, provided that each payment of the quarterly cash bonus
will not exceed eighty percent of the estimated annual cash bonus,
pro-rated for the respective quarter. The cash bonus shall be
adjusted at the end of each year, within five (5) days following the
issue by Turbodyne of its annual audited financial statements. In the
event the cash bonus to be paid exceeds the amounts advanced to Halimi
on a quarterly basis, the excess cash bonus will be paid to Halimi in
full within ten (10) days following the date of such determination.
In the event the quarterly advances of the cash bonus paid during the
year exceeds the cash bonus to be paid based on annual audited
financial statements, Halimi will pay the excess within ten (10) days
following such determination.
The Compensation payable pursuant to this Section 2.1 shall be retroactive to
January 1, 1997, notwithstanding the date of execution of this Agreement, in
view of the performance by Halimi of the duties described in this Agreement
since January 1, 1997.
3. STOCK OPTIONS
3.1 In addition to the compensation payable pursuant to Section 2.1,
Turbodyne shall grant to Halimi options to acquire 200,000 shares of stock in
Turbodyne in each year of the term of this agreement. The option price and the
terms and conditions of the options shall be determined in accordance with the
Turbodyne stock option plan in effect at the time of granting of the options.
The options shall be in effect for a five year term following the granting of
the options. It is understood that these stock options are intended to give Mr.
Halimi in incentive to manage Turbodyne and its subsidiary to the benefit of
Turbodyne. To the extent Turbodyne registers any stock in the United States or
Canada under any registration statement during the term of this agreement,
Turbodyne agrees to register sufficient shares to cover the options herein
described. The options are granted in consideration of the execution of this
contract and will survive Mr. Halimi's termination. Turbodyne represents that
any shares referred to above will be issued to Mr. Halimi free and clear of any
liens and encumbrances.
<PAGE>
iv
4. OTHER BENEFITS
4.1 Halimi, and Halimi's spouse and children, shall be entitled to
participate in any life and disability insurance, pension, dental, medical,
pharmaceutical, hospitalization, health insurance and such other employee
benefit programs as may be provided from time to time by Turbodyne and TSI.
Halimi will be entitled to participate in any pension plan approved by the
board of directors of Turbodyne or TSI from time to time and available to the
officers and directors of Turbodyne and TSI.
4.2 Turbodyne and TSI shall promptly reimburse Halimi for all
reasonable travelling, promotional and other expenses actually and properly
incurred in connection with Halimi's duties hereunder, provided that Halimi
furnishes receipts to Turbodyne and TSI in respect of such expenses and
Turbodyne and TSI may review such expenses on a monthly basis.
4.3 Halimi shall be entitled to a reasonable period of paid annual
vacation, but such periods shall not be less than four (4) weeks per year
provided that all such vacations shall be taken at such times as Turbodyne
and TSI and Halimi may mutually agree upon.
4.4 TSI will provide Mr. Halimi with the use of a new automobile and
reimburse him for any reasonable related automobile expenses incurred on
behalf of the business of Turbodyne and TSI.
4.5 Turbodyne and TSI will reimburse Halimi for all reasonable
relocation expenses actually and properly incurred as a result of Halimi
being required by Turbodyne or TSI to relocate from the Santa Barbara region
in order to continue to perform his duties hereunder.
4.6 Halimi will be entitled to receive an employee housing loan in an
amount equal to 25 percent of the purchase price of a principal residence
selected by Halimi, provided that the purchase price of the principal
residence will not exceed $1,000,000. The employee housing loan will be
repayable on the earlier of the sale of the principal residence or the
termination of this Agreement, provided that if Halimi sells his principal
residence, he will be entitled to a similar employee housing loan on a
replacement principal residence. Interest will be calculated and paid
annually by Halimi at interest rates prevailing in the housing mortgage
market for secured housing loans. In the event of termination of this
Agreement, Halimi may elect to set off any amount of the employee loan due
against any amounts owing by Turbodyne or TSI pursuant to the terms and
conditions of this Agreement.
4.7 Turbodyne and TSI will obtain and maintain appropriate directors'
and officers' insurance at amounts appropriate for the risk involved in
acting as a director and officer of Turbodyne and TSI, provided that the
coverage will be in amounts and on terms no less favourable than currently in
place as of the date of this Agreement.
<PAGE>
v
5. CONFIDENTIALITY AND NON-COMPETITION
5.1 Halimi shall not, either during the course of his employment
hereunder or at any time there-after, disclose to any person, any
confidential information concerning the business or affairs of Turbodyne and
TSI which Halimi may have acquired in the course of or incidental to his
employment hereunder or otherwise, and Halimi shall not directly or
indirectly use (whether for his own benefit or the detriment or intended
detriment of Turbodyne and TSI) any confidential information he may acquire
with respect to the business and affairs of Turbodyne and TSI.
5.2 Halimi agrees with Turbodyne and TSI that he will not, either alone
or in conjunction with any individual, firm, corporation, association or
other entity, whether as principal, agent, director, officer, employee,
shareholder or in any other capacity whatsoever:
(a) during the term of this Agreement and for a one year period from the
termination of this Agreement, carry on, or be engaged in, concerned
with or interested in, directly or indirectly, any business which is
in whole or in part competitive with the business of Turbodyne and
TSI;
(b) during the term of this Agreement and for a two year period from the
termination of this Agreement, attempt to solicit any suppliers,
customers or employees of the business of Turbodyne and TSI away from
Turbodyne and TSI;
(c) during the term of this Agreement and for a two year period from the
termination of this Agreement, knowingly take any act as a result of
which the relations between Turbodyne and TSI and the suppliers or
customers of the business of Turbodyne and TSI may be impaired or
which may otherwise be detrimental to the business of Turbodyne and
TSI.
5.3 Subject to Section 5.5, any and all inventions and improvements on
which Halimi may conceive or make, during the period of his employment,
relating, or in any way, pertaining to or connected with any of the matters
which have been, are or may become the subject of Turbodyne and TSI's
investigations, or in which Turbodyne and TSI has been, is, or may become
interested, shall be the sole and exclusive property of Turbodyne and TSI,
and Halimi will, whenever requested by Turbodyne and TSI, execute any and all
applications, assignments and other instruments which Turbodyne and TSI shall
deem necessary in order to apply for and obtain letters of patent for U.S. or
foreign countries for the inventions or improvements and in order to assign
and convey to Turbodyne and TSI the sole and exclusive right, title and
interest in and to the inventions or improvements, all expenses in connection
with them to be borne by Turbodyne and TSI. Halimi's obligations to execute
the papers referred to in this paragraph shall continue beyond the
termination of the period of his employment with respect to any and all
inventions or improvements conceived or made by him during the period of the
employment, and the obligations shall be binding on the assigns, executors,
administrators or other legal representatives of Halimi.
5.4 Subject to section 5.5, all inventions and discoveries relating to
the business of Turbodyne and TSI and all knowledge and information which
Halimi may acquire during his employment, shall be held by Halimi in trust
for the benefit of Turbodyne and TSI, and Halimi agrees that he will not
divulge, or authorize anyone else to divulge, either during the times he is
so employed or afterwards, knowledge of the inventions or discoveries, or any
information acquired in the course of his employment under this agreement, or
any confidential information concerning Turbodyne and TSI's business that he
may acquire otherwise.
5.5 Halimi will be entitled to receive royalties in accordance with the
Company's policy of granting royalties for inventions in the event of any
invention made or conceived by Halimi which becomes property of the Company
pursuant to the times and conditions of this Agreement.
<PAGE>
vi
6. TERM
6.1 This Agreement shall be in effect for a period of five (5) years from
the effective date of this Agreement, as first above written, unless sooner
terminated by the parties pursuant to the terms herein contained. The term of
this Agreement shall be automatically extended by successive one year terms upon
the expiry of each one year anniversary of this Agreement, commencing with the
initial year of the term of this Agreement, without any action of the parties,
unless notice is given in writing by either party to this Agreement prior to 30
days prior to the expiry of each one year anniversary of the party's election
not to extend the term of the Agreement.
7. TERMINATION
7.1 Turbodyne and TSI may terminate this Agreement:
(a) at any time in the event of any fraudulent activity or conduct, or in
the event of any intentional misconduct adversely and materially
affecting the business of Turbodyne and TSI;
(b) upon the death of Halimi;
(c) if Halimi shall suffer any permanent disability. For purposes of this
agreement "permanent disability" shall be defined as Halimi's
inability, by reason of physical or mental illness or other cause, to
perform the majority of this usual duties for a period of greater than
six months. Turbodyne and TSI's option shall be exercised in writing
and delivered to Mr. Halimi and shall be effective upon delivery;
(d) in the event of any assignment or attempted assignment of this
Agreement by Halimi, except as expressly permitted by this Agreement;
provided that those obligations of Halimi in this Agreement expressly stated to
continue on termination shall continue upon termination and shall not terminate
upon termination of this Agreement. Upon any such termination, Halimi shall be
entitled to receive the compensation accrued by unpaid as of the date of his
termination including a pro rata cash bonus, and shall not be entitled to any
additional compensation, except as expressly provided in this Agreement.
7.2 Halimi may terminate this Agreement at any time upon 3 months written
notice to Turbodyne and TSI, provided that those obligations of Halimi in this
Agreement expressly stated to continue on termination shall continue upon
termination and shall not terminate upon termination of this Agreement.
7.3 Turbodyne and TSI agree that the following circumstances will be
deemed to be termination of Halimi without cause:
(a) the assignment to Halimi of any duties materially and substantially
inconsistent with Halimi's present position, duties, responsibility or
status with Turbodyne or TSI as of the date of this Agreement;
(b) the removal of Halimi from or any failure to appoint Halimi to any
such position;
(c) the termination or material reduction in Halimi's facilities, or staff
reporting and available to Halimi;
<PAGE>
vii
(d) a change in Halimi's site of employment for a total period of more
than two (2) months during any period of twelve (12) months, provided
that the relocation of Halimi to Los Angeles, California (or adjacent
areas), will not be considered to be a breach of this Agreement.
In the event of termination of this Agreement without cause, Halimi will be
entitled to receive the compensation to be paid to Halimi from the date of
termination to the date of expiry of the then current term of this Agreement,
provided that those obligations of Halimi in this Agreement expressly stated to
continue on termination shall continue upon termination and shall not terminate
upon termination of this Agreement.
8. ARBITRATION
8.1 The parties shall use all reasonable efforts to resolve amicably any
controversy or claim arising out of, relating to this Agreement, or the breach
thereof. However, in the event such controversy or claim cannot be resolved by
agreement of the parties, it shall be settled by arbitration in Los Angeles
County, California, in accordance with the then existing rules of the American
Arbitration Association, except that the parties shall be entitled to all
discovery to which they would normally be entitled in civil litigation in the
California Superior Court. California law shall govern. Any judgment upon the
award of the arbitrator may be rendered and enforced in any court having
jurisdiction thereof.
9. NOTICES
9.1 Any notice required or permitted to be given under this Agreement
shall be in writing and may be delivered personally or by telecopier, or by
pre-paid registered post addressed to the parties at the above-mentioned
addresses or at such address of which notice may be given by either of such
parties. Any notice shall be deemed to have been received if personally
delivered or by telex or telecopier, on the date of delivery and, if mailed
as aforesaid, then on the fourth business day after and excluding the day of
mailing.
10. ASSIGNMENT
10.1 This Agreement is a personal service contract and may not be
assigned in whole or in part by Halimi, provided that Halimi may assign the
benefit of this Agreement to a company, all of the voting shares are owned by
Halimi. In the event of such an assignment Halimi will continue to be bound
by the terms and conditions of this Agreement and will agree not to dispose
of any interest or shares of the company to which the benefit of this
agreement has been assigned. Any sale of any interest or shares in such a
company will be deemed to be an assignment of this Agreement.
11. INTERPRETATION
11.1 This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
11.2 All headings used in this Agreement are for convenience of reference
only and are not to be used as an aid in the interpretation of this Agreement.
11.3 This Agreement replaces and supercedes all other consulting agreements
and employment agreements, between Halimi and TSI and between Halimi and
Turbodyne Technologies Inc.
11.4 If there is a dispute as to the terms and conditions of this
Agreement, the prevailing party shall be entitled to reasonable attorneys fees
and costs incurred in connection with such dispute.
<PAGE>
viii
11.5 No amendment of this agreement shall be valid unless made in writing
and signed by all parties hereto.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and
year first above written.
TURBODYNE SYSTEMS, INC.
by its authorized signatory:
- ---------------------------------
Authorized Signatory
The common seal of
TURBODYNE TECHNOLOGIES INC.
is hereby affixed in the presence of
its authorized signatory: c/s
- ---------------------------------
Authorized Signatory
SIGNED, SEALED AND DELIVERED )
BY EDWARD M. HALIMI in )
the presence of: )
)
)
- ---------------------------- ) -----------------------------
Signature ) EDWARD M. HALIMI
)
- ---------------------------- )
Name )
)
- ---------------------------- )
Address )
<PAGE>
EXHIBIT 3(XIV)
EMPLOYMENT AMENDMENT AGREEMENT
THIS AGREEMENT made as of the 27th day of January, 1998
BETWEEN:
TURBODYNE SYSTEMS, INC.,
6155 Carpenteria Avenue
Carpenteria, California U.S.A. 93013
("TSI")
OF THE FIRST PART
AND:
TURBODYNE TECHNOLOGIES INC.,
Suite 510, 1090 West Pender Street
Vancouver, British Columbia, Canada
("Turbodyne")
OF THE SECOND PART
AND:
EDWARD M. HALIMI,
163 Hot Springs Road
Montecito, California, U.S.A. 93108
("Halimi")
OF THE THIRD PART
WHEREAS:
A. Turbodyne and TSI have engaged Halimi as the President and Chief
Executive Officer of each of Turbodyne and TSI pursuant to an employment
agreement dated the first day of August, 1997 and effective the first day of
January, 1997 (the "Employment Agreement").
B. Turbodyne, TSI and Halimi have agreed to amend the Employment
Agreement upon the terms and conditions hereinafter set forth.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
promises, covenants and agreements herein contained, the parties hereto agree as
follows:
1. AMENDMENT TO EMPLOYMENT AGREEMENT
1.1 The Employment Agreement is hereby amended as follows:
i. by deleting Section 6.1 of the Employment Agreement and replacing
it with the following:
<PAGE>
"6.1 This Agreement shall be in effect for a period of ten
(10) years from the effective date of this Agreement, as first
above written, unless sooner terminated by the parties pursuant
to the terms herein contained. The term of this Agreement shall
be automatically extended by successive one year terms upon the
expiry of each one year anniversary of this Agreement, commencing
with the initial year of the term of this Agreement, without any
action of the parties, unless notice is given in writing by
either party to this Agreement prior to 30 days prior to the
expiry of each one year anniversary of the party's election not
to extend the term of the Agreement."
ii. by deleting Section 7.3 of the Employment Agreement and replacing
it with the following:
"7.3 Turbodyne and TSI agree that the following
circumstances will be deemed to be termination of Halimi without
cause:
(a) the assignment to Halimi of any duties materially and
substantially inconsistent with Halimi's present position,
duties, responsibility or status with Turbodyne or TSI as of
the date of this Agreement;
(b) the removal of Halimi from or any failure to appoint Halimi
to any such position;
(c) the termination or material reduction in Halimi's
facilities, or staff reporting and available to Halimi;
(d) a change in Halimi's site of employment for a total period
of more than two (2) months during any period of twelve (12)
months, provided that the relocation of Halimi to Los
Angeles, California (or adjacent areas), will not be
considered to be a breach of this Agreement.
(e) a change in control of Turbodyne without the prior approval
of the Board of Directors, by resolution. A "change of
control" shall be deemed to be an acquisition by any party
of a 51% interest in Turbodyne.
In the event of termination of this Agreement without cause,
Halimi will be entitled to receive the compensation to be paid to
Halimi from the date of termination to the date of expiry of the
then current term of this Agreement, provided that those
obligations of Halimi in this Agreement expressly stated to
continue on termination shall continue upon termination and shall
not terminate upon termination of this Agreement."
2. EMPLOYMENT AGREEMENT IN FULL FORCE AND EFFECT
2.1 Except as expressly amended by this Agreement, the Employment
Agreement remains in full force and effect without any additional modification
or amendment.
GENERAL PROVISIONS
3.1 This agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
3.2 This agreement may be executed in one or more counter-parts, each of
which so executed shall constitute an original and all of which
together shall constitute one and the same agreement.
<PAGE>
iii
3.3 This agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State
of California, and each of the parties hereto irrevocably attorns to
the jurisdiction of the Courts of the State of California.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and
year first above written.
TURBODYNE SYSTEMS, INC.
by its authorized signatory:
- -------------------------------
Authorized Signatory
The common seal of
TURBODYNE TECHNOLOGIES INC.
is hereby affixed in the presence of
its authorized signatory: c/s
- ---------------------------------
Authorized Signatory
SIGNED, SEALED AND DELIVERED )
BY EDWARD M. HALIMI in )
the presence of: )
)
)
- ----------------------------- ) ------------------------------
Signature ) EDWARD M. HALIMI
)
- ----------------------------- )
Name )
)
- ----------------------------- )
Address )
<PAGE>
EXHIBIT 3(XV)
EMPLOYMENT AND STOCK INCENTIVE AGREEMENT
THIS AGREEMENT made as of the 1st day of August, 1997
BETWEEN:
TURBODYNE SYSTEMS, INC.,
6155 Carpenteria Avenue
Carpenteria, California U.S.A. 93013
("TSI") OF THE FIRST PART
AND:
TURBODYNE TECHNOLOGIES INC.,
Suite 510, 1090 West Pender Street
Vancouver, British Columbia, Canada
("Turbodyne") OF THE SECOND PART
AND:
LEON E. NOWEK,
14223 - 29A Avenue
South Surrey, BC V4A 2H6
("Nowek") OF THE THIRD PART
WHEREAS:
A. Turbodyne and TSI wish to engage Nowek as the Chief Financial Officer
of each of Turbodyne and TSI.
B. Nowek has agreed to accept such engagement upon the terms and
conditions hereinafter set forth.
NOW THIS AGREEMENT WITNESSES that in consideration of the mutual promises,
covenants and agreements herein contained, the parties hereto agree as follows:
1. ENGAGEMENT OF EMPLOYEE
1.1 Turbodyne and TSI hereby employ Nowek in the positions of Chief
Financial Officer of each of Turbodyne and TSI for the term of this Agreement
and Nowek hereby accepts such retainer.
1.2 Subject to Section 1.3, during the term of this Agreement, Nowek shall
perform all such acts and do all such things as and when the same may be
necessary to properly and efficiently carry out the duties of Chief Financial
Officer of each of Turbodyne and TSI, and such duties shall include but shall
not be limited to:
(a) general responsibility for the supervision and management of the
financial affairs of each of Turbodyne and TSI, subject to the policy
decisions made by the board of directors of Turbodyne;
(b) coordinating all auditing functions with respect to Turbodyne and its
subsidiaries;
(c) performing such other duties and observing such instructions as may be
reasonably assigned to him from time to time in his capacity of Chief
Financial Officer by the Board of Directors; and
(d) generally at all times abiding by all lawful directions given to him
by the Board of Directors of the Company.
<PAGE>
1.3 Nowek, Turbodyne and TSI agree that the title duties and
responsibilities of Nowek pursuant to the terms of this Agreement may change
during the term of this Agreement by agreement among Nowek, Turbodyne and TSI.
Any change to the duties and responsibilities of Nowek will not otherwise change
the terms and conditions of this Agreement and will not constitute termination
without cause, as contemplated in Section 7.3 of this Agreement.
1.4 Mr. Nowek agrees to devote his business time and efforts to carrying
out his duties under this Agreement up to approximately 40 business hours a
week. Turbodyne and TSI acknowledge and consent to Nowek devoting a portion of
his non-business time to Nowek's business interests which are not related to or
competitive with the business of Turbodyne or TSI, provided that such activities
are not in derogation to Nowek carrying out his duties under this Agreement.
1.5 With regard to the services to be performed by Nowek pursuant to
the terms of this Agreement, Nowek shall not be liable to TSI, Turbodyne, or
any subsidiary, or to any third party, for any acts or omissions in the
performance of the services on the part of Nowek, as long as said acts or
omissions of Nowek are provided or undertaken in good faith or do not
constitute willful misconduct. Nowek shall be entitled to rely on the items
set forth in Corporations Code Section 309(b). Turbodyne and TSI shall
defend, indemnify (to the maximum extent permitted by California law) and
hold Nowek and his agents and successors free and harmless from any and all
obligations, costs, claims, judgments, attorney's fees, attachments or any
other liability arising from or growing out of the services rendered to TSI,
Turbodyne, or any subsidiary, pursuant to the terms of this Agreement or in
any way connected with the rendering of the services specified in this such
services are provided or undertaken in good faith or do not constitute
willful misconduct. In addition, Nowek shall be entitled to the benefit of
the indemnity provisions of the By-laws of Turbodyne and TSI and where
applicable, the provisions of the CANADA BUSINESS CORPORATIONS ACT with
respect to Turbodyne and any provision of the Nevada General Corporation Law
with respect to TSI.
1.6 Turbodyne and TSI agree to indemnify and save harmless Nowek from any
liability incurred by Nowek as a result of a personal guarantee granted by Nowek
in favour of Turbodyne or TSI, provided that the granting of the guarantee by
Nowek has been approved by the board of directors of either Turbodyne or TSI.
Turbodyne and TSI agree that Nowek will be given consideration for the granting
of such personal guarantees in amounts not to exceed industry standard customary
fees for the granting of such guarantees. In determining the considers, the
parties will consider the magnitude of the guarantee and the risk associated
with the guarantee.
2. REMUNERATION
2.1 Turbodyne agrees to pay Nowek during the term of this Agreement the
following salary and bonus amounts:
(a) A base salary of $13,500 US per month, payable in accordance with the
normal payroll schedule of Turbodyne or TSI; and
(b) an annual cash bonus based on the consolidated net operating income
(before taxes) of Turbodyne, TSI or Pacific Baja Light Metals Corp.
("Pacific Baja"), whichever is greater. In determining the
consolidated net operating income of TSI or Pacific Baja, no expenses
shall be considered in the determination of net operating income that
are not direct expenses of Pacific Baja or TSI, and no non-arms length
charges will be applied against the net operating income. Any
contracts with Turbodyne or any Turbodyne affiliate will be at arm's
length rates for this calculation. Such consolidated net incomes
shall be calculated on a calendar year basis during the term of this
agreement based on the annual audited financial statements of
Turbodyne. The cash bonus shall be determined based on the
consolidated net operating income (before taxes) of Turbodyne, TSI or
Pacific Baja Light Metals Corp., whichever is greater, in accordance
with the following schedule:
<PAGE>
iii
<TABLE>
<CAPTION>
CONSOLIDATED PERCENTAGE
NET PROFIT BASE SALARY
------------ -----------
<S> <C>
$0 or less 0%
$1 - $500,000 25%
$500,001 - $1,000,000 50%
$1,000,001 - $2,500,000 80%
$2,500,001 - $5,500,000 100%
$5,500,001 + 150%
</TABLE>
The cash bonus shall be paid on a quarterly basis within 30 days of
the end of each quarter, based on management prepared financial
statements, provided that each payment of the quarterly cash bonus
will not exceed eighty percent of the estimated annual cash bonus,
pro-rated for the respective quarter. The cash bonus shall be
adjusted at the end of each year, within five (5) days following the
issue by Turbodyne of its annual audited financial statements. In the
event the cash bonus to be paid exceeds the amounts advanced to Nowek
on a quarterly basis, the excess cash bonus will be paid to Nowek in
full within ten (10) days following the date of such determination.
In the event the quarterly advances of the cash bonus paid during the
year exceeds the cash bonus to be paid based on annual audited
financial statements, Nowek will pay the excess within ten (10) days
following such determination.
The Compensation payable pursuant to this Section 2.1 shall be retroactive to
January 1, 1997, notwithstanding the date of execution of this Agreement, in
view of the performance by Nowek of the duties described in this Agreement since
January 1, 1997.
3. STOCK OPTIONS
3.1 In addition to the compensation payable pursuant to Section 2.1,
Turbodyne shall grant to Nowek options to acquire 200,000 shares of stock in
Turbodyne in each year of the term of this agreement. The option price and the
terms and conditions of the options shall be determined in accordance with the
Turbodyne stock option plan in effect at the time of granting of the options.
The options shall be in effect for a five year term following the granting of
the options. It is understood that these stock options are intended to give Mr.
Nowek in incentive to manage Turbodyne and its subsidiary to the benefit of
Turbodyne. To the extent Turbodyne registers any stock in the United States or
Canada under any registration statement during the term of this agreement,
Turbodyne agrees to register sufficient shares to cover the options herein
described. The options are granted in consideration of the execution of this
contract and will survive Mr. Nowek's termination. Turbodyne represents that
any shares referred to above will be issued to Mr. Nowek free and clear of any
liens and encumbrances.
4. OTHER BENEFITS
4.1 Nowek, and Nowek's spouse and children, shall be entitled to
participate in any life and disability insurance, pension, dental, medical,
pharmaceutical, hospitalization, health insurance and such other employee
benefit programs as may be provided from time to time by Turbodyne and TSI.
Nowek will be entitled to participate in any pension plan approved by the board
of directors of Turbodyne or TSI from time to time and available to the officers
and directors of Turbodyne and TSI.
4.2 Turbodyne and TSI shall promptly reimburse Nowek for all reasonable
travelling, promotional and other expenses actually and properly incurred in
connection with Nowek's duties hereunder, provided that Nowek
<PAGE>
iv
furnishes receipts to Turbodyne and TSI in respect of such expenses and
Turbodyne and TSI may review such expenses on a monthly basis.
4.3 Nowek shall be entitled to a reasonable period of paid annual
vacation, but such periods shall not be less than four (4) weeks per year
provided that all such vacations shall be taken at such times as Turbodyne and
TSI and Nowek may mutually agree upon.
4.4 TSI will provide Mr. Nowek with the use of a new automobile and
reimburse him for any reasonable related automobile expenses incurred on behalf
of the business of Turbodyne and TSI.
4.5 Turbodyne and TSI will reimburse Nowek for all reasonable relocation
expenses actually and properly incurred as a result of Nowek being required by
Turbodyne or TSI to relocate from Vancouver region in order to continue to
perform his duties hereunder.
4.6 Nowek will be entitled to receive an employee housing loan in an
amount equal to 25 percent of the purchase price of a principal residence
selected by Nowek, provided that the purchase price of the principal residence
will not exceed $1,000,000. The employee housing loan will be repayable on the
earlier of the sale of the principal residence or the termination of this
Agreement, provided that if Nowek sells his principal residence, he will be
entitled to a similar employee housing loan on a replacement principal
residence. Interest will be calculated and paid annually by Nowek at interest
rates prevailing in the housing mortgage market for secured housing loans. In
the event of termination of this Agreement, Nowek may elect to set off any
amount of the employee loan due against any amounts owing by Turbodyne or TSI
pursuant to the terms and conditions of this Agreement.
4.7 Turbodyne and TSI will obtain and maintain appropriate directors' and
officers' insurance at amounts appropriate for the risk involved in acting as a
director and officer of Turbodyne and TSI, provided that the coverage will be in
amounts and on terms no less favourable than currently in place as of the date
of this Agreement.
5. CONFIDENTIALITY AND NON-COMPETITION
5.1 Nowek shall not, either during the course of his employment hereunder
or at any time there-after, disclose to any person, any confidential information
concerning the business or affairs of Turbodyne and TSI which Nowek may have
acquired in the course of or incidental to his employment hereunder or
otherwise, and Nowek shall not directly or indirectly use (whether for his own
benefit or the detriment or intended detriment of Turbodyne and TSI) any
confidential information he may acquire with respect to the business and affairs
of Turbodyne and TSI.
5.2 Nowek agrees with Turbodyne and TSI that he will not, either alone or
in conjunction with any individual, firm, corporation, association or other
entity, whether as principal, agent, director, officer, employee, shareholder or
in any other capacity whatsoever:
(a) during the term of this Agreement and for a one year period from the
termination of this Agreement, carry on, or be engaged in, concerned
with or interested in, directly or indirectly, any business which is
in whole or in part competitive with the business of Turbodyne and
TSI;
(b) during the term of this Agreement and for a two year period from the
termination of this Agreement, attempt to solicit any suppliers,
customers or employees of the business of Turbodyne and TSI away from
Turbodyne and TSI;
(c) during the term of this Agreement and for a two year period from the
termination of this Agreement, knowingly take any act as a result of
which the relations between Turbodyne and TSI
<PAGE>
v
and the suppliers or customers of the business of Turbodyne and TSI
may be impaired or which may otherwise be detrimental to the business
of Turbodyne and TSI.
5.3 Subject to Section 5.5, any and all inventions and improvements on
which Nowek may conceive or make, during the period of his employment, relating,
or in any way, pertaining to or connected with any of the matters which have
been, are or may become the subject of Turbodyne and TSI's investigations, or in
which Turbodyne and TSI has been, is, or may become interested, shall be the
sole and exclusive property of Turbodyne and TSI, and Nowek will, whenever
requested by Turbodyne and TSI, execute any and all applications, assignments
and other instruments which Turbodyne and TSI shall deem necessary in order to
apply for and obtain letters of patent for U.S. or foreign countries for the
inventions or improvements and in order to assign and convey to Turbodyne and
TSI the sole and exclusive right, title and interest in and to the inventions or
improvements, all expenses in connection with them to be borne by Turbodyne and
TSI. Nowek's obligations to execute the papers referred to in this paragraph
shall continue beyond the termination of the period of his employment with
respect to any and all inventions or improvements conceived or made by him
during the period of the employment, and the obligations shall be binding on the
assigns, executors, administrators or other legal representatives of Nowek.
5.4 Subject to section 5.5, all inventions and discoveries relating to the
business of Turbodyne and TSI and all knowledge and information which Nowek may
acquire during his employment, shall be held by Nowek in trust for the benefit
of Turbodyne and TSI, and Nowek agrees that he will not divulge, or authorize
anyone else to divulge, either during the times he is so employed or afterwards,
knowledge of the inventions or discoveries, or any information acquired in the
course of his employment under this agreement, or any confidential information
concerning Turbodyne and TSI's business that he may acquire otherwise.
5.5 Nowek will be entitled to receive royalties in accordance with the
Company's policy of granting royalties for inventions in the event of any
invention made or conceived by Nowek which becomes property of the Company
pursuant to the times and conditions of this Agreement.
6. TERM
6.1 This Agreement shall be in effect for a period of five (5) years from
the effective date of this Agreement, as first above written, unless sooner
terminated by the parties pursuant to the terms herein contained. The term of
this Agreement shall be automatically extended by successive one year terms upon
the expiry of each one year anniversary of this Agreement, commencing with the
initial year of the term of this Agreement, without any action of the parties,
unless notice is given in writing by either party to this Agreement prior to 30
days prior to the expiry of each one year anniversary of the party's election
not to extend the term of the Agreement.
7. TERMINATION
7.1 Turbodyne and TSI may terminate this Agreement:
(a) at any time in the event of any fraudulent activity or conduct, or in
the event of any intentional misconduct adversely and materially
affecting the business of Turbodyne and TSI;
(b) upon the death of Nowek;
(c) if Nowek shall suffer any permanent disability. For purposes of this
agreement "permanent disability" shall be defined as Nowek's
inability, by reason of physical or mental illness or other cause, to
perform the majority of this usual duties for a period of greater than
six months.
<PAGE>
vi
Turbodyne and TSI's option shall be exercised in writing
and delivered to Mr. Nowek and shall be effective upon delivery;
(d) in the event of any assignment or attempted assignment of this
Agreement by Nowek, except as expressly permitted by this Agreement;
provided that those obligations of Nowek in this Agreement expressly stated to
continue on termination shall continue upon termination and shall not terminate
upon termination of this Agreement. Upon any such termination, Nowek shall be
entitled to receive the compensation accrued by unpaid as of the date of his
termination including a pro rata cash bonus, and shall not be entitled to any
additional compensation, except as expressly provided in this Agreement.
7.2 Nowek may terminate this Agreement at any time upon 3 months written
notice to Turbodyne and TSI, provided that those obligations of Nowek in this
Agreement expressly stated to continue on termination shall continue upon
termination and shall not terminate upon termination of this Agreement.
7.3 Turbodyne and TSI agree that the following circumstances will be
deemed to be termination of Nowek without cause:
(a) the assignment to Nowek of any duties materially and substantially
inconsistent with Nowek's present position, duties, responsibility or
status with Turbodyne or TSI as of the date of this Agreement;
(b) the removal of Nowek from or any failure to appoint Nowek to any such
position;
(c) the termination or material reduction in Nowek's facilities, or staff
reporting and available to Nowek;
(d) a change in Nowek's site of employment for a total period of more than
two (2) months during any period of twelve (12) months, provided that
the relocation of Nowek to Los Angeles, California (or adjacent
areas), will not be considered to be a breach of this Agreement.
In the event of termination of this Agreement without cause, Nowek will be
entitled to receive the compensation to be paid to Nowek from the date of
termination to the date of expiry of the then current term of this Agreement,
provided that those obligations of Nowek in this Agreement expressly stated to
continue on termination shall continue upon termination and shall not terminate
upon termination of this Agreement.
8. ARBITRATION
8.1 The parties shall use all reasonable efforts to resolve amicably any
controversy or claim arising out of, relating to this Agreement, or the breach
thereof. However, in the event such controversy or claim cannot be resolved by
agreement of the parties, it shall be settled by arbitration in Los Angeles
County, California, in accordance with the then existing rules of the American
Arbitration Association, except that the parties shall be entitled to all
discovery to which they would normally be entitled in civil litigation in the
California Superior Court. California law shall govern. Any judgment upon the
award of the arbitrator may be rendered and enforced in any court having
jurisdiction thereof.
9. NOTICES
<PAGE>
vii
9.1 Any notice required or permitted to be given under this Agreement
shall be in writing and may be delivered personally or by telecopier, or by
pre-paid registered post addressed to the parties at the above-mentioned
addresses or at such address of which notice may be given by either of such
parties. Any notice shall be deemed to have been received if personally
delivered or by telex or telecopier, on the date of delivery and, if mailed
as aforesaid, then on the fourth business day after and excluding the day of
mailing.
10. ASSIGNMENT
10.1 This Agreement is a personal service contract and may not be assigned
in whole or in part by Nowek, provided that Nowek may assign the benefit of this
Agreement to a company, all of the voting shares are owned by Nowek. In the
event of such an assignment, Nowek will continue to be bound by the terms and
conditions of this Agreement and will agree not to dispose of any interest or
shares of the Company to which the benefit of this agreement has been assigned.
Any sale of any interest or shares in such a company will be deemed to be an
assignment of this Agreement.
11. INTERPRETATION
11.1 This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
11.2 All headings used in this Agreement are for convenience of reference
only and are not to be used as an aid in the interpretation of this Agreement.
11.3 This Agreement replaces and supercedes all other consulting agreements
and employment agreements, between Nowek and TSI and between Nowek and Turbodyne
Technologies Inc.
11.4 If there is a dispute a to the terms and conditions of this Agreement,
the prevailing party shall be entitled to reasonable attorney's fees and costs
incurred in connection with such breach.
11.5 No amendment of this agreement shall be valid unless made in writing
and signed by all parties hereto.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and
year first above written.
TURBODYNE SYSTEMS, INC.
by its authorized signatory:
/S/ EDWARD HALIMI
- -----------------------------
Authorized Signatory
The common seal of
TURBODYNE TECHNOLOGIES INC.
is hereby affixed in the presence of
its authorized signatory: c/s
/S/ EDWARD HALIMI
- -----------------------------
Authorized Signatory
SIGNED, SEALED AND DELIVERED )
BY LEON E. NOWEK in )
the presence of: )
)
)
)
/S/ KAREN KLEINWORT ) /S/ LEON E. NOWEK
Signature ) LEON E. NOWEK
)
Karen Kleinwort )
Name )
)
5565 Canoga Avenue )
Woodland Hills, CA 91367 )
Address )
<PAGE>
EXHIBIT 3(XVI)
EMPLOYMENT AMENDMENT AGREEMENT
THIS AGREEMENT made as of the 27th day of January, 1998
BETWEEN:
TURBODYNE SYSTEMS, INC.,
6155 Carpenteria Avenue
Carpenteria, California U.S.A. 93013
("TSI")
OF THE FIRST PART
AND:
TURBODYNE TECHNOLOGIES INC.,
Suite 510, 1090 West Pender Street
Vancouver, British Columbia, Canada
("Turbodyne")
OF THE SECOND PART
AND:
LEON E. NOWEK,
14223 - 29 A Avenue
South Surrey, British Columbia V4A 2H6
("Nowek")
OF THE THIRD PART
WHEREAS:
A. Turbodyne and TSI have engaged Nowek as the Chief Financial Officer of
each of Turbodyne and TSI pursuant to an employment agreement dated the first
day of August, 1997 and effective the first day of January, 1997 (the
"Employment Agreement").
B. Turbodyne, TSI and Nowek have agreed to amend the Employment Agreement
upon the terms and conditions hereinafter set forth.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
promises, covenants and agreements herein contained, the parties hereto agree as
follows:
1. AMENDMENT TO EMPLOYMENT AGREEMENT
1.1 The Employment Agreement is hereby amended as follows:
i. by deleting Section 6.1 of the Employment Agreement and replacing
it with the following:
<PAGE>
"6.1 This Agreement shall be in effect for a period of ten
(10) years from the effective date of this Agreement, as first
above written, unless sooner terminated by the parties pursuant
to the terms herein contained. The term of this Agreement shall
be automatically extended by successive one year terms upon the
expiry of each one year anniversary of this Agreement, commencing
with the initial year of the term of this Agreement, without any
action of the parties, unless notice is given in writing by
either party to this Agreement prior to 30 days prior to the
expiry of each one year anniversary of the party's election not
to extend the term of the Agreement."
ii. by deleting Section 7.3 of the Employment Agreement and replacing
it with the following:
"7.3 Turbodyne and TSI agree that the following
circumstances will be deemed to be termination of Nowek without
cause:
(a) the assignment to Nowek of any duties materially and
substantially inconsistent with Nowek's present position,
duties, responsibility or status with Turbodyne or TSI as of
the date of this Agreement;
(b) the removal of Nowek from or any failure to appoint Nowek to
any such position;
(c) the termination or material reduction in Nowek's facilities,
or staff reporting and available to Nowek;
(d) a change in Nowek's site of employment for a total period of
more than two (2) months during any period of twelve (12)
months, provided that the relocation of Nowek to Los
Angeles, California (or adjacent areas), will not be
considered to be a breach of this Agreement.
(e) a change in control of Turbodyne without the prior approval
of the Board of Directors, by resolution. A "change of
control" shall be deemed to be an acquisition by any party
of a 51% interest in Turbodyne.
In the event of termination of this Agreement without cause,
Nowek will be entitled to receive the compensation to be paid to
Nowek from the date of termination to the date of expiry of the
then current term of this Agreement, provided that those
obligations of Nowek in this Agreement expressly stated to
continue on termination shall continue upon termination and shall
not terminate upon termination of this Agreement."
2. EMPLOYMENT AGREEMENT IN FULL FORCE AND EFFECT
2.1 Except as expressly amended by this Agreement, the Employment
Agreement remains in full force and effect without any additional modification
or amendment.
GENERAL PROVISIONS
3.1 This agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
3.2 This agreement may be executed in one or more counter-parts, each of
which so executed shall constitute an original and all of which
together shall constitute one and the same agreement.
<PAGE>
iii
3.3 This agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State
of California, and each of the parties hereto irrevocably attorns to
the jurisdiction of the Courts of the State of California.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and
year first above written.
TURBODYNE SYSTEMS, INC.
by its authorized signatory:
/S/ EDWARD HALIMI
- --------------------
Authorized Signatory
The common seal of
TURBODYNE TECHNOLOGIES INC.
is hereby affixed in the presence of
its authorized signatory: c/s
/S/ EDWARD HALIMI
- --------------------
Authorized Signatory
SIGNED, SEALED AND DELIVERED )
BY LEON E. NOWEK in )
the presence of: )
)
)
/S/ KAREN KLEINWORT ) /S/ LEON E. NOWEK
Signature ) LEON E. NOWEK
)
Karen Kleinwort )
Name )
)
<PAGE>
v
EXHIBIT 23.1
The Board of Directors
Turbodyne Technologies, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-45865 and 333-47663) on Form S-8 of Turbodyne Technologies, Inc.
of our report dated 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, with
respect to the 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 ended
December 31, 1997, which report appears in the Form 20-F of Turbodyne
Technologies, Inc. dated July 14, 1998.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Los Angeles, California
July 14, 1998
<PAGE>
vi
EXHIBIT 23.2
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 Annual Report on Form
20F. We also consent to application of such report to the financial
information in the Annual Report on Form 20F, when such financial information
is read in conjunction with the financial statements referred to in our
report.
Vancouver, Canada
/s/ Morgan & Company
Chartered Accountants
July 10, 1998
