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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-21391
TURBODYNE TECHNOLOGIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4699061
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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6155 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 684-4551
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [X]
At April 10, 2000, there were outstanding 51,149,216 shares of the Common
Stock of the Registrant, and the aggregate market value of the shares held on
that date by non-affiliates of the Registrant, based on the closing price ($2.90
per share) of the Registrant's Common Stock on the Easdaq Market on that date,
was $148,332,726. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and officers of the Registrant were "held
by affiliates." This assumption is not to be deemed to be an admission by such
persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission with respect to its 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report. Such
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the Registrant's fiscal year ended December 31, 1999.
Exhibit index is located on page 28.
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TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.................... 3
PART I
Item 1 Business.................................................... 4
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Consolidated Financial Data........................ 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A. Qualitative and Quantitative Disclosures about Market
Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 27
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 28
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains statements that constitute
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. The words "expect," "estimate," "anticipate," "project," "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, 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. The stockholders of Turbodyne are cautioned not to put undue reliance
on such forward-looking statements. Such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected in this Report for the
reasons, among others, discussed in "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statements and Risk Factors." The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the cautionary
statements and risk factors contained in other documents the Company files from
time to time with the Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
GENERAL
Turbodyne Technologies Inc. (the "Company" or "Turbodyne") is a leading
engineering company in the design and development of charging technology to
enhance the performance of internal combustion engines. The Company's technology
is based upon DC/AC, very high-speed, high-powered, electronically commutated
electric motors in the design and development of which the Company is a leader.
The Company has incorporated its technology (the "Turbodyne Technology") into
its two primary products, the Dynacharger(TM) and the Turbopac(TM) (the
"Turbodyne Products").
During 1999, the Company significantly restructured its operations to focus
its resources on research and development of products using the Turbodyne
Technology. The principal elements of the restructuring are:
- The Company sold the assets of its Light Metals Division, which was
engaged in the manufacturing of precision aluminum cast and machined
products, in a Chapter 11 bankruptcy proceeding. See "Item 1.
Business -- Sale of Light Metals Division."
- The Company closed its offices in London, England; Paris, France; New
York, New York; and Encinitas and Woodland Hills, California and reduced
the number of employees at its headquarters from 101 to 58. See "Item 1.
Business -- Employees," "Item 2. Properties" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
- The Company has made substantial changes in management to emphasize
research and development for the Dynacharger(TM) and the Turbopac(TM)
product lines.
- The Company has sought to settle many of the accumulated lawsuits and
claims against it. See "Item 3. Legal Proceedings."
- In 1999, the Company raised an aggregate of $15,615,000 in capital,
including issuance of stock options to employees and non-employees for
services equal to $4,618,000, to finance the foregoing restructuring of
its operations and continued research and development. See Notes 9 and 10
of Notes to Consolidated Financial Statements.
- The Company shifted its emphasis from aftermarket applications to
automotive original equipment manufacturers ("OEM's") for its
Dynacharger(TM) product line and its Turbopac(TM) product line. See "Item
1. Business -- OEM Strategy."
- The Company entered into joint development and license agreements with
Honeywell Turbocharging Systems, a division of Honeywell International
Inc. (formerly "AlliedSignal, Inc."), a leading manufacturer of
turbochargers ("Honeywell"), under which the Company and Honeywell
jointly will continue the development of the Dynacharger(TM) and
Turbopac(TM) product lines for mass production to the automotive
industry.
- The Company and Honeywell jointly are seeking to establish additional
strategic relationships with OEM's. See "Item 1. Business -- Product
Development."
Under its agreements with Honeywell, the Company assigned to Honeywell its
patent and trademark portfolio (including both the Dynacharger(TM) and the
Turbopac(TM)) for $6,800,000, of which $6.65 million was used in settlement of a
judgment. See "Item 3. Legal Proceedings -- Grand Technologies et al. v.
Turbodyne Technologies et al." In addition, under these agreements, the Company
and Honeywell are sharing the development costs of the Dynacharger(TM) and the
Turbopac(TM), the Company 40% and Honeywell 60%. The Company retains the sole
worldwide rights to manufacture, market and sell all motors, generators,
electronic controllers and light metals for the Dynacharger(TM) and
Turbopac(TM), and Honeywell holds the sole worldwide rights to manufacture,
market and sell the Dynacharger(TM) and Turbopac(TM) product lines. The Company
will receive from Honeywell royalties of 3.7% (subject to adjustment) of the net
sales of the Dynacharger(TM) and Turbopac(TM) product lines. Prototypes of the
Dynacharger(TM) have been delivered to two automotive
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manufacturers in 1999, and three additional automobile manufacturers have signed
agreements for the delivery of prototypes in 2000. Mass production for
automotive manufacturers of the Dynacharger(TM) and Turbopac(TM) product lines
is expected to commence in calendar year 2003. See "Item 1. Business -- Joint
Development Agreement."
The Company believes that its current sources of working capital are
sufficient to satisfy its anticipated working capital requirements only to June
30, 2000. No assurance can be given that additional working capital will be
available on satisfactory terms or at all. Accordingly, there is substantial
doubt about the Company's ability to continue as a going concern. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- There Is Substantial Doubt About Our Ability To Continue As A
Going Concern."
BUSINESS STRATEGY
The Company believes that the following market conditions will continue to
shape the demand for the Company's charging technology for internal combustion
engines:
- Worldwide, turbocharged diesel engines will continue to represent a large
share of the power plants in passenger cars.
- The majority of the diesel engines in passenger cars are in the
displacement range from 1.8 through 3.5 liters. In 1999, approximately 4
million of those engines were built worldwide. All passenger cars
equipped with these engines share the common problem of "turbo lag." That
is, inadequate take-off performance when accelerating from low engine rpm
and power.
- Turbocharged gasoline engines are an advantageous alternative to larger
displacement gasoline engines. Currently, they represent only a very
small share of the power plants in passenger cars (approximately 1% in
1999), partially because of turbo lag. The Company believes that solving
turbo lag will increase the share of turbocharged gasoline engines in
passenger cars.
- The automobile industry is pursuing downsizing of gasoline engines as a
means to improve engine efficiency and vehicle fuel economy. The drop in
engine torque and power associated with smaller engines can be prevented
by charging the downsized engine, which must be accomplished without
turbo lag.
- The passenger car industry appears to be determined to solve turbo lag.
The Company does not know of any practical solution to solve that problem
other than the Company's charging technology as represented in the
Dynacharger(TM) and Turbopac(TM) product lines.
The Company's strategy is to take advantage of these market conditions and
become the principal tier two supplier to the automotive industry for the core
technology that will solve turbo lag and allow downsizing of internal combustion
engines. The key elements of this strategy are:
- The Company has become known to the automotive industry for its expertise
in the field of charging internal combustion engines.
- The automotive industry, to a large extent, has expressed serious
interest in the Company's technology to solve turbo lag. Some automobile
manufacturers are already testing the Company's products and additional
automobile manufacturers have purchased prototypes for testing in the
year 2000.
- The Company will continue its engineering effort to further advance its
technology in order to widen its competitive lead for mass production of
turbo lag solving technology.
- The Company has entered into joint development and licensing agreements
with Honeywell. The Company and Honeywell are developing the
Dynacharger(TM) and Turbopac(TM) product lines for mass production. The
development costs are being shared 60% by Honeywell and 40% by Turbodyne.
- The Company has secured the right to be the sole worldwide supplier of
all motors, generators, electronic controls and light metals for the
Dynacharger(TM) and Turbopac(TM) product lines.
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- The Company will seek to establish the mass production capabilities for
the motors and electronic controls for the Dynacharger(TM) and
Turbopac(TM) product lines.
- The Company and Honeywell jointly will seek to establish additional
strategic relationships with OEM's.
CORPORATE DEVELOPMENT
The Company was incorporated under the laws of British Columbia in 1983 and
was continued under Canadian federal jurisdiction in 1996 and was reincorporated
under the laws of the State of Delaware on July 24, 1998. The Company acquired
its core charging technology from Edward M. Halimi, a director and the former
Chairman of the Board, President and Chief Executive Officer of the Company, on
July 15, 1993, in consideration for 4,250,000 shares of Common Stock, of which
3,250,000 shares are held in escrow pending release upon the Company realizing
certain cash flow targets. To date, no shares have been released from escrow.
TECHNOLOGY
Charging the internal combustion reciprocal cycle engine is the prevailing
means for significantly increasing engine power and torque and has been known
for a long time. Out of all charging methods, turbocharging has evolved as the
preferred technology. This technology uses exhaust gas energy, via a turbine, to
drive a compressor that delivers air and pressurizes the engine intake system.
For many years such turbocharged engines have been used in passenger cars
and light and medium duty trucks. While those vehicles show high peak
performance, they share the problem of inadequate take off performance when
accelerated from low engine rpm and power. This is due to the absence of initial
exhaust gas energy. This phenomenon is commonly known as "turbo lag."
To overcome turbo lag requires the compressor to be driven by energy other
than exhaust gas energy until the engine produces sufficient exhaust gas energy.
The automotive industry has, for several decades, sought a manufacturable
solution to turbo lag. Although the Company knows of no complete solution that
has been offered for or implemented into mass production, the Company is aware
of competition from competing technologies. See "Competition."
The underlying requirement is an auxiliary drive unit with very high power
density capable of (a) rapidly accelerating the compressor of a turbocharger
when there is insufficient exhaust gas energy to do so, or (b) rapidly
accelerating a stand alone compressor that supports the compressor of a
turbocharger when there is insufficient exhaust gas energy to compress the
engine's intake air.
The Company has developed the technology that meets these requirements.
That is, a very high speed, high power, electronically commutated electric
motor, controlled by a very fast, high power DC/AC electronic controller,
generating motor speeds well in excess of 200,000 rpm. Based on this core
technology, the Company developed the Dynacharger(TM) technology and the
Turbopac(TM) technology.
The Dynacharger(TM) technology is accomplished by adding to a turbocharger,
the high speed, high power density electric motor which is mounted between and
co-axially with the turbine. For the Turbopac(TM) technology, the high speed,
high power, electronically commutated electric motor is mounted co-axially with
a compressor. Prototypes of both the Dynacharger(TM) technology and the
Turbopac(TM) technology are being tested by automobile manufacturers as a
solution for turbo lag. Prototypes of the Turbopac(TM) technology are also being
tested by some automobile manufacturers as a stand-alone charger (not in
combination with a turbocharger) for downsized gasoline engines.
PRODUCT DEVELOPMENT
The Company has commenced limited commercial production of selected
Turbopac(TM) models at its facility in Carpinteria, California. See "Item 1.
Business -- Urban Bus Program."
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Commercial production of the Dynacharger(TM) depends on the formation of
strategic relationships with manufacturers of turbochargers. The Company has
entered into joint development and license agreements with Honeywell relating to
the Dynacharger(TM) and the Turbopac(TM). See "Item 1. Business -- Joint
Development Agreement." The Company and Honeywell jointly are pursuing
additional strategic relationships with OEM's to develop the Turbodyne Products
for particular makes and models of vehicles. The Company does not expect
commercial production of the Dynacharger(TM) or Turbopac(TM) for the OEM market
to commence until its current relationship with Honeywell or any such new
relationships result in orders, if ever. No assurance can be given that any new
strategic relationship will be formed, that the Dynacharger(TM) will be produced
or, if produced, that the Dynacharger(TM) will be commercially successful. See
"Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Cautionary Statements and Risk Factors -- The Market
Potential Of Our Products Is Uncertain," "-- We Have No History Of Revenues
Under Our Recent Agreements With Honeywell" and "-- We Have Encountered Delays
And Start-up Costs In Developing Our Products."
The Company's limited production of its products to date has served to meet
the requirements of Detroit Diesel Corporation, limited aftermarket European
passenger car sales and the evaluation of the Company's products by other
potential customers and testing agencies. These evaluations primarily are for
the purpose of allowing potential customers to determine the suitability and
performance of the products for their applications. To date, the Company has had
no significant sales of its products.
The research and development costs incurred during each of the fiscal years
ended December 31, 1999, 1998, and 1997 were $7,585,327, $7,915,000, and
$6,609,000, respectively. The Company anticipates that it will continue to
expend significant amounts in connection with research and development efforts
in order to bring the Turbopac(TM) and the Dynacharger(TM) into full scale
commercial production. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Cautionary Statements and Risk
Factors -- We Have Encountered Delays And Start-up Costs In Developing Our
Products."
URBAN BUS PROGRAM
The Company markets the Turbopac(TM) in the aftermarket. 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 "EPA Urban Bus Program"), the Company's
Turbopac(TM) 2500 model was installed on city buses in Toledo, Ohio, Riverside,
California and Milwaukee, Wisconsin. Following the successful installation of
these Turbopac(TM) products, Milwaukee Transit requested and received from the
United States Environmental Protection Agency (the "EPA") approval to equip ten
additional buses with the Turbopac(TM) 2500 model. In April 1998, the EPA
certified the Detroit Diesel Corporation emission upgrade kit, which includes
the Turbopac(TM) 2500 model, under the Urban Bus Retrofit/Rebuild Program.
Following approval by the EPA, in April 1998, the Company entered into a
five-year sales and marketing agreement with Detroit Diesel Corporation pursuant
to which Detroit Diesel Corporation will exclusively market the Turbopac(TM) as
part of its mechanical engine rebuild kit for the EPA Urban Bus Program. In June
1998, the Company delivered the initial stocking order consisting of 100
Turbopacs(TM) to Detroit Diesel Corporation. To date, the Company has sold 575
Turbopacs(TM) under its program with Detroit Diesel Corporation. Under the terms
of the Company's joint development and license agreements with Honeywell, sales
to Detroit Diesel Corporation will be made by Honeywell.
OEM STRATEGY
In 1999, the Company shifted its emphasis from the aftermarket segment to
automotive OEM's in order to apply the Turbodyne Technology to products that
have a readily identifiable market as forecasted by the automotive OEM's. This
OEM strategy is anticipated to provide the economies of scale necessary to
obtain volume purchasing and manufacture of electric motors, light metals and
electronic components, thereby, achieving lower per unit cost.
The Company anticipates that an OEM strategy will provide the Company with
channels of distribution for its current as well as future products that are not
available in the aftermarket.
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JOINT DEVELOPMENT AGREEMENT
Turbodyne has entered into joint development, licensing and intellectual
property and product rights agreements (the "Joint Agreement"), with Honeywell
Turbocharging Systems, a division of Honeywell International Inc. (formally,
"AlliedSignal, Inc.") ("Honeywell"). Under the terms of the Joint Agreement,
Turbodyne assigned its patent and trademark portfolios (including both the
Dynacharger(TM) and the Turbopac(TM)) to Honeywell for $6.8 million, of which
$6.65 million was used in settlement of a judgment. See "Item 3. Legal
Proceedings -- Grand Technologies et al. v. Turbodyne Technologies et al." In
addition, Honeywell has licensed to Turbodyne all intellectual property and
trade secrets required for the manufacture of the electric motors, generators,
electronic controllers and light metals for the Dynacharger(TM) and the
Turbopac(TM). Turbodyne's license further includes the right to manufacture and
sell electrical motor assistance systems for Cummins BHT turbochargers in the
aftermarket if Honeywell should decide not to do so.
Under the Joint Development Agreement, Honeywell and Turbodyne will engage
in a concerted effort for the research, development and engineering for mass
production of the Dynacharger(TM) and other electrically assisted charged air
systems. Turbodyne will provide 40% and Honeywell will provide 60% of the
material and personnel required for such research and development efforts.
Honeywell will pay Turbodyne royalties of 3.7% on each unit sold pursuant to the
Joint Agreement. However, if Turbodyne fails to maintain its 40% share of the
costs under the Joint Agreement, such royalty rate will be adjusted by a ratio
of an actual percentage share of investment divided by 40% then multiplied by
3.2% to which a 0.5% base royalty will be added. Any new technology resulting
from such research and development efforts will be jointly owned by Turbodyne
and Honeywell.
As part of the Joint Agreement, Honeywell will obtain a production or
advanced development commitment for the Dynacharger(TM) from a third party
customer by July 1, 2001, or a non-exclusive license will be granted back to
Turbodyne for the rights to market and sell the products. If Honeywell does not
obtain a production or advanced development commitment from a third party
customer by January 1, 2002, Honeywell will grant Turbodyne a non-exclusive
license with the right to sublicense for Turbodyne's continued development and
sale of both Dynacharger(TM) and Turbopac(TM) products and Turbodyne's royalty
rate will be reduced by 0.5%. Honeywell has committed to pursue aftermarket and
OEM customers and obtain supply commitments for the Turbopac(TM) by January 1,
2002. If Honeywell fails to obtain such commitments by January 1, 2003,
Turbodyne shall be granted an exclusive license to pursue sales of the
Turbopac(TM) and Turbodyne's royalty will increase to 4.7% of net profits for
Dynacharger(TM) products. Turbodyne would, under that scenario, pay Honeywell a
royalty of 2% of net profits on sales of the Turbopac(TM) by Turbodyne. Any
products developed under the Joint Agreement are anticipated to be sold
primarily to automobile, heavy duty vehicle and engine manufacturers.
Under the Joint Agreement, Honeywell has the exclusive worldwide right to
develop, manufacture, market and sell any electrically assisted turbochargers
and turbochargers employing an electric motor or generator for power assistance
and takeoff or any improvement developed under the Joint Agreement.
Additionally, Honeywell has the exclusive worldwide right to license, make, have
made, use and sell any products incorporating such technology. Under the Joint
Agreement, Turbodyne has the exclusive worldwide right to manufacture, market
and sell all light metal castings, electric motors, generators and electronic
controllers of any products developed under the Joint Agreement. Activities
under the Joint Agreement are governed by a committee of five members,
consisting of a chairperson appointed by Honeywell, and two members appointed by
each of Turbodyne and Honeywell.
There can be no assurances that any products will be developed under the
Joint Agreement, that Turbodyne will be able to maintain its share of
development costs or that any product developed under the Joint Agreement will
be commercially successful. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Cautionary Statements and Risk
Factors -- Joint Development Agreement."
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COMPETITION
The Company does not believe that there are any products directly
competitive to the Company's products. However, competition to the Company's
technology exists from competing technologies marketed by companies, many of
which have greater resources than the Company. In addition, there is no
assurance that new competitors will not attempt to enter the industry.
The Company expects competition for the Turbopac(TM) products from
improvements and refinements to conventional internal combustion engines which
may result in increased power and fuel efficiency. 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. The Company also
expects competition for the Dynacharger(TM) products from improvements and
refinements to existing turbocharger technology which may be less expensive than
turbochargers incorporating the Dynacharger(TM) products. In addition, OEM's and
consumers may be more willing to accept improvements and refinements to existing
technology than a new technology.
Both the Turbopac(TM) and Dynacharger(TM) products may realize competition
from existing products manufactured by OEMs who do not incorporate Turbodyne's
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's products into its product lines
could pose a significant barrier to entry to the Company. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cautionary Statements and Risk Factors -- Intense Competition."
NASDAQ AND EASDAQ REGULATION
On March 1, 1999, the Easdaq Market Authority held a hearing to consider
disciplinary action against Turbodyne for, among other things, allegedly issuing
a number of press releases which contained false or misleading price sensitive
information to the market. Following discussions with the Company's
representatives, the Easdaq Market Authority concluded that the Company's press
releases were not intentionally misleading, but nevertheless gave an
overly-optimistic impression of the Company's prospects. Pursuant to the
direction of the Market Authority, the Company issued an announcement relating
to certain business relationships on March 3, 1999.
On March 11, 1999, Turbodyne attended a hearing with the NASD in connection
with its initiation of proceedings relating to a possible delisting of the
Company's common stock. On April 1, 1999, the Company was informed that the
Nasdaq Listing Qualifications Panel determined to delist the Company's
securities from The Nasdaq Stock Market effective with the close of business
that day.
The Company currently maintains a Disclosure Committee which consists of
Irving M. Einhorn, James L. Sanders and John M. Fedders. Mr. Fedders is a former
Director of Enforcement at the SEC. Mr. Einhorn has served, among other
positions, as Branch Chief, Enforcement of the SEC's Chicago regional office
and, later, as Regional Administrator at the SEC's Los Angeles office. Mr.
Sanders is a former Regional Administrator of the SEC's Los Angeles regional
office. The Disclosure Committee is responsible for reviewing and approving each
of the Company's press releases.
GOVERNMENT REGULATION
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 Detroit Diesel Corporation's
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 Turbodyne's
products currently do not satisfy, in which event, the Company may be required
to expend significant resources to develop and incorporate the technology
necessary to meet the increased 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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Cautionary
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Statements and Risk Factors -- We Have Encountered Delays And Start-up Costs In
Developing Our Products."
In March 1999, the Company received an executive order from CARB for a
universal exemption of the Turbopac(TM) 2500 for heavy-duty diesel vehicles that
are equipped with mechanical unit fuel injection and no electronic injection
timing or electronic throttle delay. The CARB executive order enables Turbodyne
to advertise, market and install the Turbopac(TM) 2500 on vehicles equipped with
engines covered by the CARB executive order. The CARB executive order does not
constitute a certification, accreditation, approval or any other type of
endorsement by CARB of any claims of Turbodyne concerning antipollution benefits
or any other benefits of the Turbopac(TM) 2500.
PROPRIETARY PROTECTION OF PRODUCTS
As of December 17, 1999, the Company has assigned the intellectual property
and product rights for the patent and trademark portfolio of the Dynacharger(TM)
and the Turbopac(TM) to Honeywell. This agreement covered the TURBOPAC,
TURBOFLOW and DYNACHARGER trademarks, and the 18 patents owned and the 14 patent
applications pending with the U.S. Patent Office. These trademarks, patents and
patent applications encompass the construction of the Turbopac(TM) and
Dynacharger(TM) products.
Turbodyne requires all employees, consultants and persons or companies
involved in the testing of Turbodyne's products to execute confidentiality
agreements and to agree to keep confidential all proprietary information with
respect to Turbodyne's products.
SALE OF LIGHT METALS DIVISION
In July 1996, the Company acquired Pacific Baja Holding, Inc., a
manufacturer of aluminum cast products primarily for the automotive industry. In
1999, 1998 and 1997, Pacific Baja Holdings, Inc. and its subsidiaries
(collectively, "Pacific Baja") accounted for 96.6%, 98.2% and 100% of the
Company's revenues.
In September 1999, Pacific Baja commenced Chapter 11 bankruptcy proceedings
in the United States Bankruptcy Court for the Central District of California. On
December 14, 1999, the Bankruptcy Court entered an order authorizing the sale of
substantially all of the assets of Pacific Baja to an assignee of Hawthorne
Partners (the "Buyer") for a combination of cash and other consideration
totaling approximately $14.4 million. The purchase price included the assumption
of certain liabilities of Pacific Baja and a cash payment to Wells Fargo Bank,
which had a financing agreement with Pacific Baja. Wells Fargo Bank received
$7.9 million towards monies that it was owed and waived approximately $900,000
of its claim. The amount waived was applied to the monies available for the
unsecured creditors of Pacific Baja. In addition, one supplier of Pacific Baja
waived a $1.2 million claim for post-petition raw material advances.
Pacific Baja and the Company, to the extent it was a guarantor, are
responsible for all amounts then due under leases, other than those which were
assumed by the Buyer. All equipment leases of Pacific Baja which the Company
guaranteed have been assumed by the Buyer, except for one. The Company believes
that the obligation of Pacific Baja and the Company, as guarantor, will not
exceed $40,000 under the equipment lease rejected by the Buyer. In addition, one
real estate lease was rejected by the Buyer and retained by Pacific Baja. As a
guarantor on this real estate lease the Company is responsible for lease
payments of approximately $19,500.00 per month until May 31, 2009. The Company
is attempting to reduce these ongoing lease obligations by seeking a sublessee.
EMPLOYEES
At December 31, 1999, the Company has approximately 58 full-time employees,
including 16 administrative employees, eight manufacturing employees, 27
employees in research and development and seven support employees. The Company
considers its relations with its employees to be good.
10
<PAGE> 11
ITEM 2. PROPERTIES
Until November 1999, the principal United States corporate offices of the
Company were located in leased premises consisting of approximately 5,400 square
feet at 21700 Oxnard Street, Suite 1550, Woodland Hills, California 91367. The
term of the lease expires on August 31, 2002. The Company's monthly rent for the
first two and one half years of the lease term is approximately $10,000 and
increases to approximately $11,000 for the duration of the lease term. The
Company relocated the corporate office to its engineering, production and
assembly facilities in Carpinteria, California on November 18, 1999. The Company
is actively pursuing a buyout on a portion of this space and a sublet agreement
on the remaining portion of the space on the corporate offices in Woodland
Hills.
The principal United States corporate office of the Company and its
production and assembly facilities are located in leased premises at 6155
Carpinteria Avenue, California 93013. The facilities are approximately 28,000
square feet on 3.17 acres of land and are subleased on a month to month basis
from American Appliance Inc., a private company controlled by Mr. Halimi. The
term of the lease between American Appliance Inc. and its landlord expires on
January 30, 2005. The Company's monthly rent is $28,224 plus operating costs,
including taxes, insurance and utilities.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION LAWSUITS. In January through March of 1999, six purported
class action complaints were filed against the Company and certain of its
officers and directors in the United States District Court for the Central
District of California, as follows:
<TABLE>
<CAPTION>
ABBREVIATED CASE NAME CASE NO. DATE FILED
--------------------- --------------- ----------
<S> <C> <C>
Takeda, et al. v. Turbodyne Technologies, et al. ........... CV-99-00697-MMM 01/22/99
Zaks, et al. v. Turbodyne Technologies, et al. ............. CV-99-00743-MMM 01/25/99
Lincscott, et al. v. Turbodyne Technologies, et al. ........ CV-99-00933-MMM 01/28/99
Siebert, et al. v. Turbodyne Technologies, et al. .......... CV-99-01288-MMM 02/08/99
Gentile, et al. v. Turbodyne Technologies, et al. .......... CV-99-02194-MMM 03/01/99
Giammarco, et al. v. Turbodyne Technologies, et al. ........ CV-99-02751-MMM 03/16/99
</TABLE>
On June 4, 1999, the court entered an order consolidating these six actions
for all purposes under the caption In Re Turbodyne Technologies, Inc. Securities
Litigation, Master File No. CV-99-00697-MMM (BQRx) (the "Consolidated Action").
By the same order, the court appointed the "Kadner-7 Group," comprised of Ralf
Kadner, Gordon Williamson & Associates, Louis T. Inglehart, Ronald Shoen,
Gunther Wrieden, Combined Atlantic Carriers and Dennis Jones, as Lead Plaintiffs
pursuant to the provision of the Private Securities Litigation Reform Act of
1995, 15 U.S.C. sec. 78u-4(a)(3)(B), and approved the Lead Plaintiffs' selection
of lead counsel for the plaintiffs in the Consolidated Action.
On August 9, 1999, the plaintiffs filed their consolidated class action
complaint, which is now the operative complaint in the Consolidated Action. The
Consolidated Action purports to be brought on behalf of individuals claiming to
have purchased Common Stock of the Company during the time period from March 1,
1997 through January 22, 1999. Plaintiffs seek unspecified damages arising from
alleged misstatements concerning such matters as the technological capability
and actual and potential sales of the Company's Turbopac(TM) product, and the
demand for and market acceptance of the Turbopac(TM) and other Company products.
Plaintiffs allege that these alleged misstatements caused the Company's stock
price to be "artificially inflated" during the purported class period.
The Company has tendered these actions to its insurance carriers who have
appointed counsel to represent the Company and the other defendants in these
actions. The Company has filed a motion to dismiss which was granted by the
court without prejudice. Since this action is in the very early stages of
litigation, the Company is unable to assess the likelihood of an adverse result,
and there can be no assurances as to the outcome of the action.
11
<PAGE> 12
GRAND TECHNOLOGIES ET AL. V. TURBODYNE TECHNOLOGIES ET AL. On March 3,
1999, in the matter of the binding arbitration between Grand Technologies Inc.
and the Company arising out of the exclusive distributorship agreement entered
into between the Company and Grand Technologies in June 1996, an arbitrator
determined that the Company was liable to Grand Technologies for damages in the
amount of approximately $6.65 million as a result of negligent
misrepresentation, breach of contract and attorneys' fees and costs, which were
set by the arbitrator at the sum of $182,000 in a supplemental arbitration award
dated April 12, 1999. On April 13, 1999, the Los Angeles Superior Court entered
an order confirming the arbitrator's March 3, 1999 award, and on May 12, 1999
the Los Angeles Superior Court entered an order confirming the arbitrator's
April 12, 1999 supplemental award. On June 4, 1999, judgment was entered against
the Company based on these orders confirming the arbitration award and
supplemental arbitration award in the total sum, including costs, of $6,941,000.
On July 26, 1999, the Company filed a Notice of Appeal from the June 4, 1999
judgment. In December 1999 the Company paid both the above arbitration awards.
In March 2000, the Company reached a global settlement with Grand Technologies
settling all outstanding disputes and the Appeal have been dismissed. In such
settlement, the Company granted Grand Technologies a warrant to purchase 300,000
shares of Common Stock at $2.53 per share, exercisable on or before October 8,
2003.
TURBODYNE V. LLOYD'S OF LONDON. On May 3, 1999, the Company filed an action
in the Superior Court of the State of California for the County of Los Angeles
(Case No. BC209688) against certain Underwriters at Lloyd's of London
("Lloyd's") claiming breach of contract, breach of implied covenant of good
faith and fair dealing, promissory misrepresentation and estoppel in connection
with Lloyd's denial of coverage under the Company's Directors and Officers and
Company Reimbursement Indemnity Insurance Policy for the Grand Technologies
matter. The defendants filed a demurrer to the Company's complaint, or
alternatively, a motion to strike certain allegations. The court denied
defendant's demurrer, but granted the motion to strike the Company's allegations
regarding the lost opportunity to settle the underlying action. Thereafter, the
Company filed a writ of mandate to the court of appeal, seeking the
reinstatement of these allegations in the complaint. In December 1999, the
Company settled this action pursuant to which Lloyd's made a $1.5 million
payment to the Company in January 2000.
JOHN P. SINGLETON V. TURBODYNE TECHNOLOGIES, INC. ET AL. On December 23,
1998, John P. Singleton filed an action against the Company and certain of its
officers and directors in the Superior Court of the State of California for the
County of Los Angeles Northwest District (Case No. LC047346) which alleges
claims for tortuous constructive discharge in violation of public policy, breach
of express contract of continued employment, breach of implied covenant of good
faith and fair dealing, various torts involving intentional and negligent
misrepresentations, breach of contract and specific performance. Mr. Singleton
alleges, among other matters, that he entered an oral contract with the Company
to serve as its Chief Financial Officer and later also as its Chief Operating
Officer and that defendants created intolerable working conditions which forced
Mr. Singleton to resign. Mr. Singleton seeks damages in excess of $25,000,000,
punitive damages, reasonable attorneys' fees, costs of the lawsuit and such
other and further relief as the court deems proper. The Company answered the
complaint, has denied all of the claims and has asserted affirmative defenses.
This case is in the discovery process. The Company has tendered this complaint
to its insurance carriers who have appointed counsel to represent the Company
and the other defendants in this matter. As of March 31, 2000, the Company
reached settlement with Mr. Singleton in the amount of $35,000, which amount was
paid by the Company's insurance carrier.
TURBODYNE V. ASENSIO. On December 16, 1998, the Company filed suit against
Manuel P. Asensio & Company, in the Los Angeles Superior Court, Case No. BC
202422, requesting damages in an amount not less than $10 million, according to
proof. The Company sued Asensio for defamation, disparagement, intentional
interference with economic relationship, fraud and unfair competition. As of
March 31, 2000, the Company reached a settlement with Mr. Asensio.
CW CALCATERRA V. TURBODYNE AND A RELATED SUIT TURBODYNE V. CW
CALCATERRA. In February 1997, Mr. Halimi, a director and a former executive of
the Company, sublet certain premises with a remaining eighteen-month term and
two five-year options. In January 1998, such sublease was assigned to the
Company. In 1998, several related actions were filed with regard to such lease
in Santa Barbara Superior Court (Case
12
<PAGE> 13
No. SB224666) for unlawful detainer and declaratory relief. The parties, lessor,
sublessor and sublessees, reached a tentative settlement agreement at a
mediation in September 1999. By December 1999, the settlement agreement was
being reduced to writing by the parties' attorneys. The settlement agreement
calls for a universal settlement of all disputes between the parties and payment
by Turbodyne of $200,000.00 to the plaintiffs. As of December 1999, Turbodyne
had paid $50,000 of the entire settlement amount to the plaintiffs.
BARNES-CURCI V. TURBODYNE. On October 19, 1999, Turbodyne received a demand
for arbitration from Barnes-Dyer (now Curci) Marketing, pursuant to contractual
requirements, regarding Turbodyne's alleged breach of a marketing contract. The
parties are expected to enter arbitration in May 2000.
SEC INVESTIGATION. In June 1999, the Company received a formal request for
production of documents from the Securities and Exchange Commission (the "SEC").
The SEC indicated that its inquiry should not be construed as an indication by
the SEC or its staff that any violations of law have occurred, nor should it be
construed as an adverse reflection on the merits of the Company's securities or
any person or entity. The Company has cooperated fully and intends to continue
to fully cooperate with any additional requests of the SEC.
BANKRUPTCY OF PACIFIC BAJA. On September 30, 1999, Pacific Baja filed
Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court, Central
District of California, Case No. RS99-26477MG in Riverside, California. For a
description of this matter, see "Item 1. Business -- Sale of Light Metals
Division."
POLLUTION RESEARCH & CONTROL CORP. ET AL. V. TURBODYNE TECHNOLOGIES. On
October 2, 1998, Pollution Research & Control Corporation, Dasibi Environmental
Corporation and Logan Medical Devices filed an action against the Company in the
Superior Court of the State of California for the County of Los Angeles alleging
claims in connection with an alleged agreement between plaintiffs and the
Company pursuant to which the Company was to acquire all of the issued and
outstanding stock of Dasibi and Logan in exchange for $6.5 million. Plaintiffs
also allege that the agreement calls for the Company to loan plaintiffs the sum
of $1.1 million. The plaintiffs seek compensatory damages and punitive damages
in an unspecific amount, but in excess of $2 million. The Company filed a
cross-complaint against the plaintiffs for breach of a written promissory note
in the amount of $100,000, seeking recovery of sums lent to plaintiffs. On June
3, 1999, the Company entered into a settlement agreement with plaintiffs, each
party dismissing their action against the other for the mutual release of all
claims and payment to the Company of $106,500 on or before June 10, 1999. On
June 17, 1999, both actions were dismissed with prejudice.
LEIGH WALKER-PENA, AS TRUSTEE OF THE TATTIANA TRUST, AND GLORIA WALKER V.
VINCENT SCALICE AND TURBODYNE TECNOLOGIES ET AL. The Company is a party to an
action filed in December 1997 in the Santa Barbara Superior Court by Leigh
Walker-Pena. The complaint alleged that officers and directors of the Company
told the plaintiffs that the Company's stock was going to be listed on Nasdaq
and that the price of the stock would increase substantially, and that these
statements were false and misleading and constituted intentional or negligent
misrepresentations. In July 1999, this case was settled by the Company's payment
of $10,000 and grant of options to purchase 25,000 shares of Common Stock.
GLOBA V. TURBODYNE. An action was filed against the Company in the Superior
Court of the State of California for the County of Santa Barbara alleging breach
of employment contract and fraud. Plaintiff sought lost wages, options to
purchase 100,000 shares of Common Stock and other benefits of his employment. In
May 1999, this matter was settled and subsequently dismissed for the Company's
payment of $30,000. Payment of this settlement was made by the Company's
insurance carrier.
JAMISON CAPITAL, INC. V. TURBODYNE AND PACIFIC BAJA. The Company is party
to an action filed on January 21, 2000, in the Superior Court of New Jersey, Law
Division Camden County (Case No. L-00307-00). This action is an alleged suit for
money damages for professional services rendered to Turbodyne, with an alleged
guarantee by Pacific Baja. The complaint requests damages of $115,000 plus
interest and costs of suit, and any other relief the Court deems appropriate.
The Company has caused this complaint to be removed to federal court and has
filed an answer.
13
<PAGE> 14
TST, INC. V. TURBODYNE. On March 31, 2000, TST, Inc. filed an action
against the Company in San Bernardino Superior Court. Such action alleges that
in order to induce TST, Inc. to extend credit to a subsidiary of Pacific Baja,
the Company executed guarantees in favor of TST, Inc. TST, Inc. alleges such
subsidiary has defaulted on the credit facility and that the Company, as
guarantor, is liable. The complaint seeks damages in an amount in excess of $1.5
million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ LISTING
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's Common Stock (symbol: TRBD) on the Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------ -----
<S> <C> <C>
1999
First Quarter (January 1, 1999 to January 20, 1999)....... $ 5.84 $4.40
1998
Fourth Quarter............................................ $ 5.81 $4.09
Third Quarter............................................. 17.00 3.25
Second Quarter............................................ 10.81 3.75
First Quarter............................................. 4.47 2.03
</TABLE>
Effective as of January 20, 1999, the Common Stock ceased to be traded on
the Nasdaq SmallCap Market. Effective as of April 1, 1999, the Common Stock was
delisted from the Nasdaq SmallCap Market. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Cautionary
Statements and Risk Factors -- Our Common Stock was delisted from The Nasdaq
SmallCap Market."
EASDAQ LISTING
The following table sets forth for the periods indicated the high and low
closing sales prices of the Company's Common Stock (symbol: TRBD) on the Easdaq
Market.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------ -----
<S> <C> <C>
2000
First Quarter............................................. $ 4.90 $2.48
1999
Fourth Quarter............................................ $ 2.55 $1.13
Third Quarter............................................. 3.00 1.51
Second Quarter............................................ 2.59 1.18
First Quarter............................................. 5.60 3.33
1998
Fourth Quarter............................................ $ 5.83 $4.05
Third Quarter............................................. 16.35 3.33
Second Quarter............................................ 10.58 4.10
First Quarter............................................. 4.58 2.10
</TABLE>
As of April 10, 2000, the outstanding Common Stock was held of record by
183 stockholders.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Therefore, it
should not be expected that any dividends will be declared on the Common Stock
in the foreseeable future. Any dividend payment will be at the discretion of the
Company's Board of Directors and will be dependent upon the Company's earnings,
operating and financial condition and capital requirements, as well as general
business conditions.
15
<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data for the Company for the years ended
December 31, 1999, 1998 and 1997 and the balance sheet data for the Company at
December 31, 1999 and 1998 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, 1995 and 1994 and the balance sheet data for the Company at
December 31, 1997, 1996 and 1995 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, the information
contained under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Report.
The Company's financial statements for the fiscal years ended December 31,
1999, 1998 and 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 have been prepared in accordance
with CDN GAAP and are stated in Canadian dollars.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Sales............................ $ 50,218 $ 40,858 $ 39,165 $ 13,944 --
Gross Profit..................... 3,788 5,033 6,839 1,843 --
Net Loss......................... (35,989) (30,033) (13,185) (5,563) (2,603)
Net Loss per Common Share........ (.88) (.88) (.58) (.33) (.46)
BALANCE SHEET DATA
Working Capital (Deficit)........ $ 350,811 $ 4,185 $ 8,205 $ 7,026 CDN $ 83
Total Assets..................... 6,764 55,046 49,726 39,441 5,202
Long Term Liabilities............ 48 13,079 10,022 5,265 483
Total Liabilities................ 4,649 29,097 18,883 11,727 966
Shareholders Equity.............. 2,115 25,949 30,843 27,714 4,236
Number of Shares Outstanding..... 51,044,816 41,313,816 29,961,612 23,580,098 16,542,121
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company designs, develops and manufactures charging technology for
internal combustion engines. In addition, the Company has designed and developed
high speed, high powered, DC/AC, electronically commutated electric motors which
is the core of the Company's charging technology (the "Turbodyne Technology").
The Company has incorporated the Turbodyne Technology into its two primary
products, the Turbopac(TM) and the Dynacharger(TM) (collectively, the "Turbodyne
Products").
In 1999, the Company shifted its emphasis from aftermarket to automotive
original equipment manufacturers ("OEM's"). As such, the Company entered into
joint development, license and intellectual property and product rights
agreements with Honeywell Turbocharging Systems, a division of Honeywell
International, Inc. (formerly, "Allied Signal, Inc."), a leading manufacturer of
turbochargers ("Honeywell"), under which the Company assigned to Honeywell its
patent and trademark portfolios (including both the Dynacharger(TM) and the
Turbopac(TM)) for $6.8 million. This amount was used in settlement of a
judgment. See "Item 3. Legal Proceedings -- Grand Technologies et al. v.
Turbodyne Technologies et al." In addition, under these agreements, the Company
and Honeywell are sharing the development costs of the Dynacharger(TM) and
16
<PAGE> 17
the Turbopac(TM), the Company 40% and Honeywell 60%. The Company retains the
sole worldwide rights to manufacture, market and sell all motors, generators,
electronic controls and light metals for the Dynacharger(TM) and Turbopac(TM),
and Honeywell holds the sole worldwide rights to manufacture, market and sell
the Dynacharger(TM) and Turbopac(TM) product lines. The Company will receive
from Honeywell royalties of 3.7% of the net sales of the Dynacharger(TM) and
Turbopac(TM) product lines. Prototypes of the Dynacharger(TM) have been
delivered to two automotive manufacturers in 1999, and three additional
automobile manufacturers have signed agreements for the delivery of prototypes
in 2000. Mass production for automotive manufacturers of the Dynacharger(TM) and
Turbopac(TM) product lines is expected to commence in calendar year 2003. See
"Item 1. Business -- Joint Development Agreement."
The Company undertook low volume production and limited sales of the
Turbopac(TM) 2500 model in 1999 pursuant to its contract with Detroit Diesel
Corporation, a major global diesel engine producer. The contract with Detroit
Diesel Corporation is the main source of sales of the Turbodyne Products. Under
the Company's joint development agreement with Honeywell, sales to Detroit
Diesel Corporation will be made by Honeywell. At December 31, 1999, the Company
had expended an aggregate of $28,634,327 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 financing and funds
generated through the Company's Light Metal Division. See "Item 1.
Business -- Product Development."
In September 1999, the Company sold substantially all of the assets of
Pacific Baja pursuant to an order of the U.S. Bankruptcy Court. Pacific Baja
accounted for substantially all of the Company's sales revenue on a consolidated
basis for the nine months ended September 30, 1999. The Company is liable as a
guarantor on certain leases assumed or rejected by the buyer. The Company
currently is not able to determine the amount of this liability. See "Item 1.
Business -- Sale of Light Metals Division."
The Company did not realize the anticipated favorable effects on its profit
margins of the modernization and relocation of Pacific Baja's facilities. The
result was an increase in the cost of goods sold. In addition, the costs
associated with the relocation were higher then anticipated. The resulting net
losses resulted in limited cash flows and delinquency in payments to suppliers.
The Company has reported net losses in each year since it began operations.
The Company does not have substantial cash on hand. If financing transactions
are not completed timely, the Company's research and product development efforts
may be substantially delayed or eliminated and its business and results of
operations will be materially adversely affected. In previous years, the Company
has relied on the cash flows generated by the Light Metals Division to help
support the research and development efforts of the Company. The Company is now
solely dependent on its ability to raise funds for its working capital and
research and development through financings.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
SALES. Sales for the year ended December 31, 1999 increased to $50,218,161
from $40,858,000 for the year ended December 31, 1998, an increase of $9,360,161
or 22.9%.
Sales in these periods were primarily attributable to the Light Metals
Division. The increase in sales is primarily attributable to an increase in the
automotive components segment of the Light Metals Division and the commencement
of sales of the Turbodyne Products. For the year ended December 31, 1999 and
1998, sales attributable to the Light Metals Division accounted for $48,503,000
and $40,135,000, respectively, and sales attributable to the Turbodyne Products
accounted for $1,715,161 and $723,000, respectively.
The Light Metals Division's strategy of aggressively pursuing the growing
global OEM demand for precision cast aluminum components and assemblies for
engine and vehicle application proved successful, providing an increase in sales
for fiscal 1999. Aftermarket wheel sales declined slightly during this period
compared to 1998 as a result of the OEM's providing more custom wheels on
production cars.
17
<PAGE> 18
For fiscal 1999, aftermarket wheel product sales represented 28.4% of the
Light Metals Division's total sales, a decrease of $98,000, or less than one
percent, from fiscal 1998. For fiscal 1999, the engine and vehicle component
sales represented 72% of the Light Metals Division's total sales, an increase of
$8,466,000, or 32%, from fiscal 1998.
As a result of the disposition of the Light Metals Division, the Company
will no longer recognize revenues from this segment of the business. The
Company's sole source of revenue will be from sales of the Turbopac(TM) 2500 to
Detroit Diesel Corporation. The marketing and sale of the Turbopac(TM) 2500 is
expected to be assumed by Honeywell as part of its agreement with the Company.
COST OF GOODS SOLD. Cost of goods sold consists primarily of material and
labor costs attributable to the Light Metals Division. Cost of goods sold in
fiscal 1999 increased to $46,430,198 from $35,825,000 in fiscal 1997, an
increase of $10,605,198, or 29.6%. Cost of goods sold as a percentage of net
sales for fiscal 1999 increased to 92.5% from 87.7% for fiscal 1998. The
increase in cost of goods sold as a percentage of net sales in fiscal 1999 is
primarily attributable to increased manufacturing costs being realized as a
result of the relocation, consolidation and modernization of all wheel
production and the majority of the automotive engine components foundry and
machine shop operations. These costs include, among others, the reduction in
productivity as a result of relocation, inadequate inventory control and
inefficient production processes resulting in an increase of scrap metal
production, as well as extraordinary costs to ensure that orders received during
the relocation process were timely met.
In fiscal 1999 and 1998, the Light Metals Division incurred costs and
expenses in excess of management's projections and experienced delays
attributable to the final phase of relocation, consolidation and modernization
of all existing aluminum foundry and machining operations. These costs include
costs associated with the relocation of machinery and equipment, higher than
anticipated cost of hiring and training of new employees, overtime premiums and
transportation premiums incurred to meet increased demand in the automotive
components business and lower than expected production efficiencies at the new
facility. All of these costs were expensed as incurred.
During the third and fourth quarter of 1999, the Company did not realize
the anticipated favorable effects of the modernization and relocation on its
profit margins. The result was an increase in cost of goods sold In addition,
the costs associated with the relocation were higher than anticipated.
The Company experienced an acceleration of orders in the automotive engine
components division in fiscal 1998 due in part to its increased marketing
efforts associated with this division. These orders were received by the Company
prior to the relocation of its automotive components manufacturing operations
and, therefore, the Company incurred extraordinary costs to ensure the customer
orders were timely met. In 1999, although orders in the automotive engine
components division continued to increase, increased costs involved in the
relocation adversely affected profit margins.
GROSS PROFIT. Gross profit for fiscal 1999 decreased to $3,787,963, or
7.54% of sales, compared to $5,033,000, or 12.32% of sales, for fiscal 1998, a
decrease of $1,245,037 or 24.7%. Gross profit for these years was primarily
attributable to the Light Metals Division.
The reduction in gross profit for fiscal 1999 primarily is attributable to
two factors: the extraordinary costs associated with the relocation,
consolidation and modernization of the Light Metals Division and the shift in
product mix from aftermarket wheel sales with higher gross margins to engine
component sales with lower gross margins, all as discussed in more detail above.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1999 decreased to $12,170,524 from
$15,026,000 for fiscal 1998, a decrease of $2,855,746, or 19.0%. Selling,
general and administrative expenses as a percentage of sales decreased to 24.2%
from 36.8% for the comparable fiscal year periods. These changes are primarily
attributable to a reduction in the administrative and support staff of the Light
Metals Division. In addition, the Company reduced its staff by 42.6% in 1999.
The expenses associated with the Company's marketing efforts have been greatly
reduced.
18
<PAGE> 19
RESEARCH AND DEVELOPMENT. Research and development costs for fiscal 1999
decreased to $7,585,327 from $7,915,000 for fiscal 1998, a decrease of $329,673,
or 4.1%. The decrease was primarily attributable to Honeywell's participation in
the development costs of the Dynacharger(TM) product, and recovery of a portion
of the costs associated in developing prototypes for OEM's. In addition,
development costs associated with the development of the Turbopac 2500 have been
reduced. Furthermore, research and development costs will be attributable to
specific programs contracted with automotive manufacturers or products, or next
generation products. Based on the Company's historical expenditures related to
research and development and its current development goals, the Company
anticipates that, for the foreseeable future, research and development expenses
will continue to be significant.
COMPENSATION EXPENSE. During fiscal 1999, the Company granted options to
purchase 380,000 shares of Common Stock to consultants for various services
rendered associated with marketing, legal and related matters that the Company
deemed essential to its operations at prices ranging from $1.91 to $4.50. As a
result, the Company recognized $1,043,310 of compensation expense in fiscal
1999. The Company from time to time, may grant a significant number of options
to non-employees in subsequent periods. In addition, the Company had $3,574,405
in options granted to employees and non-employees. Compensation cost has been
recognized in accordance with APB Opinion 25.
OTHER INCOME AND EXPENSES. Other income and expense consists of interest
expense on bank operating lines of credit and equipment finance contracts and
interest income on cash. Interest expense for fiscal 1999 increased $738,529, or
92.3%, from fiscal 1998. The increase was attributable to an increase in
interest expense due to a decrease in the Company's average daily cash position,
additional borrowings, bank fees and expenses as a result of being in default of
the Company's credit facility and financing for property and equipment
purchases. On December 20, 1999, the Company assigned its intellectual property
rights and rights to manufacture, market and sell Turbodyne Products to
Honeywell, who in turn paid $6.8 million, $6.5 million of which was used to pay
an outstanding arbitration award of $6.65 million issued on March 3, 1999.
$5,996,789 is recognized as extraordinary one time income as gain on sale of
patents. In addition, the award of $6.65 million is offset by $1.5 million
awarded from an insurance carrier.
NET LOSS. Net loss for fiscal 1999 was $35,988,896, an increase of
$5,955,896 compared to the prior period. Of the increase in net loss for fiscal
1999, a substantial portion was on a nonrecurring basis, consisting of (i)
$7,551,531 paid in settlement of the March 3, 1999 arbitration award of $6.65
million and for contingent liabilities associated with certain legal actions
pending against the Company, (ii) $702,400 which is a reversal of an accrued tax
for a Pacific Baja IRS audit which was submitted to the Bankruptcy Court and
(iii) $1,043,310 of non-cash non-employee compensation expenses largely
attributable to consultants retained by the Company to assist it in connection
with marketing, legal, investor relations and related matters. In addition, a
significant portion of the increase in net loss is directly related to the
reorganization, modernization and relocation of the Light Metals Division, which
as of March 31, 1999 was substantially complete. For fiscal 1999, the Light
Metals Division reported a net loss from operations of $6,594,000. For fiscal
1998, the Light Metals Division reported a loss before taxes of $4,595,000,
including $2,323,000 of relocation charges. The net impact on the operating
results of the Light Metals Division for fiscal 1999 is due primarily to the
decline in wheel orders and an increase in the cost of goods sold.
1998 COMPARED TO 1997
SALES. Net sales for the fiscal year ended December 31, 1998 increased to
$40,858,000 from $39,165,000 for the fiscal year ended December 31, 1997, an
increase of $1,693,000, or 4.3%. The sales in both years were attributable
primarily to the Light Metals Division. The increase in sales was due to an
increase in the automotive components segment of the light metals business and
commencement of sales of the Turbodyne Products. For 1998 and 1997, sales of
aftermarket wheel products accounted for sales of $13,848,000 and $20,691,000,
respectively, of the total sales attributable to the Light Metals Division, and
sales of cast aluminum products, including compressor housings and manifolds,
accounted for sales of $26,287,000 and $18,474,000, respectively. The net sales
for fiscal 1997 also include sales of $2,258,000 related to the machining
business of Pacific Baja with Navistar.
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COST OF GOODS SOLD. Cost of goods sold consists primarily of material and
labor costs attributable to the Light Metals Division. Costs of goods sold for
fiscal 1998 increased to $35,825,000 from $32,326,000 for fiscal 1997, an
increase of $3,499,000, or 10.8%. The cost of goods sold in each of these years
was attributable solely to the Light Metals Division. The increase in cost of
goods sold as a percentage of net sales in fiscal 1998 was primarily
attributable to increased manufacturing costs as a result of the relocation,
consolidation and modernization of all wheel production and the majority of the
automotive engine components foundry and machine shop operations. These costs
include, among other factors, the reduction in productivity as a result of
operating in two remote locations, as well as extraordinary costs to ensure that
orders received during the relocation process were timely met.
In fiscal 1998 and 1997, the Light Metals Division incurred costs and
expenses in excess of management's projections and experienced delays
attributable to the final phase of relocation, consolidation and modernization
of all existing aluminum foundry and machining operations. These costs include
costs associated with the relocation of machinery and equipment, higher than
anticipated cost of hiring and training of new employees, overtime premiums and
transportation premiums incurred to meet increased demand in the automotive
components business and lower than expected production inefficiencies at the new
facility. All of these costs were expensed as incurred.
The Company experienced an acceleration of orders in the automotive engine
components segment in fiscal 1998 due in part to its increased marketing efforts
associated with this division. These orders were received by the Company prior
to the relocation of its automotive components manufacturing operations and,
therefore, the Company incurred extraordinary costs to ensure the customer
orders were timely met.
Cost of goods sold as a percentage of net sales was 87.7% and 82.5% for
fiscal 1998 and fiscal 1997, respectively.
GROSS PROFIT. Gross profit for fiscal 1998 decreased to $5,033,000 from
$6,839,000 for fiscal 1997, a decrease of $1,806,000, or 26.4%. Gross profit for
these years also was attributable solely to the Light Metals Division. Of the
gross profit attributable to the Light Metals Division, sales of aftermarket
wheel products accounted for gross profits of $2,974,000 in 1998 and $3,990,000
in 1997 and sales of cast aluminum products, including compressor housings and
manifolds, accounted for a gross profit of $1,938,000 in 1998 and $3,400,000 in
1997. Turbodyne products generated gross profit of $121,000 in 1998 and a loss
of $(551,000) in 1997.
RESEARCH AND DEVELOPMENT. Research and development costs increased to
$7,915,000 in fiscal 1998 from $6,609,000 in fiscal 1997, an increase of
$1,306,000, or 19.8%. 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) 3000 and 3500 models. In addition,
development programs were also initiated for Turbopac(TM) 1500 and 2500.
Research and development costs also included the operation and expansion of the
Company's quality control laboratory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $15,026,000 for fiscal 1998 from $9,136,000
in fiscal 1997, an increase of $5,890,000, or 64.5%. The increase in operating
expenses was largely due to the addition of the operating expenses associated
with the Light Metals Division as well as additional expenses relating to
increased product development efforts, including expenses associated with
overseas travel in conjunction with the Company's pursuit of strategic
relationships and the designation of its Common Stock on the Easdaq Market. 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.
OTHER INCOME AND EXPENSES. Other income and expense consists primarily of
interest expense on bank operating lines of credit and equipment finance
contracts.
NET LOSS. The Company recorded a net loss of $30,033,000 in fiscal 1998 and
a net loss of $13,185,000 in fiscal 1997 for the reasons set forth above.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed principally through a
combination of private and public sales of equity and debt securities,
borrowings under a bank credit facility and cash flows from the operations of
Pacific Baja. Borrowings under the bank credit facility and cash flows from the
operations of Pacific Baja ceased as of October 1, 1999 with the bankruptcy
filings of Pacific Baja. The Company will have to rely solely on its ability to
raise funds through the private and public sale of equity and debt securities
and the limited volume of sales to Detroit Diesel Corporation by Honeywell. At
December 31, 1999, the principal source of liquidity for the Company was cash of
$29,025 as compared to $1,257,000 at December 31, 1998.
Cash used in operating activities for fiscal 1999 and 1998 was $9,709,060
and $18,269,000, respectively. In 1999, cash used in operating activities
decreased approximately $8.5 million. The majority of which is a decrease in
selling, general and administrative costs of $2.9 million, a decrease in
relocation cost of $2.3 million and a decrease in income taxes of $1.4 million,
offset by a decline in gross profit of $1.2 million.
Cash used in investing activities for fiscal 1999 and 1998, was $1,570,823
and $2,725,000, respectively, resulting primarily from the purchase of property
and equipment primarily related to the relocation of the Company's manufacturing
facilities in 1998.
Cash provided by financing activities for fiscal 1999 and 1998 was
$9,937,650 and $21,418,000, respectively, resulting primarily from the sale of
equity and convertible debt securities as well as bank borrowings.
In an effort to create operating efficiencies and preserve working capital,
the Company has undergone a restructuring program, closing offices and focusing
its resources on research and development of products using the Turbodyne
Technology with an emphasis on automotive original equipment manufacturers. The
Company plans to continue this restructuring program into the year 2000.
The Company believes that its current sources of working capital are
sufficient to satisfy its anticipated working capital requirements only to June
30, 2000. No assurance can be given that additional working capital will be
available on satisfactory terms or at all. Accordingly, there is substantial
doubt about the Company's ability to continue as a going concern.
YEAR 2000
The Company's computer based systems have passed all Year 2000 testing and
are successfully operating as of March 31, 2000. Certain infrastructure and
information systems have been upgraded and meet Year 2000 requirements. The
Company has successfully conducted transactions and the overall system
infrastructure is Year 200 compliant.
The Company's products are Year 2000 compliant as of March 31, 2000.
The Company's suppliers' operations, and the products and services they
provide, are Year 2000 compliant.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 modifies the accounting
for derivative and hedging activities and as amended by SFAS No. 137 is
effective for fiscal years beginning after June 2000. The Company believes that
the adoption of SFAS No. 133 will not have a material impact on the Company's
financial reporting.
In 1999, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting the Costs of Start-Up Activities" ("SOP
98-5"). The Company believes that the adoption of SOP 98-5 will not have a
material impact on the Company's financial reporting.
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CAUTIONARY STATEMENTS AND RISK FACTORS
THE MARKET POTENTIAL AND ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN
Our future financial performance will largely depend on the acceptance of
products incorporating the Turbodyne Technology by OEMs and consumers. There can
be no assurance that such acceptance will occur.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN
We have suffered net losses in each of the last four years resulting in an
accumulated deficit of $91,757,896 at December 31, 1999, have used cash in our
operating activities in each of the last four years, have disposed of our most
significant subsidiary through bankruptcy, are subject to a lawsuit brought
against us by shareholders, and based on our projected cash flows for the
ensuring year we will be required to seek additional equity or debt financing in
order to continue our present operations, irrespective of the amounts to be
paid, if any, in connection with the aforementioned lawsuit. These matters raise
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
THE COMPANY IS UNDER INVESTIGATION BY THE U.S. SECURITIES AND EXCHANGE
COMMISSION (THE "SEC")
The SEC inquiry is ongoing. The SEC has indicated that its inquiry should
not be construed as an indication by the SEC or its staff that any violations of
law have occurred, nor as an adverse reflection on the merits of the Company's
securities. The Company has cooperated with the SEC and intends to continue to
cooperate with any additional requests from the SEC. Failure to resolve the SEC
inquiry satisfactorily could have a material adverse effect on the Company.
THE COMPANY RECENTLY SOLD ITS LIGHT METALS DIVISION IN A BANKRUPTCY COURT
APPROVED TRANSACTION
The Company sold substantially all of the assets of Pacific Baja pursuant
to an order of the U.S. Bankruptcy Court. Pacific Baja accounted for
substantially all of the Company's sales revenue on a consolidated basis for the
nine months ended September 30, 1999. The Company is liable as a guarantor on
certain leases assumed or rejected by the buyer. The Company currently is not
able to determine the amount of this liability. See "Item 1. Business -- Sale
of Light Metals Division."
WE HAVE NO HISTORY OF REVENUES UNDER OUR RECENT AGREEMENTS WITH HONEYWELL
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. We cannot
assure you that the other Turbopac(TM) models or the 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.
FUTURE REVENUES DEPEND ON THE ABILITY OF HONEYWELL TO PROTECT PROPRIETARY
ASSETS
The Company assigned its patent and trademark portfolios relating to the
Turbodyne Technology and the Turbopac(TM) and Dynacharger(TM) products to
Honeywell. Patent applications have been filed in the United States and in
certain foreign jurisdictions relating to these products. Certain patents have
been issued and other applications are in various stages of review at the U.S.
or foreign patent offices. Application for a patent offers no assurance that a
patent will be issued or issued without material modification. Moreover, we
cannot assure you 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 Honeywell will be able to achieve or maintain a technological
advantage. Protection of trade secrets and proprietary know-how is critical for
the Company to achieve and maintain a competitive position. We cannot assure you
that others may not independently develop
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similar or superior technologies or gain access to trade secrets or know-how
relevant to the business of the Company.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES
To date, we have not been profitable. We reported net losses of
$35,988,896, $30,033,000 and $13,185,000 for the fiscal years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, we had an accumulated
deficit of $90,257,896. We cannot assure you that we will report net income in
any future year or period.
WE HAVE ONLY LIMITED WORKING CAPITAL
We believe that our current sources of working capital are sufficient to
satisfy our anticipated working capital requirements only to June 30, 2000. We
intend to seek to raise additional funds through public or private offerings of
equity or debt or joint development arrangements. No assurance can be given that
additional funds can be raised or, if they can be raised, that the terms on
which they can be raised will be satisfactory. Any such financing may involve
significant dilution to our current stockholders. Joint development arrangements
may require us to relinquish rights to certain of its technologies or products.
If additional financing transactions are not completed timely, our research and
product development efforts may be substantially delayed or eliminated and our
business and results of operations will be materially adversely affected.
WE HAVE ENCOUNTERED DELAYS AND START-UP COSTS IN DEVELOPING OUR PRODUCTS
We have commenced only limited commercial production of certain of the
Turbopac(TM) models. Historically, we have encountered unexpected delays in
development due to undetected design defects or changes to specifications and we
may continue to experience such delays. These delays could increase the cost of
development of our products and affect the timing of commercial availability.
Our revenue in fiscal 2000 will depend to a significant degree on sales of the
Turbopac(TM) product through Honeywell. If Honeywell encounters problems in the
marketing of the Turbopac(TM) product or any other new products, our business
and prospects could be materially and adversely affected. Moreover, we have not
begun commercial production of the Dynacharger(TM).
We have incurred, and likely will continue to incur, substantial start-up
costs associated with the introduction of new products. As a result, we likely
will incur operating losses or experience a reduced level of profitability in
periods following product introduction. We cannot assure you that any new
product will receive market acceptance or that any new product can be sold at a
profit. Additionally, both the Dynacharger(TM) and certain of the Turbopac(TM)
models have undergone only limited testing. Once commercially introduced, each
product could require additional refinement. In the event government standards
regarding emissions are increased, we may need to modify product designs and
improve the Turbodyne Technology to meet these new standards, which may require
significant expenditures and delay production of the our products. Any delay in
commercial production or additional refinement to these products could result in
a material adverse effect on our business, operating results and financial
condition.
OUR MARKETING EFFORTS INVOLVE LONG TESTING PERIODS
We have entered into, and expect to continue to enter into, relationships
with OEM's in an effort to market our products. These parties typically engage
in testing programs concerning our products that last for a period of between
three and five years. During this period, we may provide certain products to
these parties free of charge or at a reduced rate. In addition, we devote a
significant amount of time and attention to pursuing these programs in an effort
to obtain purchase orders for the products tested. These parties are under no
obligation to purchase our products during these testing periods and, following
their evaluations, may determine not to purchase any products from us.
Alternatively, these parties may request modifications to existing products in
order to satisfy specific regulations imposed in the countries in which they
operate. Accordingly, we may expend a significant amount of time and devote
substantial resources to these testing
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programs which may not result in any sales, or if purchase orders are obtained,
they may only be obtained many years following the commencement of the related
testing program.
WE WILL LIKELY EXPERIENCE POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND
SEASONALITY
We have 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 us and our competitors,
- customer demand for our 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 our
products,
- changes or anticipated changes in pricing by us or our 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, and
- other unanticipated operating expenses and general economic conditions.
We anticipate that our operating results will continue to fluctuate
significantly in the future as a result of these and other factors. A
substantial portion of our costs and expenses are related to costs of
engineering services and other personnel costs, product development, facilities
and marketing programs. We cannot adjust the level of spending for these costs
and expenses quickly and our level of spending is based, in significant part, on
our expectations of future revenues. If revenues are below expectations, our
quarterly and annual operating results will be adversely effected, which could
have a material adverse effect on our results of operations.
INTENSE COMPETITION
The business environment in which we operate is highly competitive. Certain
of our competitors have, and potential competitors may have, greater financial,
marketing, technological and other resources. We believe that no products
technologically similar to the Turbopac(TM) and Dynacharger(TM) products have
been sold. However, future competitors may develop related technologies that
improve the performance of internal combustion engines or reduce emissions that
are not encompassed by our patents. In addition, other companies may be issued
patents which may inhibit our ability to develop certain products encompassed by
those patents. There also may be improvements to existing technologies.
If new techniques are developed and are commercially successful, they may
reduce our potential market share or make our products less attractive or
obsolete, each of which will adversely effect our business. In addition, a
relatively small number of OEM's hold a significant share of the automotive
market and the determination of an OEM not to incorporate our products into its
product line may force us to expend additional amounts to gain market share or
significantly reduce our potential market share.
Our strategy is one of aggressive product development and enhancement and
patent support to protect a competitive position to the extent practicable.
However, we cannot assure you that the market will determine that our products
are superior to existing or subsequently developed competitive products, that we
will obtain significant market share or be able to adapt to evolving markets and
technologies, develop new products or achieve or maintain technological
advantages.
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WE DEPEND ON KEY PERSONNEL
The skills and efforts of our management team and engineering staff,
including our Chairman of the Board, Prof. Dr.-Ing. Peter Hofbauer, and Chief
Executive Officer, Gerhard Delf, are critical to our success. As we grow, we
will continue to hire, appoint or otherwise change senior management and members
of the engineering staff. We cannot assure you that executive officers and key
personnel will remain with us or that we will attract additional qualified
members to management in the future. The loss of services of Prof. Hofbauer, Mr.
Delf or any key employee could have a material adverse effect on our business.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE
The industries in which we compete are characterized by rapid and
significant technological change. Our success will 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 ability to enhance these products and
develop new products. Moreover, changes in manufacturing technology could
require us to make significant expenditures on new plant and equipment in order
to remain competitive, all of which could adversely affect our operating costs
and results of operations. We cannot assure you that our products will be
commercially accepted or that we will be able to enhance existing products or
develop new products. We also cannot assure you that technological change will
not render obsolete or uneconomical any of our products. Our ability to continue
to develop and market new and improved products that can achieve significant
market acceptance will determine our future sales and profitability.
OUR STOCK PRICE IS EXTREMELY VOLATILE
The price of our Common Stock on the Easdaq Market has been and may
continue to be subject to wide fluctuations in response to a number of events
and factors, such as quarterly variations in results of operations,
announcements of new technological innovations or purchase orders for our
products, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to us, and news relating to trends in our markets.
In addition, the stock market in general, and the market for high technology
stocks in particular, has experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the price of our Common Stock,
regardless of our operating performance.
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE STOCK
As of April 10, 2000, approximately 56,977,324 shares of Common Stock will
be outstanding assuming the exercise of all outstanding options and warrants.
Although some of these options and warrants are exercisable at prices which may
exceed the current prevailing market prices of our Common Stock, their existence
could potentially limit the scope of increases in the market value of the Common
Stock which might otherwise be realized. The terms on which we may obtain
additional financing during the respective terms of these outstanding stock
options and warrants may be adversely affected by their existence. The holders
of these stock options and warrants may exercise these securities at times when
we might be able to obtain additional capital through one or more new offerings
of securities or other forms of financing on terms more favorable than those
provided by these stock options and warrants.
ABSENCE OF DIVIDENDS
We have never paid cash dividends on the Common Stock and no cash dividends
are expected to be paid on the Common Stock in the foreseeable future. Any
future determination to declare or pay dividends will be at the discretion of
the Board of Directors and will be dependent on our results of operations,
financial condition, contractual and legal restrictions and other factors deemed
relevant by the Board of Directors.
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OUR COMMON STOCK WAS DELISTED FROM THE NASDAQ SMALLCAP MARKET
Our Common Stock was delisted from The Nasdaq SmallCap Market on April 1,
1999. No assurance can be given that our Common Stock will be listed on any
United States securities exchange in the future.
WE MAY BECOME SUBJECT TO RULES RELATING TO LOW-PRICED OR PENNY STOCK
The Company expects that the Common Stock may be traded in the
over-the-counter markets through the "pink sheets" or on the NASD's OTC Bulletin
Board, in which event the Common Stock would be covered by a SEC rule that
imposes additional sales practice requirements on broker-dealers who sell our
securities to certain persons. These rules may affect the ability of
broker-dealers to sell our Common Stock and also may affect the ability of
holders of our Common Stock to resell their shares of Common Stock.
WE HAVE NO HISTORY OF PRODUCT SALES
None of our products have been 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. We cannot
assure you that the other Turbopac(TM) models or 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 and the report of
independent public accountants are included on pages F-1 to F-21 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On November 29, 1999, KPMG LLP ("KPMG") resigned as the principal
accountant to audit the Company's financial statements, beginning with its
financial statements for the year ending December 31, 1999. On January 12, 2000,
the Company retained McGowan Guntermann as its independent auditor to audit the
Company's financial statements, beginning with its financial statements for the
year ending December 31, 1999.
The reports of KPMG on the financial statements for the years ended
December 31, 1998 and December 31, 1997 did not contain any adverse opinion or a
disclaimer of opinion and were not qualified or modified as to audit scope or
accounting principles and the KPMG report on the Company's 1998 consolidated
financial statements contained an uncertainty paragraph regarding substantial
doubt as to the ability of the Company to continue as a going concern.
During the Company's fiscal years ended December 31, 1998 and December 31,
1997, and each interim period subsequent to December 31, 1998 preceding KPMG's
resignation, there were no disagreements between the Company and KPMG on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the subject
matter of the disagreement(s) in connection with its report on the Company's
financial statements. KPMG did not review the Company's Quarterly Reports on
Form 10-Q for the quarterly periods ending September 30, 1999, June 30, 1999 and
March 31, 1999.
The Company received from KPMG a letter dated December 20, 1999 addressed
to the Securities and Exchange Commission stating that it agrees with the above
statements made by the Company.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled "Proposal
1 -- Election of Directors" contained in the definitive Proxy Statement of the
Company to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1 -- Election of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of certain beneficial
owners and management is incorporated herein by reference from the sections
entitled "General Information -- Security Ownership of Principal Stockholders
and Management" and "Proposal 1 -- Election of Directors" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is incorporated herein by reference from the section entitled "Proposal
1 -- Election of Directors" contained in the Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The consolidated financial statements are filed as part of this Annual
Report on Form 10-K as listed on page F1 of this document.
REPORTS ON FORM 8-K
Current Report on Form 8-K/A, Item 7, filed on December 23, 1999.
Current Report on Form 8-K/A, Item 4, filed December 15, 1999.
Current Report on Form 8-K, Item 4, filed December 6, 1999.
Current Report on Form 8-K, Item 5, filed on October 15, 1999.
EXHIBITS
The following exhibits are included as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Registrant's Form 10-Q for the
fiscal quarter ended June 30, 1998.
3.2 Bylaws of the Registrant. Incorporated by reference to
Exhibit 3.2 to Registrant's Form 10-Q for the fiscal quarter
ended June 30, 1998.
4.1 Form of Convertible Preferred Stock Purchase Agreement.
Incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form F-1 (File No.
333-7932).
4.2 Form of Registration Rights Agreement. Incorporated herein
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form F-1 (File No. 333-7932).
4.3 Form of Redemption Warrant. Incorporated herein by reference
to Exhibit 4.3 to the Company's Registration Statement on
Form F-1 (File No. 333-7932).
10.1* Joint Development Agreement dated January 28, 1999, between
Honeywell International, Inc. (formerly, "AlliedSignal,
Inc.") and the Registrant.
10.2 Sub-Lease between American Appliance, Inc. and Carole D.
King dated December 1, 1994 for Carpinteria Property.
Incorporated herein by reference to Exhibit 3(iii) to the
Company's Registration Statement on Form 20-F filed on
September 18, 1996.
10.3* License Agreement dated January 28, 1999, between Honeywell
International, Inc. and the Registrant.
10.4* Amendment to License Agreement dated December 15, 1999,
between Honeywell International, Inc. and the Registrant.
10.5* Amendment to Joint Development Agreement dated December 15,
1999, between Honeywell International, Inc. and Registrant.
10.6* Intellectual Property and Product Rights Agreement dated
December 15, 1999, between Honeywell International, Inc. and
the Registrant.
10.7 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.
10.8 Employment Agreement dated August 1, 1997 between the
Company and Edward Halimi, as amended. Incorporated by
reference to Exhibit 3(xiii) to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 1997.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.9 Employment Agreement dated August 1, 1997 between the
Company and Leon Nowek, as amended. Incorporated by
reference to Exhibit 3(xix) to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 1997.
23.1 Consent of KPMG LLP.
23.2 Consent of McGowan Guntermann.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* All schedules or exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
29
<PAGE> 30
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
DECEMBER 31, 1999 AND 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditor's Report of McGowan Guntermann.......... F-2
Independent Auditor's Report of KPMG LLP.................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Shareholders' Equity........... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 31
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Turbodyne Technologies, Inc. and Subsidiaries
Carpinteria, California
We have audited the accompanying consolidated balance sheet of Turbodyne
Technologies, Inc. and subsidiaries, as of December 31, 1999, and the related
consolidated statements of operations, shareholders' 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 financial statements based on our audit.
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 consolidated 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 at December 31, 1999, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
discussed in Note 13 to the consolidated financial statements, the Company has
suffered net losses in each of the last four years resulting in an accumulated
deficit of $90,257,896 at December 31, 1999, has used cash in its operating
activities in each of the last four years, has disposed of its most significant
subsidiary through bankruptcy, is subject to a lawsuit brought against it by
shareholders, and based on the Company's projected cash flows for the ensuing
year it will be required to seek additional equity or debt financing in order to
continue its present operations, irrespective of the amounts to be paid, if any,
in connection with the aforementioned lawsuit. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 13 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
McGowan Guntermann
Santa Barbara, California
April 4, 2000
F-2
<PAGE> 32
PRIOR 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, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the two years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Turbodyne
Technologies Inc. and subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for the two years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered net losses in each of the last three years resulting in an accumulated
deficit of $54,269,000 at December 31, 1998, has used cash in its operating
activities in each of the last three years, has violated covenants of its debt
facilities, has received an adverse award and a judgment in the aggregate amount
of approximately $7.1 million related to an arbitration matter and a building
lease, respectively, is subject to several class-action lawsuits brought against
it by certain of its stockholders, and based on the Company's projected cash
flows for the ensuring year it will be required to seek additional equity or
debt financing in order to continue its present operations, irrespective of
amounts to be paid, if any, in connection with the aforementioned adverse award
and judgment and class-action lawsuits. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
KPMG LLP
Los Angeles, California
March 15, 1999
F-3
<PAGE> 33
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 29,025 $ 1,257,000
Trade accounts receivable -- less allowance for doubtful
accounts of $45,000 and $270,000 in 1999 and 1998,
respectively........................................... 2,677,320 10,623,000
Employee advances receivable -- less allowance for
doubtful accounts of $237,500 and $0 in 1999 and 1998,
respectively (Note 11)................................. 696,347 415,000
Inventories (Note 2)...................................... 1,524,261 6,507,000
Prepaid expenses and other current assets................. 24,719 1,401,000
------------ ------------
Total Current Assets.............................. 4,951,672 20,203,000
Property and equipment, at cost, net (Note 3)............. 1,765,107 20,616,000
Goodwill -- net........................................... -- 12,992,000
Other assets (Note 11).................................... 46,980 1,235,000
------------ ------------
TOTAL ASSETS...................................... $ 6,763,759 $ 55,046,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 4 and 5)....... $ 1,250,000 $ 497,000
Current maturities of obligations under capital leases
(Note 8)............................................... 39,764 778,000
Accounts payable.......................................... 2,455,109 8,916,000
Accrued liabilities....................................... 506,250 5,527,000
Reserve for lawsuit settlement............................ 349,738 400,000
Income taxes payable (Note 6)............................. -- 700,000
------------ ------------
Total Current Liabilities......................... 4,600,861 16,018,000
Long-term debt, less current maturities (Note 5).......... -- 9,941,000
Obligations under capital leases, less current maturities
(Note 8)............................................... 47,871 3,138,000
------------ ------------
Total Liabilities................................. 4,648,732 29,097,000
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value. Authorized 1,000,000
shares; issued 10,000 Series A Convertible Preferred
and 10,000 Series B Convertible Preferred shares and
outstanding none in 1999 and 1998...................... -- --
Common stock $0.001 par value. Authorized 60,000,000
shares; issued and outstanding 51,044,816 shares in
1999 and 41,313,816 shares in 1998..................... 51,045 42,000
Treasury stock, at cost, 378,580 shares at December 31,
1999 and 330,080 shares at December 31, 1998........... (1,755,534) (1,500,000)
Additional paid-in capital................................ 94,057,154 81,770,000
Other comprehensive income (loss)......................... 20,258 (94,000)
Accumulated deficit....................................... (90,257,896) (54,269,000)
------------ ------------
Total Shareholders' Equity........................ 2,115,027 25,949,000
Commitments and contingencies (Note 8 and 15)............. -- --
Liquidity (Note 13)....................................... -- --
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 6,763,759 $ 55,046,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 34
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $ 50,218,161 $ 40,858,000 $ 39,165,000
Cost of goods sold............................... 46,430,198 35,825,000 (32,326,000)
------------ ------------ ------------
Gross Profit........................... 3,787,963 5,033,000 6,839,000
------------ ------------ ------------
Selling, general and administrative expenses
(Note 11)...................................... 12,170,524 15,026,000 9,136,000
Research and developments costs (Note 1L)........ 7,585,327 7,915,000 6,609,000
Non-employees compensation expense (Note 10)..... 1,043,310 3,308,000 542,000
Depreciation and amortization.................... 3,692,104 3,631,000 2,695,000
Relocation costs (Note 7)........................ 96,328 2,323,000 --
------------ ------------ ------------
Total Operating Expense................ 24,587,593 32,203,000 18,982,000
------------ ------------ ------------
Loss from Operations................... (20,799,630) (27,170,000) (12,143,000)
Other expense (income)
Interest expense, net.......................... 1,538,529 800,000 770,000
Litigation expense (Notes 7 and 14)............ 6,051,531 1,400,000 --
Gain on sale of patents (Note 14).............. (5,996,789) -- --
Loss on disposal of assets (Note 1G and 15).... 14,298,395 -- --
Other, net..................................... -- (37,000) 66,000
------------ ------------ ------------
Loss before income taxes............... (36,691,296) (29,333,000) (12,979,000)
Income tax expense (benefit) (Note 6)............ (702,400) 700,000 206,000
------------ ------------ ------------
Net Loss............................... $(35,988,896) $(30,033,000) $(13,185,000)
============ ============ ============
Net loss per common share:
Basic loss per share........................... $ (0.88) $ (0.88) $ (0.58)
Diluted loss per share......................... (0.88) (0.88) (0.58)
============ ============ ============
Weighted average shares used for basic and
diluted loss per share......................... 40,952,987 34,232,000 22,685,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 35
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER
-------------------- --------------------- PAID-IN SPECIAL COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS INCOME (LOSS)
---------- ------- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... 23,580,098 $24,000 -- $ -- $22,575,000 16,007,000 $(204,000)
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 5,000 -- -- 15,654,000 (16,007,000) --
Exercise of warrants............. 1,002,014 1,000 -- -- 4,088,000 -- --
Exercise of stock options........ 754,500 1,000 -- -- 2,400,000 -- --
Translation adjustment........... -- -- -- -- -- -- 226,000
Issuance of stock options to
nonemployees for services...... -- -- -- -- 542,000 -- --
Net loss......................... -- -- -- -- -- -- --
Preferred stock dividends
declared....................... -- -- -- -- -- -- --
---------- ------- ------- ----------- ----------- ----------- ---------
Balance at December 31, 1997..... 29,961,612 31,000 10,000 9,604,000 45,259,000 -- 22,000
Conversion of series one class A
preference stock, net of
expenses....................... 4,577,899 5,000 (10,000) (9,604,000) 9,587,000 -- --
Conversion of subordinated
convertible debentures, net of
expenses....................... 1,099,290 1,000 -- -- 2,852,000 -- --
Issuance of common stock for
finders fees................... 150,000 -- -- -- 375,000 -- --
Exercise of warrants............. 705,499 -- -- -- 3,169,000 -- --
Exercise of stock options........ 4,654,892 5,000 -- -- 16,864,000 -- --
Treasury stock repurchase........ -- -- -- -- -- -- --
Translation adjustment........... -- -- -- -- -- -- (116,000)
Preferred stock dividends
declared....................... -- -- -- -- -- -- --
Preferred stock dividends paid... 164,624 -- -- -- 356,000 -- --
Issuance of stock options to
nonemployees for services...... -- -- -- -- 3,308,000 -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------- ------- ----------- ----------- ----------- ---------
Balance, December 31, 1998....... 41,313,816 42,000 -- -- 81,770,000 -- (94,000)
Exercise of warrants............. -- -- -- -- -- -- --
Exercise of stock options........ 160,000 -- -- -- 429,100 -- --
Exercise of stock options for
services rendered.............. 100,000 -- -- -- 190,847 -- --
Private placement of common
stock.......................... 9,029,138 9,045 -- -- 10,123,897 -- --
Conversion of subordinated
convertible debentures, net of
expenses....................... 441,862 -- -- -- 500,000 -- --
Purchase of treasury stock....... -- -- -- -- -- -- --
Translation adjustment........... -- -- -- -- -- -- 114,258
Issuance of stock options to
nonemployees for services...... -- -- -- -- 1,043,310 -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------- ------- ----------- ----------- ----------- ---------
Balance, December 31, 1999....... 51,044,816 $51,045 -- $ -- $94,057,154 -- $ 20,258
========== ======= ======= =========== =========== =========== =========
<CAPTION>
TREASURY STOCK
ACCUMULATED --------------------- NET STOCKHOLDERS'
DEFICIT SHARES AMOUNT EQUITY
------------ ------- ----------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996..... $(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....................... -- -- -- (348,000)
Exercise of warrants............. -- -- -- 4,089,000
Exercise of stock options........ -- -- -- 2,401,000
Translation adjustment........... -- -- -- 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..... (24,073,000) -- -- 30,843,000
Conversion of series one class A
preference stock, net of
expenses....................... -- -- -- (12,000)
Conversion of subordinated
convertible debentures, net of
expenses....................... -- -- -- 2,853,000
Issuance of common stock for
finders fees................... -- -- -- 375,000
Exercise of warrants............. -- -- -- 3,169,000
Exercise of stock options........ -- -- -- 16,869,000
Treasury stock repurchase........ -- 330,080 (1,500,000) (1,500,000)
Translation adjustment........... -- -- -- (116,000)
Preferred stock dividends
declared....................... (163,000) -- -- (163,000)
Preferred stock dividends paid... -- -- -- 356,000
Issuance of stock options to
nonemployees for services...... -- -- -- 3,308,000
Net loss......................... (30,033,000) -- -- (30,033,000)
------------ ------- ----------- ------------
Balance, December 31, 1998....... 54,269,000 330,080 (1,500,000) 25,949,000
Exercise of warrants............. -- -- -- --
Exercise of stock options........ -- -- -- 429,100
Exercise of stock options for
services rendered.............. -- -- -- 190,847
Private placement of common
stock.......................... -- -- -- 10,132,942
Conversion of subordinated
convertible debentures, net of
expenses....................... -- -- -- 500,000
Purchase of treasury stock....... -- 48,500 (255,534) (255,534)
Translation adjustment........... -- -- -- 114,258
Issuance of stock options to
nonemployees for services...... -- -- -- 1,043,310
Net loss......................... (35,988,896) -- -- (35,988,896)
------------ ------- ----------- ------------
Balance, December 31, 1999....... $(90,257,896) 378,580 $(1,755,534) $ 2,115,027
============ ======= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 36
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(35,988,896) $(30,033,000) $(13,185,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 3,692,104 3,631,000 2,695,000
Preferred stock compensation........................... -- 375,000 --
(Gain) loss on sale of assets (Note 14)................ 809,486 (1,000) 76,000
Loss on disposal of assets related to net book value of
fixed assets, goodwill and debt (Note 15)............ 16,764,619 -- --
Non cash stock option compensation..................... 1,234,157 3,308,000 542,000
(Increase) decrease in operating assets:
Trade accounts receivable............................ 7,945,680 (1,359,000) (3,255,000)
Employee advances receivable......................... (281,347) (62,000) (486,000)
Inventories.......................................... 4,982,739 (1,038,000) (2,016,000)
Prepaid expenses and other current assets............ 1,376,281 422,000 (340,000)
Other assets......................................... 1,188,020 (1,229,000) (338,000)
Increase (decrease) in operating liabilities:
Trade accounts payable............................... (6,460,891) 3,633,000 2,408,000
Accrued liabilities.................................. (4,271,012) 3,334,000 20,000
Income taxes payable................................. (700,000) 614,000 86,000
Deferred tax liability............................... -- 136,000 --
------------ ------------ ------------
Net cash used in operating activities............. (9,709,060) (18,269,000) (13,793,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment....................... (1,570,823) (2,733,000) (6,910,000)
Proceeds from sale of property, plant and equipment...... -- 8,000 42,000
------------ ------------ ------------
Net cash used in investing activities............. $ (1,570,823) $ (2,725,000) $ (6,868,000)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from long-term borrowings................... $ 1,750,000 $ 1,676,000 $ 3,321,000
Repayments under capital lease obligations............... (1,045,976) (1,637,000) (826,000)
Repayments from long-term borrowings..................... (1,572,882) -- --
Proceeds from convertible subordinated debentures........ 500,000 3,000,000 --
Issuance of common stock................................. 10,132,942 -- --
Proceeds from exercise of stock options and warrants..... 429,100 20,038,000 6,490,000
Exercise of stock options for professional services...... -- -- --
Repurchase of treasury stock............................. (255,534) (1,500,000) --
Net proceeds from preferred stock issue.................. -- -- 9,604,000
Issuance costs paid...................................... -- (159,000) (348,000)
------------ ------------ ------------
Net cash provided by financing activities......... 9,937,650 21,418,000 18,241,000
------------ ------------ ------------
Effect of exchange rate changes on cash.................... 114,258 (116,000) 226,000
------------ ------------ ------------
Net increase (decrease) in cash................... (1,227,975) 308,000 (2,194,000)
Cash at beginning of year.................................. 1,257,000 949,000 3,143,000
------------ ------------ ------------
Cash at end of year........................................ $ 29,025 $ 1,257,000 $ 949,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 1,136,433 $ 988,000 $ 882,000
Income taxes........................................... 4,000 -- 120,000
Supplemental disclosure of noncash investing and financing
activities:
Issuance of notes for financing of capital leases...... $ 644,943 $ 2,651,000 $ 1,947,000
Preferred stock dividends paid......................... -- 356,000 --
Preferred stock dividends declared..................... -- 163,000 200,000
Settlement of claim through sale of patents (Note
14).................................................. $ 6,650,000 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 37
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF BUSINESS
Turbodyne Technologies Inc. and subsidiaries (the Company), a Delaware
corporation, engineers, develops, manufactures and markets products designed to
enhance performance and reduce emissions of internal combustion engines. The
Company has developed a patented 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 this technology into
two primary products: the Turbopac and the Dynacharger, collectively called the
Turbodyne Products.
Through a wholly owned subsidiary, the Company manufactured aluminum cast
automotive products, including engine and vehicle components, chassis and
specialty wheels. This subsidiary also manufactured all of the engineered
aluminum components for the Turbodyne Products.
This wholly owned subsidiary was sold by order of the Bankruptcy Court on
December 23, 1999 (Note 15) . The Company has not generated significant revenues
from its operations that develop engine enhancement products. See Note 12
regarding operating segments.
During 1999, the Company was delisted from NASDAQ. The Company is currently
in the process of making changes suggested by NASDAQ, and intends to reapply for
listing on the NASDAQ exchange once all of the suggested changes are in place.
B. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Turbodyne Technologies Inc. and its wholly owned subsidiaries, Turbodyne
Systems, Inc., Turbodyne U.K. Ltd. (which was liquidated during 1999), Turbodyne
Germany Ltd. and Pacific Baja Light Metals Corp. (Pacific Baja) (Note 15). All
material intercompany accounts and transactions have been eliminated in
consolidation.
C. INVENTORIES
Inventories are valued at the lower of cost or market. For the materials
portion of Pacific Baja's inventories, the cost was determined using the
last-in, first-out (LIFO) method. For all other materials and other components
of inventories (labor and overhead), the cost is determined using the first-in,
first-out (FIFO) method.
D. 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>
E. 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 annually assesses
the recoverability
F-8
<PAGE> 38
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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, 1999 and 1998.
F. GOODWILL
Goodwill was associated with the purchase of Pacific Baja on July 2, 1996
by the Company and was being amortized on a straight-line basis over 20 years.
On December 23, 1999 the assets of Pacific Baja were sold through bankruptcy
(Note 15), and the net book value of the goodwill of $12,242,000 was charged to
loss on disposal of assets. Accumulated amortization was $1,930,000 at December
31, 1999.
G. 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 27%,
respectively, of net sales in 1999; however these customers relate to Pacific
Baja, which was disposed through bankruptcy on December 23, 1999. Of the
remaining operations, the Company has two customers, that represent essentially
all sales. Additionally, these two customers represent essentially all of
accounts receivable at December 31, 1999. The loss of either one of these
customers could have a material adverse effect on the Company.
The Company had sales to three significant customers constituting
approximately 49%, 15% and 16%, respectively, of net sales in 1998.
Additionally, these customers comprised 42%, 17% and 20%, respectively, of
accounts receivable at December 31, 1998.
The Company had sales to two significant customers constituting
approximately 39% and 30%, respectively, of net sales in 1997. These customers
comprised 31% and 43%, respectively, of accounts receivable at December 31,
1997.
H. 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.
I. EARNINGS (LOSS) PER SHARE
The Company accounts for earnings per share under the provisions of SFAS
No. 128, "Earnings per Share." SFAS 128 specifies the computation, presentation
and disclosure requirements for earnings (loss) per share (EPS).
For the years ended December 31, 1999, 1998 and 1997, options and warrants
to purchase 7,182,174, 6,836,642 and 5,103,500 common stock, respectively, at
prices ranging from $.37 to $6.50 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 $163,000 and $200,000 in 1998 and 1997, respectively, to arrive at
loss attributable to common stockholders, no other adjustments were made for
purposes of per share calculations.
F-9
<PAGE> 39
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
J. 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.
K. 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.
L. 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 $7,585,327, $7,915,000 and $6,609,000 for the years ended 1999, 1998
and 1997 respectively.
M. 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.
N. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the 1999 presentation.
O. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. SFAS No. 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net earnings
(loss) and all other nonowner changes in equity. Except for net earnings (loss)
and foreign currency translation adjustments, the Company does not have any
transactions and other economic events that qualify as comprehensive income as
defined under SFAS No. 130. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, net earnings
(loss) approximated comprehensive income for each of the years in the three-year
period ended December 31, 1999.
P. BUSINESS SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," effective in 1998. SFAS No. 131 establishes
new standards for reporting information about business segments and related
disclosures about products and services, geographic areas and major customers,
if applicable. Significant reportable business segments of the Company are
aftermarket automotive wheels,
F-10
<PAGE> 40
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
automotive engine components and Turbodyne products. Information related to
these segments is summarized in Note 12.
Q. CASH AND EQUIVALENTS
The Company considers all highly liquid financial instruments with a
maturity of three months or less to be cash equivalents.
NOTE 2 -- INVENTORIES
Inventories are comprised of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials subject to LIFO....................... $ -- $1,677,000
Raw materials subject to FIFO....................... 1,116,449 1,543,000
Work in process..................................... 154,601 1,158,000
Finished goods...................................... 253,211 2,129,000
---------- ----------
$1,524,261 $6,507,000
========== ==========
</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,
1999 and 1998 by $0 and $165,000, respectively.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property, plant and equipment, at cost, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Construction in progress................................... $ -- $ 1,365,000
Land and buildings......................................... -- 3,545,000
Machinery and equipment.................................... 2,312,053 13,429,000
Transportation equipment................................... 180,228 622,000
Furniture and fixtures..................................... 161,155 649,000
Leasehold improvements..................................... 112,199 5,199,000
Equipment under capital leases............................. 183,792 5,423,000
---------- -----------
2,949,427 30,232,000
Less: Accumulated depreciation and amortization............ 1,184,320 9,616,000
---------- -----------
Net property, plant and equipment.......................... $1,765,107 $20,616,000
========== ===========
</TABLE>
Accumulated depreciation on assets under capital leases amounted to
$1,345,905 and $1,029,000 at December 31, 1999 and 1998, respectively.
NOTE 4 -- NOTES PAYABLE
In February, 1999, the Company signed three promissory notes totalling
$1,300,000 with a relative of a Director. This loan has been personally
guaranteed by the Director. All notes bear interest at 12% per annum, compounded
monthly. Only $1,250,000 of the $1,300,000 notes were drawn down in 1999. The
notes have maturity dates occurring in 1999 and therefore the notes are
considered due on demand. No interest has been paid on these loans in 1999.
F-11
<PAGE> 41
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Under a loan agreement covering the three promissory notes, a signing bonus
of 75,000 shares of common stock has been offered for each and every million
dollars funding advanced. In order to pay back this loan, the Company has
offered 1.3 million in common shares to the lender. In addition, 1.3 million in
common stock warrants at a exercise price of $1.25 with a maturity date of five
years has been offered to the lender. As of December 31, 1999, no stock warrant
agreements have been signed.
NOTE 5 -- LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Revolving bank line of credit(A)........................... $ -- $ 9,703,000
Revolving bank line of credit(B)........................... -- 320,000
Notes payable (Note 4)..................................... 1,250,000 --
Notes payable to bank, with monthly installments of $12,534
plus interest payable monthly at prime plus .25%,
maturing at
June 2001................................................ -- 389,000
Other...................................................... -- 26,000
---------- -----------
Total long-term debt............................. 1,250,000 10,438,000
Less: Current maturities......................... 1,250,000 497,000
---------- -----------
Long-term debt, excluding current maturities..... $ -- $ 9,941,000
========== ===========
</TABLE>
- ---------------
(A) The Company's wholly owned subsidiary, Pacific Baja, had a revolving line of
credit with a bank permitting borrowings up to $10 million, secured by all
receivables and inventory of which $9,703,000 was outstanding as of December
31, 1998. The borrowings bear interest at the Company's option at LIBOR
(5.10% at December 31, 1998) plus 2% or at prime (7.75% at December 31,
1998). The line of credit expires June 1, 2000. The line of credit agreement
was amended on January 19, 1999 whereby the revolving line of credit was
increased to $11,500,000. The outstanding balance at December 23, 1999 of
approximately $8.5 million was settled through bankruptcy at a $900,000
discount. (See Note 15).
(B) The Company also entered into an additional line of credit agreement for
$350,000 of which $320,000 was outstanding at December 31, 1998, with
interest at prime plus 2%, and expired June 30, 1999.
The Company was not in compliance with certain of its covenants related to
its debt facilities at December 31, 1998, and had received waivers through the
first quarter ended March 31, 1999. (See Note 15)
F-12
<PAGE> 42
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 6 -- INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $(612,500) $612,500 $160,000
State........................................... (89,900) 87,500 46,000
--------- -------- --------
(702,400) 700,000 206,000
--------- -------- --------
Deferred:
Federal......................................... -- -- --
State........................................... -- -- --
--------- -------- --------
-- --
--------- -------- --------
$(702,400) $700,000 $206,000
========= ======== ========
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 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>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Computed "expected" income tax
benefit............................... $(14,664,036) $(10,778,354) $(4,628,000)
State income taxes, net of Federal...... -- -- 30,000
benefit Losses with no U.S. tax
benefit............................... -- -- 1,473,000
Nondeductible expenses.................. 22,605 54,462 321,000
Change in valuation allowance........... 13,939,031 11,472,873 2,419,000
Other................................... -- (50,981) 591,000
------------ ------------ -----------
Total income tax expense
(benefit)................... $ (702,400) $ 700,000 $ 206,000
============ ============ ===========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities................................. $ 741,967 $ 2,854,042
Inventory -- related items.......................... 122,238 296,802
Alternative minimum tax credit...................... 55,000 55,230
Net operating loss carryover -- state............... 1,972,947 992,896
Net operating loss carryover -- Federal............. 24,537,575 12,598,213
------------ ------------
Gross deferred tax assets................... 27,429,727 16,797,183
Less valuation allowance............................ (26,829,727) (16,204,873)
------------ ------------
Deferred tax assets, net of valuation
allowance................................. 600,000 592,310
Deferred tax liabilities -- basis of fixed assets... (600,000) (592,310)
------------ ------------
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
F-13
<PAGE> 43
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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, 1999. Accordingly, a valuation allowance has been
provided for the total net deferred tax assets.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
A. LEASES
The Company leases certain factory and office premises in California under
noncancelable operating leases expiring between August, 2002 and May, 2009.
Rental expense for 1999, 1998 and 1997 was approximately $908,000, $1,061,000
and $1,050,000, respectively.
The Company subleases its Carpinteria facility from American Appliance,
Inc., a private company controlled by a Director of the Company. Rental expense
for this facility in 1999, 1998, and 1997 was approximately $310,000, $336,000
and $252,000, respectively. The Company leased the Pacific Baja facility in
Mexico from certain stockholders of the Company. Rental expense for this
facility in 1999, 1998, and 1997 was approximately $167,000, $192,000 and
$180,000, respectively. See Note 15 regarding sale of Pacific Baja assets.
The Company has leased office facilities in Woodland Hills at approximately
$11,000 per month, expiring August, 2002. The Company relocated it's corporate
office from Woodland Hills to Carpinteria in November, 1999. Additionally, the
Company has guaranteed a lease for the former Pacific Baja facility, at
approximately $19,500 per month, expiring May, 2009. The Company is actively
pursuing either a buyout or a sublease agreement for these leases.
The Company is obligated under capital lease agreements for certain
equipment and vehicles. The leases are due in monthly installments at various
dates through September, 2003.
Minimum future rental commitments under the operating leases and future
minimum capital lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
Year ending December 31:
2000............................................... $ 47,480 $ 704,688
2001............................................... 26,918 704,688
2002............................................... 15,131 660,688
2003............................................... 10,637 572,688
2004............................................... -- 572,688
Thereafter......................................... -- 1,033,500
-------- ----------
Total future minimum lease payments........ 100,166 $4,248,940
==========
Less amounts representing interest (at rates ranging
from 7.90% to 11.00%).............................. 12,531
--------
Present value of net minimum capital lease
payments........................................... 87,635
Less current maturities of obligations under capital
leases............................................. 39,764
--------
Obligations under capital leases, excluding current
maturities......................................... $ 47,871
========
</TABLE>
F-14
<PAGE> 44
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
B. CONSULTING AGREEMENTS
The Company has entered into consulting commitments for assistance in
management development, international marketing, licensing and financing,
technical and educational services with a former officer and former director.
Future commitments under these contracts as of December 31, 1999 are:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $ 342,500
2001...................................................... 342,500
2002...................................................... 342,500
2003...................................................... 342,500
2004...................................................... 342,500
Thereafter................................................ 1,027,500
----------
Total............................................. $2,740,000
==========
</TABLE>
In addition to the above, the Company has other consulting agreements with
an officer which are payable on a month-to-month basis for a total of $15,000
per month and continue indefinitely until either party terminates the agreement
in writing with advance notice ranging from one to three months.
C. LITIGATION
During 1999 the Company was a party to various lawsuits stemming from a
building lease related to the Company's operations in Carpinteria, California,
and was subject to an adverse award of over $400,000. In late 1999, the Company
entered into a mediation in order to reach a universal settlement to these
various lawsuits. In February, 2000 the Company finalized a settlement agreement
requiring the Turbodyne parties to pay $200,000 to the opposing parties in full
settlement of the various lawsuits, which had been accrued previously.
The Company is currently involved in various collection claims and legal
actions, including shareholder claims arising in the ordinary course of
business. It is not possible at this time to predict the outcome of the legal
actions; however, Company management does not believe that disposition of these
matters will have a material effect on the Company's financial position or
results of operations. See Note 14 for additional legal matters.
NOTE 8 -- RELOCATION COSTS
During 1998, the Company commenced a relocation of certain of its
operations and incurred expenses aggregating $2,323,000 for the year ended
December 31, 1998. The effect of these unusual expenses was $0.07 per common
share. All such costs have been expensed as incurred and are included in the
$2,323,000 described above.
NOTE 9 -- STOCK OPTIONS
On March 3, 1997, the Company established an incentive stock option plan
(the "1997 Plan"). Under the 1997 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. As of December 31, 1999, the options to purchase
the maximum number of shares of common stock allowable under the 1997 Plan had
been granted.
F-15
<PAGE> 45
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Options granted under the 1997 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 in appropriate circumstances.
On September 4, 1998, the Board of Directors approved an incentive stock
option plan (the "1998 Plan"). Under the 1998 Plan, the Company may grant
options to its directors, officers, employees and consultants for up to
4,000,000 shares of common stock. The option's maximum term is ten years. The
Stock Option Committee will determine the terms of any options or other rights
granted under the 1998 Plan, including the grant date of any option, the
exercise price and the term, which in any event shall not exceed ten years. The
maximum number of shares of common stock under the 1998 Plan to any participant
is 200,000 per participant per year. As of December 31, 1999 and 1998, 74,500
and 544,300, respectively, represent the number of unoptioned shares available
for the granting of options under the 1998 Plan.
The following summarizes information relating to stock options during 1999,
1998 and 1997:
<TABLE>
<CAPTION>
NONEMPLOYEES EMPLOYEES ALL
--------------------------- ----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- -------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1999
Outstanding at beginning of year.... 430,000 $6.01 5,880,141 $4.48 6,310,141 $4.58
Granted............................. 380,000 2.13 755,900 1.83 1,135,900 1.93
Exercised........................... -- -- (260,000) 5.01 (260,000) 5.59
Forfeited........................... (105,000) 8.37 (1,059,743) 3.92 (1,164,743) 3.87
-------- ---------- ----------
Outstanding at end of year.......... 705,000 3.58 5,316,298 4.25 6,021,298 4.17
Options exercisable at end of
year.............................. 672,000 3.48 4,745,525 4.30 5,417,525 4.20
Weighted average fair value of
options granted during the year... -- 1.64 -- 1.58 -- 1.60
======== ===== ========== ===== ========== =====
1998
Outstanding at beginning of year.... 510,000 $4.73 3,621,500 $4.78 4,131,500 $4.77
Granted............................. 760,000 5.88 10,496,700 4.40 11,256,700 4.50
Exercised........................... (230,000) 3.62 (4,899,892) 4.26 (5,129,892) 4.23
Forfeited........................... (610,000) 5.66 (3,338,167) 4.77 (3,948,167) 4.91
-------- ---------- ----------
Outstanding at end of year.......... 430,000 6.01 5,880,141 4.48 6,310,141 4.58
Options exercisable at end of
year.............................. 363,333 6.15 4,619,124 4.37 4,282,457 4.50
Weighted average fair value of
options granted during the year... -- 4.48 -- 2.94 -- 3.04
======== ===== ========== ===== ========== =====
1997
Outstanding at beginning of year.... 25,000 $5.25 2,275,500 $4.55 2,300,500 $4.56
Granted............................. 485,000 4.70 2,594,000 4.67 3,079,000 4.68
Exercised........................... -- -- (754,500) 2.06 (754,500) 2.06
Forfeited........................... -- -- (493,500) 5.75 (493,500) 5.75
-------- ---------- ----------
Outstanding at end of year.......... 510,000 4.73 3,621,500 4.78 4,131,500 4.77
Options exercisable at end of
year.............................. 231,950 4.75 2,984,655 4.78 3,216,615 4.78
Weighted average fair value of
options granted during the year... -- 3.50 -- 3.45 -- 3.48
======== ===== ========== ===== ========== =====
</TABLE>
F-16
<PAGE> 46
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
------------------------------------------------- ------------------------------
NUMBER OF NUMBER OF
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE REMAINING TERM EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to $2.35 1,485,800 $2.10 $3.93 1,264,365 $2.14
$2.36 to $3.50 1,643,798 3.50 2.75 1,643,798 3.50
$3.51 and up 2,891,700 5.63 3.65 2,509,362 5.69
--------- ---------
Total 6,021,298 4.18 3.47 5,417,525 4.20
========= ===== ===== ========= =====
</TABLE>
The per share weighted average fair value of stock options granted during
1999, 1998 and 1997 was $1.60, $4.32 and $3.48, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: 1999, 1998 and 1997 expected dividend yield 0%; expected
volatility of between 148% and 106%; risk-free interest rate of between 5.00%
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported............................ $(35,988,896) $(33,033,000) $(13,185,000)
Pro forma.............................. (39,563,301) (61,527,000) (20,687,000)
============ ============ ============
Basic and diluted loss per share:
As reported............................ $ (0.88) $ (0.88) $ (0.58)
Pro forma.............................. (0.97) (1.80) (0.91)
============ ============ ============
</TABLE>
NOTE 10 -- SHAREHOLDERS' EQUITY
A. 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.
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
F-17
<PAGE> 47
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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. As of
December 31, 1999 and 1998, 74,500 and 544,300, respectively, represent the
number or unoptioned shares available for the granting of options under the 1998
Plan.
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 June 30, 1998, 272,000 Series "C" stock purchase warrants were
exercised for common stock and at December 31, 1998, no Series "C" stock
purchase warrants were outstanding.
B. STOCK PURCHASE WARRANTS
At December 31, 1999, 1998 and 1997, the Company had 1,160,876, 526,501 and
972,000 of stock purchase warrants outstanding, respectively. 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 $1.739 to $5.00 and expiration dates between September 2000 and
July 2004.
C. 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.
During 1998, all the holders of the Class A Preferred stock elected to
exercise the conversion rights under this class of shares. The $10 million face
value amounts were converted into 4,742,522 common shares. The total stock
issued on conversion also includes the 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.
D. 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.
E. SHARE BUY-BACK PLAN
On September 17, 1998, the Company announced that its Board of Directors
authorized the Company to repurchase up to $3,500,000 of its shares of common
stock. The actual number of shares repurchased, and the
F-18
<PAGE> 48
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
timing of the purchases, has been based on the stock price, general conditions
and other factors. The Company has repurchased 378,580 shares for a total of
$1,755,534 at December 31, 1999.
F. ISSUANCE OF STOCK OPTIONS TO NONEMPLOYEES FOR SERVICES
The Company has recorded $1,043,310, $3,308,000 and $542,000 of
compensation expense in 1999, 1998 and 1997 respectively, relating to stock
options issued to nonemployees for services rendered during those years.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company made payments to related parties as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Project management fees........................... $180,000 $180,000 $ 324,000
Consulting fees................................... 131,539 202,000 470,000
Rent and administrative services.................. 284,529 192,000 360,000
-------- -------- ----------
$596,068 $574,000 $1,154,000
======== ======== ==========
</TABLE>
The following amounts are due from related parties and are included in
employee advances receivable and other assets:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Advances receivable from directors interest free and payable
on demand................................................. $256,020 $ 403,000
Housing loan receivable from directors...................... 462,500 656,000
-------- ----------
$718,520 $1,059,000
======== ==========
</TABLE>
The Company expended funds aggregating $7,750 and $1,464,000 in 1999 and
1998, respectively, to a Company controlled by one of its officers for research
and development activities related to the Company's product development which is
included in research and development costs at December 31, 1999 and 1998.
The Company leased the Carpinteria facility and the Pacific Baja facility
from related parties (see Note 7A).
F-19
<PAGE> 49
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 12 -- SEGMENT REPORTING
The Company's accounting policies of the segments below are the same as
those described in the summary of significant accounting policies, except that
the Company does not allocate income taxes to segments. The Company evaluates
performance based on net revenues and profit or loss from operations. The
business segments are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales from external customers:
Aftermarket wheels*............................ $ 13,750,000 $ 13,848,000 $ 20,691,000
Automotive engine components*.................. 34,753,000 26,287,000 18,474,000
Turbodyne products............................. 1,715,161 723,000 --
------------ ------------ ------------
$ 50,218,161 $ 40,858,000 $ 39,165,000
============ ============ ============
Gross Profit (Loss):
Aftermarket wheels*............................ $ 1,079,000 $ 2,974,000 $ 3,990,000
Automotive engine components*.................. 2,430,000 1,938,000 3,400,000
Turbodyne products............................. 278,963 121,000 (551,000)
------------ ------------ ------------
$ 3,787,963 $ 5,033,000 $ 6,839,000
============ ============ ============
Loss from operations:
Aftermarket wheels*............................ $ (3,216,000) $ (341,000) $ 570,000
Automotive engine components*.................. (3,378,000) (2,867,000) 752,000
Turbodyne products............................. (14,205,630) (23,962,000) (13,465,000)
------------ ------------ ------------
$(20,799,630) $(27,170,000) $(12,143,000)
============ ============ ============
Depreciation and amortization:
Aftermarket wheels*............................ $ 1,207,000 $ 1,081,000 $ 806,000
Automotive engine components*.................. 1,323,000 1,349,000 844,000
Turbodyne products............................. 412,104 1,201,000 1,045,000
------------ ------------ ------------
$ 2,942,104 $ 3,631,000 $ 2,695,000
============ ============ ============
Net interest expense (income):
Aftermarket wheels*............................ $ 912,000 $ 703,000 $ 402,000
Automotive engine components*.................. 950,000 722,000 484,000
Turbodyne products............................. (323,471) (625,000) (116,000)
------------ ------------ ------------
$ 1,538,529 $ 800,000 $ 770,000
============ ============ ============
Capital expenditures:
Aftermarket wheels*............................ $ 332,000 $ 559,000 $ 927,000
Automotive engine components*.................. 2,126,000 1,547,000 5,441,000
Turbodyne products............................. 134,268 627,000 542,000
------------ ------------ ------------
$ 2,592,268 $ 2,733,000 $ 6,910,000
============ ============ ============
Total assets:
Aftermarket wheels*............................ $ -- $ 12,237,000 $ 13,017,000
Automotive engine components*.................. -- 22,194,000 17,633,000
Turbodyne products............................. 6,763,759 20,615,000 19,076,000
------------ ------------ ------------
$ 6,763,759 $ 55,046,000 $ 49,726,000
============ ============ ============
</TABLE>
- ---------------
* This segment represents Pacific Baja. See Note 15
F-20
<PAGE> 50
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 13 -- LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered net losses in each of the last four years resulting in an accumulated
deficit of $90,257,896 at December 31, 1999, has used cash in its operating
activities in each of the last four years, has disposed of its most significant
subsidiary through bankruptcy, is subject to a lawsuit brought against it by
shareholders, and based on the Company's projected cash flows for the ensuing
year it will be required to seek additional equity or debt financing in order to
continue its present operations, irrespective of the amounts to be paid, if any,
in connection with the aforementioned lawsuits. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
The Company's operations have been financed principally through a
combination of private and public sales of equity and debt securities. Although
the Company continues to raise operating funds with a combination of debt and
equity instruments there is no guarantee that the company will be able to
continue to finance operations by this method The Company is also limited in
raising funds through the sale of equity because of the remaining authorized
shares available for sale.
The Company continues to examine it's operation and processes for further
methods of cutting cost and gaining efficiencies. However, there is no assurance
that the cost reductions will be realized in the full amount.
NOTE 14 -- SETTLEMENT OF CLAIM -- SALE OF PATENTS
In July 1998, a claim was filed against the Company alleging, among other
things, breach of contract, breach of purchase order, negligent
misrepresentation and fraud. On March 3, 1999 an arbitration award was issued
against the Company for a total of $6.65 million including a lien on all assets,
plus recovery of plaintiff's attorney's fees and other costs. The Company
settled the claim on December 20, 1999 by assignment of intellectual property
rights and rights to manufacture, market and sell products to a customer under a
new joint venture with Honeywell Turbocharging Systems (Note 16), who in turn
paid the outstanding claim. The award of $6.65 million is included in litigation
expense, offset with $1.5 million awarded from an insurance carrier, and the
gain on assignment of the patents, net of book value of patents of $809,486, is
included in gain on sale of patents.
NOTE 15 -- PACIFIC BAJA BANKRUPTCY
In July 1999, a major creditor of the Company's wholly-owned major
subsidiary, Pacific Baja, began collection activities against Pacific Baja which
threatened Pacific Baja's banking relationship with, and source of financing
from, Wells Fargo Bank. As a result, Pacific Baja and its subsidiaries commenced
chapter 11 bankruptcy proceedings on September 30, 1999.
Pursuant to the Bankruptcy court order, the assets were sold to the highest
bidder at an auction on December 23, 1999, for approximately $14.4 million.
There are no proceeds available for distribution to unsecured creditor, after
the payment of Pacific Baja's secured debt. The Company was owed approximately
$6 million.
There were no remaining assets and liabilities of Pacific Baja as of
December 31, 1999, however several of the capital leases of the subsidiary
totalling approximately $4 million were guaranteed by Turbodyne Technologies
Inc., which were substantially assumed by the buyer after December 31, 1999.
Additionally there were approximately $1.8 million in Pacific Baja's purchases
commitments of raw material from a supplier guaranteed by Turbodyne Technologies
Inc., however the supplier now has a new purchase agreement with the new buyer.
F-21
<PAGE> 51
TURBODYNE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The Company recorded a loss on disposal of the Pacific Baja assets of
$14,298,395. Additionally it recorded $237,720 of cumulative translation
adjustments included in selling, general and administrative expenses as a result
of a complete liquidation of all of the investment in the Mexican foreign
subsidiary.
NOTE 16 -- JOINT AGREEMENT
In 1999, the Company entered into joint development and licensing
agreements with Honeywell Turbocharging Systems (Honeywell), a division of
AlliedSignal Inc. Under its agreements with Honeywell, the Company assigned to
Honeywell its patent and trademark portfolio (including both the Dynacharger(TM)
and the Turbopac(TM)) for $6.8 million. Of the $6.8 million, $6.65 million was
used in settlement of a judgment (Note 14). In addition, under these agreements,
the Company and Honeywell are sharing the development costs of the
Dynacharger(TM) and the Turbopac(TM), the Company 40% and Honeywell 60%. The
Company retains the sole worldwide rights to manufacture, market and sell all
motors, generators, electronic controls and light metals for the Dynacharger(TM)
and Turbopac(TM), and Honeywell holds the sole worldwide rights to manufacture,
market and sell the Dynacharger(TM) and Turbopac(TM) product lines. The Company
will receive from Honeywell royalties of 3.7% (subject to adjustment) of the net
sales of the Dynacharger(TM) and Turbopac(TM) product lines. Prototypes of the
Dynacharger(TM) have been delivered to two automotive manufacturers in 1999, and
three additional automobile manufacturers have signed agreements for the
delivery of prototypes in 2000. Mass production for automotive manufacturers of
the Dynacharger(TM) and Turbopac(TM) product lines is expected to commence in
calendar year 2003.
F-22
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on April
12, 2000.
TURBODYNE TECHNOLOGIES INC.
/s/ GERHARD E. DELF
--------------------------------------
By: Gerhard E. Delf
Title: President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gerhard E. Delf and Joseph D. Castano, or any one
of them, his attorney-in-fact and agent, with full power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the date indicates.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ PETER HOFBAUER Chairman of the Board April 12, 2000
- -------------------------------------------------------- and Director
Peter Hofbauer
/s/ GERHARD E. DELF President and April 12, 2000
- -------------------------------------------------------- Chief Executive Officer
Gerhard E. Delf (Principal Executive Officer)
/s/ JOSEPH D. CASTANO Chief Financial Officer April 12, 2000
- -------------------------------------------------------- (Principal Financial Officer
Joseph D. Castano and Principal Accounting
Officer) and Secretary
/s/ WENDELL R. ANDERSON Director April 12, 2000
- --------------------------------------------------------
Wendell R. Anderson
/s/ SADAYAPPA DURAIRAJ Director April 12, 2000
- --------------------------------------------------------
Sadayappa Durairaj
/s/ DANIEL GERONAZZO Director April 12, 2000
- --------------------------------------------------------
Daniel Geronazzo
/s/ FRIEDRICH GOES Director April 12, 2000
- --------------------------------------------------------
Friedrich Goes
/s/ PETER KITZINSKI Vice President Corporate April 12, 2000
- -------------------------------------------------------- Finance Europe, General
Peter Kitzinski Manager of Turbodyne Europe
GmbH and Director
/s/ ROBERT F. TAYLOR Director April 12, 2000
- --------------------------------------------------------
Robert F. Taylor
Director April 12, 2000
- --------------------------------------------------------
Edward M. Halimi
</TABLE>
<PAGE> 1
EXHIBIT 10.1
JOINT DEVELOPMENT AGREEMENT
This joint development agreement (the "Agreement") is entered into on
this 28th day of January, 1999 by and between AlliedSignal Inc., a Delaware
corporation acting through its Turbocharging Systems business unit having an
address of 23326 Hawthorne Boulevard, Suite 200, Torrance, California 90505
("AlliedSignal") and Turbodyne Technologies, Inc., a Delaware corporation having
an address of 6155 Carpinteria Avenue, Carpinteria, California 93013 and
Turbodyne Systems, Inc., a Nevada corporation its fully owned subsidiary
(collectively "Turbodyne"). AlliedSignal and Turbodyne shall be referred to in
the Agreement jointly as the "Parties" and individually, as appropriate, as the
"Party".
RECITALS
A. AlliedSignal is a manufacturer of turbochargers for internal
combustion engines and other applications and has extensive experience in the
development of charge air systems employing turbochargers and other comparable
devices.
B. Turbodyne has developed technology and acquired patents relating to
electrically assisted turbochargers for use with combustion engines.
C. AlliedSignal and Turbodyne believe that electrically assisted
turbochargers offer performance improvements over conventional turbochargers for
various engine applications.
D. AlliedSignal and Turbodyne believe that by combining their
independent technologies they will more quickly realize their mutual goal of
introducing the Products (as defined in section 7 below) to the market as soon
as reasonably possible.
E. Turbodyne has granted AlliedSignal an exclusive license attached
hereto as Exhibit A (the "License Agreement") for the manufacture and sale of
products incorporating Turbodyne's electrically assisted turbocharger technology
and improvements resulting from this Agreement.
F. Accordingly, AlliedSignal and Turbodyne desire to jointly
develop specifications, designs, processes, know-how, trade secrets,
innovations, improvements and inventions for electrically assisted turbochargers
and turbochargers having combined electrical motor assist and
All schedules and exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
1
<PAGE> 2
generator power extraction (the "New Technology") while maintaining the
integrity of their respective businesses with respect to research, development,
engineering and manufacturing of their core technologies.
NOW, THEREFORE, in consideration of the covenants and promises made
herein and other good and valuable consideration, the sufficiency of which is
acknowledged, the Parties agree as follows:
1. PURPOSE. AlliedSignal and Turbodyne intend to jointly conduct
research, development and engineering in the field of electrical motor/generator
and electronic devices and the integration of such devices into turbochargers
(the "Field of Use").
2. REPRESENTATIONS. Each of AlliedSignal and Turbodyne represent
to the other as follows:
a. Each is a corporation duly organized, validly existing, and in
good standing under the laws of the State of its incorporation, with all
requisite corporate power, authority, and legal right to own its property and
conduct its business as now conducted and as contemplated under this Agreement.
b. Each is duly qualified to do business in each jurisdiction in
which the nature of its properties or its business requires such qualification
and in which the failure to so qualify would materially adversely affect its
business or financial condition.
c. The execution, delivery, and performance by each of this
Agreement and the performance by each of its obligations hereunder (i) are
within their respective power and authority; (ii) have been duly authorized by
all necessary action on the part of their respective governing bodies or
authorized officers; (iii) will not contravene any provision of law or
regulation, or any writ or decree of any court or governmental instrumentality
or their respective States of incorporation or other agreement of either, or any
other agreement, instrument, or undertaking binding upon either or any of their
respective assets; and (iv) will not contravene any agreements with any of
lenders or investors of either.
d. This Agreement has been duly executed and delivered by each
Party and constitutes the valid, legal, and binding obligation of each Party,
enforceable in accordance with its terms.
e. Except as defined herein, no approval or consent of, or filing
with, any governmental authority is required to be obtained or effected by
either Party in connection with its execution, delivery, and performance of this
Agreement or, alternatively, each Party has obtained or shall obtain in respect
of this Agreement and the transactions contemplated hereby, on or prior
2
<PAGE> 3
to the date hereof, all governmental permissions, rights, licenses, and permits,
if any, to carry out the transactions contemplated thereby.
f. Neither Party has received notice of any violation of any
applicable law, regulation, order, or requirement which would have a materially
adverse effect on its business or on the transactions contemplated by this
Agreement, and which has not been complied with or corrected in all material
respects.
g. There is no pending or, to the knowledge of the executing
officer, threatened action, suit or proceeding or investigation before any
court, board of arbitration or arbitrator, governmental body, agency,
instrumentality, or official against or affecting either Party, the outcome of
which, if adversely determined, would have a material adverse effect on its
business or assets or could adversely impair the ability of either Party to
fully perform its obligations under this Agreement. AlliedSignal is aware that
two class action lawsuits have recently been commenced by shareholders of
Turbodyne.
h. Neither Party is a party to any agreement or instrument or
subject to any restriction having a materially adverse effect on its business,
operations, intellectual property, real or personal property, assets, or
condition, financial or other, or its ability to perform its obligations under
this Agreement or any agreement or instrument thereunder and is not in default
in the performance, observance, or fulfillment of the material obligations,
covenants, or agreements contained in any agreement or instrument or by which
any of its property or assets is bound. Turbodyne has disclosed to AlliedSignal
an Agreement in Principle (the "3K Agreement") it entered into in April 1997
with AG Kuhnle, Kopp & Kausch now know as 3K-Warner Turbosystems GmbH
("3K-Warner"). Although the validity and scope of the 3K Agreement and
Turbodyne's obligations thereunder are uncertain, the Parties agree that
Turbodyne's obligations, if any, under the 3K Agreement shall be fulfilled by
sub-license under the License Agreement and AlliedSignal and Turbodyne shall
share any benefits accruing to Turbodyne under the 3K Agreement on a 60%/40%
basis, respectively.
i. Neither party is in default under any applicable order, writ,
injunction, or decree of any court, governmental department, board, or agency,
or instrumentality of any arbitrator.
3. CONTRIBUTION OF DEVELOPMENT EFFORT
a. AlliedSignal and Turbodyne will each contribute material and
personnel resources on a shared basis, sixty percent (60%) by AlliedSignal and
forty percent (40%) by Turbodyne as required and called for by the Development
Committee. Such contribution shall include work effort and expenses undertaken
by the Parties individually under the direction of the Program Manager pursuant
to the Development Program attached hereto as Exhibit B, which may be amended by
the Program Manager from time to time. Costs of employees of the Parties shall
be
3
<PAGE> 4
charged at a standard rate of $85 per hour and other costs shall be at actual
cost without mark-up. If such work effort and expense by a Party shall exceed
its contribution share, the Development Committee shall equitably assess the
other Party for a contribution for reimbursement of the excess amount pursuant
to the percentages defined above. Except with the approval of both Parties, the
Parties shall not be obligated to contribute in the aggregate more than
$1,500,000 in any 12 month period and $6,000,000 during the term of this
Agreement. If Turbodyne does not maintain its 40% share of investment in the
Development program in response to Development Committee assessments, the
royalty rate of the License Agreement shall be adjusted by a ratio of actual
percentage share of investment divided by 40% times 3.2% to which shall be added
a 0.5% base royalty.
b. The parties shall work diligently and in good faith to
implement the objectives and purposes of this Agreement including the
development of New Technology as soon as commercially feasible to facilitate the
manufacture, marketing and sale of the Products. Either party's failure to so
perform shall constitute a breach of this Agreement subject to arbitration under
paragraph 16.
c. Following the execution of this Agreement, both of the Parties
shall only engage in activities relating to the design, development,
manufacture, licensing or marketing of the Products or pursue the development of
technology relating to the Products as authorized in this Agreement or the
License Agreement. Notwithstanding the foregoing, Turbodyne shall be permitted
to continue with design and development activities, marketing, sale or other
activities relating to the exploitation of Turbopac products as defined in
Exhibit B to the License Agreement and AlliedSignal shall have any interest in
such products or activities.
4. MANAGEMENT.
a. The activities of this Agreement shall be governed by a
committee of five members (the "Development Committee" or the "Board") including
a chairperson appointed by AlliedSignal and two (2) members appointed by each
Party.
b. The Parties will , by mutual agreement, appoint one person to
direct the Development Program contemplated by this Agreement (the "Program
Manager"). The Program Manager, with the assistance of the Development Committee
as required, shall define the personnel requirements, budget and other needs and
make recommendations to the Board for action. The Program Manager initially
appointed by the Parties shall be removable by a majority vote of the
Development Committee. Subsequent Program Managers will be appointed and removed
by a majority of the Development Committee.
4
<PAGE> 5
c. The Program Manager will have full power and authority to
conduct and manage the Development Program contemplated by this Agreement and to
undertake and implement, on behalf of the Parties, all directions of the
Development Committee.
d. The Program Manager, shall diligently and in good faith manage
and implement or cause to be implemented any directions of the Board, and
otherwise conduct the Development Program contemplated by this Agreement. The
Program Manager will devote such time and attention to the Development Program
as is reasonably necessary to accomplish the purposes of this Agreement.
e. All decisions of the Development Committee shall be made by
majority vote. The Development Committee shall not materially alter the
Development Program or materially deviate from this Agreement without the
consent of the Parties.
5. COMPENSATION OF THE BOARD, PROGRAM MANAGER AND PERSONNEL. The
Development Committee shall remain employees of the Party appointing them and
shall be compensated by that Party. The Program Manager shall be employed and
compensated as determined by the Development Committee.
6. DEVELOPED INTELLECTUAL PROPERTY.
a. Any specifications, designs, processes, know-how, trade
secrets, innovations, improvements, inventions, whether or not patentable,
trademarks and copyrightable works (collectively "Developed Intellectual
Property") conceived, reduced to practice or created during a project developing
New Technology solely by AlliedSignal shall be owned by AlliedSignal and all
right, title and interest in and to such Developed Intellectual Property shall
be held by AlliedSignal. Any Developed Intellectual Property conceived, reduced
to practice or created during a project developing New Technology jointly by the
Parties shall be jointly owned by the Parties. Any Developed Intellectual
Property conceived, reduced to practice or created during a project developing
New Technology solely by Turbodyne shall be owned by Turbodyne and shall be
exclusively licensed to AlliedSignal Pursuant to the License Agreement.
b. AlliedSignal may, under the direction of the Development
Committee, license intellectual property from Third Parties for use by the
Parties in Products and Components and license Developed Intellectual Property,
with consent of the Parties, to third parties for royalty or fee income pursuant
to the License Agreement. The cost of any license of third party technology
shall be borne by the Parties at a ratio of 60% AlliedSignal and 40% Turbodyne.
5
<PAGE> 6
7. PRODUCTS.
a. Pursuant to the License Agreement AlliedSignal holds the sole
world wide right, subject to the license granted to Turbodyne to manufacture and
sell the Component Parts as defined in 7.b below, to develop, manufacture,
market and sell any electrically assisted charge air product or other engine
product, including electrically assisted turbochargers and turbochargers
employing an electric motor / generator for power assist / take-off, (the
"Products") or employing Developed Intellectual Property as an Improvement under
the License Agreement.
b. AlliedSignal shall grant to Turbodyne, pursuant to a
sublicense under the License Agreement acceptable to both parties ("Turbodyne
License Agreement"), the sole world wide right, subject to any license granted
to third parties by AlliedSignal pursuant to paragraph 6. b., to manufacture,
market and sell all light metals, motors, generators and electronic controls
(collectively "Component Parts") for the Products and AlliedSignal shall license
to Turbodyne any Developed Intellectual Property necessary to manufacture,
market and sell the Component Parts. Turbodyne shall produce and provide
exclusively to AlliedSignal and to other licensees pursuant to 6.b above, and
AlliedSignal shall acquire the Component Parts solely from Turbodyne, pursuant
to AlliedSignal's standard terms and conditions for purchase under a Long Term
Supply Agreement, to be negotiated by the Parties, which shall be subject to
Turbodyne remaining competitive in cost, quality and delivery, and the price to
AlliedSignal for the Component Parts shall not exceed cost plus seven percent
(7%).
c. Notwithstanding the terms of paragraph 7. a., Turbodyne shall
retain the rights to manufacture and sell any motor driven compressor products
currently offered in Turbodyne's Turbopac product line, as defined in Exhibit B
to the License Agreement including any developments or improvements to such
products limited to integration of the control electronics into those products
and changes not substantially affecting form, fit or function. Further,
AlliedSignal under its rights pursuant to paragraph 7. a. grants to Turbodyne a
limited sublicense for the right to manufacture and sell electrical motor
assistance systems for Cummins BHT turbochargers (the "BHT Products") in the
aftermarket pending development of AlliedSignal's capability, capacity and
interest in the sale and production of those products.
8. TRANSFERS OF INTEREST IN THIS AGREEMENT. Either Party may
assign its rights and obligations under this Agreement upon the sale of all or
substantially all of its business and assets relating to the subject matter of
the Agreement subject to obtaining the consent of the other party which consent
shall not be unreasonably withheld. Neither party may otherwise, without the
prior written consent of the other party, sell, assign, or transfer in any way,
or mortgage, hypothecate, or otherwise encumber either of their respective
interests in this Agreement. Any attempted action in violation of this provision
will be null and void.
6
<PAGE> 7
9. TERM AND TERMINATION. The term of this Agreement will commence
as of the date first above mentioned and will continue in effect during the term
of the License Agreement.
10. MATERIAL BREACH - NOTICE AND CURE. If there is a material
breach of this Agreement, the party intending to arbitrate for termination must
give the defaulting party sixty (60) days' written notice thereof, detailing the
particular action or condition that is claimed to constitute a material breach.
The defaulting party may cure the breach during this period or take steps to
cure, and if cured, or if the steps taken to cure the breach will do so within a
reasonable period if diligently prosecuted, an arbitration action shall not be
brought.
11. NO JOINT LIABILITIES OR AGENCY. This Agreement shall not be
deemed to create any agreement or control giving rise to joint and several
liability as between AlliedSignal and Turbodyne for any purpose, acts or
omissions by a Party, except as statutorily required for the legal entity formed
as this Agreement. No ownership or other interest is acquired by either Party in
the other Party. Further, no agency relationship between the Parties is formed
hereby and neither Party shall represent or hold itself out as an authorized
representative of the other Party for any purpose.
12. CONFIDENTIALITY. Each Party shall maintain in confidence any
and all information received from the other Party which is known to be
confidential or proprietary ("Confidential Information") and will not disclose
such Confidential Information to any third party without the written consent of
the Party owning the Confidential Information. Confidential Information shall
not include any information which by demonstrable evidence
a. is known by the receiving Party prior to its disclosure by the
disclosing Party;
b. is in the public domain;
c. is received from a third party not having any duty to maintain
the information in confidence; and
d. is independently created by the receiving Party.
This duty of confidentiality shall not be breached by disclosure of
Confidential Information pursuant to any court order or other process of law or
regulatory requirement, however, the Party required to disclose shall notify the
Party owning the Confidential Information of the requirement to disclose in a
timely manner prior to such disclosure and shall cooperate with that Party in
any efforts to minimize the disclosure of the Confidential Information.
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13. PUBLICATIONS. Any statement, publication, press release or
announcement by Turbodyne regarding this Agreement or the New Technology shall
be approved by AlliedSignal prior to any publication or disclosure to a third
party.
14. INDEMNIFICATION. Each Party agrees to indemnify the other
Party from any damages, losses, expense or costs, including attorney's fees,
based on any breach of the representations made by the indemnifying Party
herein, including, without limitation, any claim by a third party based on any
agreement in conflict with or frustrating the purpose and benefits of this
Agreement. The indemnifying Party shall defend, at its sole expense, and hold
harmless the other Party from any such claim. Notwithstanding the
indemnification of this paragraph 14, in no event shall either Party be liable
to the other Party for consequential damages or damages for loss of business by
the other party.
15. NOTICE. Any notice required pursuant to this Agreement to the
Parties or to the Board of this Agreement shall be effective upon deposit in the
United States Mail Certified Return Receipt requested addressed as follows:
If to AlliedSignal:
AlliedSignal Inc.
3201 West Lomita Boulevard
Torrance, California 90505
Attn: Jonathan Katz, Vice President
If to Turbodyne:
Turbodyne Technologies, Inc.
6155 Carpinteria Avenue
Carpinteria, California 93013
Attn: Ed Halimi
With copy to:
Kelly, Lytton, Mintz & Vann LLP
1900 Avenue of the Stars
Suite 1450
Los Angeles, California 90067
Attn: Peter D. Kelly
16. INTEGRATION; GOVERNING LAW. This Agreement merges and
supersedes all prior Agreements between the parties hereto, and shall be
governed by, and construed in accordance with, the laws of the State of
California. Any dispute arising under this Agreement which cannot be resolved by
the Parties shall be settled by arbitration under the Commercial Arbitration
Rules of the American Arbitration Association before a panel of three
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arbitrators selected by the Parties, or if the Parties are unable to agree,
appointed by the director of the American Arbitration Association office in
which the arbitration is to occur. The arbitration proceedings will be held at a
location agreed to by the Parties in the greater Los Angeles Metropolitan area.
Any award or remedy by the arbitration panel will be enforceable by any court
having jurisdiction over the Parties and may include equitable remedies and
reimbursement of attorneys' fees and arbitration costs as equitably determined
by the panel. Either Party may apply to the arbitration panel or to a court of
competent jurisdiction for a preliminary injunction or other provisional remedy
to maintain the status quo pending arbitration.
17. SURVIVAL. This Agreement and all the representations,
covenants and provisions contained in this Agreement will survive following the
formation of this Agreement and shall continue in effect throughout the duration
of this Agreement; provided, however, in the event of any inconsistency between
the terms of this Agreement and the License Agreement, the terms of the License
Agreement shall prevail.
18. AMENDMENTS. No modification, amendment, or waiver of any
provision of this Agreement, or consent to any departure by either party
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the other party.
19. CAPTIONS AND INTERPRETATION. The captions present in the
Agreement are for convenience only and shall not be interpreted as altering or
defining the content or substance of the Agreement contained herein. This
Agreement shall be considered as fully negotiated by the Parties and no
inference or presumption shall be interpreted for any language herein
attributable to the drafting Party.
20. FURTHER DOCUMENTS. The Parties agree to negotiate in good
faith, execute and deliver any such further documents or agreements as may be
necessary to accomplish the intent of this Agreement.
21. SEVERABILITY. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal, or unenforceable in any
respect, the validity, legality, and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby.
22. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their authorized officers under seal effective the date first
written above.
AlliedSignal Inc. Turbodyne Systems, Inc.
By: By:
--------------------------- --------------------------
Title: Title:
------------------------ -----------------------
Turbodyne Technologies, Inc
By:
--------------------------
Title:
-----------------------
Attested: Attested:
By: By:
--------------------------- --------------------------
Title: Assistant Secretary Title: Secretary
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EXHIBIT 10.2
LICENSE AGREEMENT
THIS AGREEMENT made and effective this 28th day of January, 1999, is
between, TURBODYNE TECHNOLOGIES, INC., a Delaware corporation having an address
of 6155 Carpinteria Avenue, Carpinteria, California 93013 and TURBODYNE SYSTEMS,
INC., a Nevada corporation its fully owned subsidiary (collectively "Turbodyne")
and ALLIEDSIGNAL INC. acting by and through its AlliedSignal Turbocharging
Systems business unit having an office at 23326 Hawthorne Boulevard, Torrance,
California hereinafter "AlliedSignal".
RECITALS:
WHEREAS AlliedSignal is now and has been engaged in the business among
others of manufacturing and selling systems and components for charge air
boosting and control for internal combustion engines; and
WHEREAS Turbodyne has developed technology and acquired patents relating
to electrically assisted turbochargers for use with combustion engines
technology and may hereafter develop improvements directed to the such
technology; and
WHEREAS AlliedSignal desires to acquire an exclusive license under
Turbodyne's proprietary and Licensed Patents;
NOW, THEREFORE in consideration of the premises and mutual covenants
herein contained and other good and valuable considerations it is hereby agreed
as follows:
- ------------
All schedules and exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
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1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth herein:
1.(a) "Effective Date" shall mean the date first written above
1.(b) "Patent and Proprietary Rights" shall mean all proprietary rights
relating to the Technology (as hereinafter defined) and all rights under those
patents and patent applications and trademark rights identified in Exhibit A
attached hereto and all patents issuing from any such applications, all
counterpart patents and patent applications thereof now and hereafter filed
and/or issuing in any country of the world and all continuation, continuation in
part and reissued patent applications of any of the preceding and all patents
issuing therefrom and all related design rights, if any, and utility models. The
Parties agree that the patents and patent applications identified are
intellectual property within the statutory definition of the Bankruptcy Code.
1 (c) "Improvements" shall mean all inventions and discoveries, whether
patentable or not, directed to the Technology and conceived and/or first reduced
to practice after the Effective Date. "Turbodyne Improvements" shall mean all
such Improvements made solely through the efforts of Turbodyne and/or controlled
by Turbodyne and/or for which Turbodyne has the right to grant licenses to
others. "AlliedSignal Improvements" shall mean any Improvements made solely by
employees of AlliedSignal. "Joint Improvements" shall mean inventions and
discoveries comprising Improvements made jointly by employees of Turbodyne and
AlliedSignal.
1.(d) "Licensed Patents" shall mean the patents and patent applications
of the Patent and Proprietary Rights and any patents arising from the
Improvements.
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1.(e) "Licensed Products" shall mean electrically assisted charge air
product or other engine product, including electrically assisted turbochargers
and turbochargers employing an electric motor / generator for power assist /
take-off, within the scope of any one or more claims of the Licensed Patents.
1.(f) "Net Sales of Licensed Products" shall mean the invoiced sales
price less any discounts or rebates not itemized in the invoiced sales price and
not including any transportation or insurance costs of products within the scope
of Licensed Patents sold by AlliedSignal and all Subsidiaries of AlliedSignal
during the Reporting Period which are manufactured or sold in any country in
which the Licensed Patents are enforceable less the total number of returns to
AlliedSignal during such Reporting Period of such Licensed Products.
1.(g) "Party" shall mean AlliedSignal and/or Turbodyne as apparent from
the context in the Section in which it is used.
1.(h) "Reporting Period" shall mean each successive three (3) month
period during the term of this Agreement the first of which shall commence on
the Date of First Commercial Production.
1.(i) "Subsidiary" shall mean any entity (including. but not limited to
any corporation. partnership or joint venture) that directly or indirectly
through one or more intermediaries controls or is controlled by or is under
common control with a Party. Control shall mean the ownership directly or
indirectly of at least thirty-five percent (35%) or more of the outstanding
voting shares of the entity or the maximum percent allowed under the laws of the
country or organization of the entity in the event the maximum percent allowed
is less than 35%.
1.(j) "Technology" shall mean any designs, processes, data, inventions,
developments or other proprietary information relating to electrically assisted
turbochargers and motors and controls therefore.
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1. (k) "Component Parts" shall mean any light metals, motors, generators
and electronic controls employed in an electrically assisted turbochargers
employing the Technology. 1. (l) "Third Party" shall mean any entity other than
any Party and any Subsidiary.
1.(m) "Production Commitment" shall mean an order placed by a Third
Party with AlliedSignal for Licensed Products in production quantities.
1. (n) "Joint Development Agreement" shall mean that certain agreement
entered into by the Parties entitled Joint Development Agreement and dated
January 28, 1999.
2. GRANT AND SUPPORT
2.(a) Turbodyne hereby grants to AlliedSignal the worldwide exclusive
license under Patent and Proprietary Rights and Turbodyne Improvements, with the
right to sublicense, to make, have made, use and sell products incorporating the
Technology. Turbodyne and AlliedSignal shall report to each other on a monthly
basis all Improvements made within the preceding month which are to be employed
in Licensed Products.
2.(b) Turbodyne also grants to AlliedSignal an exclusive worldwide
license under Turbodyne's owned portion of any Joint Improvement.
2 (c) Turbodyne shall make available to AlliedSignal all proprietary and
confidential information relating to the Technology necessary for the design and
manufacture of products pursuant to this Agreement and will provide technical
support at AlliedSignal's request for Component integration into Licensed
Products and for customer support regarding the Technology.
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2 (d) Notwithstanding the terms of paragraph 2.(a), Turbodyne shall
retain the rights and AlliedSignal hereby grants a royalty free non-exclusive
sublicense under the Patent and Proprietary Rights to manufacture and sell any
motor driven compressor products currently sold in Turbodyne's Turbopac product
line, defined in Exhibit B hereto, including any developments or improvements to
such products limited to integration of the control electronics into those
products and other changes not substantially affecting form, fit or function.
Turbodyne further shall retain the rights and AlliedSignal hereby grants a
royalty free non-exclusive sublicense under the Patent and Proprietary Rights to
manufacture and sell electrical motor assistance systems for Cummins BHT
turbochargers in the independent aftermarket.
2 (e) AlliedSignal shall be the sole owner of any and all rights to
Licensee Improvements including any patents and patent applications arising
therefrom.
2 (f) AlliedSignal shall grant to Turbodyne, pursuant to a sublicense
under this Agreement acceptable to both parties ("Turbodyne License Agreement"),
the sole world wide right, subject to any license granted to third parties by
AlliedSignal pursuant to paragraph 6. b. of the Joint Development Agreement, to
manufacture, market and sell all light metals, motors, generators and electronic
controls for the Licensed Products and AlliedSignal shall license to Turbodyne
any Developed Intellectual Property necessary to manufacture, market and sell
the Component Parts. Turbodyne shall produce and provide exclusively to
AlliedSignal and to other licensees pursuant to 6.b above, and AlliedSignal
shall acquire the Component Parts solely from Turbodyne, pursuant to
AlliedSignal's standard terms and conditions for purchase under a Long Term
Supply Agreement, to be negotiated by the Parties, which shall be subject to
Turbodyne remaining competitive in cost, quality and delivery, and the price to
AlliedSignal for the
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Component Parts shall not exceed cost plus seven percent (7%).
3. ROYALTIES
3.(a) In exchange for the exclusive license granted in Section 2 above
AlliedSignal shall pay to Turbodyne an earned royalty for each Reporting Period.
in an amount equal to the Net Sales of Licensed Products multiplied by three and
seven tenths percent (3.7) for each Licensed Product applicable to the Reporting
Period in question. If Turbodyne does not maintain its 40% share of investment
in the Development program in response to Development Committee assessments
pursuant to paragraph 3a of the Joint Development Agreement, the royalty rate of
the License Agreement shall be adjusted by a ratio of actual percentage share of
investment divided by 40% times 3.2% to which shall be added a 0.5% base
royalty.
3 (b) Only one royalty shall be due with respect to any royalty bearing
Licensed Product regardless of whether such Licensed Product is covered by more
than one claim and/or patent and/or patent application of Licensed Patents.
4. REPRESENTATIONS AND WARRANTIES
4.(a) Turbodyne represents and warrants that, to the best of its
knowledge, the exploitation by AlliedSignal of Licensed Patents and/or Turbodyne
Improvements and the manufacture, use or sale of Licensed Products does not
infringe any patent right or other proprietary right or alleged right of any
Third Party known to Turbodyne at the time of execution of this License.
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4.(b) TURBODYNE MAKES NO REPRESENTATION OR WARRANTY. EXPRESS OR IMPLIED
REGARDING THE MERCHANTABILITY OF LICENSED PRODUCTS NOR THE FITNESS THEREOF FOR
ANY PARTICULAR PURPOSE.
4 (c) Turbodyne represents and warrants that it has all right, title and
interest in and to the Patents and Proprietary Rights and has the power and
authority to enter into the License granted in this Agreement. Further,
Turbodyne has not sold, assigned, licensed, hypothecated or otherwise
transferred ownership or title to the Patents and Proprietary Rights and is not
a party to any agreement or instrument or subject to any restriction having a
materially adverse effect on its ability to perform its obligations under this
Agreement or any agreement or instrument thereunder and is not in default in the
performance, observance, or fulfillment of the material obligations, covenants,
or agreements contained in any agreement or instrument or by which any of its
Patents and Propretary Rights is bound. Turbodyne has disclosed to AlliedSignal
an Agreement in Principle (the "3K Agreement") it entered into in April 1997
with AG Kuhnle, Kopp & Kausch now know as 3K-Warner Turbosystems GmbH
("3K-Warner"). Although the validity and scope of the 3K Agreement and
Turbodyne's obligations thereunder are uncertain, the Parties agree that
Turbodyne's obligations, if any, under the 3K Agreement shall be fulfilled by
sub-license under this Agreement and AlliedSignal and Turbodyne shall share any
benefits accruing to Turbodyne under the 3K Agreement on a 60%/40% basis,
respectively.
5. PATENT INFRINGEMENT
5.(a) In the event a claim of infringement of a patent has been asserted
against AlliedSignal by a third party as a result of AlliedSignal's manufacture,
use or sale of Licensed
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Products Turbodyne shall make reasonable efforts to assist AlliedSignal in
modifying the Licensed Products to the extent necessary to avoid such claim of
infringement.
5.(b) Turbodyne agrees to defend, at its expense, any claim or suit
against AlliedSignal based on an assertion or claim that any Component Part
employed in a Licensed Product infringes any patent or other intellectual
property right, where such assertion or claim is based solely on the Technology
and not on any substantial combination or addition designed or created by
AlliedSignal. Turbodyne further agrees to hold AlliedSignal harmless and
indemnify AlliedSignal for any cost, expense, damages, attorney's fees or other
financial loss resulting from any settlement, judgment or final award in any
suit or other action arising from such claim or assertion, provided that
Turbodyne is notified by AlliedSignal in a timely manner of the claim and
Turbodyne is tendered the defense of such claim at its own expense. Turbodyne
shall as a portion of this indemnity use reasonable efforts to obtain for
AlliedSignal and its customers the right to use the Licensed Products and
Technology. Failure of Turbodyne to perform under this paragraph 5 (b) which
results in costs or damages to AlliedSignal shall be directly setoff against any
royalties due or prospective royalties arising under this Agreement.
5.(c) Any claim or suit against AlliedSignal or Turbodyne based on any
assertion or claim that any Licensed Product infringes any patent or other
intellectual property right shall be defended jointly by the Parties with costs
of the defense and any cost expense, damage or other financial loss resulting
from any settlement, judgment or final award in any such suit or other action
borne by the Parties in the proportion of 60% AlliedSignal and 40% Turbodyne.
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6. PATENT ENFORCEMENT
6.(a) In the event either Party discovers tangible evidence of the
manufacture use or sale by another of a product which infringes any claim of
patents comprising a portion of Licensed Patents and/or Improvements the Party
that discovered the evidence shall notify the other Party promptly in writing
upon such discovery. Such notification shall include such tangible evidence
discovered by the notifying Party.
6.(b) AlliedSignal shall have the right but not the obligation to
initiate an action to enforce Licensed Patents. Any such enforcement shall be at
the expense of AlliedSignal and all damages awarded as a result of such action
shall be for AlliedSignal's account provided, however, that AlliedSignal shall
pay to Turbodyne a portion of any damages award after deduction of all
AlliedSignal's reasonable costs and expenses for pursuing the action (the "Net
Award"), to compensate Turbodyne for its proportional loss of royalties under
this Agreement comparable to AlliedSignal's proportionate loss of profits from
sales of Licensed Products suffered as a result of the infringement AlliedSignal
shall, within one hundred twenty (120) days after becoming aware of such
infringement by, a Third Party of Licensed Patents and/or any patents and/or
patent applications of Improvements whether by AlliedSignal's discovery of such
evidence or by notification from Turbodyne , notify Turbodyne whether
AlliedSignal intends to bring an action for enforcement of such Licensed
Patents. If AlliedSignal notifies Turbodyne of election to initiate legal
action, AlliedSignal shall promptly thereafter commence and prosecute to final
resolution such action, whether by judgment or settlement. In the event
AlliedSignal notifies Turbodyne that AlliedSignal is electing not to bring art
action for infringement of such Licensed Patents, Turbodyne shall have the
right, but not the obligation, to initiate and prosecute any legal action for
infringement by such Third Party thereof at Turbodyne's sole cost and expense.
Any
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proceeds from such litigation undertaken by Turbodyne shall be for Turbodyne's
account provided, however, that Turbodyne shall pay to AlliedSignal a portion of
any damages award after deduction of all Turbodyne's reasonable costs and
expenses for pursuing the action (the "Net Award"), to compensate AlliedSignal
for its proportional loss of profits from sales of Licensed Products under this
Agreement comparable to Turbodyne's proportionate loss of royalties suffered as
a result of the infringement. The Parties agree to cooperate in any litigation
or action taken under the Licensed Patents at the expense of the litigating
party.
7. FILING & MAINTAINING PATENTS
7.(i) Turbodyne shall maintain active and enforceable patents and patent
applications in Exhibit A and on Turbodyne Improvements provided however that
any time after the seventh anniversary of this Agreement, Turbodyne shall have
the option to forego payment of maintenance fees or annuities in the event that
Turbodyne shall have first offered to AlliedSignal the option to pay the fees
and to take title to the patents for no additional royalty payments.
AlliedSignal shall maintain active and enforceable any patents issuing on
AlliedSignal and Joint Improvements. If AlliedSignal elects not to maintain such
patents and forego payment of maintenance fees, AlliedSignal shall notify
Turbodyne of such election and Turbodyne shall have the right to acquire title
to such patents subject to the Grant of License herein.
7.(b) At the request of AlliedSignal and at AlliedSignal's expense for
the preparation, filing, prosecution and maintenance thereof, Turbodyne shall
with respect to patents and patent applications in Exhibit A and Turbodyne
Improvements file and cause to be filed patent application(s) in such additional
countries as AlliedSignal may designate. AlliedSignal shall
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have no obligations to maintain active and enforceable any patents and/or patent
applications for which it incurred any costs.
8. PAYMENTS
8.(a) All payments shall become due under any provision of this
Agreement shall be made by AlliedSignal to Turbodyne , without discount or
offset, in lawful money of the United States, or to such bank or other location
that Turbodyne may designate. All taxes shall be paid by and be for the account
of Turbodyne, provided however, that AlliedSignal may deduct income taxes
required to be withheld under law, if any. With such payments AlliedSignal shall
deliver to Turbodyne a certified copy of the receipt by the government of
payment of such taxes.
8.(b) Within ninety (90) days after the end of each Reporting Period
AlliedSignal shall render to Turbodyne accounting statement showing the Net
Sales of Licensed Products sold during such Reporting Period, the amount of
royalties payable to Turbodyne and, at the same time AlliedSignal shall pay to
Turbodyne the royalties shown by the report to be due.
8 (c) Acceptance by Turbodyne of any payment tendered hereunder whether
or not the amount thereof shall be in dispute shall not constitute acceptance of
the account or schedules on which such payment is based, provided however, that
the correctness of any such payment shall be conclusively presumed unless
questioned within two (2) years from the date of receipt thereof.
9. BOOKS
9.(a) AlliedSignal shall keep adequate records in sufficient detail to
enable the royalties payable to Turbodyne hereunder to be determined and shall
permit said records to be inspected at Turbodyne's expense at any time during
regular business hours by an independent auditor,
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appointed by Turbodyne for this purpose and not objectionable to AlliedSignal,
who shall report to Turbodyne the Net Sales of Licensed Products and the amount
of the royalties payable hereunder. However, AlliedSignal shall not be obligated
to retain said records longer than two (2) years after receipt by Turbodyne of
such payment unless the amount of the payment is disputed. In the event the
auditor determines that additional royalties are due Turbodyne, AlliedSignal
shall within (30) days of receipt by AlliedSignal of a copy of such auditors
determination pay to Turbodyne all additional royalties due and the reasonable
costs of the audit.
10. TERM AND TERMINATION
10.(a) The term of this Agreement shall commence on the Effective Date
and. unless sooner terminated as provided in this Section 10, shall continue in
force until the date of expiration of the earlier of the date of the last to
expire of Licensed Patents or the twentieth anniversary of the Effective Date of
this Agreement, unless extended by mutual agreement of the Parties, upon which
date the rights granted under Article 2 above shall become fully paid up and
thereafter irrevocable.
10.(b) This Agreement may be terminated by Turbodyne at any time by
giving not less than sixty (60) days prior written notice of termination if: (i)
AlliedSignal fails to make any payment due under this Agreement when due or
fails to perform any material obligation hereunder when due and such nonpayment
and/or failure continues for sixty (60) days after receipt of notice from
Turbodyne; (ii) AlliedSignal is dissolved or becomes bankrupt or insolvent or
makes any assignment for the benefit of creditors, or if a trustee or receiver
of its property is appointed, or (iii) if AlliedSignal takes or is subjected to
any other action based upon its inability to meet its
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financial obligations. In the event of such termination all rights and licenses
granted to AlliedSignal hereunder shall cease and terminate.
10.(c) This Agreement may be terminated by AlliedSignal if the Licensed
Products fail to obtain commercial or technical viability. No termination by
AlliedSignal under this Section 10(c) shall relieve AlliedSignal of its
obligation to make all payments due to Turbodyne resulting from activities
conducted by AlliedSignal on or before the date of termination and Turbodyne
shall under no circumstances be obligated to reimburse any proper payments made
prior to such termination.
10(d) Turbodyne may terminate this Agreement if Production Commitments
pursuant to paragraph 17 (c) are not obtained by AlliedSignal.
10 (e) During the period of one (1) year commencing on the date of
termination of this Agreement pursuant to Sections 10(b), 10(c), or 10(d) above
AlliedSignal may, subject to the payment to Turbodyne of the running royalty
amount due to it in accordance with Section 3(b) above sell Licensed Products
which it had on hand as of the date of termination.
10(f) The Parties agree that this Agreement is governed by Section
365(n) of the Bankruptcy Code and the terms herein shall be modified as
necessary pursuant to paragraph 15 for continuation of the License granted
herein at AlliedSignal's option upon any rejection of the Agreement by a duly
appointed Trustee in Bankruptcy.
11. FORCE MAJEURE
11.(a) If either Party is rendered unable wholly, or in part, to carry
out any of its duties or obligations under this Agreement by reason of (i) act
of God; or the public enemy, fire, explosion; perils of the sea, flood, drought,
war, riot, sabotage, accident, embargo, or (ii) without limiting
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the foregoing circumstances of circumstances of like or different character
beyond the reasonable control of the party so failing; or (iii) inadequacy, or
shortage or failure of supply of materials or breakdowns, labor trouble from
whatever cause arising and whether or not the demands of the employees involved
are reasonable and within said Party's power to concede or (iv) compliance by
either Party with any order , action, failure to act, direction or request of
any governmental officer, department, agency, authority, or committee thereof;
and (v) whether in any case the circumstance now exists or hereafter arises such
Party shall forthwith give written notice thereof to the other Party (such
notice briefly to describe the circumstances causing such inability) and
thereupon to the extent that the Party giving such notice is unable to perform
such duty or obligation shall be suspended during but no longer than the
continuance of such circumstances.
12. ASSIGNABILITY
12(a) Either Party shall have the right to assign this Agreement to any
Subsidiary, or any Third Party acquiring substantially the entire business or
assets of the Party to which this Agreement pertains;
12.(b) In the event that AlliedSignal assigns any of the Licensed
Patents to any Subsidiary, AlliedSignal will procure the due performance by such
Subsidiary with all of the obligations set out in this Agreement is if such
Subsidiary were a part of this Agreement and will indemnify Turbodyne for and
against all damages, costs, claims and proceedings incurred by Turbodyne as a
result of any breach by such Subsidiary.
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13. NOTICES AND COMMUNICATIONS
13.(a) Any notice or other communication required or authorized to be
given by either party to the other hereunder shall be in writing and shall be
delivered personally or by air mail, registered with postage prepaid and return
receipt requested or by telex confirmed by air mail in either case addressed to
the Party to receive the same at the address set forth below or such other
address as such party shall have specified by written notice hereunder, and
shall be effective when received. It is the responsibility of each party to
notify the other within a reasonable period of time of any change of address.
If to AlliedSignal
AlliedSignal Inc.
Turbocharging Systems
23326 Hawthorne Boulevard
Torrance, CA 90505
Attention: President Turbocharging Systems
With copy to:
AlliedSignal Inc.
Law Department
101 Columbia Road
PO Box 2245
Morristown, NJ 07962
Attn: Licensing
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If to Turbodyne:.
Turbodyne Technologies, Inc.
6155 Carpinteria Avenue
Carpinteria, California 93013
Attn: Ed Halimi
With copy to:
Kelly, Lytton, Mintz & Vann LLP
1900 Avenue of the Stars
Suite 1450
Los Angeles, California 90067
Attn: Peter D. Kelly
14. WAIVER
14(a) Failure of either Party to insist upon the strict performance of
any provision of this Agreement or to exercise any right or remedy shall not be
deemed to be a waiver of such right or remedy or of any right or remedy with
respect to any subsequent breach or default, the election by either Party of any
right or remedy shall not be deemed to exclude any other and all rights and
remedies of either Party shall be cumulative.
15. SEVERABILITY
If any provision or provisions of this Agreement are held invalid by a
court of competent jurisdiction or other court appointed authority the remaining
provisions of this agreement shall not be effected and this Agreement shall be
modified to conform with such laws or regulations provided, however, that either
Party shall have the right to terminate this Agreement in the event its rights
hereunder are significantly, adversely affected by such invalidation.
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16. INDEMNIFICATION
Turbodyne shall indemnify AlliedSignal from any damages, losses,
expenses or costs, including attorney's fees, based on any breach of
representations made herein , including, without limitation, any claim by a
Third Party based on any agreement in conflict with or frustrating the purpose
and benefits of this Agreement. Turbodyne shall defend, at its sole expense, and
hold harmless AlliedSignal from any such claim. Notwithstanding the
indemnification of this paragraph 16, in no event shall Turbodyne be liable to
AlliedSignal for consequential damages or damages for loss of business.
17. CONTINUING DEVELOPMENT
17 (a) Turbodyne and AlliedSignal commit to using their best efforts to
continue development of the Technology pursuant to the Joint Development
Agreement during the term of this Agreement for the mutual benefit of the
Parties.
17 (b) The Parties mutually agree to enter into good faith negotiations
for formation of a joint venture for more fully exploiting the Technology upon
full reinstatement of Turbodyne on its listing stock exchanges and receipt of an
opinion of competent counsel that Turbodyne is not liable under any claim,
action, suit, agreement or other obligation which would encumber either Party's
rights with respect to a joint venture.
17(c) Unless this Agreement is superceded by a joint venture negotiated
pursuant to paragraph 17 (b), AlliedSignal will conduct development of the
Licensed Products pursuant to the Joint Development Agreement and obtain a
Production Commitment from a Third Party customer by July 1, 2001 or the License
granted herein will become non-exclusive, at Turbodyne's option. If AlliedSignal
is unable to obtain a Production Commitment by January 1, 2002, Turbodyne may,
17
<PAGE> 18
at its option, terminate this Agreement. If the License granted pursuant to
paragraph 2(a) becomes non-exclusive by operation of this paragraph 17(c), the
royalty rates defined in paragraph 3(a) shall be reduced by one-half percent
(.5%).
18. CONFIDENTIALITY AND PUBLICITY
18 (a) Each Party shall maintain in confidence any and all information
received from the other Party which is known to be confidential or proprietary
("Confidential Information") and will not disclose such Confidential Information
to any third party without the written consent of the Party owning the
Confidential Information. Confidential Information shall not include any
information which by demonstrable evidence
i. is known by the receiving Party prior to its disclosure by the
disclosing Party;
ii. is in the public domain;
iii. is received from a third party not having any duty to
maintain the information in confidence; and
iv. is independently created by the receiving Party.
This duty of confidentiality shall not be breached by disclosure of Confidential
Information pursuant to any court order or other process of law or regulatory
requirement, however, the Party required to disclose shall notify the Party
owning the Confidential Information of the requirement to disclose in a timely
manner prior to such disclosure and shall cooperate with that Party in any
efforts to minimize the disclosure of the Confidential Information. The terms
and obligations of this paragraph 18(a) shall survive any termination of the
Agreement.
18
<PAGE> 19
18(b) Any statement, publication, press release or announcement by
Turbodyne regarding this Agreement, the License granted hereunder or the
Technology shall be approved by AlliedSignal prior to any publication or
disclosure to a Third Party.
19. GOVERNING LAW
19 (a) This Agreement may be executed in two or more counterparts, each
of which shall constitute an original, but all of which, when taken together,
shall constitute but one instrument and this Agreement shall be governed by and
interpreted in accordance with the laws of the State of California, United
States of America, disregarding any conflicts of law rules which may dictate the
application of the laws of another jurisdiction.
19(b) Any dispute arising under this License which cannot be resolved by
the Parties themselves shall be settled by arbitration before a panel of three
arbitrators in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The arbitration will be conducted at a location agreed
to by the Parties or, if the Parties fail to agree, in the Los Angeles,
California metropolitan area. The award rendered in any arbitration conducted
may provide for equitable remedies, an accounting and/or reimbursement for
attorneys' fees and costs. Either party may apply to the arbitration panel or an
appropriate court of law for a preliminary injunction or other provisional
remedy to preserve the status quo pending arbitration. Any award shall be
enforceable in any court of competent jurisdiction.
20. ENTIRETY OF AGREEMENT
This Agreement contains the entire agreement and understanding between
the Parties hereto with respect to the subject matter hereof and merges and
supersedes all prior
19
<PAGE> 20
discussions and writings with respect thereto. Unless expressly set forth in
this Agreement, no warranties, express or implied are made and no statement,
promises or inducements made or offered by either Party or by any agent or
representative of either Party shall be valid or binding. No modification or
alteration of this Agreement shall be effective unless made in writing and
signed by both Parties hereto.
IN WITNESS WHEREOF the Parties hereto have caused this Agreement to be
executed and delivered in duplicate as of the day and year first written above.
AlliedSignal, Inc. Turbodyne Technologies, Inc.
By: By:
-------------------------- --------------------------
Title: Title:
----------------------- -----------------------
Turbodyne Systems, Inc.
By:
Title:
Attested: Attested:
By: By:
-------------------------- --------------------------
Title: Assistant Secretary Title: Secretary
20
<PAGE> 1
EXHIBIT 10.3
AMENDMENT
TO
LICENSE AGREEMENT
This Amendment to the License Agreement, dated January 28, 1999 by and between
Honeywell International Inc. (formerly AlliedSignal Inc), a Delaware corporation
acting through its Turbocharging Systems business unit having an address of
23326 Hawthorne boulevard, Suite 200, Torrance California 90505 ("Honeywell")
and Turbodyne Technologies, Inc., a Delaware corporation having an address of
6155 Carpinteria Avenue, Carpinteria, California 93103 and Turbodyne Systems,
Inc. a Nevada corporation its fully owned subsidiary (collectively "Turbodyne")
(the "License Agreement"), is entered into by the Parties on this ___ day of
December 1999. . Honeywell and Turbodyne shall be referred to in this Amendment
jointly as the "Parties" and individually , as appropriate, as the "Party".
RECITALS
A. On even date herewith the Parties have entered into an agreement for the
assignment of intellectual property rights and rights to manufacture,
market and sell products in the Turbopac product line (the "Turbopac
Agreement").
B. The Turbopac Agreement includes the assignment of all right and title in
and to all patents and patent applications (the "Patent Portfolio") of
Turbodyne to Honeywell. The exclusive license to Honeywell granted by
the License Agreement for patents and patent applications in existence
as of the date of the Turbopac Agreement is, therefore, merged with the
assignment of the patents and patent applications previously licensed.
C. This Amendment conforms the License Agreement to the intent of the
Parties in the Turbopac Agreement.
NOW, THEREFORE, in consideration of the covenants and promises made
herein and in the Turbopac Agreement, in further consideration of the ongoing
License Agreement and other good and valuable consideration, the sufficiency of
which is acknowledged, the Parties agree to amend the License Agreement as
follows:
1. Paragraph 1.(b) is amended to read:
1.(b) "Patent and Proprietary Rights" shall mean all proprietary rights
relating to the Technology (as hereinafter defined) and all rights under those
patents and patent applications and trademark rights identified in Exhibit A
attached hereto, and all patents and patent applications not included in Exhibit
A assigned to Honeywell by Turbodyne in the Turbopac Agreement and all patents
issuing from any such applications, all counterpart patents and patent
applications thereof now and hereafter filed and/or issuing in any country of
the world and all continuation, continuation in part and reissued patent
applications of any of the preceding and all patents issuing therefrom and all
related
- ------------
All schedules and exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
1
<PAGE> 2
design rights, if any, and utility models. The Parties agree that the patents
and patent applications identified are intellectual property within the
statutory definition of the Bankruptcy Code
2. Paragraph 2.(a) is amended to read:
2.(a) Turbodyne hereby grants to Honeywell the worldwide exclusive
license under Turbodyne Improvements, with the right to sublicense, to make,
have made, use and sell products incorporating the Technology. Turbodyne and
Honeywell shall report to each other on a monthly basis all Improvements made
within the preceding month which are to be employed in Licensed Products.
3. Paragraph 2.(d) is amended to identify the elimination of the retention
of rights by Turbodyne in the Turbopac products and now reads as follows:
2.(d) Honeywell shall have all rights to manufacture and sell any motor
driven compressor products currently sold in Turbodyne's Turbopac product line,
defined in Exhibit B hereto, including any developments or improvements to such
products. Turbodyne shall retain the rights and Honeywell hereby grants a
royalty free non-exclusive sublicense under the Patent and Proprietary Rights to
manufacture and sell electrical motor assistance systems for Cummins BHT
turbochargers in the independent aftermarket.
4. Paragraphs 3 (a) and 3 (b) shall be amended as follows:
3.(a) In exchange for the assignment of the Patent Portfolio and
exclusive license granted in Section 2 above Honeywell shall pay to Turbodyne an
earned royalty for each Reporting Period. in an amount equal to the Net Sales of
Products (as defined in section 7 of the Joint Development Agreement) multiplied
by three and seven tenths percent (3.7%) for each Product applicable to the
Reporting Period in question.
3 (b) Only one royalty shall be due with respect to any royalty bearing
Product regardless of whether such Product is covered by more than one claim
and/or patent and/or patent application of Licensed Patents.
5. Paragraph 7.(i) [sic] is amended to read as follows:
2
<PAGE> 3
7.(i) . Honeywell shall maintain active and enforceable any patents
issuing on Honeywell Improvements, Turbodyne Improvements and Joint
Improvements. If Honeywell elects not to maintain such patents and forego
payment of maintenance fees, Honeywell shall notify Turbodyne of such election
and Turbodyne shall have the right to acquire title to such patents subject to
the Grant of License herein. Allied Signal shall also maintain active and
enforceable any patents of Turbodyne's for which Turbodyne has granted an
exclusive license to Allied Signal or which Turbodyne has assigned to Allied
Signal under the terms of this amendment.
6. Paragraph 7.(b) is amended to read as follows:
7.(b) At the request of Honeywell and at Honeywell's expense for the
preparation, filing, prosecution and maintenance thereof, Turbodyne shall with
respect to patents and patent applications for Turbodyne Improvements file and
cause to be filed patent application(s) in such additional countries as
Honeywell may designate. Honeywell shall have no obligations to maintain active
and enforceable any patents and/or patent applications for which it incurred any
costs.
7. Paragraph 10(b) is amended to add "No termination under this License
Agreement shall affect, impact, annul, reverse or otherwise alter the assignment
of patents and patent applications by Turbodyne to Honeywell pursuant to the
Turbopac Agreement."
8. Paragraph 17 (c) is amended to read as follows: "Unless this Agreement
is superseded by a joint venture negotiated pursuant to paragraph 17(b), Allied
Signal will conduct development of the Products pursuant to the Joint
Development Agreement and obtain a Production Commitment or Advancd Development
Program from a Third Party customer by July 1, 2001 or the License granted
herein for the Turbodyne Improvements will become non-exclusive, at Turbodyne's
option. If Allied Signal is unable to obtain a Production Commitment by January
1, 2002, Honeywell will grant to Turbodyne a nonexclusive license under the
assigned Patent Portfolio with right to sublicense for Turbodyne's continued
development and sale of the Dynacharger and Turbopac products. If the License
granted pursuant to Paragraph 2(a) becomes non-exclusive by operation of this
paragraph 17(c), the royalty rates defined in paragraph 3(a) shall be reduced by
one-half percent (.5%). Allied Signal will conduct development of the Turbopac
products and honor existing supply and distributor agreements pursuant to the
Joint Development Agreement, pursuing after market and/or OEM customers and
obtain supply commitments by January 1, 2002. If Allied Signal is unable to
obtain supply commitments by January 1, 2003, Allied Signal will grant Turbodyne
an exclusive license to pursue sales of Turbopac products and Turbodyne's
royalty will increase to 4.7% of net profits for Dynacharger products. Turbodyne
will pay to Honeywell a royalty of 2% of net profits on sales of Turbopac
products by Turbodyne." All terms and provisions of the License Agreement not
specifically modified or amended herein shall remain in full force and effect.
The License Agreement shall be interpreted
3
<PAGE> 4
to be in conformance with the terms and provisions of the Turbopac Agreement,
which shall take precedence if any conflict shall arise.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
Honeywell International Inc. Turbodyne Systems Inc.
Turbocharging Systems
By: By:
Name: Name:
Title: Title:
Turbodyne Technologies Inc.
By:
Name:
Title:
4
<PAGE> 1
EXHIBIT 10.4
AMENDMENT
TO
JOINT DEVELOPMENT AGREEMENT
This Amendment to the Joint Development Agreement, dated January 28, 1999 by
and between Honeywell International, Inc. (formerly AlliedSignal Inc.), a
Delaware corporation acting through its Turbocharging Systems business unit
having an address of 23326 Hawthorne Boulevard, Suite 200, Torrance, California
90505 ("Honeywell") and Turbodyne Technologies, Inc., a Delaware corporation
having an address of 6155 Carpinteria Avenue, Carpinteria, California 93103 and
Turbodyne Systems, Inc. a Nevada corporation its fully owned subsidiary
(collectively "Turbodyne") (the "Joint Development Agreement"), is entered into
by the Parties on this 15th day of December 1999, Honeywell and Turbodyne shall
be referred to in this Amendment jointly as the "Parties" and individually, as
appropriate, as the "Party".
RECITALS
A. On even date herewith the Parties have entered into an agreement for the
assignment of intellectual property rights and rights to manufacture,
market and sell products in the Turbopac product line (the "Turbopac
Agreement").
B. This Amendment conforms the Joint Development Agreements to the intent of
the Parties in the Turbopac Agreement.
NOW, THEREFORE, in consideration of the Covenants and promises made herein
and in the Turbopac Agreement, in further consideration of the ongoing Joint
Development Agreement and other good and valuable consideration, the sufficiency
of which is acknowledged, the Parties agree to amend the Joint Development
Agreement as follows:
1. Section 3(c) shall be amended to reflect Honeywell's assumption of rights
to the Turbopac products and will read as follows:
c. Following the execution of this Agreement, both of the Parties
shall only engage in activities relating to the design, development,
manufacture, licensing or marketing of the Products or pursue the development of
technology relating to the Products as authorized in this Agreement or the
License Agreement. Honeywell shall have all rights to manufacture, market and
sell or otherwise exploit the Turbopac products as defined in Exhibit B to the
License Agreement. Turbodyne shall have the exclusive worldwide right pursuant
to the terms hereof to supply Components (as hereinafter defined) for the
Turbopac products. Notwithstanding the foregoing, Turbodyne shall be permitted
to continue design and development activities, marketing, sale or other
activities relating to products outside the scope of this Joint Development
Agreement and the License Agreement and AlliedSignal shall have no interest in
such products or activities.
- -------------
All schedules and exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
1
<PAGE> 2
2. Section 5 shall be amended to add the phrase "Honeywell shall have the
right to offer employment to personnel of Turbodyne engaged in the Development
Program."
3. Section 7(a) shall be amended to read as follows:
a. Pursuant to the License Agreement Honeywell holds the sole world wide
right, subject to the license granted to Turbodyne to manufacture and sell the
Component Parts as defined in 7.b below, to develop, manufacture, market and
sell any electrically assisted charge air product or other engine product,
including electrically assisted turbochargers and turbochargers employing an
electric motor/generator for power assist/take-off, (the "Products") or
employing Developed Intellectual Property as an Improvement under the License
Agreement, including Turbopac products.
3. Section 7(c) shall be amended to delete Turbodyne's retention of rights to
the Turbopac products and shall read as follows:
c. Honeywell under its rights pursuant to paragraph 7.a. grants to
Turbodyne a limited sublicense for the rights to manufacture and sell
electrical motor assistance systems for Cummins BHT turbochargers (the "BHT
Products") in the aftermarket pending development of Honeywell's capability,
capacity and interest in the sale and production of these products.
All terms and provisions of the Joint Development Agreement not specifically
modified or amended herein shall remain in full force and effect. The Joint
Development Agreement shall be interpreted to be in conformance with the terms
and provisions of the Turbopac Agreement, which shall take precedence if any
conflict shall arise.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
Honeywell International Inc. Turbodyne Systems, Inc.
Turbocharging Systems
By: /s/ JEFFREY SINCLAIR By: /s/ GERNARD E. DELP
------------------------- -----------------------
Name: Jeffrey Sinclair Name: Gernard E. Delp
Title: President Title: President
Turbodyne Technologies, Inc.
By: /s/ GERNARD E. DELP
-----------------------
Name: Gernard E. Delp
Title: CEO
2
<PAGE> 1
EXHIBIT 10.5
1. INTELLECTUAL PROPERTY AND PRODUCT RIGHTS AGREEMENT
This agreement for the assignment of intellectual property rights and rights to
manufacture, market and sell products in the Turbopac product line (the
"Agreement") is entered into on this ____ day of December 1999 by and between
Honeywell International Inc. (formerly AlliedSignal Inc.), a Delaware
corporation acting through its Turbocharging Systems business unit having an
address of 23326 Hawthorne boulevard, Suite 200, Torrance California 90505
("Honeywell") and Turbodyne Technologies, Inc., a Delaware corporation having an
address of 6155 Carpinteria Avenue, Carpinteria, California 93103 and Turbodyne
Systems, Inc. a Nevada corporation its wholly owned subsidiary (collectively
"Turbodyne"). Honeywell and Turbodyne shall be referred to in the Agreement
jointly as the "Parties" and individually , as appropriate, as the "Party".
RECITALS
A. Honeywell and Turbodyne are parties to a Joint Development Agreement and a
License Agreement both dated January 28, 1999 (collectively referred to herein
as the "Joint Development Agreement") regarding the development of electrically
assisted turbochargers for engine applications.
B. Honeywell desires to obtain the right to manufacture, market and sell
products previously reserved by Turbodyne in the Joint Development Agreement and
defined as the Turbopac products shown in Exhibit B thereto and redefined as
Attachment 1 to this Agreement and Turbodyne is willing to release its
reservation in the Turbopac products and grant to Honeywell the rights to that
product line (subsequently referred to herein as "Turbopac").
C. Turbodyne had granted to Honeywell an exclusive license to certain Turbodyne
patents and patent applications for manufacture, marketing and sale of
electrically assisted turbochargers and Honeywell had granted back a sublicense
to Turbodyne for production of Components for such turbochargers.
D. Honeywell desires to obtain and Turbodyne is willing to make an assignment of
all right, title and interest in and to the patents and patent applications
identified in Attachment 2 (subsequently referred to herein as the "Patent
Portfolio").
E. Turbodyne is subject to an adverse arbitration award of approximately $6.8
million in favor of Grand Tech, Inc. (the "Award") secured by a Stipulation
Regarding Enforcement of Arbitration Awards, Security Agreement, Injunction and
Contingent Partial Satisfaction of Awards And Order Approving Stipulation dated
April 20, 1999.
F. Grand Tech, Inc. is presently involved in an internal dispute as to control
of the corporation. Payment of the judgment made on the arbitration award must,
therefore, be made by way of interpleader action in the California Superior
Court.
All schedules and exhibits have been omitted. Any omitted schedule or exhibit
will be furnished supplementally to the Securities and Exchange Commission on
request.
1
<PAGE> 2
NOW, THEREFORE, in consideration of the covenants and promises made herein, the
specific consideration recited and other good and valuable consideration, the
sufficiency of which is acknowledged, the Parties agree as follows:
1. PURCHASE AND SALE OF PRODUCT LINE. Subject to and upon the terms and
conditions set forth in this Agreement, Turbodyne hereby sells,
transfers, conveys, assigns and delivers to Allied Signal and Honeywell
purchases all rights to manufacture, market and sell Turbopac including
all tangible and intangible rights of every nature and kind in Turbopac
including, without limitation, designs, specifications, drawings,
schematics, data, test results, and information (generally referred to
hereinafter as "Data") and all trademarks associated with Turbopac.
Turbodyne shall retain the rights to produce and sell Components for
Turbopac as defined in the Joint Development Agreement and License
Agreement amended pursuant to sections 7 and 8 infra and shall have
access and rights to use the Data for such purpose.
2. ASSIGNMENT. Turbodyne will and does hereby assign all right, title and
interest in and to the Patent Portfolio by means of an assignment in the
form attached hereto as Attachment 3. The assignment of the Patent
Portfolio will be free of all liens or other encumbrances other than the
License Agreement dated January 28, 1999 between the Parties as amended
pursuant to this Agreement. Turbodyne will and does hereby assign all
right title and interest in and to the trademarks associated with
Turbopac by means of an assignment in the form attached hereto as
Attachment 4.
3. PAYMENT. In consideration of the sale, transfer, conveyance, assignments
and delivery defined in sections 1 and 2, and in reliance on the
representations made in section 6 infra, Honeywell will, in payment
therefor, pay to Turbodyne, in the manner defined in section 4 infra,
Six Million Eight Hundred Thousand Dollars ($6,800,000) (the "Payment")
with a continuing royalty for the life of the patents in the Patent
Portfolio of three and seven tenths percent (3.7%) as defined in the
License Agreement as amended.
4. SETTLEMENT AND RELEASE. Turbodyne shall obtain a settlement of the
Arbitration matter with Grand Tech, Inc. presently under the
jurisdiction of the Superior Court of California, County of Los Angeles,
Case NO. BS056312 (the "Grand Matter") and shall, within thirty (30)
days, obtain a release of all liens pending pursuant to the Stipulation
Regarding Enforcement of Arbitration Awards, Security Agreement,
Injunction and Contingent Partial Satisfaction of Awards And Order
Approving Stipulation dated April 20, 1999, which may, in any manner,
encumber the Patent Portfolio. The satisfaction and release shall be
reflected in a court order, satisfactory in form to Honeywell.
5. TRANSACTION MECHANICS. Upon execution of this Agreement, within 5
business days Honeywell shall deposit such portion of the Payment as
shall be determined
2
<PAGE> 3
by the Parties to be required to satisfy the Grand Tech Award with the
Clerk of the California Superior Court under an interpleader action to
be filed by Turbodyne. Honeywell shall file a declaration at the request
of Turbodyne setting out the facts regarding the present Agreement to
provide for disbursement to Grand Tech Inc., the court, or such holder
as the court may designate of such amount of the Payment as is required
to satisfy the Award upon the date of filing (the "Effective Date") of
an order of the court reflecting a settlement and release of the Grand
Matter defined in section 4 supra, the order to be delivered to
Honeywell. Turbodyne is authorized to disclose to Grand Tech, Inc. and
the court in the Grand Matter the availability of the funds submitted to
the court for such purpose. Any amount of the Payment in excess of that
required to satisfy the Award shall be simultaneously disbursed to
Turbodyne. Any amount of the Award exceeding the Payment shall be paid
by Turbodyne.
6. REPRESENTATIONS. Each of Honeywell and Turbodyne represent to the other
as follows:
a. Each is a corporation duly organized, validly existing, and in
good standing under the laws of the State of its incorporation, with all
requisite corporate power, authority, and legal right to own its property and
conduct its business as now conducted and as contemplated under this Agreement.
b. Each is duly qualified to do business in each jurisdiction in
which the nature of its properties or its business requires such qualification
and in which the failure to so qualify would materially adversely affect its
business or financial condition.
c. The execution, delivery, and performance by each of this
Agreement and the performance by each of its obligations hereunder (i) are
within their respective power and authority; (ii) have been duly authorized by
all necessary action on the part of their respective governing bodies or
authorized officers as evidenced by the resolution of the Board of Directors of
Turbodyne attached as Attachment 5 and the delegation of authority of the
Chairman and Chief Executive Officer of Honeywell attached as Attachment 6;
(iii) will not contravene any provision of law or regulation, or any writ or
decree of any court or governmental instrumentality or their respective States
of incorporation or other agreement of either, or any other agreement,
instrument, or undertaking binding upon either or any of their respective
assets; and (iv) will not contravene any agreements with any of lenders or
investors of either.
d. This Agreement has been duly executed and delivered by each
Party and constitutes the valid, legal, and binding obligation of each Party,
enforceable in accordance with its terms.
e. Except as defined herein, no approval or consent of, or filing
with, any governmental or court authority is required to be obtained or effected
by either Party
3
<PAGE> 4
in connection with its execution, delivery, and performance of this Agreement
or, alternatively, each Party has obtained or shall obtain in respect of this
Agreement and the transactions contemplated hereby, on or prior to the date
hereof, all permissions, rights, licenses, and permits, if any, to carry out the
transactions contemplated thereby.
f. Neither Party has received notice of any violation of any
applicable law, regulation, order, or requirement which would have a materially
adverse effect on its business or on the transactions contemplated by this
Agreement, and which has not been complied with or corrected in all material
respects.
g. Other than the Grand Matter and a pending inquiry by the SEC,
there is no pending or, to the knowledge of the executing officer, threatened
action, suit or proceeding or investigation before any court, board of
arbitration or arbitrator, governmental body, agency, instrumentality, or
official against or affecting either Party, the outcome of which, if adversely
determined, would have a material adverse effect on its business or assets or
could adversely impair the ability of either Party to fully perform its
obligations under this Agreement. Honeywell is aware that one class action
lawsuit and one civil suit have recently been commenced against Turbodyne.
h. Except as disclosed herein, neither Party is a party to any
agreement or instrument or subject to any restriction having a materially
adverse effect on its business, operations, intellectual property, real or
personal property, assets, or condition, financial or other, or its ability to
perform its obligations under this Agreement or any agreement or instrument
thereunder and is not in default in the performance, observance, or fulfillment
of the material obligations, covenants, or agreements contained in any agreement
or instrument or by which any of its property or assets is bound.
i. Neither party is in default under any applicable order, writ,
injunction, or decree of any court, governmental department, board, or agency,
or instrumentality of any arbitrator.
j Turbodyne represents and warrants that, as of the Effective
Date, full and final settlement in the Grand Matter has been obtained and an
order from the court directing a release of all liens by Grand Tech, Inc has
been entered.
7. JOINT DEVELOPMENT AGREEMENT AMENDMENT. The Parties shall amend the Joint
Development Agreement as defined in the amendment attached hereto as
Attachment 7.
8. LICENSE AGREEMENT AMENDMENT. The Parties shall amend the License
Agreement as defined in the amendment attached hereto as Attachment 8.
9. INDEMNIFICATION. Turbodyne hereby indemnifies and agrees to defend and
hold Honeywell, its directors, officers and agents, harmless from,
against and in respect of any and and all losses, liabilities, or
damages suffered or incurred by Honeywell by reason of (a) any untrue
representation, breach of warranty, or
4
<PAGE> 5
nonfulfillment of any term or covenant of this Agreement or in any
certificate, document, or instrument delivered to Honeywell pursuant
hereto or in connection herewith, or (b) which would not have been
suffered or incurred if such representation were true and not breached
or if such term or covenant were fully performed, including without
limitation, any action by or on behalf of Grand Tech, Inc. or other
third party asserting any rights in or to the assets and rights
transferred under this Agreement.
Allied Signal hereby indemnifies and agrees to defend and hold
Turbodyne, its directors, officers and agents, harmless from, against
and in respect of any and all lossess, liabilities, or damages suffered
or incurred by Turbodyne by reason of (a) any untrue representation,
breach of warranty, or nonfulfillment of any term or covenant of this
Agreement or any certificate, document or instrument delivered to
Turbodyne pursuant hereto or in connection herewith, or (b) which would
not have been suffered or incurred if such representation were true and
not breached or if such term or covenant were fully performed.
10. CONFIDENTIALITY. Turbodyne shall maintain in confidence any information
concerning Turbopac ("Turbopac Confidential Information") which cannot
be shown by demonstrative evidence to have been publicly disclosed prior
to the execution of this Agreement. Turbodyne shall not disclose any
Turbopac Confidential Information to any third party without the prior
written consent of Honeywell.
11. PUBLICATIONS. Any statement, publication, press release or announcement
by Turbodyne regarding this Agreement or Turbopac shall be approved by
Honeywell prior to any publication or disclosure to a third party.
12. MISCELLANEOUS.
(a) This writing constitutes the entire agreement of the Parties
with respect to the subject matter hereof and may not be modified, amended, or
terminated except by a written agreement specifically referring to this
Agreement signed by all of the Parties hereto.
(b) No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the Party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
(c) This Agreement shall be binding upon and inure to the benefit
of each Party hereto, its successors and assigns..
(d) The paragraph headings contained herein are for the purposes
of convenience only and are not intended to define or limit the contents of said
paragraphs.
(e) Each Party hereto shall cooperate, shall take such further
action,
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<PAGE> 6
and shall execute and deliver such further documents as may be reasonably
requested by any other Party in order to carry out the provisions and purposes
of this Agreement.
(f) This Agreement may be executed in one or more counterparts,
all of which taken together shall be deemed one original.
(g) This Agreement and all amendments thereof shall be governed
by and construed in accordance with the law of the state of California
applicable to contracts made and to be performed therein.
(h) This Intellectual Property and Product Rights Agreement may
be rescinded by Honeywell unilaterally at its sole option, if the deposit of
court order and disbursement of the Payment is not made within forty-five (45)
days of the Effective Date pursuant to section 4 supra.
(i) Any controversy or claim arising out of or relating to this
agreement or the breach or validity thereof shall be settled by arbitration in
Los Angeles California in accordance with the rules of the American Arbitration
Association. Judgment upon the award rendered by the arbitrator[s] may be
entered in any court having jurisdiction thereof, and the parties consent to the
jurisdiction of the California Superior courts for this purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Honeywell International Inc. Turbodyne Systems Inc.
Turbocharging Systems
By: By:
Name: Name:
Title: Title:
Turbodyne Technologies Inc.
By:
Name:
Title:
6
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Turbodyne Technologies Inc.:
We consent to the incorporation by reference in the Registration Statement
(No. 333-64133) on Form S-8 of Turbodyne Technologies Inc. of our report dated
March 15, 1999 relating to the consolidated balance sheet of Turbodyne
Technologies Inc. as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the two
years ended December 31, 1998, which report appears in the December 31, 1999
annual report on Form 10-K of Turbodyne Technologies Inc.
Our report dated March 15, 1999, contains an explanatory paragraph that states
that the Company has suffered recurring losses, has used cash in its operating
activities in each of the last three years, has violated covenants of its debt
facilities, has received an adverse award and a judgment in the aggregate
amount of $7.1 million related to an arbitration matter and a building lease,
respectively, is subject to class-action lawsuits brought against it by certain
of its stockholders, and based upon the Company's projected cash flows for the
ensuing year, it will be required to seek additional financing in order to
continue its present operations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
KPMG LLP
Los Angeles, California
April 13, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
Board of Directors and Shareholders
Turbodyne Technologies, Inc. and Subsidiaries
Carpinteria, California
We consent to the incorporation by reference in the Registration Statement (No.
333-64133) on Form S-8 of Turbodyne Technologies, Inc. and subsidiaries, of our
report dated April 4, 2000 relating to the consolidated balance sheet of
Turbodyne Technologies, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended, which report appears in the December 31, 1999
annual report on Form 10-K of Turbodyne Technologies, Inc. and subsidiaries.
Our report, date April 4, 2000, contains an explanatory paragraph that states
that the Company has suffered net losses in each of the last four years, has
used cash in its operating activities in each of the last four years, has
disposed of its most significant subsidiary through bankruptcy, is subject to a
lawsuit brought against it by shareholders, and based on the Company's
projected cash flows for the ensuing year it will be required to seek
additional equity or debt financing in order to continue its present
operations. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
McGowan Guntermann
Santa Barbara, California
April 14, 2000
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