Prospectus Filed Pursuant to Rule 424(b)(4)
Registration No. 333-68649
iQ POWER TECHNOLOGY INC.
COMMON SHARES
5,500,000 shares (maximum offering amount)
3,000,000 shares (minimum offering amount)
We are offering and selling all of the shares listed above for US$1.00 per
share. The minimum subscription per investor is 25,000 shares or US$25,000. The
offering will terminate on May 31, 1999 or a later date if we and IPO Capital
Corp. agree but, in any event, not later than June 30, 1999. Prior to this
offering, the shares have not been traded publicly.
IPO Capital Corp. is acting as our selling agent outside the United States, and
sales agents selected by IPO may act as our sales agents in the United States in
connection with this offering. IPO and the sales agents are offering the shares
on a "best efforts" basis, which means that they are obligated only to offer and
sell the shares on our behalf and are not required to purchase any of the
shares. The proceeds of this offering will be held in escrow by IPO subject to
the conditions described elsewhere in this prospectus.
-----------------------
The shares we are offering involve a high degree of risk. See "Risk Factors" at
page 2.
-----------------------
This prospectus is not complete and may be amended. Until the registration
statement we have filed with the SEC becomes effective, we cannot sell or accept
any offers to buy the shares. No one has been given authority to give any
information or to make any representation that is not in this prospectus. You
should not assume that the information in this prospectus is accurate as of any
date other than the date of this prospectus.
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Price Commissions Proceeds to iQ Power
----- ----------- --------------------
<S> <C> <C> <C>
Per share..................... US$1.00 US$0.10 US$0.90
Total Minimum................. US$3,000,000 US$300,000 US$2,700,000
Total Maximum................. US$5,500,000 US$550,000 US$4,950,000
</TABLE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
-----------------------
The date of this prospectus is May 10, 1999
-----------------------
IPO CAPITAL CORP.
<PAGE>
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TABLE OF CONTENTS
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Page
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SUMMARY...........................................................................................................1
RISK FACTORS......................................................................................................2
Our inability to secure additional financing on acceptable terms could prevent or delay
us from developing and commercializing the iQ technology which could decrease the value of
the shares or cause us to go out of business...............................................................2
The intense competition in the lead-acid battery industry may hinder our entry into the
marketplace which could negatively impact your investment in the shares....................................2
Our inability to commercialize the iQ technology could decrease the value of your investment.................2
Our revenues will depend solely on licensing the iQ technology or selling batteries that
incorporate iQ technology which will make us vulnerable to changes in market demand.
As a result, any decline in demand could materially, adversely affect us and your investment
in the shares.................................. ...........................................................2
We may not be able to develop acceptable new electric power technologies or products which
could negatively affect our prospects for growth and the value of your investment..........................3
Market demand for the iQ technology and for batteries that incorporate the iQ technology is
uncertain which may affect our ability to generate revenues and profits and may adversely
affect your investment............. .......................................................................3
We expect to be dependent on a few key customers, and the loss of any one of them could
significantly reduce our revenues which would decrease the value of your shares............................3
We will rely on third parties to supply development, manufacturing, marketing and distribution
expertise which will make our success dependent upon their efforts. If they are not successful,
it could negatively impact us and your investment in the shares............................................3
NOTE REGARDING FORWARD-LOOKING STATEMENTS.........................................................................5
OUR COMPANY.......................................................................................................6
EXCHANGE RATES....................................................................................................7
ENFORCEABILITY OF CIVIL LIABILITIES...............................................................................7
CAPITALIZATION....................................................................................................8
DILUTION..........................................................................................................9
Dilution To New Investors If The Maximum Offering Amount Is Sold.............................................9
Dilution To New Investors If The Minimum Offering Amount Is Sold.............................................9
PLAN OF DISTRIBUTION.............................................................................................11
USE OF PROCEEDS..................................................................................................12
BUSINESS.........................................................................................................13
Overview....................................................................................................13
Industry Background.........................................................................................13
How the iQ technology Works.................................................................................15
Performance Specifications and Test Results.................................................................16
Our Strategy................................................................................................18
Industry Relationships......................................................................................19
Research and Development....................................................................................20
Competition.................................................................................................20
Intellectual Property Rights................................................................................21
Plan of Operation...........................................................................................21
Employees...................................................................................................22
Facilities..................................................................................................22
Legal Proceedings...........................................................................................22
SELECTED FINANCIAL DATA..........................................................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................24
Overview....................................................................................................24
Acquisition of iQ Germany...................................................................................24
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Our Results of Operations...................................................................................25
iQ Germany's Results of Operations..........................................................................25
Liquidity and Capital Resources.............................................................................26
Year 2000 Issue.............................................................................................26
Foreign Currency Translation Risk...........................................................................27
Recent Accounting Pronouncements............................................................................27
DIRECTORS AND EXECUTIVE OFFICERS.................................................................................28
Directors and Executive Officers............................................................................28
COMPENSATION OF DIRECTORS AND OFFICERS...........................................................................30
Options to Purchase Securities..............................................................................30
Employment Agreements.......................................................................................31
1998 Stock Option Plan......................................................................................31
Indebtedness Of Directors And Senior Officers...............................................................31
PRINCIPAL SHAREHOLDERS...........................................................................................32
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.......................................................33
DESCRIPTION OF CAPITAL STOCK.....................................................................................35
Common Shares...............................................................................................35
Certain Rights of Shareholders..............................................................................35
Exchange Controls and Other Limitations Affecting Holders of Common Shares..................................35
Pooling and Escrow Agreements...............................................................................36
Transfer Agent and Registrar................................................................................37
DIVIDEND POLICY..................................................................................................37
CERTAIN TAX CONSIDERATIONS.......................................................................................37
United States Federal Income Tax Considerations.............................................................38
Personal Holding Companies..................................................................................38
Foreign Personal Holding Companies..........................................................................39
Passive Foreign Investment Companies........................................................................39
Controlled Foreign Corporation..............................................................................40
Certain Canadian Federal Income Tax Considerations..........................................................40
SECURITIES ELIGIBLE FOR FUTURE SALE..............................................................................41
AVAILABLE INFORMATION............................................................................................42
LEGAL MATTERS....................................................................................................42
INTRODUCTION TO FINANCIAL STATEMENTS.............................................................................43
</TABLE>
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<PAGE>
SUMMARY
THE COMPANY: iQ Power Technology Inc. was founded in December 1994. The
address of our principal executive office is Suite 708-A,
1111 West Hastings Street, Vancouver, British Columbia V6E
2J3, and our phone number is (604) 669-3132.
PRINCIPAL BUSINESS: We, through our wholly-owned subsidiary, iQ Battery Research
and Development GmbH, develop and market technology related
to starting, lighting and ignition batteries. Throughout
this prospectus, we refer to iQ Battery Research and
Development GmbH as "iQ Germany."
TERMS OF THE
OFFERING: We are offering a maximum of 5,500,000 shares and a minimum
of 3,000,000 shares at US$1.00 per share. The minimum
subscription per investor is 25,000 shares or US$25,000, but
we may, at our option, accept a lesser amount. IPO will hold
the proceeds of the offering in escrow until:
o we have received subscriptions for the minimum number
of shares; and
o our registration statement on Form 8-A under the
Securities Exchange Act of 1934 has been declared
effective by the SEC.
At that time we will issue the shares to you.
USE OF PROCEEDS: After we pay commissions and offering expenses of
approximately US$260,000, we will receive approximately
US$4,690,000 in net proceeds from the offering if we sell
5,500,000 shares and approximately US$2,440,000 in net
proceeds if we sell 3,000,000 shares.
We expect to use the net proceeds for research and
development of our battery technologies, expansion of our
marketing and sales organization and for general working
capital. We may also use some of the net proceeds to acquire
or invest in businesses, products or technologies that
enhance our existing business.
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<PAGE>
RISK FACTORS
Our inability to secure additional financing on acceptable terms could prevent
or delay us from developing and commercializing the iQ technology which could
decrease the value of the shares or cause us to go out of business. We may need
additional financing in order to fund our anticipated research and development
efforts, or if we experience delays, cost overruns, additional funding needs for
joint ventures or other unanticipated events. If we fail to get the necessary
financing on a timely basis, it might:
o delay and increase the costs of development and commercialization of
the iQ technology;
o cause us to default on some of our financial commitments;
o prevent us from being able to commercialize the iQ technology; and
o force us to discontinue our operations or to look for a purchaser for
the iQ technology or our business,
all of which would negatively impact your investment in the shares. If we raise
money by selling additional securities, it could cause substantial reduction in
the value of your shares. If we borrow funds from third parties, the money may
not be available on a timely basis or on terms acceptable to us. We anticipate
that the net proceeds we receive from this offering will satisfy our cash needs
for about twelve months after this offering.
The intense competition in the lead-acid battery industry may hinder our entry
into the marketplace which could negatively impact your investment in the
shares.
Many of our competitors have:
o longer operating histories than we do;
o substantial resources that are devoted to research and development,
manufacturing, marketing and commercializing products;
o products and technologies that are widely accepted by retail consumers
and other buyers of batteries;
o long histories of reliable and effective use; and
o established reputations and long-standing relationships with original
equipment manufacturers.
all of which could hinder our entry into the marketplace and give them a large
competitive advantage over us. We expect competition in the battery industry to
intensify because many battery companies are consolidating or vertically
integrating which, because they own all stages of production, allows them to
make batteries at lower cost. In recent years, buyers of lead-acid batteries
have also consolidated, reducing the number of customers for lead-acid batteries
and increasing price competition.
Our inability to commercialize the iQ technology could decrease the value of
your investment.
We believe that the iQ technology can be integrated into lead-acid batteries on
a commercial basis, and that a commercially feasible manufacturing process can
be developed. However, if we are not successful in doing so, it would
materially, adversely affect our financial condition and results of operations
and the value of your investment. Our design requires us to integrate the iQ
technology with existing lead-acid battery technology. Neither we nor iQ Germany
have manufactured prototypes of batteries based on the iQ technology in
commercial quantities or have developed a commercial manufacturing process.
Our revenues will depend solely on licensing the iQ technology or selling
batteries that incorporate iQ technology which will make us vulnerable to
changes in market demand. As a result, any decline in demand could materially,
adversely affect us and your investment in the shares.
We anticipate that all of our revenues will initially come from fees derived
from licensing the iQ technology or, possibly, from the sale of our own
batteries that incorporate the iQ technology. Consequently, any decline in the
demand for such technology or batteries could materially, adversely affect us
and your investment in the shares. We cannot guarantee that we will receive any
revenues from the licensing of the iQ technology or from the sale of
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<PAGE>
batteries incorporating the iQ technology, or that we can generate a profit. If
we receive any revenues, the revenues may decrease after an initial period of
market introduction due to factors such as:
o increased competition;
o changes in consumer preferences;
o changes in customer specifications, market saturation;
o changes in demand from OEMs;
o changes in demand for automobiles;
o changes in economic conditions;
or other factors, many of which are beyond our control.
We may not be able to develop acceptable new electric power technologies or
products which could negatively affect our prospects for growth and the value of
your investment.
We may not successfully complete the development or introduction of new electric
power technologies or products, or, if we do, such technologies or products may
not achieve market acceptance. In addition, we may experience delays in the
development process. We believe our growth will depend upon our ability to
develop and commercialize the iQ technology and to introduce new products and
technologies that are attractive to consumers, OEMs, automobile manufacturers,
automobile service providers and retailers of automotive batteries. We cannot
assure you that we will be successful in doing so.
Market demand for the iQ technology and for batteries that incorporate the iQ
technology is uncertain which may affect our ability to generate revenues and
profits and may adversely affect your investment.
There may not be enough demand for the iQ technology or for batteries that
incorporate the iQ technology to generate enough revenues so that we will make a
profit. If so, this would adversely affect your investment. There are currently
no lead-acid batteries that use technology that is similar to the iQ technology.
As a result, the potential demand for batteries that use the iQ technology and
the degree to which the iQ technology can meet market demand is difficult to
estimate. Our success in gaining market acceptance for the iQ technology will be
affected by a number of factors that are beyond our control, such as:
o the license fees for the iQ technology;
o the willingness of consumers to pay a premium price for batteries
incorporating the iQ technology;
o specifications of automobile manufacturers;
o the marketing and pricing strategies of competitors;
o the development of alternative technologies; and
o general economic conditions.
We expect to be dependent on a few key customers, and the loss of any one of
them could significantly reduce our revenues which would decrease the value of
your shares.
To the extent we depend upon key customers for a large percentage of our
revenues, the loss of one or more of them or a significant reduction in
licensing fees from one or more of them could have a material adverse effect on
us and on the value of your shares. We anticipate that a large portion of our
revenues will come from license fees from a limited number of key customers
including automobile manufacturers, aftermarket resellers and OEMs. To date, we
have not entered into any licensing agreements for the iQ technology.
We will rely on third parties to supply development, manufacturing, marketing
and distribution expertise which will make our success dependent upon their
efforts. If they are not successful, it could negatively impact us and your
investment in the shares.
Our future success is dependent on the development and maintenance of strategic
relationships. If our strategic partners or third parties fail to perform
effectively, we may not generate any revenues or a profit. We may rely upon
strategic partners:
o to assist us in the research and development of the iQ technology and
future technologies;
o to participate in the later stage development and testing of
commercial prototypes;
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<PAGE>
o to manufacture products based on the iQ technology; and
o to market and distribute such products.
We have no experience in manufacturing battery technology or products. If we
decide to manufacture and market our own product line, we will likely contract
with a third-party manufacturer to manufacture, assemble, test and package our
products to our specifications. We cannot assure you that we will be able to
enter into such contracts on terms that are acceptable to us. In addition,
third-party manufacturers are required to meet governmental and regulatory
requirements including environmental and consumer safety requirements. If the
third-party manufacturer we select should fail to comply with the regulatory
requirements or be unable to meet our quantity and quality requirements, we will
have to select another manufacturer, which may result in delays in delivering
products to distributors or other purchasers.
We have no sales, marketing or distribution experience. To the extent that we
depend on our strategic partners or third parties for marketing and
distribution, any revenues received by us will depend upon their efforts. We
cannot guarantee that such efforts will lead to a successful and effective sales
force and distribution system. We may have to rely on experienced employees,
strategic partners, distributors and third-party manufacturer's representatives
to market our products. If we are unable to maintain or establish third-party
distribution relationships, we may have to develop our own marketing and sales
force with technical expertise and supporting distribution capabilities. We can
not guarantee you that we will be successful in doing so.
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<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import, constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
<TABLE>
SUMMARY FINANCIAL DATA
Nine Months Ended Fiscal
September 30, Years Ended December 31, Period
------------------------------------------------------------------- Ended
1998 1997 December
Statement of Operations Data: Pro Forma 1998 1997 Pro Forma 31, 1996
(unaudited)(2) (unaudited) (unaudited) (unaudited)(1) 1997 (seven months)
-------------- ----------- ----------- -------------- ---- --------------
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Revenue............................... $ -- $ -- $ -- $ 26,000 $ -- $ --
Operating Expenses..................... 917,000 241,428 57,023 715,000 135,236 10,504
Operating income (loss)............... (917,000) (241,428) (57,023) (689,000) (135,236) (10,504)
Net income (loss) for the period...... (947,000) (241,428) (57,023) (733,000) (135,236) (10,504)
Net income (loss) per share........... (0.06) (0.05) N/A (0.05) (0.14) N/A
Weighted average shares outstanding... 15,086,461 4,546,845 N/A 13,750,294 950,294 --
</TABLE>
<TABLE>
As at September 30, 1998
------------------------------------------------------------------------------
As Adjusted Proforma(5)
(unaudited) (unaudited)
--------------------------------------------------------------
Actual Minimum(3) Maximum(4) Minimum Maximum
--------------- --------------------------------------------------------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 340,393 $ 2,989,000 $ 5,239,000 $ 3,092,000 $ 5,342,000
Working capital.................... 348,249 3,472,000 5,722,000 2,264,000 4,514,000
Total assets....................... 3,505,845 6,155,000 8,405,000 3,329,000 5,579,000
Non-current liabilities............ - - - 60,000 60,000
Shareholders' equity............... 2,848,249 5,397,000 7,647,000 1,681,000 3,931,000
- ------------------------------
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(1) Gives effect to the business combination with iQ Germany as if it had
occurred on January 1, 1997.
(2) Gives effect to the business combination with iQ Germany as if it had
occurred on January 1, 1998.
(3) Adjusted to give effect to the net proceeds from our sale of the minimum
(3,000,000) shares offered in the offering (at an assumed offering price of
US$1.00 per common share and after deducting the estimated agents' fees and
commissions and estimated offering expenses payable), and other capital
transactions.
(4) Adjusted to give effect to the net proceeds from our sale of the maximum
(5,500,000) shares offered in the offering (at an assumed offering price of
US$1.00 per common share and after deducting the estimated agents' fees and
commissions and estimated offering expenses payable), and other capital
transactions.
(5) Gives effect to the business combination with iQ Germany as if it had
occurred on September 30, 1998.
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OUR COMPANY
We were incorporated on December 20, 1994 under the Canada Business Corporations
Act as 3099458 Canada Inc. We changed our name to iQ Power Technology Inc. on
May 9, 1997. Our principal executive offices are located at Suite 708-A, 1111
West Hastings Street, Vancouver, British Columbia, Canada V6E 2J3, and our
telephone number at that location is (604) 669-3132.
iQ Germany was formed in 1991 to research and evaluate methods of maximizing
lead-acid battery performance. We were formed to acquire iQ Germany and to
license the technology developed by iQ Germany to others or to market products
based on such technology. Throughout this prospectus we refer to the technology
developed by iQ Germany as the "iQ technology."
The Share Exchange. On August 25, 1998, we acquired all the issued and
outstanding common stock of iQ Germany in exchange for 10,000,000 of our common
shares. The total deemed purchase price of iQ Germany was US$2,500,000 or
US$0.25 per share. Under the terms of the Share Exchange Agreement, the former
holders of iQ Germany common stock, as a group, have a limited right to require
us to repurchase all, but not less than all, of the our shares they received.
They may exercise this right at and after April 10, 1999 if:
o we have failed to complete an equity offering with gross proceeds of
at least US$3 million; and
o such shareholders have repaid to us the full amount of all funds we
have advanced or invested in iQ Germany.
This right will terminate at the close of this offering.
We have also issued an additional 2,800,000 common shares into escrow against
the deposit into escrow of "atypical shares" of iQ Germany by all the holders of
such shares. Atypical shares are securities, the terms of which are defined by
contract, that include liquidation and other preferences. At the close of this
offering, our shares will be released from escrow to the former holders of the
atypical shares and the atypical shares will be released from escrow to us. In
the event the repurchase right described above is exercised, our shares will be
released from escrow and returned to us and the atypical shares will be released
from escrow and returned to the former holders of the atypical shares.
In connection with the share exchange, the former holders of iQ Germany's common
stock and atypical shares and our shareholders have entered into two pooling
agreements under which they have agreed to escrow an aggregate of 16,979,424 of
their common shares. We understand that some of the former shareholders of iQ
Germany have also entered into a shareholders agreement under which they have
agreed to act jointly when voting their common shares. In addition, three former
shareholders of iQ Germany have entered into employment, confidentiality and
non-competition agreements with us.
We will account for the business combination under the purchase method of
accounting with iQ Germany being identified as the acquiror. This method of
accounting is called a reverse acquisition and results in the assets and
liabilities of our company being combined with those of iQ Germany at fair
values. Until all of the conditions have been satisfied to the closing of the
acquisition, our financial results and iQ Germany's financial results cannot be
reported on a consolidated basis. Accordingly, unless otherwise stated in this
prospectus, the financial information presented is only our financial
information.
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EXCHANGE RATES
The historical financial statements of iQ Germany are in Deutschmarks (DM). Set
forth below are the relevant exchange rates for one Deutschmark, expressed in
U.S. dollars, based on the noon buying rate in New York City for cable transfers
payable in Deutschmarks as certified for customs purposes by the Federal Reserve
Bank of New York.
U.S. Dollars Per Deutschmark
<TABLE>
Nine Months
Year Ended December 31, Ended
--------------------------------------------------------------------- September 30,
1993 1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Period End.................... US$0.6020 US$0.6454 US$0.6971 US$0.6499 US$0.5558 US$0.5987
Average....................... 0.5749 0.6204 0.7012 0.6636 0.5749 0.5595
High.......................... 0.6380 0.6702 0.7372 0.6967 0.6488 0.5987
Low........................... 0.5745 0.5673 0.6405 0.6388 0.5316 0.5393
</TABLE>
On January 1, 1999, the European Economic Monetary Union adopted the new "Euro"
currency. As a result, the values of the participating currency units, including
the German Deutschmark, have been irrevocably fixed against the Euro. The
official fixed conversion rate for the translation of Deutschmarks to Euros is
DM0.5113 = 1 Euro. On April 30, 1999, the noon buying rate as adjusted by the
foregoing Euro conversion rate was DM1.00 = US$0.5401. The DM is convertible
into U.S. dollars at freely floating rates, and there are currently no
restrictions on the flow of German currency between Germany and the United
States.
ENFORCEABILITY OF CIVIL LIABILITIES
Your enforcement of civil liabilities under the federal securities laws of the
United States may be affected adversely by the fact that:
o we are incorporated or organized under the laws of Canada;
o that some or all of our directors and officers may be residents of
Canada;
o that some or all of the experts named in the registration statement
may be residents of Canada; and
o that all or a substantial portion of our assets and said persons are
located outside the United States.
As a result, it may be difficult for you to serve process within the United
States upon our directors and officers or experts named in the registration
statement who are not residents of the United States or to enforce, in the
United States, judgments of courts of the United States predicated upon the
civil liability provisions of the federal securities laws of the United States.
We has been advised by Werbes Sasges & Company, our Canadian counsel, that there
is doubt as to the ability of shareholders to subject us, our directors or
officers or experts named in the registration statement who are not residents of
the United States to liability predicated solely upon the civil liability
provisions of the federal securities laws of the United States in original
actions in Canadian courts or in actions in such courts for enforcement of
judgments of courts of the United States.
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CAPITALIZATION
The following table sets forth, at September 30, 1998, our pro forma
capitalization giving effect to the business combination with iQ Germany and our
capitalization as adjusted to give effect to our issuance and sale of the
minimum amount (3,000,000) of shares offered in the offering, at an assumed
public offering price of US$1.00 per share and before deducting the underwriting
discounts and commissions and estimated offering expenses. You should read this
table in conjunction with the consolidated financial statements and the
accompanying notes included in this prospectus.
<TABLE>
September 30, 1998
-----------------------------
Pro Forma
After
Business As
Combination Adjusted(3)
--------------- -------------
(in thousands)
<S> <C> <C>
Long Term Bank Debt................................................................. 4,000 4,000
Non-Current due to Shareholders..................................................... 56,000 56,000
------------- -------------
60,000 60,000
--------------- -------------
Shareholders' equity
Common Shares, without par value, unlimited number of shares
authorized; 16,179,425 shares issued, actual;
19,179,425 shares issued(2), as adjusted...................................... $519,000 $3,519,000
Share subscriptions............................................................. - -
Special Warrants, 2,300,000 issued and outstanding(1)........................... 575,000 575,000
Cumulative Foreign Exchange Adjustment.......................................... 58,000 58,000
Retained earnings (deficit)..................................................... (1,336,000) (1,896,000)
--------------- -------------
Total shareholders' equity.................................................... (184,000) 2,256,000
--------------- -------------
Total capitalization............................................................... $(124,000) $2,316,000
========== ==========
- --------------------------------
</TABLE>
(1) Each Special Warrant is exchangeable, without payment of additional
consideration, into one common share.
(2) Includes 12,800,000 shares issued to acquire the common and atypical shares
of iQ Germany.
(3) Determined on the basis that iQ Germany is the accounting parent.
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<PAGE>
DILUTION
As of September 30, 1998, the pro forma net tangible book value of our common
shares was US$3,557,299, or US$0.23 per share. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares outstanding after giving effect to the issuance
of an additional 2,836,200 common shares issued after September 30, 1998.
Dilution To New Investors If The Maximum Offering Amount Is Sold
After giving effect to our sale of the maximum number of shares offered in the
offering (5,500,000) at an assumed offering price of US$1.00 per share and after
deducting the commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of September 30, 1999 would have been
US$8,947,299, or US$0.37 per share. This represents an immediate increase in net
tangible book value of US$0.14 per share to existing shareholders and an
immediate dilution of US$0.63 per share to new investors purchasing the shares
in this offering. Dilution is determined by subtracting pro forma net tangible
book value per share after the offering from the amount of cash paid by a new
investor for a share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share ......................................... US$1.00
Pro forma net tangible book value (deficiency) per share as of
September 30, 1998...................................................... US$0.23
Increase per share attributable to the offering........................... US$0.14
----------
Pro forma net tangible book value per share after this offering........... US$0.37
Dilution per share to new investors....................................... US$0.63
==========
</TABLE>
The following table summarizes, on an as adjusted basis as of April 30, 1998,
the number of common shares purchased from us, the total consideration paid to
us and the average price per share paid by existing shareholders and by new
investors purchasing the maximum amount of shares offered in the offering based
at an assumed offering price of US$1.00 per share (before deducting discounts
and commissions and estimated offering expenses payable by us):
<TABLE>
Average
Shares Purchased Total Consideration Price
---------------------------------------------------------------------
Number Percent Amount Percent Per Share
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing shareholders, as adjusted basis... 18,479,425 77.0% US$4,619,856 45.7% US$0.25
New investors.............................. 5,500,000 23.0% US$5,500,000 54.3% US$1.00
========================================================
Total................................. 23,979,425 100% US$10,119,856 100%
========================================================
</TABLE>
Dilution To New Investors If The Minimum Offering Amount Is Sold
After giving effect to our sale of the minimum common shares offered in the
offering (3,000,000) at an assumed offering price of US$1.00 per share and after
deducting the commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of September 30, 1998 would have been
US$6,697,299, or US$0.31 per share. This represents an immediate increase in net
tangible book value of US$0.08 per share to existing shareholders and an
immediate dilution of US$0.69 per share to new investors purchasing shares in
this offering.
-9-
<PAGE>
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share ......................................... US$1.00
Pro forma net tangible book value (deficiency) per share as of
September 30, 1998...................................................... US$0.23
Increase per share attributable to the offering........................... US$0.08
----------
Pro forma net tangible book value per share after this offering........... US$0.31
Dilution per share to new investors....................................... US$0.69
==========
</TABLE>
The following table summarizes, on an as adjusted basis as of April 30, 1999,
the number of common shares purchased from us, the total consideration paid to
us and the average price per share paid by existing shareholders and by new
investors purchasing the minimum amount of shares offered in the offering based
on an assumed offering price of US$1.00 per share (before deducting discounts
and commissions and estimated offering expenses payable by us):
<TABLE>
Average
Shares Purchased Total Consideration Price
---------------------------------------------------------------------
Number Percent Amount Percent Per Share
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing shareholders, as adjusted basis... 18,479,425 86.0% US$4,619,856 60.6% US$0.25
New investors.............................. 3,000,000 14.0% US$3,000,000 39.4% US$1.00
========================================================
Total................................. 21,479,425 100% US$7,619,856 100%
========================================================
</TABLE>
The computations above exclude, as of April 30, 1999, the possible issuance of
2,875,000 common shares at an average exercise price of $1.00 per share under
outstanding stock options. To the extent such options are exercised, there would
be no dilution to new investors in the offering. In addition, the above
computations exclude an aggregate of 325,000 common shares reserved for issuance
upon exercise of options to be granted under our 1998 Stock Option Plan. To the
extent such new stock options are granted and exercised, there may be further
dilution to new investors in the offering.
-10-
<PAGE>
PLAN OF DISTRIBUTION
Under the terms and subject to the conditions contained in the Agency Agreement,
IPO has agreed to use its "best efforts" to sell the shares, which means that
IPO is obligated only to offer and sell the shares on our behalf and is not
required to purchase any of the shares. IPO may engage other broker-dealers
registered with the NASD and in applicable jurisdictions and selected securities
dealers in Canada to participate in this offering and may pay a commission to
these dealers. IPO will not make any sales to discretionary accounts. We have
agreed to indemnify IPO against specific types of liabilities, including
liabilities under the Securities Act, or to contribute to payments IPO may be
required to make as a result of any such liabilities.
The offering began on December 10, 1998 and will continue until May 31, 1999 or
such later date as we and IPO agree but, in any event, not later than June 30,
1999. If we do extend the offering, IPO will notify you of the extension.
When collected, the subscription funds will be held by IPO in an
interest-bearing escrow account. We have the right to reject orders to purchase
shares in whole or in part if we determine that the offering is over-subscribed
or if accepting your subscription would violate applicable securities laws. If
we reject your subscription, IPO will return your money to you without interest
or deduction on the next business day after our rejection.
The offering will be terminated, no shares will be sold, and no subscription
proceeds will be released from escrow to us unless on or before the expiration
of the offering:
o we have accepted subscriptions and payment in full for the minimum
number of shares; and
o our registration statement on Form 8-A under the Exchange Act has been
declared effective by the SEC.
If these conditions have not been satisfied by the expiration of the offering,
or if we otherwise terminate the offering, IPO will promptly return to all
subscribers all subscription funds and will retain any interest earned on the
funds. Our directors, officers, and other affiliates may, but are not required
to, purchase shares in order to satisfy the minimum offering amount.
If the minimum number of shares are sold and our registration statement on Form
8-A has been declared effective under the Exchange Act, the subscription amounts
held in escrow, including interest, will be released to us for immediate use.
Any subscriptions accepted by us after the sale of the minimum number of shares,
but before the expiration of the offering, will be held by IPO pending
acceptance or rejection of subscriptions by us. Upon acceptance, such proceeds
will be available for immediate use by us.
We will pay IPO a commission equal to 10% of the offering price and have agreed
to issue IPO warrants to purchase common shares in an amount equal to 10% of the
shares sold in the offering. IPO may exercise the warrants for a period of two
years from the date they receive a letter from us indicating that our
registration statement on Form 8-A has been declared effective by the SEC. IPO
may exercise the warrants for US$1.00 per share during the first year and for
US$1.50 per share during the second year. We have also agreed to pay to IPO a
corporate finance fee of US$50,000.
Before this offering, there has been no market for our common shares. The
offering price of the shares was determined by negotiation between us and IPO
and does not necessarily bear any relationship to our assets, book value,
revenues or other established criteria of value, and should not be considered
indicative of the actual value of the shares. Factors considered in determining
such offering price, in addition to prevailing market conditions, include:
o the history of, and prospects for, the industry in which we compete;
o assessment of our management;
o our past and present operations;
o our prospects;
o our capital structure; and
o such other factors as were deemed relevant.
-11-
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered in the
offering, based on an offering of 3,000,000 to 5,500,000 shares at an assumed
initial public offering price of US$1.00 per share and after deducting
commissions and estimated offering expenses of US$260,000 payable by us, are
estimated to be between US$2,440,000 and US$4,690,000.
We expect to use the proceeds from the offering for:
o research and development of new products and technologies;
o expansion of our marketing and sales organization and activities; and
o general working capital.
The following table sets forth the amounts and anticipated uses of the proceeds
of this offering:
<TABLE>
Net Proceeds
-----------------------------------------
Maximum Minimum
------------------- ------------------
<S> <C> <C>
Research and Development Expenses...................... $3,678,000 $2,002,000
Marketing and Sales Expenses........................... 312,000 110,000
General and Administrative Expenses.................... 700,000 328,000
------------------- ------------------
$4,690,000 $2,440,000
</TABLE>
We may also use a portion of the proceeds to acquire or invest in businesses,
products or technologies that expand, complement or are otherwise related to our
existing business. We have no present plans, agreements or commitments, and are
not currently engaged in any negotiations, with respect to any such
transactions.
In the event the proceeds of this offering are insufficient to satisfy our
needs, we may need to raise additional funds through the issuance of equity or
debt securities. We cannot assure you that we will be able to obtain more
financing, or if we do, that such financing will be on terms favorable to us, or
that we will be able to obtain such financing on a timely basis.
Pending their use, we will invest the net proceeds from this offering in United
States government securities or short-term, interest- or dividend-bearing,
investment grade securities.
-12-
<PAGE>
BUSINESS
Overview
We are engaged in the development and commercialization of electrical power
sources for the automotive industry. Our primary technology relates to a "smart"
automotive starter battery which combines several proprietary features. These
features include:
o an insulated case to minimize temperature fluctuation;
o an internal microprocessor to monitor and control the charging and
discharging process; and
o a battery acid anti-stratification device, to create a battery with
more efficient charging, storage and power delivery than conventional
automotive batteries.
Compared to conventional car batteries, the iQ battery is lighter, has increased
cold-weather starting performance and increased life expectancy.
The starting, lighting and ignition battery industry is a mature and stable
industry that is composed of a limited number of aftermarket resellers and OEMs.
Over the last ten years, new competition and changes in the automotive industry
have increased pressure on SLI battery manufacturers to reduce costs and to
improve the power and efficiency of the batteries they produce. In response to
these conditions and to the increased market demand for smaller and lighter SLI
batteries that produce adequate amounts of electrical power, we have developed
the iQ technology, a battery technology that lowers the weight and increases the
electrical output of SLI batteries.
We have produced prototype batteries based on the iQ technology for testing by
several major automotive manufacturers, including Daimler-Benz, BMW and Audi. As
a result of these tests and extensive internal testing, we believe that when
compared to a conventional 12 volt automotive battery, a comparable iQ battery
will:
o weigh 40% less;
o have six times the recharging capacity in cold conditions;
o require 40% less lead;
o have increased service life; and
o have increased low-temperature starting capacity.
We intend to market the iQ battery to automakers in order to stimulate demand
for the iQ technology. We anticipate that we will eventually license the iQ
technology to automobile suppliers and battery manufacturers or enter into one
or more strategic relationships with established battery manufacturers to
produce and distribute the iQ battery.
Industry Background
The SLI battery industry is a stable, mature industry that is composed of a
limited number of aftermarket resellers and OEM's. In 1997, worldwide unit sales
in the SLI battery market have been estimated at approximately 235 million units
with a value of US$7.5 billion (Source: AMZ Auto Motor Zubehor, September 1997).
The SLI battery industry is highly-concentrated and is dominated by eight SLI
battery manufacturers who, in 1997, accounted for approximately 66% of the
worldwide market share. The following graph sets forth the approximate world SLI
battery market share of the principal battery manufacturers in 1997 (Source: AMZ
Auto Motor Zubehor, September 1997).
-13-
<PAGE>
Worldwide Market Share: 1997*
[Pie chart setting forth the approximate world SLI battery market share of
principal battery manufacturers in 1997. The information contained in the chart
is as follows:
Manufacturer Market Share
Exide 20%
Yuasa (Japan) 10%
GNB (Australia) 8%
Hawker (England) 7%
Johnson Controls (U.S.) 6%
Varta (Germany 5%
JSB (Japan) 5%
Delco Remy (U.S. 5%
Others 34%]
*(Source: AMZ Auto Motor Zubehor, September 1997)
The SLI battery industry, over the past 30 years, has had a relatively low level
of product innovation and has been slow to respond to changes in automotive
technology and performance requirements. However, new competition within the SLI
battery industry and changes in the automotive manufacturing industry have
placed increased pressure on SLI battery manufacturers to reduce costs and to
increase the power and efficiency of the batteries they produce. In recent
years, many automotive manufacturers have begun selling their component
manufacturing divisions in an effort to streamline production. This has resulted
in increased competition and lower overall prices for SLI batteries. At the same
time, many automobile manufacturers, in an effort to reduce costs, have begun to
apply strict conditions to their relationships with OEM's, such as requiring
"just-in-time" delivery and "in house" assembly of components. Many automobile
manufacturers have also adopted a policy of having at least two alternative
sources of supply, thus requiring any developer of new battery technologies to
persuade other OEM's to adopt similar technologies.
Recent advances in automobile technology and design have placed increasing
demands on the electrical output generated by an automobile battery. Despite
these changes, conventional lead acid batteries have remained relatively
unchanged since they were first introduced as an electrical power source for the
auto industry. Conventional lead acid batteries are extremely sensitive to
changes in temperature and continuously lose output capacity due to temperature
fluctuations, vibration damage and corrosion and sulfatation inside the battery.
As a result, in order to compensate for the tendency of conventional lead acid
batteries to lose much of their output capacity over time, conventional battery
manufacturers are required to manufacture larger and heavier batteries with
increased initial output capacity. Such batteries not only add additional weight
to the vehicle, but are also often more difficult to integrate into modern
engine configurations. At the same time, fuel efficiency requirements and engine
designs require that battery size and weight be reduced to ensure maximum fuel
efficiency.
We believe that increased competition in the SLI battery manufacturing industry
along with increased demands for high-powered, lightweight, efficient SLI
batteries that can be used in both traditional and alternative vehicle
applications, will facilitate the adoption of our "smart battery" technology by
aftermarket resellers and OEM's.
-14-
<PAGE>
THE iQ BATTERY
[PICTURE OF iQ BATTERY]
How the iQ technology Works
Over time, lead-acid batteries lose output capacity due to, among other things,
temperature fluctuations and corrosion of the internal lead plates. The iQ
battery utilizes an insulated case, an internal microprocessor and a battery
acid anti-stratification device to minimize the loss of output capacity. As a
result, the iQ battery requires fewer lead plates than a conventional lead acid
battery to deliver the required output capacity for a specific application.
Double-Walled Casing
Conventional lead-acid batteries are vulnerable to damage caused by temperatures
above 50 degrees Centigrade (122 degrees Fahrenheit) and to loss of starting
performance when temperatures fall below freezing (0 degrees Celsius or 32
degrees Fahrenheit). Some auto manufacturers have attempted to protect batteries
from the high temperatures found in the car's engine compartment by installing
the batteries in the rear of the vehicle. Although this placement protects
batteries from heat, it requires the use of long, thick cables to connect the
battery to the engine. The cables not only increase the weight of the car, they
also produce electrical losses in cold starting conditions. To offset these
losses, manufacturers must use batteries with larger amounts of lead and acid,
thus further increasing the total weight of the automobile.
In order to minimize the loss of performance caused by temperature extremes, we
engaged BASF, Germany's largest chemical company, to develop a double-walled
battery case made from a polypropylene foam material called Neopolen(R), a
thermoplastic particle foam. When a battery is placed inside the Neopolen case,
it is protected against the extreme temperature fluctuations by the thermal
insulation properties of the material.
In addition, Neopolen has mechanical properties which lends itself to
integrating with battery technology. The cells of this ductile material remain
intact under mechanical pressure and, after protracted compression, the material
returns to its original shape. We believe that the structural stability of the
Neopolen case will provide additional protection to the internal battery
components.
Energy Control System
Although the insulated case of the iQ battery provides protection against
extreme high temperatures, the insulated case cannot protect the battery from
extended low temperatures. Temperatures below freezing dramatically reduce
-15-
<PAGE>
the ability of a battery to start an automobile engine and to be recharged by a
running car's generator. To prevent the loss of performance caused by low
temperatures, the iQ battery incorporates an energy control system to maintain
or reestablish optimal internal battery temperatures.
The energy control system consists of a sensor and control system and an
internal heating component. The sensor and control unit is designed to measure
and record a variety of internal and external factors, including:
o outside temperature
o changes in outside temperature
o inside temperatures
o changes in inside temperature
o the revolutions per minute at which the engine was cranked
o the time of travel and the RPMs during travel
o voltage
o changes in voltage
Using this information, the energy control system determines when the heating
component must be activated and the amount of power that may be used to maintain
optimum internal battery temperature without draining the battery to the point
that damage occurs. We anticipate that, in the future, automobiles will have
real time electronic information displays linked to the vehicle's on-board
computer system to provide the driver information relating to battery charge
levels, electrical outputs, temperature and other information.
We have initiated programs to complete the production design of the integrated
circuits necessary for the internal sensor and control unit. As part of this
process, we have received bids, from several manufacturers, each of which has
established, at its own cost, design teams to compete for anticipated production
orders. At the present time, each manufacturer has developed and presented
functional prototypes meeting our specifications. If we elect to produce the iQ
battery, rather than license the iQ technology, we anticipate that we will
select one of these manufacturers to produce the energy control system
components.
The Anti-Stratification Component
Acid stratification is a less well-known, but significant problem associated
with lead-acid batteries. Lead-acid batteries utilize a mixture of sulfuric acid
and distilled water. Because the density of water is less than that of sulfuric
acid, over time gravity causes the acid and the water to separate. When this
separation occurs, the battery is not able to produce or store electric power in
the upper parts of the internal lead plates that are surrounded by water. In
addition, if pure sulfuric acid becomes concentrated in the lower parts of the
battery, the highly corrosive effects of the acid tend to override the
electrochemical process in the lower parts of the internal lead plates.
The problems caused by acid stratification can be alleviated by continuously
mixing the acid and water. In the past, manufacturers have sought to address
this problem with acid pumps and other methods, but their efforts have not been
successfully adapted for commercial application in the automotive starter
battery market.
Instead of using moving parts or pumps, the iQ technology uses hydrodynamic
principles to facilitate continuous mixing of the sulfuric acid and the
distilled water inside the battery without using moving parts. A simple plastic
baffle is integrated into each cell of the battery. When the vehicle is moving,
e.g., accelerating or braking, the inertial energy acts with the baffle to
produce internal fluid pressure that causes the sulfuric acid at the bottom of
the battery to travel through a corridor to the top of the battery. Specially
designed "gating" mechanisms inhibit the reversal of the fluid flow. In
addition, when the vehicle is not moving, the internal baffle system acts as a
hydrodynamic pump that moves fluid to the top of the battery in response to the
battery's internal heating element.
Performance Specifications and Test Results
The outer dimensions of the iQ battery are identical to a conventional 12 volt
lead acid battery in order to facilitate ease of replacement in existing
vehicles. In addition, the dimensions and shape of the iQ battery's terminals
are identical to those of conventional batteries. The iQ battery, however, loses
charging capacity at a much lower rate
-16-
<PAGE>
than conventional batteries. As a result, the iQ battery requires less amp
output to deliver the same performance over time, and therefore because it
requires fewer lead plates, weighs approximately 40% less than conventional
batteries.
Our prototype batteries have been tested extensively both in-house and by
third-party organizations. The following tables detail the results of
independent tests performed in 1998 by a major auto manufacturer with which we
have a strategic relationship. All tests compared the prototype iQ battery with
a standard, 12 volt, 100 amp battery that is normally used as OEM equipment in
German luxury cars.
Car Power System Test
[Bar graph showing electrical output for the iQ Battery and a standard battery
under two different temperature conditions: -20 degrees Celcius and 20 degrees
Celcius. The results reflected in the graph are as follows:
-20 degrees Celsius Relative Amp Value
------------------- ------------------
Standard Battery 0.3
iQ Battery 1.22
20 degrees Celsius Relative Amp Value
------------------- ------------------
Standard Battery 5.66
iQ Battery 6.98]
In the car power system test, the tested batteries were inserted into the power
system of a standard automobile. A winter night drive was then simulated by
placing the power system under load by adding additional power consumers, such
as a heater, headlights, a stereo, power windows, etc. The electrical current
output of the batteries was then measured under two different temperature
conditions, 20 degrees Celsius and -20 degrees Celsius. The results indicate
that at 20 degrees Celsius, the electrical current output of the iQ battery was
125% of a conventional battery. At -20 degrees Celsius, the electrical current
output of the iQ battery was 420% of a conventional battery.
Battery Test
[Bar graph showing total cycle time (in hours) for the iQ Battery and a standard
battery under 3 different temperature conditions: -20 degrees Celcius, 0 degrees
Celcius and 20 degrees Celcius. The results reflected in the graph are as
follows:
-20 degrees Celsius Cycle Time (Hours)
------------------- -----------------
Standard Battery 62
iQ Battery 20
0 degrees Celsius Cycle Time (Hours)
------------------ -----------------
Standard Battery 19
iQ Battery 20
20 degrees Celsius Cycle Time (Hours)
------------------- -----------------
Standard Battery 19
iQ Battery 19]
In the battery test, the tested batteries were charged and discharged multiple
times at different temperature levels. The amount of time necessary to complete
a full charging cycle (e.g., fully charge after being fully discharged) was
measured. The tests showed that the iQ battery's recharging times were
substantially equivalent to conventional batteries in moderate to warm
temperatures and over 40 hours less than the recharge time of a conventional
battery in extreme cold conditions.
-17-
<PAGE>
Climate Room Test
[Bar graph showing total revolutions per minute attributable to electrical
output from the iQ Battery and a standard battery. The results reflected in the
graph are as follows:
Revolutions Per Minute
----------------------
iQ Battery 83
Standard Battery 71]
In the climate room test, the batteries were mounted in automobiles and placed
in cold conditions (-25 degrees Celsius). The car's engine was then cranked and
the number of revolutions per minute was recorded. The higher the revolutions,
the more starting power can be attributed to the tested battery. Based on the
results of the climate room test, the iQ battery performed better than the
conventional battery in cold starting conditions.
Life Cycle Test
[Bar graph showing total percentage reduction in battery capacity in the iQ
Battery and in a standard battery. The results reflected in the graph are as
follows:
Percentage Reduction in Capacity
--------------------------------
iQ Battery 14%
Standard Battery 22%]
In the life cycle test, the batteries were run through a series of industry
standard tests that simulated the normal life cycle of a automobile SLI battery.
At the end of the test, the lead battery plates were examined and the charging
capacity of the batteries was measured to determine the percentage of battery
capacity that was lost over time. The iQ battery lost approximately 14% of its
capacity compared with the loss of approximately 22% of capacity for the
conventional battery.
In addition to the foregoing, in 1996, we completed independent, third party
safety testing of the iQ battery in Germany, and in which all applicable safety
specifications were met. (TUV Rheinland Product Safety GmbH, test report no.
E-9613191E-01). We are not aware of any safety issues related to the iQ battery
that are not also applicable to standard automotive batteries.
Our Strategy
Our objective is to license the iQ technology to leading manufacturers of
automotive batteries and to position us as a leading provider of batteries and
electric power technology to the automotive industry. Our strategy includes the
following elements:
o Marketing to Automakers. We and iQ Germany have begun marketing
production-ready prototypes of the iQ battery to major automakers in
order to stimulate demand for the iQ technology. We anticipate that
its initial marketing efforts with automakers will be concentrated on
a relatively small group of
-18-
<PAGE>
companies and will be directed by a small and highly-skilled sales
force of sales and application engineers.
o License the iQ technology and Develop Manufacturing Relationships.
Once automaker and manufacturer demand has been developed, we intend
to license the iQ technology to major automakers and established
third-party manufacturers of SLI batteries. We may also establish
strategic relationships with manufacturers and suppliers of SLI
batteries in order to produce commercial quantities of SLI batteries
utilizing the iQ technology.
o Competitive Pricing. We anticipate that the retail price of the iQ
battery will be comparable to the retail prices of other premium
priced SLI batteries.
Industry Relationships
iQ Germany has established relationships with a number of companies in the
automotive and electronics industries which are described below:
Suppliers and Manufacturers
BASF
iQ Germany has entered into a Cooperation Agreement with BASF, a leading
international chemical and textile manufacturer, under which BASF has agreed to
participate with the iQ Germany in developing and marketing the Neopolen battery
case. Under the agreement, iQ Germany has agreed to exclusively use the Neopolen
material produced by BASF in its battery designs in return for a payment by BASF
to iQ Germany on every kilogram of Neopolen sold by BASF to battery
manufacturers.
Akkumulatorenfabrik Moll
iQ Germany has established a relationship with Moll, a leading battery
manufacturer, under which Moll has manufactured prototypes of a battery based on
the iQ technology. Currently, iQ Germany and Moll are negotiating a cooperation
agreement relating to the joint development, production and marketing of
batteries incorporating the iQ technology.
Automakers
Daimler-Benz
iQ Germany has provided prototypes of the iQ battery to Daimler-Benz, which is
currently performing in-the-car and out-of-the-car tests.
BMW
iQ Germany has provided prototypes of the iQ battery to BMW, which is currently
testing the prototypes. iQ Germany has also purchased and installed BMW battery
test and electronic lab equipment in iQ Germany's laboratories in Chemnitz,
Germany, for the purposes of conducting tests on the iQ battery prototypes.
To date, neither Daimler-Benz nor BMW have committed to incorporate the iQ
technology into any of their commercially available automobiles or other
products.
Other Relationships
In addition to the above relationships, we, via iQ Germany, have also had
discussions, and in some cases, delivered prototypes of the iQ battery to Audi,
Volkswagen and Porsche for testing. We currently do not have any contractual
arrangements with these automakers other than confidentiality agreements and
limited agreements for the testing of prototypes. Neither Audi, Volkswagen nor
Porsche have committed to incorporate the iQ technology into any of
-19-
<PAGE>
their commercially available automobiles or other products. In addition to these
German automakers, we are also pursuing contacts with other major automakers
worldwide.
We have engaged in discussions with established battery manufacturers regarding
the possibility of a joint venture to produce small quantities of batteries
using the iQ technology in order to stimulate market interest or to satisfy
niche market demands. In the event we are unsuccessful in our primary marketing
strategy of licensing the iQ technology to major automakers and established
battery manufacturers, we anticipate that this type of arrangement may provide
an alternative means of market entry for us. There can be no assurance that we
will be able to successfully establish a joint venture arrangement with a
battery manufacturer on terms favorable to us, if at all.
Research and Development
We and iQ Germany are focusing our research and development efforts on improving
the iQ technology and developing process technology required to manufacture the
iQ battery. A key element of our strategy is to complete development of a
battery that has undergone all relevant testing programs by German auto
manufacturers and can be produced in commercial quantities. Over its most recent
three fiscal years, iQ Germany has spent a total of DM2,198,000 (US$1,403,000)
on research and development.
We believe that our highly-qualified engineering and scientific personnel
provide us with a significant competitive advantage. iQ Germany currently
employs 12 engineers and scientists in its Chemnitz plant on a full- and
part-time basis, whose primary focus is research and development. iQ Germany's
personnel have considerable experience with the development of SLI battery
systems and applications. We believe that this combination of expertise has
allowed iQ Germany, and will continue to allow us to design and develop battery
technologies that can be implemented in a timely and cost-effective manner.
Competition
Competition in the battery industry is, and is expected to remain, intense. Our
competitors range from early stage companies to major domestic and international
companies. Many of these companies have financial, technical, marketing, sales,
manufacturing, distribution, and other resources significantly greater than
ours. In addition, many of these companies have name recognition, established
positions in the market, and long-standing relationships with OEMs and other
customers. Our competitors are doing significant development work on various
battery systems (including electrochemistries such as NiCd, NiMH and lithium),
with significant effort focused on achieving higher energy densities, lower
maintenance, lighter weight, longer energy retention and lower cost batteries.
We cannot assure you that one or more new, higher power battery technologies
will not be introduced which could be directly compete with or be superior to
the iQ technology.
We believe that our primary competitors are existing suppliers of automotive and
lead-acid batteries. Johnson Controls, Inc., Exide Corporation, GNB Inc. and
Delphi are the primary suppliers of car batteries in North America. VB
Autobatterie GmbH), Hawker Batteries, Fiamm, Delco Remy, Exide Corporation,
Autosil, Hoppecke, Yuasa and Matsushita are the primary suppliers of car
batteries in Europe. All of these companies are very large and have substantial
resources and market presence. Many are vertically integrated and produce the
core components for their batteries from raw or recycled materials, reducing the
unit cost of manufacturing. These companies have pursued and implemented
aggressive production and manufacturing strategies which have led to substantial
competitive advantages in the areas of production efficiencies and integrated
distribution and inventory management systems. We expect that we will compete in
targeted market segments on the basis of performance, reliability, ease of
recycling and increased battery life. We cannot assure you that we will be able
to compete successfully against these companies in any of the targeted market
segments.
We may also develop products to compete in market segments including standby
power, small batteries for engine starting and medical and electronics
applications. We expect that our primary competition in the market for small
lead acid batteries used in non-automotive applications are Yuasa, Exide
Corporation, Matsushita, Hawker, CSB Battery of America Corp. and GS Battery.
These companies are large and have substantial resources and market presence. We
cannot assure you that we will be able to compete successfully against
traditional lead acid batteries in any of the targeted applications.
-20-
<PAGE>
The market for batteries, and the evolution of battery technology, is very
dynamic. Other companies are devoting significant resources to improving
existing battery technologies and developing new battery technologies. We cannot
assure you that we will be able to compete effectively in any of their targeted
market segments.
Intellectual Property Rights
Our success is dependent on iQ Germany's ability to protect its intellectual
property rights. iQ Germany relies principally on a combination of copyright,
trademarks, trade secret and patent laws, non-disclosure agreements and other
contractual provisions to establish and maintain its proprietary rights. iQ
Germany holds two United States patents related to its technology, both of which
will expire in the year 2014. iQ Germany has also applied for patents related to
the iQ technology in Germany and the European Union. iQ Germany has been issued
patents cover the battery temperature sensor and heating element design and
configuration.
As part of its confidentiality procedures, iQ Germany generally enters into
nondisclosure and confidentiality agreements with each of its key employees,
consultants, distributors and corporate partners and limits access to and
distribution of its technology, documentation and other proprietary information.
In particular, iQ Germany has entered into non-disclosure agreements with each
of its employees and strategic partners. The terms of the employee
non-disclosure agreements include provisions requiring assignment to iQ Germany
of employee inventions. There can be no assurance that iQ Germany's efforts to
protect its intellectual property rights will be successful. Despite iQ
Germany's efforts to protect its intellectual property rights, unauthorized
third parties, including competitors, may from time to time copy or reverse
engineer portions of the iQ technology and use such information to create
competitive products.
Policing the unauthorized use of the iQ technology is difficult, and, while we
are unable to determine the extent to which piracy of the iQ technology exists,
such piracy can be expected to be a persistent problem. In addition, the laws of
some countries in which the iQ technology is or may be licensed do not protect
its products and intellectual property rights to the same extent as do the laws
of the United States. As a result, sales of products based on the iQ technology
in such countries may increase the likelihood that iQ technology might be
infringed upon by unauthorized third parties.
It is possible that the scope, validity and/or enforceability of our
intellectual property rights could be challenged by competitors or other
parties. iQ Germany is currently in the process of recording its interests in
the iQ technology with relevant authorities in applicable jurisdictions. The
results of such challenges before administrative bodies or courts depend on many
factors which cannot be accurately assessed at this time. Unfavorable decisions
by such administrative bodies or courts could have a negative impact on iQ
Germany's intellectual property rights. Any such challenges, whether with or
without merit, could be time consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. In the event
of a claim of product infringement against us and our failure or inability to
license the infringed or similar technology, our business, operating results and
financial condition could be materially adversely affected.
iQ Germany has registered the trademark "iQ" in Germany. iQ Germany has not
registered any trademarks in the United States.
Plan of Operation
Over the next 12 months, we intend to expand our research and development
operations, prepare for a pre-production and initial production of batteries
that incorporate the iQ technology and continue our third party testing program.
Specifically, we anticipate that our laboratories in Chemitz, Germany will be
fully operational by June 1999. In August 1999, we intend to initiate a
pre-production run of 500 batteries that incorporate the iQ technology in order
to evaluate the production processes and to implement any needed modifications.
During the course of the pre-production process we will finalize the iQ battery
design and identify manufacturing facilities and component suppliers. We expect
that the initial production of the iQ battery will occur on or before January
2000. We also expect that all third party testing will be completed in January
2000.
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<PAGE>
We anticipate that the net proceeds we receive from this offering will satisfy
our cash needs for the twelve months after this offering. We may need more money
if we experience delays, cost overruns, additional funding needs for joint
ventures or other unanticipated events. We cannot assure you that we will be
able to obtain more financing or that, if we do, it will be on favorable terms
or on a timely basis.
Employees
As of April 30, 1999, iQ Germany had 12 employees engaged in product research
and development on a part- and full-time basis and 8 employees engaged in
general and administrative and marketing functions on a part- and full-time
basis. Our and iQ Germany's success will depend in large part on their ability
to attract and retain skilled and experienced employees. None of our or iQ
Germany's employees are covered by a collective bargaining agreement, and we
believe iQ Germany's relations with its employees are good. We do not currently
have any key man life insurance on any of our directors or executive officers.
Facilities
iQ Germany occupies approximately 228 square meters of leased office space at
its headquarters in Unterhaching, Germany for its product development,
marketing, support and administration operations. iQ Germany also occupies
approximately 509 square meters of leased office space in Chemitz, Germany. The
Unterhaching lease terminates on February 28, 2001 and the Chemitz lease may be
terminated on the giving of six months' notice, but not before December 31,
2001. We maintain a license for our executive offices in Vancouver, British
Columbia, Canada on a month-to-month basis.
Legal Proceedings
As of the date hereof, there is no material litigation pending against us or iQ
Germany. On January 3, 1994, a civil lawsuit was filed by Hans Engelhorn against
Peter E. Braun and Horst Dieter Braun in the District Court of Berlin (Case No.
3 O 40/94). Mr. Engelhorn seeks to compel transfer of intellectual property
rights related to the iQ technology or, alternatively, money damages of
approximately DM500,000 (US$310,000). The intellectual property rights at issue
are now held by iQ Germany. Mr. Engelhorn alleges that the Brauns had a
contractual obligation to transfer the intellectual property to a partnership
which has since been dissolved. Although the lawsuit is still pending, we have
been advised by the Brauns that the prosecution of this lawsuit has not been
pursued. We believe that the lawsuit is without merit and will not materially
affect our rights in the intellectual property at issue.
From time to time, we and/or iQ Germany may be a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, we believe that the final outcome of
such matters will not have a material adverse effect on our business, financial
condition and operating results.
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<PAGE>
SELECTED FINANCIAL DATA
Our selected consolidated financial data are qualified in their entirety by
reference to and should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section of this
prospectus and the audited consolidated financial statements and notes included
in this prospectus. The consolidated statement of operations data for the years
ended December 31, 1997 and 1996 and the consolidated balance sheet data at
December 31, 1997 and 1996, are derived from and are qualified by reference to
our audited consolidated financial statements which appear in this prospectus
The consolidated statement of operations data for the nine month periods ended
September 30, 1998 and 1997 and the consolidated balance sheet data at September
30, 1998 have been derived from our unaudited financial statements appearing
herein, which, in our opinion, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
information included therein. These financial statements were prepared in
accordance with Canadian GAAP. We provide the pro forma financial data for
comparative purposes only and such data is not necessarily indicative of results
that would have been achieved if we had completed the transactions reflected at
the beginning of the period for which pro forma information is presented or of
the results we expect for any later period.
<TABLE>
Fiscal
Period
Ended
Years ended December
Nine Months Ended September 30, December 31, 31
--------------------------------------------- --------------------------- --------------
1998 1997
Pro Forma 1998 1997 Pro Forma 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited) (seven months)
--------------- -------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................... $ -- $ -- $ -- $ 26,000 $ -- $ --
Operating Expenses........ 917,000 241,428 57,023 715,000 135,236 10,504
Net income (loss) for the
period................... (947,000) (241,428) (57,023) (733,000) (135,236) (10,504)
Earnings (loss) per
common share............. (0.06) (0.05) N/A (0.05) (0.14) N/A
Weighted average shares
outstanding.............. 15,086,461 4,546,845 -- 13,750,294 950,294 --
</TABLE>
<TABLE>
As at September 30, As At December 31,
------------------------------------------------------------------------------------------
1998
Pro Forma 1998
(unaudited) (unaudited) 1997 1996
---------------------- -------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents. $ 3,092,000 $ 340,393 $ 43,525 $ --
Working capital
(deficiency).............. 2,264,000 348,249 346,695 (10,503)
Total assets.............. 3,329,000 3,505,845 419,261 147,977
Non-current liabilities... 60,000 -- -- --
Stockholders' equity...... $ 1,681,000 $ 2,848,249 $ 346,695 $ (10,503)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains "forward-looking statements." In particular,
some statements in "Overview" and "Acquisition of iQ Germany" and the sections
entitled "Results of Operations of iQ Power," "Results of Operations of iQ
Germany" and "Liquidity and Capital Resources" contain forward-looking
statements. Our actual results could differ materially from the results
projected in the forward-looking statements as a result of our ability to:
o achieve the objectives of our business strategy;
o accelerate or defer operating expenses;
o achieve revenue; and
o hire new personnel.
and other factors set forth under "Risk Factors" in this prospectus.
The following discussion is qualified by the more complete financial information
contained in our audited financial statements and the related notes and the
financial statements of iQ Germany and the related notes included in this
prospectus. Our financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. We believe that there is no
material difference between Canadian GAAP and United States generally accepted
accounting principles as applied to our financial results. The financial
statements of iQ Germany have been prepared in accordance with US GAAP.
The following discussion of our results of operations should be read in
conjunction with our audited financial statements and the related notes, the
discussion of iQ Germany's results of operations discussed below and the audited
financial statements of iQ Germany and the related notes included in this
prospectus. iQ Germany's results of operations are not included in our financial
statements.
Overview
We were organized in December 1994 and commenced operations in June 1996. We
develop and commercialize batteries and electric power technology for the
automotive industry. Our primary product is a "smart" automotive starter battery
which combines several proprietary features designed to optimize automotive
starter battery efficiency.
We are an early stage company and our principal activity to date has been the
acquisition of all the issued and outstanding shares of iQ Germany. Neither we
nor iQ Germany have derived revenues from operations, and we do not anticipate
having material revenues from operations until 2000, if at all. We and iQ
Germany have incurred substantial losses to date, and we cannot assure you that
we will attain any particular level of revenues or that we will achieve
profitability.
We believe that our historic spending levels and the historic spending levels of
iQ Germany are not indicative of future spending levels because we are entering
a period in which we will increase spending on product research and development,
marketing, staffing and other general operating expenses. For these reasons, we
believe our expenses, losses, and deficit accumulated during the development
state will increase significantly before it generates material revenues. In the
absence of additional funding, such as that sought in this offering, there is
substantial doubt about our and iQ Germany's ability to continue as a going
concern for a reasonable period of time as set forth in the audited financial
statements and related notes included in this prospectus.
Acquisition of iQ Germany
On August 25, 1998, we acquired all the issued and outstanding common stock of
iQ Germany in exchange for 10,000,000 of our shares at a deemed price of US$0.25
per common share for a total purchase price of US$2,500,000. As a result of the
business combination, the shareholders of iQ Germany have control of us. Due to
this acquisition of control, iQ Germany will be identified as the acquiror
(reverse acquisition), and we will account for the business combination under
the purchase method. Under the terms of the Share Exchange Agreement, the
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<PAGE>
former shareholders of iQ Germany, as a group, have a limited right to require
us to repurchase all, but not less than all, of our shares received by such
shareholders. They may exercise this right at and after April 10, 1999 if:
o we have failed to complete an equity offering with gross proceeds of
at least US$3 million; and
o they repay us the full amount of all funds we have has advanced or
invested in iQ Germany.
Their repurchase right will terminate at the close of this offering.
Our Results of Operations
We were organized in December 1994 and commenced operations in June 1996. Our
principal activity to date has been the acquisition of all the issued and
outstanding shares of iQ Germany.
No revenues were recorded in either the seven month period ended December 31,
1996, the year-ended December 31, 1997 or the nine-month period ended September
30, 1998.
As of September 30, 1998, we had an accumulated deficit of US$387,168. We
incurred a net loss of US$241,428 for the nine-month period ended September 30,
1998, compared to a net loss of US$57,023 for the comparable period of the prior
year and a net loss of US$135,236 for the year ended December 31, 1997, and
US$10,504 for the seven-month period ended December 31, 1996.
We anticipate that the level of spending will increase significantly in future
periods as we undertake research and development activities related to the
commercialization of the iQ technology. In addition, we anticipate that our
general and administrative expenses will also significantly increase as a result
of the growth in our research, development, testing and business development
programs. The actual levels of research and development, administrative and
general corporate expenditures are dependent on the cash resources available to
us.
iQ Germany's Results of Operations
iQ Germany was organized in 1991 to develop and commercialize batteries and
electric power technology for the automotive industry. Since that date, iQ
Germany has been engaged primarily in research and product development efforts.
As of September 30, 1998, iQ Germany had an accumulated deficit of DM2,140,000
(US$1,336,000). iQ Germany incurred a net loss of DM1,262,000 (US$706,000) for
the nine-month period ending September 30, 1998 compared with a net loss of
DM745,000 (US$430,000) for the comparable period of the prior year, DM1,034,000
(US$594,000) for the year ending December 31, 1997 and DM791,000 (US$525,000)
for the year ending December 31, 1996.
iQ Germany had no revenues for the nine-month period ending September 30, 1998
and revenues of DM5,000 (US$2,900) for the nine month period ending September
30, 1997, revenues of DM45,000 (US$27,000) for the year ending December 31,
1997, and no revenues for the year ending December 31, 1996. All of iQ Germany's
revenues were derived primarily from licensing fees.
For the nine month period ended September 30, 1998, iQ Germany incurred research
and development expenses of DM1,062,000 (US$593,000) compared with DM584,000
(US$336,000) for the comparable period of the prior year, DM842,000 (US$488,000)
for the year ending December 31, 1997 and DM655,000 (US$435,000) for the year
ending December 31, 1996. The increase in research and development expenses in
each period reflects the cost of supporting a higher level of activity,
principally research, product development, building prototypes and product
testing.
iQ Germany incurred general and administrative expenses of DM148,000 (US$83,000)
for the nine-month period ended September 30, 1998 compared with DM114,000
(US$66,000) for the comparable period of the prior year, DM162,000 (US$93,000)
for the year ending December 31, 1997 and DM127,000 (US$84,000) for the year
ending December 31, 1996. The increases in administrative and general corporate
expenses from period to period were due
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<PAGE>
primarily to the increase in expenses related to the growth of iQ Germany's
operations, the leasing of a new office facility in 1997, and other
administrative and corporate expenses related to the share exchange with us.
Following completion of the offering, iQ Germany's expenditures are expected to
materially increase as we pursue our research, development, testing and
commercialization programs and expands our finance and administrative staff and
financial and management system.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through sales of our
equity securities. As of September 30, 1998, we had cash and cash equivalents of
approximately $340,393. As of September 30, 1998, we had raised approximately
$711,000 (net of issuance costs) from the sale of such securities, excluding the
issuance of 10,000,000 common shares for deemed proceeds of $2,500,000 on the
business combination with iQ Germany. In December 1998, we received gross
proceeds of $709,050 by issuing 536,200 shares and special warrants to purchase
2,300,000 shares at a price of US$0.25 per share and US$0.25 per special
warrant.
iQ Germany is obligated to pay to Horst Dieter Braun, our Vice President,
Research and Development and Peter Braun, our President, DM400,000 in connection
with iQ Germany's acquisition of the iQ technology and other intellectual
property rights. The amount is payable only out of and only to the extent of the
gross profits of iQ Germany.
We plan to finance our capital needs principally from the net proceeds of this
offering and interest thereon and, to the extent available, lines of credit. We
currently have no commitments for any credit facilities such as revolving credit
agreements or lines of credit that could provide additional working capital. We
believe that the net proceeds from this offering, together with interest thereon
and our existing capital resources, will be sufficient to fund our operations
through 1999. Our capital requirements depend on several factors, including the
success and progress of our product development programs, the resources we
devote to developing our products, the extent to which our products achieve
market acceptance, and other factors. We expect to devote substantial cash for
research and development. We cannot adequately predict the amount and timing of
our future cash requirements. We will consider collaborative research and
development arrangements with strategic partners and additional public or
private financing (including the issuance of additional equity securities) to
fund all or a part of a particular program in the future. We cannot assure you
that additional funding will be available or, if available, that it will be
available on terms acceptable to us. If adequate funds are not available, we may
have to reduce substantially or eliminate expenditures for research and
development, testing, production and marketing of our proposed products, or
obtain funds through arrangements with strategic partners that require us to
relinquish rights to some of our technologies or products. We cannot assure you
that we will be able to raise additional cash if our cash resources are
exhausted. Our ability to arrange such financing in the future will depend in
part upon the prevailing capital market conditions as well as our business
performance.
Year 2000 Issue
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise. To prevent this from occurring, information systems need to be updated to
ensure they recognize the Year 2000.
We have conducted a review of our computer systems to identify the systems that
could be incompatible with dates beyond December 31, 1999, and are developing an
implementation plan to resolve issues that may arise. We place minimal reliance
on data sensitive software and believe that the expected cost and availability
of resources, to recover information not properly processed after December 31,
1999, would not result in a material effect on our results of operations.
We and iQ Germany began our respective Year 2000 strategies by compiling a list
of all computerized equipment and making a determination of how, if at all, the
software will be affected by Year 2000. Although the effect is so far
unquantified, all of our and iQ Germany's software is recent, and therefore we
and iQ Germany anticipate that
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<PAGE>
we will have sufficient time to test any new systems that need to be installed.
All of our and iQ Germany's financial and business records will be backed up to
ensure that no loss of information can occur. We do not anticipate incurring
significant costs in this regard.
We have contacted each of our strategic partners, consultants, contractors and
significant suppliers and have obtained assurances from some of them that their
relevant operating software and systems are Year 2000 compliant or would be by
December 31, 1999. We plan to continue to make inquiries of those suppliers and
service providers who have not yet provided us with information regarding their
Year 2000 compliance status. We anticipate that we will complete our third-party
Year 2000 compliance review by mid-summer 1999. We are monitoring the status of
all of our significant service providers' and suppliers' Year 2000 compliance
efforts to minimize the risk of any material adverse effect on our operations
resulting from compliance failures. We have also, in some cases, identified
alternative sources of supply or service should our present suppliers or service
providers encounter Year 2000 compliance problems.
Foreign Currency Translation Risk
To date, exposure to foreign currency fluctuations has not had a material effect
on our operations. We believe our risk of foreign currency translation is
limited, as our operations are based in Germany with resulting transactions
primarily denominated in United States dollars. We do not currently engage in
hedging or other activities to control the risk of foreign currency translation,
but may do so in the future, if conditions warrant.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including some types of
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 1999 and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. We do not expect the adoption of
the accounting pronouncement to have a material effect on our financial position
or results of operations.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and key employees are as follows:
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Peter E. Braun 35 President and Chief Executive Officer, Director
Dr. Gunther C. Bauer 48 Vice President, Research and Development, Director
Gerhard K. Trenz 57 Vice President, Finance and Chief Financial Officer
Russell French 51 Director
Eckehard Endler 55 Development Engineer
Rolf Kohler 53 Development Engineer
Freidrich-Wilhelm Schutz 57 Director, Material Management, Electronic Production and Quality Control
Steffen Tschirsch 37 Director of Research and Development
Gregory A. Sasges 38 Secretary
- -----------------------------
</TABLE>
Directors and Executive Officers
Peter E. Braun has served as a director and as our President and Chief Executive
Officer since September 1998. From 1994 to the present, Mr. Braun has also
served as Managing Director of iQ Germany. From 1992 to 1994, Mr. Braun worked
for Daimler Benz as an in-house consultant to Deutsche Aerospace. Mr. Braun
received a Masters of Science degree in Aeronautic Engineering and Space
Technology from the Technical University of Berlin in 1992.
Dr. Gunther C. Bauer has served as a director and as our Vice President,
Research and Development since September 1998. From 1994 to the present, Dr.
Bauer has also served as Vice President, Engineering of iQ Germany. From 1993 to
1994, Dr. Bauer was responsible for creating a Profit Center within the Daimler
Benz Group, an German automobile manufacturer, and from 1992 to 1993, he was
responsible for business strategy with the TEMIC Group, a wholly-owned
subsidiary of Daimler-Benz Aerospace A.G. From 1987 to 1992, Dr. Bauer served in
positions with German Aerospace, including Head of Staff of Innovations Field
Logic and Director of Corporate Development for Business Aeronautics. Since
1980, Dr. Bauer has been a Lecturer at the University of the Bundeswehr German
Forces in Munich, Germany. Dr. Bauer received his Master of Science in
Electronics from the Technical University of Munich and his doctorate in
Mechanical Engineering from the University of Dortmund in Dortmund, Germany.
Gerhard K. Trenz has served as our Vice President, Finance and our Chief
Financial Officer since September 1998. From 1996 to the present, Mr. Trenz has
also served as Vice President, Finance at iQ Germany. From 1988 to 1996, Mr.
Trenz headed Semicustom, a business unit of the Siemens Group, as Vice
President, Finance and Business Administration of Siemens Semiconductor
Division. From 1970 to 1988, Mr. Trenz held various positions in the Siemens
Group including Controller of Technology Development for ICs, in-house
consultant for the Corporate Strategic Planning Group of Siemens and Vice
President, Finance and Business Administration of Lormont / Bordeaux, a
production site of Siemens in France. Mr. Trenz received his Master of Science
degree in Telecommunications and Business Administration at the Technical
University of Munich.
Russell French has served as a director since 1994. From December 1994 to August
1998, Mr. French served as our President. From 1993 to the present, Mr. French
has been a principal of Mayon Management Corp., a company organized to manage,
organize and find new business ventures. Mr. French currently serves as a
director and President of AlPaka Resources Corp. Mr. French is a past director
and President of Pacific Falkon Resources Corp. and a past director of
International Precious Metals Corporation.
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<PAGE>
Gregory A. Sasges has served as our Secretary since December 1, 1998. Mr. Sasges
is a partner in a Vancouver law firm through his personal corporation and has
practiced law continually for the past 12 years with a preferred area of
practice in corporate and securities law. Mr. Sasges also currently serves as
the corporate secretary and is a former director of High Desert Mineral
Resources, Inc., a mineral resource company. Mr. Sasges is a past director of
Alpaka Resources Corp. and a past corporate secretary of GHK Resources Ltd.,
both of which were mineral resource companies. Mr. Sasges received his Bachelor
of Commerce and Bachelor of Laws degrees from the University of British
Columbia, Canada, in 1984 and 1985 respectively.
All officers are appointed annually by the board of directors and serve at the
pleasure of the board. All directors are elected annually at the annual general
meeting of shareholders and serve until the next annual general meeting, or
until their successors are elected and qualified.
KEY EMPLOYEES:
Our key employees are:
Eckehard Endler has served as a Development Engineer since 1998. From 1994 to
the present, Mr. Endler has also served as manager, Measurement and Laboratories
of iQ Germany. From 1978 to 1994, Mr. Endler worked as a Development Engineer
for a textile company. He received a degree in Electrical Engineering from The
Senior Technical College in Dresden, Germany in 1973.
Rolf Kohler has served as a Development Engineer since 1998. From 1973 to 1997,
he served as a Development and Test Engineer at Foron, a white goods producer,
in Chemnitz, Germany. Mr. Koehler received a degree in Electronic Device
Construction from The Senior Technical College in Midweida / Chemnitz in 1973.
Friedrich-Wilhelm Schutz has served as our Director, Material Management,
Electronic Production and Quality Control since 1998. In 1997, Mr. Schutz held
the same position in iQ Germany. From 1967 to 1996, Mr. Schutz worked in the
field of production and project development at Deutsche Aerospace, Bosch and
Rhode & Schwarz. Mr. Schutz received his Master of Science degree in
Telecommunications from the Senior Technical College in Cologne, Germany and in
Microelectronics from the Technical University in Aachen, Germany in 1967.
Steffen Tschirch has served as our Director of Research and Development since
1998. From 1994 to the present, Mr. Tschirch held the same position at iQ
Germany. From 1989 to 1993, Mr. Tschirch worked as a Scientific Assistant at the
Technical University of Chemnitz, Germany. Prior to that period, Mr. Tschirch
studied at the Technical University of Chemnitz with a focus on Physics and
Electronic Components and received his Master of Science degree in 1989.
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<PAGE>
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the compensation paid to our directors and
officers during the fiscal year ended December 31, 1998. The amounts shown for
Gunther C. Bauer, Peter E. Braun and Gerhard K. Trenz reflects salary paid to
the officer or director by iQ Germany during the fiscal year ended December 31,
1998. For your convenience, we have converted Deutschmark salary amounts into
U.S. dollars using the average noon buying rate in New York City for cable
transfers payable in Deutschmarks as certified for customs purposes by the
Federal Reserve Bank of New York for the relevant period, as set forth in
"Exchange Rate Information."
<TABLE>
Summary Compensation Table
(in United States Dollars)
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------
Awards Payouts
---------------------------------------
Restricted
Securities Shares or
Fiscal Other Annual under Restricted LTIP
Name and Principal Year Salary Bonus Compensation Options/SARs Share Units Payouts All Other
Position Ended (US$) (US$) (US$) Granted (#) (US$) (US$) Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gunther C. Bauer, 1998 85,809 - - - - - -
Vice President
Research and
Development
Peter E. Braun, 1998 87,009 - - - - - -
President and CEO
Russell French, 1998 51,290(1) - - - - - -
Director
Gerhard K. Trenz, 1998 78,009 - - - - - -
Vice President,
Finance and CEO
- ------------------------------
</TABLE>
(1) Represents consulting fees paid to Mayon Management Corp., a corporation
controlled by Russell French.
We do not have a long-term incentive plan under which cash or non-cash
compensation intended to serve as an incentive for performance (whereby
performance is measured by reference to financial performance or the price of
our securities) was paid or distributed to the executive officers listed above
during the most recently completed financial year.
During our most recently completed financial year ended December 31, 1998, we
did not have a pension plan for its our directors, officers or employees
Director Compensation
Other than compensation paid to Peter Braun, Gunther Bauer and Russell French,
as disclosed above under the sub-heading "Compensation of Directors and
Officers," none of our directors have received any cash compensation, directly
or indirectly, for their services rendered during our most recently completed
financial year. We do not have any non-cash compensation plans for our directors
and we do not propose to pay or distribute any non-cash compensation during the
current financial year, other than by granting stock options.
Options to Purchase Securities
During our most recently completed financial year ended December 31, 1998, we
have granted our directors and officers the stock options described below under
"Principal Shareholders." During our most recently completed financial year
ended December 31, 1998, none of our directors or officers exercised any stock
options. In addition,
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during our most recently completed financial year ended December 31, 1998, we
did not do any SAR or stock option repricings. Since the completion of our
fiscal year ended December 31, 1998, we have not granted any stock options.
Employment Agreements
Effective September 1, 1998, Peter E. Braun, Dr. Gunther C. Bauer and Gerhard
Trenz have entered into employment agreements with us, providing for annual
salaries of US$102,000, US$96,000 and US$84,000, respectively. Mr. Braun's and
Dr. Bauer's employment agreements are for a term of five (5) years. Mr. Trenz's
employment agreement is for a term of three (3) years. The employment agreements
are governed by the laws of Germany.
1998 Stock Option Plan
In December 1998, our board of directors adopted the 1998 Stock Option Plan. The
Stock Option Plan will terminate on the earlier of June 30, 2008 or such other
date as the board of directors may determine. The Stock Option Plan is
administered by the board of directors (or a committee thereof) and provides
that options may be granted to our officers, directors, employees and other
persons, including consultants, as determined by the Plan Administrator in its
sole discretion.
The options issued under the Stock Option Plan are exercisable at a price fixed
by the Plan Administrator, in its sole discretion; provided that options granted
in substitution for outstanding options of another corporation in connection
with a merger, consolidation, acquisition of property or stock or other
reorganization involving such corporation and us or any of our subsidiaries may
be granted with an exercise price equal to the exercise price for the
substituted option of the other corporation, subject to adjustment. Subject
exceptions in the Stock Option Plan relating to death, divorce and estate
planning techniques, options granted under the Stock Option Plan are
non-assignable and non-transferable.
The maximum number of the shares reserved for issuance under the Stock Option
Plan including options currently outstanding is 3,000,000 shares. As of April
30, 1999 a total of 2,875,000 options are issued and unexercised.
Indebtedness Of Directors And Senior Officers
None of our directors or senior officers or any of our associates or affiliates,
are or have been indebted to us at any time since the beginning of the last
completed financial year.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of April 30, 1999 information concerning the
beneficial ownership of our shares, and as adjusted to reflect the issuance of
the minimum shares issuable in this offering (3,000,000) by persons who are
known by us to own beneficially more than 10% of shares, by each of the persons
named in the table under the caption "Compensation of Directors and Officers"
and by all of our directors and executive officers as a group. The calculations
in the table are based on an aggregate of 18,479,225 shares outstanding as of
April 30, 1999. Unless otherwise noted all addresses of the beneficial owners
are Erlenhof Park, Inselkammer Strasse 4, D-82008, Unterhaching, Germany. The
percentage listed under the "as adjusted" column is base on an assumed offering
of an aggregate of 3,000,000 shares. The symbol "*" indicates that the amount
shown is less than 1% of outstanding shares.
<TABLE>
As Adjusted
-------------------------------------
Name and Address Number of Percentage of Number of shares Percentage of
of Beneficial Owner shares Class Class
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gunther Bauer(1)....................... 2,954,000 15.6% 2,954,000 13.4%
Horst Dieter Braun..................... 2,500,000 13.5% 2,500,000 11.6%
Peter E. Braun(2)...................... 2,500,000 13.2% 2,500,000 11.4%
Karin Wittkewitz....................... 1,900,000 10.3% 1,900,000 8.8%
Schrenckweg 1,
85658 Egmating, Germany
Gerhard Trenz(3)....................... 96,297 1.0% 96,297 *
Russell French(4)...................... 636,214 3.4% 636,214 2.9%
Suite 708-A
1111 West Hastings Street
Vancouver, B.C. V6E 2J3
All Directors and Officers as a
Group(5)............................... 10,661,511 54.0% 10,661,511 46.9%
- -------------------------------
</TABLE>
(1) Includes vested options to purchase 400,000 shares within 60 days of April
30, 1999 and 54,000 shares held by Mr. Bauer's spouse, Christiane Bauer.
(2) Includes vested options to purchase 400,000 shares within 60 days of April
30, 1999.
(3) Includes vested options to purchase 66,667 shares within 60 days of April
30, 1999.
(4) Includes 236,213 shares held by Mayon Management Corp., a corporation
controlled by Mr. French, also includes vested options to purchase 400,000
shares within 60 days of April 30, 1999.
(5) Includes vested options to purchase 1,266,667 shares within 60 days of
April 30, 1999.
We have been advised that Gunther Bauer, Horst Dieter Braun, Peter E. Braun,
Karin Wittkewitz and Gerhard Trenz and all other former shareholders of iQ
Germany have entered into a Shareholders Agreement in which they have agreed to
act jointly with respect to the voting of our shares held by them.
As of April 30, 1999, the following options to purchase our shares are
outstanding.
<TABLE>
Optionee Number of Shares Exercise Price Expiration Date
-------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Alain Marchand 50,000 US$1.00 12/01/08
Gregory A. Sasges 50,000 1.00 12/01/08
Joachim Schweizer 50,000 1.00 12/01/08
Steffen Tschirch 50,000 1.00 12/01/08
Joanne Gaska 25,000 1.00 12/01/08
Eckehard Endler 20,000 1.00 12/01/08
Friedrich-Wilhelm Schutz 20,000 1.00 12/01/08
Rolf Kohler 10,000 1.00 12/01/08
Russell French 800,000 1.00 12/01/08
Peter E. Braun 800,000 1.00 12/01/08
Gunther Bauer 800,000 1.00 12/01/08
Gerhard K. Trenz 200,000 1.00 12/01/08
-------
TOTAL: 2,875,000
</TABLE>
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INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
In March 1995, iQ Germany entered into an Industrial Property Rights and
Know-How Agreement with Horst Dieter Braun and Peter Braun. Under the Industrial
Property Rights Agreement, Horst Dieter Braun, a principal shareholder of our
company, and Peter Braun, a principal shareholder, director and officer of our
company, transferred to iQ Germany all their right, title and interest to
patents and other intellectual property rights related to starter batteries
technologies, and the German registered national trademark "iQ" in consideration
for payment of a one time payment of DM400,000 and royalties equal to 40% of our
revenues from license fees and 20% of our gross revenues (excluding license
fees) until the Year 2000. In August 1996, iQ Germany entered into a
supplemental contract with Messrs. Braun, which supplements the obligations of
Messrs. Braun under the Industrial Property Rights Agreement, requires them to
undertake all necessary actions to convey the Braun IP Rights and acknowledges a
civil dispute in District Court Berlin (Case No. 3 0 40/94) regarding a
partnership in which Messrs. Braun were involved. In September 1996, iQ Germany
entered into an extension of the Industrial Property Rights Agreement with
Messrs. Braun. Under the extension, the one time payment of DM400,000 is
allocated DM300,000 to Horst Dieter Braun and DM100,000 to Peter Braun, and iQ
Germany's obligations to Messrs. Braun are offset by payments on bank loans made
by iQ Germany on behalf of Horst Dieter Braun in the cumulative amount of
DM275,000 and on behalf of Peter Braun in the cumulative amount of DM120,000. In
December 1996, the Industrial Property Rights Agreement was amended to provide
that, until iQ Germany has the ability to pay or until it is liquidated, the one
time payment of DM400,000 due under the Industrial Property Rights Agreement,
may be delayed. In October 1998, Messrs. Braun waived their right under the
Industrial Property Rights Agreement to receive royalties equal to 40% of our
revenues from license fees and 20% of our gross revenues (excluding license
fees) until the Year 2000.
In December 1998, iQ Germany, Horst Dieter Braun and Peter Braun entered into an
Agreement Re Rights and Interests amending and supplementing the payment terms
of the Industrial Property Rights Agreement previously entered into among the
parties. The Agreement Re Rights and Interests provided that the one time
payment of DM400,000 due under the Industrial Property Rights Agreement is
payable only out of and only to the extent of the gross profits of iQ Germany.
In December 1998, iQ Germany, Horst Dieter Braun and Peter Braun entered into a
Trademark Assignment Agreement amending and supplementing the Industrial
Property Rights Agreement to restate the assignment of all rights and interest
in German Trademark No. 2,061,981 for the "iQ" trademark and design. In December
1998, iQ Germany, Horst Dieter Braun and Peter Braun entered into a Patent
Assignment Agreement amending and supplementing the Industrial Property Rights
Agreement to restate the assignment of all rights and interest in German Patent
No. 41 42 628 and other patents and patent applications related to the iQ
technology.
In October 1996, iQ Germany entered into a consulting contract with Dr. Gunther
Bauer, a director and officer of our company. The consulting contract is
terminable by either party with three month's notice and provides for a base fee
of DM6,100 per month plus statutory sales tax and related expenses. This
contract has been superseded by an employment agreement and a confidentiality
agreement discussed below.
In December 1996, iQ Germany entered into a loan contract with Karin Wittkewitz,
a principal shareholder of our company. Under the terms of the loan contract,
Ms. Wittkewitz agreed to loan iQ Germany DM60,000 at an annual interest rate of
3% above the bank rate of the German Bundesbank. The loan contract is terminable
within six months after the end of any calendar quarter in which written notice
is given, but in any event, not earlier than December 31, 1998.
In December 1996, iQ Germany entered into an agreement with Dr. Bauer in which
Dr. Bauer agreed not to enforce his claim to the payment of DM95,000 owed to Dr.
Bauer under an agreement dated July 15, 1994 with us unless iQ Germany has the
ability to redeem the obligation or unless a surplus exists after any
liquidation of iQ Germany.
We have entered into employment and confidentiality agreements, effective
September 1998, with Peter Braun, Dr. Bauer, and Gerhard Trenz, our
Vice-President, Finance and Chief Financial Officer. We have also entered into a
confidentiality agreement with Russell French, a director of our company. The
confidentiality agreements restrict competition with us for a period of five
years, and require that our confidential information be kept confidential and
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that all work product, copyrights, inventions and patents produced during the
employment relationship will be our property.
In August 1998, we entered into a consulting agreement with Mayon Management
Corp., a corporation controlled by Mr. French. The agreement is for an initial
term of three (3) years and provides for a base annual fee of US$72,000 and for
the reimbursement of reasonable expenses. The agreement superseded a management
agreement between us and Mayon dated January 1997.
In August 1998, we entered into a Share Exchange Agreement with iQ Germany and
the shareholders of iQ Germany including Dr. Bauer and Peter E. Braun and Horst
Dieter Braun and Ms. Wittkewitz under which we acquired all the issued and
outstanding shares in iQ Germany in exchange for 10,000,000 shares at a deemed
price of US$0.25 per common share. Under the terms of the Share Exchange
Agreement, the former shareholders of iQ Germany, as a group, have been granted
a limited right to require us to repurchase all, but not less than all, of the
our shares received by such shareholders. This right is exercisable at and after
April 10, 1999 if:
o we have failed to complete an equity offering with gross proceeds of
at least US$3 million; and
o such shareholders have repaid to us the full amount of all funds we
have advanced or invested in iQ Germany.
The repurchase right will terminate at the close of this offering.
In August and September of 1998, we entered into Atypical Share Exchange
Agreements with each of the holders of atypical shares of iQ Germany, including
Mr. Trenz, under the terms of which we issued into escrow an additional
2,800,000 shares against the deposit into escrow of "atypical shares" of iQ
Germany held by such holders. The shares and the "atypical shares" will be
released from escrow to us and the common shares will be released to the former
holders of atypical shares at the close of this offering. In the event the
repurchase right described above is exercised, the shares will be released from
escrow and returned to us and the atypical shares will be returned to the
holders of atypical shares.
In connection with the Share Exchange transaction, our shareholders and the
former holders of common stock and atypical share of iQ Germany, including Mr.
French, Peter Braun, Dr. Bauer, Horst Dieter Braun, Mr. Trenz and Ms.
Wittkewitz, entered into a pooling agreement under the terms of which an
aggregate of 16,979,424 shares in our company are held in escrow subject to
conditions governing their release.
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DESCRIPTION OF CAPITAL STOCK
Common Shares
As of April 15, 1999, 18,479,425 of our common shares are issued and
outstanding. All of our common shares rank equally as to dividends, voting
powers and participation in assets and as to all other benefits which might
accrue to holders of the shares. No shares have been issued subject to call or
assessment. There are no pre-emptive or conversion rights, and no provision for
redemption, purchase for cancellation, surrender or sinking funds attached to
any of our common shares other than the option the former shareholders of iQ
Germany have, as a group, to require us to repurchase all, but not less than
all, of our shares received by such shareholders. This right is exercisable at
and after April 10, 1999 if:
o we have failed to complete an equity offering with gross proceeds of
at least US$3 million; and
o such shareholders have repaid to us the full amount of all funds we
have advanced or invested in iQ Germany.
The repurchase right will terminate at the close of this offering. Provisions as
to the modification, amendment or variation of such rights or provisions are
contained in the Canadian Business Corporations Act. Each share carries one vote
at our shareholder meetings.
Certain Rights of Shareholders
In accordance with the provisions of the Canadian Business Corporation Act, the
amendment of rights of holders of a class of our shares, including our common
shares, requires the approval of at least two-thirds of the votes cast by the
holders of such shares voting at a special meeting of such holders. Under our
bylaws, a quorum for a special meeting of the holders of our common shares
occurs when at least two persons entitled to vote at such a meeting are present.
In circumstances where the rights of our common shares may be amended, however,
holders of our common shares have the right under the Canadian Business
Corporation Act to dissent from such amendment and require that we pay them the
then fair value of the shares.
Exchange Controls and Other Limitations Affecting Holders of Common Shares
Canada has no system of exchange controls. There is no law, government decree or
regulation in Canada restricting the export or import of capital or affecting
the remittance of dividends, interest or other payments to a non-resident holder
of common shares, other than withholding tax requirements.
The Canadian Business Corporation Act generally requires a majority of the board
of directors of a CBCA company to be resident Canadians. Accordingly, this has
the effect of limiting the rights of all holders of common shares with respect
to the election of directors. Other than this limitation on who may be elected
as a director, and the limitations imposed by the Investment Canada Act
discussed below, there are no limitations on the right of holders of common
shares not resident in Canada to hold or vote the common shares imposed by any
governmental laws, decrees or regulations in Canada or by the charter or other
constituent document.
Under the Investment Canada Act, an investment by an individual, a government or
a government agency or an entity that is not a "Canadian" (as defined in the
Investment Canada Act) may be subject to a requirement to notify the Director of
Investments of the investment at any time prior to, or within thirty days after,
the investment. The investment may also be subject to review by the Minister
responsible for the administration of the Investment Canada Act. Except as set
forth below, an investment in common shares by a non-Canadian would be
reviewable under the Investment Canada Act if:
o such investment constitutes an acquisition of direct control of us
where the value of our assets is at least $5 million; or
o an acquisition of indirect control of us where the value of the our
assets is at least $50 million; or
o the investment is related to Canada's cultural heritage or national
identity.
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<PAGE>
All investments subject to review may not be implemented unless the Minister is
satisfied that the investment is likely to be of net benefit to Canada.
Generally, however, an investment made by a "WTO Investor" (as defined in the
Investment Canada Act and which includes American or American controlled
entities) in common shares is reviewable under the Investment Canada Act only if
such investment constitutes an acquisition of direct control of us and the value
of our assets is at least $179 million (in 1998). An indirect acquisition of
control by a WTO Investor (including an American) is generally no longer subject
to review. The lower thresholds of $5 million for direct acquisitions and $50
million for indirect acquisitions are still applicable for WTO Investors
investing in uranium production, financial services, cultural services and
transportation services.
The Investment Canada Act states that a non-Canadian shall acquire control or
shall be deemed to acquire control if such person or entity acquires a majority
of the voting shares. An acquisition of less than a majority but more than
one-third of the voting shares will be presumed to be an acquisition of control
unless it can be established that, upon acquisition, we are not controlled in
fact by the acquiror through the ownership of voting shares.
The notification requirements which would be applicable in the event of a
proposed acquisition of control not otherwise subject to review require the
potential investor to supply information concerning the proposed investment
prior to, or within thirty days following, the consummation of the acquisition.
However, the Federal Cabinet retains the right to review any such proposed
investment that is related to cultural heritage or national identity if, within
a specific period, the Federal Cabinet considers it in the public interest on
the recommendations of the Minister to issue an order for the review of the
investment.
In some limited circumstances, transactions in relation to voting shares would
be exempt from the Investment Canada Act, including:
o an acquisition of voting shares if the acquisition were made in
connection with the person's business as a trader or dealer in
securities;
o an acquisition of control of us in connection with the realization of
a security interest granted for a loan or other financial assistance
and not for any purpose related to the provisions of the Investment
Canada Act; and
o an acquisition of control of us by reason of an amalgamation, merger,
consolidation or corporate reorganization, following which the
ultimate direct or indirect control of us, through the ownership of
voting interests, remains unchanged.
Pooling and Escrow Agreements
An aggregate of 13,514,844 of our common shares are held in escrow under the
terms of a pooling agreement dated August 25, 1998 between us, Montreal Trust
Company of Canada and 29 of our shareholders. These shareholders consist of the
founders of our company and the former holders of atypical shares in iQ Germany.
Under the terms of the August pooling agreement, 3,378,711 shares will be
released from escrow on April 1, 2000 and an additional 25% of the shares will
be released from escrow every three months thereafter until all shares are
released. Any shareholder who holds less than or equal to 50,000 shares at a
release date shall have all such shares released at such release date.
2,800,000 shares subject to the August pooling agreement have been issued into
escrow against the deposit into escrow of all the outstanding "atypical shares"
of iQ Germany. The common shares will be released from escrow to the former
holders of the atypical shares and the atypical shares will be released from
escrow to us, at the close of this offering. Upon release from escrow the shares
issued to the former holders of the atypical shares will be subject to the
August pooling agreement under the terms of an amendment to the August pooling
agreement dated August 25, 1998.
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<PAGE>
An aggregate of 3,464,580 of our common shares are held in escrow under the
terms of a pooling agreement dated December 1, 1998 between us, Montreal Trust
Company of Canada and 22 of our shareholders. These shareholders consist of
investors who acquired common shares and special warrants subsequent to the
issuance of shares to the founders of our company. Under the terms of the
December pooling agreement, 3,378,711 shares will be released from escrow on
September 1, 1999 and an additional 25% of the shares will be released from
escrow every three months thereafter until all shares are released. Any
shareholder who holds less than or equal to 25,000 shares at a release date
shall have all such shares released at such release date.
Transfer Agent and Registrar
Montreal Trust Company of Canada, Vancouver, British Columbia, acts as registrar
and transfer agent for our common shares.
DIVIDEND POLICY
To date, we have not paid any dividends to holders of our shares. The payment of
dividends, if any, to holders of the shares is within the discretion of the
board of directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors. We do not intend to declare any
cash dividends to the holders of the shares in the foreseeable future, but
instead intend to retain all future earnings, if any, for further research and
development, business expansion and working capital.
Certain Tax Considerations
In this section we summarize some of the tax considerations relevant to a
purchase of shares in this offering by individuals and corporations which:
o for purposes of the United States Internal Revenue Code, the Income
Tax Act (Canada) and the Canada-United States Tax Convention, are
resident in the United States and not in Canada,
o hold shares as capital assets for purposes of the Internal Revenue
Code and capital property for purposes of the Income Tax Act
o deal at arm's length with us; and
o do not use or hold the shares in carrying on a business through a
permanent establishment or in connection with a fixed base in Canada
and, in the case of individual holders, are also U.S. citizens.
We will refer to persons who satisfy the above conditions as "Unconnected U.S.
Shareholders."
We will assume, for purposes of this discussion, that you are an Unconnected
U.S. Shareholder. The tax consequences of a purchase of shares by persons who
are not Unconnected U.S. Shareholders may differ substantially from the tax
consequences discussed in this section. The Income Tax Act contains rules
relating to securities held by some financial institutions. We do not discuss
these rules and holders that are financial institutions should consult their own
tax advisors.
This discussion is based upon the current provisions of:
o the Income Tax Act and regulations under the Income Tax Act;
o the Internal Revenue Code and regulations under the Internal
Revenue Code;
o the Canada-United States Income Tax Convention;
o our understanding of the current administrative policies and
practices published by Revenue Canada;
o all specific proposals to amend the Income Tax Act and the
regulations under the Income Tax Act that have been publicly
announced by the Minister of Finance (Canada) prior to the date
of this prospectus;
o the administrative policies published by the U.S. Internal
Revenue Service; and
o judicial decisions,
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all of which are subject to change either prospectively or retroactively. We do
not discuss the potential effects of any recently proposed legislation in the
United States and do not take into account the tax laws of the various provinces
or territories of Canada or the tax laws of the various state and local
jurisdictions of the United States or foreign jurisdictions.
We intend this discussion to be a general description of the U.S. federal and
Canadian federal income tax considerations material to a purchase of shares. We
do not intend it to be legal or tax advice to any prospective Unconnected U.S.
Shareholder and you should not consider it to be legal or tax advice. We do not
give any opinion or make any representation with respect to the income tax
consequences to you. We also have not taken into account your particular
circumstances and do not address consequences peculiar to you if you are subject
to special provisions of U.S. or Canadian income tax law. Therefore, you should
consult your own tax advisor regarding the tax consequences of purchasing shares
in this offering.
United States Federal Income Tax Considerations
As an Unconnected U.S. Shareholder, you generally will include in income
dividends paid by us to the extent of our current or accumulated earnings and
profits. You must include in income an amount equal to the U.S. dollar value of
such dividends on the date of receipt (based on the exchange rate on such date),
without reduction for the Canadian withholding tax. You will generally be
entitled to a foreign tax credit, or deduction for U.S. federal income tax
purposes, in an amount equal to the Canadian tax withheld. To the extent
dividend distributions paid by us exceed our current or accumulated earnings and
profits, they will be treated first as a return of capital up to the your
adjusted tax basis in the shares, and then as a gain from the sale or exchange
of the shares.
Dividends paid by us generally will constitute "passive income" for purposes of
the foreign tax credit, which could reduce the amount of foreign tax credit
available to you. The Internal Revenue Code applies various limitations on the
amount of foreign tax credit that may be available to a U.S. taxpayer. Because
of the complexity of those limitations, you should consult your own tax advisor
with respect to the potential consequences of those limitations.
Dividends paid by us on the shares will not generally be eligible for the
"dividends received" deductions. An Unconnected U.S. Shareholder which is a
corporation may, under some circumstances, be entitled to a 70% deduction of the
U.S. source portion of dividends received from us if such Unconnected U.S.
Shareholder owns shares representing at least 10% of our voting power and value.
If you sell the shares, you generally will recognize gain or loss in an amount
equal to the difference, if any, between the amount realized on the sale and
your adjusted tax basis in the shares. Any gain or loss you recognize upon the
sale of shares held as capital assets will be long-term or short-term capital
gain or loss, depending on whether the shares have been held by you for more
than one year.
Under current U.S. tax regulations, dividends paid by us on the shares generally
will not be subject to U.S. information reporting or backup withholding tax
unless they are paid in the United States through a U.S. or U.S-related paying
agent (including a broker). If you furnish the paying agent with a duly
completed and signed Form W-9 such dividends will not be subject to the backup
withholding tax. You will be allowed a refund or a credit equal to any amounts
withheld under the U.S. backup withholding tax rules against your U.S. federal
income tax liability, provided you furnish the required information to the
Internal Revenue Service.
Personal Holding Companies
We could be classified as a personal holding company for U.S. federal income tax
purposes if both of the following tests are satisfied:
o if at any time during the last half of our taxable year, five or
fewer individuals own or are deemed to own more than 50% of the
total value of our stock; and
o we receive 60% or more of our U.S. related gross income from
specified passive sources, such as royalty payments.
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<PAGE>
A personal holding company is taxed on a portion of its undistributed U.S.
source income (including specific types of foreign source income which are
connected with the conduct of a U.S. trade or business) to the extent such
income is not distributed to shareholders. We can not assure you that we will
not qualify as a personal holding company in the future.
Foreign Personal Holding Companies
We could be classified as a foreign personal holding company if in any taxable
year both of the following tests are satisfied:
o five or fewer individuals who are United States citizens or
residents own or are deemed to own more than 50% of the total
voting power of all classes of our stock entitled to vote or the
total value of our stock; and
o at least 60% (50% in some cases) of our gross income consists of
"foreign personal holding company income," which generally
includes passive income such as dividends, interest, gains from
the sale or exchange of stock or securities, rent and royalties.
We do not believe that we satisfy either the ownership test or the income test
set forth above. If we are classified as a foreign personal holding company and
if you held shares on the last day of our taxable year, you must include in your
gross income as a dividend your pro rata portion of our undistributed foreign
personal holding company income. If you dispose of your shares prior to such
date, you would not be subject to tax under these rules. We can not assure you
that we will not qualify as a foreign personal holding company the future.
Passive Foreign Investment Companies
The rules governing "passive foreign investment companies" can have significant
tax effects on Unconnected U.S. Shareholders. We could be classified as a
passive foreign investment company if, for any taxable year, either:
o 75% or more of our gross income is "passive income," which
includes interest, dividends and some types of rents and
royalties, or
o the average percentage, by fair market value (or, in some cases,
by adjusted tax basis) of our assets that produce or are held for
the production of "passive income" is 50% or more.
Distributions which constitute "excess distributions," as defined in Section
1291 of the Code, from a passive foreign investment company and dispositions of
stock of a passive foreign investment company are subject to the highest rate of
tax on ordinary income in effect and to an interest charge based on the value of
the tax deferred during the period during which the shares are owned. However,
if an Unconnected U.S. Shareholder makes a timely election to treat us as a
qualified electing fund under section 1293, the above-described rules generally
will not apply. Instead, the Unconnected U.S. Shareholder would include annually
in his gross income his pro rata share of our ordinary earnings and net capital
gain, regardless of whether such income or gain was actually distributed. Tax on
this income, however, may be deferred.
In addition, subject to specific limitations, Unconnected U.S. Shareholders
owning (actually or constructively) marketable stock in a passive foreign
investment company may make an election under section 1296 to mark that stock to
market annually, rather than being subject to the above-described rules. Amounts
included in or deducted from income under this mark to market election (and
actual gains and losses realized upon disposition, subject to specific
limitations) will be treated as ordinary gains or losses. In addition, special
rules apply if we qualify as both a passive foreign investment company and a
"controlled foreign corporation" (as defined below) and an Unconnected U.S.
Shareholder owns, actually or constructively, 10% or more of the total combined
voting power of all classes of our stock entitled to vote.
We believe that we may qualify as a passive foreign investment company for the
current fiscal year and may qualify as a passive foreign investment company in
future years. We can not assure you regarding our current or future passive
foreign investment company status or that we will be able to satisfy record
keeping requirements that are imposed on qualified electing funds. You should
consult a tax advisor with respect to how the passive foreign
-39-
<PAGE>
investment company rules affect your tax situation, including the manner and
advisability of making an election to treat us a qualified electing fund or of
making a mark to market election.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of our stock or the total
value of our stock is owned, directly or indirectly, by citizens of the United
States, U.S. domestic partnerships and corporations or estates or trusts other
than foreign estates or trusts, each of which owns 10% or more of the total
combined voting power of all classes of our stock, we could be treated as a
"controlled foreign corporation" under Subpart F of the Internal Revenue Code.
This classification would effect many complex results, including such
shareholders to include in income their pro rata shares of our "Subpart F
Income" (as specifically defined by the Internal Revenue Code). In addition,
under Section 1248 of the Internal Revenue Code, gain from the sale or exchange
of stock by an Unconnected U.S. Shareholder who is or was a 10% or greater
shareholder at any time during the five-year period ending with the sale or
exchange will be ordinary dividend income to the extent of our earnings and
profits attributable to the stock sold or exchanged.
We do not believe that we are a controlled foreign corporation and we do not
anticipate that we will become a controlled foreign corporation as a result of
the offering. However, we can not assure you that we will not qualify as a
controlled foreign corporation in the future.
Certain Canadian Federal Income Tax Considerations
In this section, we summarize some of the Canadian income tax considerations
relevant to your purchase of shares.
If you purchase the shares you will be deemed to have received a dividend to the
extent that the amount paid by you exceeds the paid-up capital, as defined in
the Tax Act, of the shares acquired. Furthermore, you will be deemed to have
disposed of the shares for proceeds of disposition equal to the amount paid less
the amount deemed to have been received as a dividend. Capital gains realized on
the deemed disposition will have the income tax consequences described below.
The portion of the proceeds of disposition that are deemed to be a dividend will
be subject to a Canadian withholding tax on dividends, as described above.
Under the Tax Act, you will be generally be exempt from Canadian tax on a
capital gain realized on an actual or deemed disposition the shares under the
Canada-United States Income Tax Convention (1980) unless:
o the shares formed part of the business property of a permanent
establishment in Canada that the holder had within the twelve-month
period preceding the disposition; or
o if an individual, the holder
- was resident in Canada for 120 months during any 20 consecutive
year period preceding the disposition;
- was resident in Canada at any time during the 10 years
immediately preceding the disposition; and
- owned the shares when the holder ceased to be a resident of
Canada.
Dividends paid, credited or deemed to have been paid or credited on the shares
to Unconnected U.S. Shareholders will be subject to a Canadian withholding tax
at a rate of 25% under the Income Tax Act. Under the Canada-United States Income
Tax Convention, the rate of withholding tax generally applicable to Unconnected
U.S. Shareholders who beneficially own the dividends is reduced to 15%. In the
case of Unconnected U.S. Shareholders that are companies that beneficially own
at least 10% of our voting stock, the rate of withholding tax on dividends is
reduced to 5%.
Canada does not currently impose any estate taxes or succession duties, however,
if you die, there is a deemed disposition of the shares held at that time for
proceeds of disposition equal to the fair market value of the shares immediately
before the death. Capital gains realized on the deemed disposition, if any, will
have the income tax consequences described above.
-40-
<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common shares in the
United States. Upon the completion of this offering, assuming the maximum amount
of shares offered in the offering (5,500,000) are issued, there will be
23,979,425 of our common shares outstanding, excluding 2,875,000 shares issuable
upon exercise of presently outstanding options. Of these shares, the 5,500,000
shares being sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, except for any such shares
issued to persons who, as a result of positions with us (such as directors and
officers) or stock ownership, are or were "affiliates." Any person who is deemed
to be an affiliate may not resell in the United States our shares held by such
person in the absence of registration under the Securities Act unless an
exemption from registration is available, such as Rule 144 discussed below.
A total of 3,709,684 common shares were issued and sold by us in reliance on an
exemption from registration under the Securities Act provided by Rule 504 under
the Securities Act. Such shares are unrestricted and freely tradable in the
United States.
Our affiliates holding 9,290,844 common shares, 7,790,843 shares of which are
subject to the August pooling agreement described below, are entitled to sell in
the United States within any three-month period, that number of shares that does
not exceed the greater of:
o one percent of the number of common shares then outstanding
(approximately 234,794 shares immediately after this offering);
or
o the average weekly trading volume of the common shares during the
four calendar weeks preceding such sale.
A total of 14,769,741 common shares were issued by us in reliance upon
Regulation S under the Securities Act to persons whom we believe were outside
the United States at the time of sale and who are not our affiliates. Shares
sold outside the United States in reliance upon Regulation S may be resold in
the United States by persons other than our affiliates without registration
under the Securities Act, subject to fulfillment of resale conditions imposed by
Rule 144 under the Securities Act described below.
Under Regulation S, any shares held by persons other than us, any underwriter,
dealer or other person who participates, under the terms of a contractual
arrangement, in the distribution of the shares sold in reliance thereon, any of
their respective affiliates (other than directors or officers who are affiliates
solely by virtue of holding such position) or any person acting on behalf of any
of the foregoing, may resell the shares in an "offshore transaction," as defined
in Regulation S, provided that the sale is not prearranged with a buyer in the
United States and no directed selling efforts (as such term is defined in
Regulation S) are made in the United States by the seller, any affiliate or any
person acting on their behalf. Officers and directors who are affiliates solely
by virtue of holding such position may also resell shares on the same basis,
provided that no selling commission, fee or other remuneration is paid in
connection with such offers and sales other than usual and customary brokers
commissions. All other of our affiliates and such persons would be required to
comply with Regulation S restrictions applied to primary offerings by issuers
which, in addition to the offshore transaction and no directed selling efforts
requirements, may include other offering restrictions.
In general, under Rule 144, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year (including the holding
period of any prior owner, except an affiliate) is entitled to sell in "broker's
transactions" or to market makers, within any three-month period commencing 90
days after the date of this prospectus, a number of shares that does not exceed
the greater of:
o one percent of the number of common shares then outstanding
(approximately 234,794 shares immediately after this offering);
or
o the average weekly trading volume of the shares during the four
calendar weeks preceding the required filing of a Form 144 with
respect to such sale.
-41-
<PAGE>
Sales under Rule 144 are generally subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
29 of our shareholders, including the former holders of common stock and
atypical shares of iQ Germany, have agreed to place their shares into escrow
subject to the terms of the August pooling agreement. An aggregate of 13,514,844
shares are held in escrow under the terms of the August pooling agreement. Under
the terms of the August pooling agreement, 3,378,711 shares will be released
from escrow on April 1, 2000 and an additional 25% of the shares will be
released from escrow every three months thereafter until all shares are
released, and any shareholder who holds less than or equal to 50,000 shares at a
release date shall have all such shares released at such release date.
In addition to the August pooling agreement, 3,464,580 of our common shares are
held in escrow under the terms of the December pooling agreement. Under the
terms of the December pooling agreement, 866,145 shares will be released from
escrow on the earlier of September 1, 1999 or the date this offering closes and
an additional 25% of the shares will be released from escrow every three months
thereafter until all shares are released. Any shareholder who holds less than or
equal to 25,000 shares at a release date shall have all such shares released at
such release date.
Assuming the minimum amount of shares are sold in the offering, we intend to
take steps to permit the development of a market in our common shares on the
Nasdaq OTC Bulletin Board, an electronic bulletin board market maintained by the
National Association of Securities Dealers. We cannot assure you, however, that
an active trading market for the common shares will ever develop.
AVAILABLE INFORMATION
We do not report under the Exchange Act. We have filed with the SEC a
registration statement on Form SB-1 covering the shares. We have not included in
this prospectus additional information contained in the registration statement
and you should refer to the registration statement and its exhibits for further
information. For a fee, you may get a copy of the registration statement from
the public reference section of the SEC at: Judiciary Plaza, 450 5th Street,
N.W., Washington, D.C. 20549; and at the SEC's Regional Office located at: 1400
Citicorp Center, 500 West Madison Street, Chicago, IL 60661. In addition, the
SEC maintains a web site on the Internet at the address http://www.sec.gov that
contains reports, proxy information statements and other information regarding
registrants that file electronically with the SEC.
After completion of this offering, we will be exempt from the rules under the
Exchange Act that require us to furnish proxy statements to our shareholders,
and our officers, directors and principal shareholders will be exempt from the
reporting and short swing profit recovery provisions of Section 16 under the
Exchange Act. However, we will be subject to the reporting requirements of the
Exchange Act that are applicable to foreign private issuers. We are not required
under the Exchange Act to publish financial statements as frequently or as
promptly as United States companies who are subject to the Exchange Act. We
intend, however, to continue to furnish our shareholders with annual reports
containing consolidated financial statements audited by independent accountants
and with quarterly reports containing unaudited summary financial information
for each of the first three fiscal quarters of each fiscal year, as well as any
other reports as our board of directors may authorize or that are required by
law.
LEGAL MATTERS
The legality of the shares offered by this prospectus will be passed upon for us
by Werbes Sasges & Company, our Canadian Counsel. Matters of United States law
that arise connection with this offering will be passed upon for us Dorsey &
Whitney LLP, Seattle, Washington our special United States counsel Dorsey &
Whitney LLP will rely on the opinions of Werbes Sasges & Company as to matters
of Canadian law.
-42-
<PAGE>
INTRODUCTION TO FINANCIAL STATEMENTS
The financial statements included in this prospectus are those of our company.
These financial statements are set forth on the pages that follow.
-43-
<PAGE>
iQ POWER TECHNOLOGY INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
iQ Power Technology Inc...........................................................................................1
Auditors'Report................................................................................................2
Balance Sheets.................................................................................................3
Statements of Loss and Deficit.................................................................................4
Statements of Cash Flow........................................................................................5
Notes to the Financial Statements..............................................................................6
IQ BATTERY Research & Development GmbH...........................................................................11
Independent Auditors'Report...................................................................................11
Balance Sheet.................................................................................................12
Statement of Operations.......................................................................................13
Statement of Cash Flows.......................................................................................14
Notes to the Financial Statements.............................................................................15
Selected Unaudited Pro forma Consolidated Financial Information..................................................23
Unaudited Pro Forma Consolidated Balance Sheet................................................................24
Unaudited Pro Forma Statement of Loss for the nine months ended September 30, 1998............................25
Unaudited Pro Forma Statement of Loss for the twelve months ended December 31, 1997...........................26
Notes to the Unaudited Pro Forma Consolidated Financial Information...........................................27
</TABLE>
<PAGE>
AUDITORS' REPORT
To the Directors of
IQ Power Technology Inc.
(a development stage company)
We have audited the balance sheets of IQ Power Technology Inc. (a development
stage company) as at December 31, 1997 and 1996 and the statements of loss and
deficit and cash flow for the year ended December 31, 1997, the seven month
period ended December 31, 1996 and cumulative from date of inception to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1997 and 1996
and the results of its operations and cash flows for the year ended December 31,
1997, the seven month period ended December 31, 1996 and cumulative from date of
inception to December 31, 1997 in accordance with accounting principles
generally accepted in Canada applied on a consistent basis.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
October 15, 1998
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA
- -- U.S. REPORTING CONFLICT
To the Directors of
IQ Power Technology Inc.
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the auditor
concludes that there is substantial doubt about the entities' ability to
continue as a going concern such as described in Note 2 of the financial
statements. Our report to the shareholders dated October 15, 1998 is expressed
in accordance with Canadian reporting standards, which do not permit a reference
to such an uncertainty in the auditors' report when the uncertainty is
adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
October 15, 1998
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Balance Sheets
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
September 30 December 31
1998 1997 1996
----------------- ----------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT
Cash $ 340,393 $ 43,525 $ -
Accounts receivable 7,614 3,060 -
Prepaids and deposits - 4,600 -
Advances to iQ Germany (Note 4) 657,838 368,076 147,977
- ----------------------------------------------------------------------------------------------------------------------
$ 1,005,845 $ 419,261 $ 147,977
Investment (Note 6) 2,500,000 - -
- ----------------------------------------------------------------------------------------------------------------------
$ 3,505,845 $ 419,621 $ 147,977
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 177,596 $ 56,841 $ -
Accrued liabilities 5,000 15,725 -
Due to shareholder (Note 5) - - 5,877
Share subscription (Note 11(e)) 475,000 - 152,603
- ----------------------------------------------------------------------------------------------------------------------
657,596 72,566 158,480
- ----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (Note 6) 3,210,806 492,435 1
Share subscriptions 24,611 - -
Accumulated deficit, during development stage (387,168) (145,740) (10,504)
- ----------------------------------------------------------------------------------------------------------------------
2,848,249 346,695 (10,504)
- ----------------------------------------------------------------------------------------------------------------------
$ 3,505,845 $ 419,261 $ 147,976
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CONTINUANCE OF OPERATIONS (Note 2)
F-3
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Statements of Loss and Deficit
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Cumulative Cumulative Twelve months
from date of Nine months Nine months from date of Twelve months Seven months
inception to ended ended inception to period ended period ended
September 30 September 30 September 30 December 31 December 31 December 31
--------------- -------------- --------------- -------------- ---------------- ---------------
1998 1998 1997 1997 1997 1996
--------------- -------------- --------------- -------------- ---------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Expenses
Automobile $ 1,180 $ 1,180 $ - $ - $ - $ -
Advertising and 6,424 6,424 - - - -
promotion
Loss on foreign 32,394 - - 32,394 32,394 -
exchange
Management fees 99,988 56,790 32,641 43,198 43,198 -
Office 31,194 30,983 29 211 211 -
Professional fees 120,623 94,357 1,085 26,266 21,640 4,626
Technical reports 5,878 - - 5,878 - 5,878
Travel 89,487 51,694 23,268 37,793 37,793 -
- ------------------------------------------------------------------------------------------------------------------------
387,168 241,428 57,023 145,740 135,236 10,504
- ------------------------------------------------------------------------------------------------------------------------
Net loss (387,168) (241,428) (57,023) (145,740) (135,236) (10,504)
Accumulated deficit (145,740) (10,504) (10,504)
during development
stage, beginning of
period
- ------------------------------------------------------------------------------------------------------------------------
Accumulated deficit $(387,168) $ (387,168) $ (67,527) $(145,740) $ (145,740) $ (10,504)
during development
stage, end of period
- ------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss $ (0.05) N/A $ (0.14) N/A
per share
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number 4,546,845 N/A 950,294 N/A
of shares outstanding
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Statements of Cash Flow
(Expressed in U.S. Dollars)
<TABLE>
Cumulative Cumulative
from date of Nine months Nine months from date of Twelve months Seven months
inception to ended ended inception to ended ended
September 30 September 30 September 30 December 31 December 31 December 31
1998 1998 1997 1997 1997 1996
--------------- ---------------- ------------------------------- ------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (387,168) $ (241,428) $ (57,023) $ (145,740) $ (135,236) $ (10,504)
Items not affecting cash
Increase in accounts
receivable (7,614) (4,554) (1,562) (3,060) (3,060) -
(Decrease) increase in
prepaid and deposits - 4,600 - (4,600) (4,600) -
Decrease in GST payable - - (759)
Increase in accounts
payable 177,596 120,755 34,925 56,841 56,841 -
Increase in advances
payable - - 7,879
(Decrease) increase in
accrued liabilities 5,000 (10,725) - 15,725 15,725 -
- -----------------------------------------------------------------------------------------------------------------------------
(212,186) (131,352) (16,540) (80,834) (70,330) (10,504)
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Increase in advances to
iQ Germany (657,838) (289,762) (78,685) (368,076) (220,099) (147,977)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in
due to shareholder - - (5,877) - (5,877) 5,877
Increase in
share subscriptions 177,214 24,611 142,505 152,603 - 152,603
(equity)
Increase in
share subscriptions 475,000 475,000 - - - -
(liability)
Issuance of common
shares 558,203 218,371 - 339,832 339,831 1
- -----------------------------------------------------------------------------------------------------------------------------
1,210,417 717,982 136,628 492,435 333,954 158,481
- -----------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS 340,393 296,868 41,403 43,525 43,525 -
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD - 43,525 - - - -
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS, END
OF PERIOD $ 340,393 $ 340,393 $ 41,403 $ 43,525 $ 43,525 $ -
- -----------------------------------------------------------------------------------------------------------------------------
See Note 6 for non-cash investing and financing activity
</TABLE>
F-5
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
(Information as at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
iQ Power Technology Inc. (the "Company") was incorporated under the Canada
Business Corporations Act on December 20, 1994. The Company commenced
operations on June 21, 1996. The Company's current business strategy is to
acquire 100% interest in iQ Battery Research & Development GmbH (iQ
Germany) which is legally domiciled in Floha, Germany. The Company's
strategic objectives include the commercial exploitation of a new
generation of computer optimized vehicle batteries researched and developed
by iQ Germany.
2. CONTINUANCE OF OPERATIONS
These financial statements have been prepared on a going concern basis. The
company's ability to continue as a going concern is dependent upon the
ability of the Company to attain future profitable operations and/or to
obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due. The
Company plans to raise a maximum of $4,690,000 to a minimum of $2,440,000,
net of commissions and costs of issue, through the issuance of 5,500,000 or
3,000,000 shares of common stock pursuant to a Registration Statement on
Form SB-1. The Company intends to use the proceeds to fund research and
development of iQ Germany, expansion of the Company's marketing and sales
activities and general working capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada, which for these financial
statements conform with those in the United States except as outlined in
Note 10.
(a) Foreign currency translation
The Company's current activities result in transactions denominated in
both US and Canadian dollars. Management considered the following in
the process to determine the Company's functional currency
i) All equity financings to this date have been denominated in US
funds. The Company's proposed financing as disclosed in Note 11(g) is
also denominated in US funds.
ii) In excess of 50% of the Company's operating expenditures are paid
or denominated in US funds.
iii)90% of the total assets throughout 1997 and 1998 were denominated
in US funds. Further, the Company maintains its cash in US dollars,
only converting to Canadian dollars to the extent necessary to pay
Canadian denominated liabilities.
Management considers that subsequent to the completion of the business
combination with iQ Germany that the majority of transactions of the
combined enterprise will be denominated in US dollars and German
Deutsche marks. Based on these factors the Company has determined that
the United States dollar is the appropriate functional currency for
measurement and reporting purposes.
Assets and liabilities denominated in Canadian dollars are translated
at the rate of exchange in effect at the balance sheet date.
Transaction gains and losses relating to conversion of period and
balances denominated in Canadian dollars and revenue and expenses
denominated in Canadian dollars are included within operating results.
F-6
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
(Information as at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(a) Foreign currency translation (continued)
The exchange rates between the Canadian and US dollars were:
Balance Sheet Date Average
------------------ -------
September 30, 1998............ 1.5213 1.4502 - moving average
December 31, 1997............. 1.4305 1.3844
December 31, 1996............. 1.3706 1.3636
Bank of Canada
(b) Estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Investments
Investments in iQ Research & Development GmbH are carried at cost,
less any impairment which is deemed to be other than temporary. On a
quarterly basis, the Company reviews its investment for any
impairment. In the period since the investment was acquired there has
been no indication of a permanent impairment.
(d) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks,
deposits in trust, and highly liquid investments with an original
maturity of three months or less.
(e) Unaudited interim financial statements
The unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial reporting. While these financial
statements reflect all fair presentation of the results for the
interim period, they may not include the footnotes required by
generally accepted accounting principles for complete financial
statements.
4. PROMISSORY NOTES RECEIVABLE
Of the total advances of $657,838, the amount of DM 100,000 ($59,680) is
supported by promissory notes. Promissory notes receivable are unsecured,
do not bear interest and are payable on demand. The remainder of the
advances are not evidenced by any formal documentation and as such are
subject to unspecified terms and conditions. The advances are intended to
provide interim financing until all conditions of the business combination
are satisfied. (Note 11(d))
5. DUE TO SHAREHOLDER
The amounts due to shareholder are unsecured, non-interest bearing and have
no specific terms of repayment.
F-7
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
(Information as at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL
Authorized: an unlimited number of common shares
<TABLE>
September 30 December 31
------------------------------ ----------------------------------------------------------
1998 1997 1996
------------------------------ --------------------------- ------------------------------
Number of Number of Number of
Common shares Amount Common shares Amount Common shares Amount
------------------------------ -------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period 1,969,741 $ 492,435 1 $ 1 1 $ 1
Private placement,
issued for cash 873,484 218,371 1,969,740 492,435 - -
Shares contingently
issued 10,000,000 2,500,000 - - - -
- ---------------------------------------------------------------------------------------------------------------
12,843,225 $ 3,210,806 1,969,741 $ 492,435 1 $ 1
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has issued shares for cash (September 30, 1998: 873,484 shares
and December 31, 1997: 1,969,740 shares) pursuant to private placements at
$0.25 per share.
During the period ended September 30, 1998, the Company issued shares
pursuant to a share exchange agreement dated August 25, 1998 with iQ
Germany whereby the shareholders of iQ Germany sold and transferred their
iQ Germany shares to the Company for, in the aggregate, 10,000,000 common
shares of the Company for deemed proceeds of $2,500,000. The shareholders
of iQ Germany have the option to cancel the share exchange agreement if
after the four month anniversary of the initial filing by IQ Canada of a
registration statement on Form SB-1 with the United States Securities and
Exchange Commission (a) IQ Canada has failed to complete an equity offering
with gross proceeds of at least $3,000,000 and (b) the shareholders of iQ
Germany have repaid to IQ Canada the full amount of all funds advanced to
iQ Germany (see Note 11(d)). The option shall terminate and shall not be
exercisable as of such date that IQ Canada shall complete an equity
financing with gross proceeds of not less than $3,000,000;
The Company has also entered into share exchange agreements in September
1998 under which 2,800,000 common shares of the Company were issued to the
holders of the atypical Shares of iQ Germany. Atypical Shares means certain
shares of iQ Germany which are not part of the ordinary capital of iQ
Germany and were issued pursuant to agreements between iQ Germany and the
holders of those shares under German tax incentives. The Company's common
shares and atypical shares will be held in escrow until completion of the
offering. The share exchange will not be completed if the option referred
to above is exercised.
The business combination at the expiration of the put option will be
accounted for as a reverse takeover as iQ Germany is determined to be the
acquirer. Due to the put rights and the reverse takeover accounting the
investment has been recorded at the deemed proceeds of $2,500,000.
F-8
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
(Information as at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable,
prepaids and deposits, travel advances, accounts payable and accrued
liabilities, due to shareholder and share subscriptions, the fair value of
such financial instruments approximates carrying values due to the
short-term to maturity of the financial instruments and similarity to
market rates. The Company is exposed to currency risk in respect of
financial instruments. Currency risk is the risk that the value of
financial instruments will fluctuate due to changes in foreign exchange
rates. The Company does not attempt to hedge currency risk.
The fair value of the advances to iQ Germany is $609,109, based on a
discount factor of 8% and an anticipated term of 1 year.
8. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in the
financial statements include:
(a) management fees of September 30, 1998 of $20,801 (September 30, 1997 -
$21,802; December 31, 1997 - $43,198 - 1996 - $Nil) paid to a company
with a common director;
(b) a lawyer was appointed secretary of the Company effective December 1,
1998. The law firm of which this officer is a partner provided legal
services to the Company for fees of $16,445 during the year ended
December 31, 1997 and $44,404 during the nine months ended September
30, 1998;
(c) accounts payable and accrued liabilities include at September 30, 1998
of $56,947 (1996 - $Nil) due to a company with a common director; and
(d) issuance of 236,213 common shares at a price of $0.25 per share for
proceeds of $59,053 to a company with a common director.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Company may experience the effects of the Year 2000 issue before, on,
or after January 1, 2000, and the impact on operations and financial
reporting, if not addressed, may range from minor errors to significant
systems failure which could affect the Company's ability to conduct normal
business operations. It is not possible to be certain that all aspects of
the Year 2000 issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully
resolved.
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(a) Accounting for income taxes
U.S. GAAP requires, pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, that a deferred tax asset amount be
recognized for loss carry-forwards. Although the Company has Canadian
non-capital tax loss carry-forwards, due to uncertainty as to
utilization prior to their expiry, the deferred tax asset amounts
would have been completely offset in these consolidated financial
statements by a valuation provision.
F-9
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
(Information as at September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (Continued)
(b) Recent accounting pronouncements
(i) In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income", which requires
that an enterprise report, by major components and as a single
total, the change in its net assets during the period from
non-owner sources; and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" which establishes
annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of
these statements will not impact the Company's consolidated
financial position, results of operations or cash flows.
(ii) In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which standardizes the accounting for derivative
instruments. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. The Company is
currently assessing the impact of SFAS No. 133 on the Company's
financial statements and has not yet determined what if any
changes will be necessary.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1997 and September 30, 1998, the Company entered
into the following transactions that are not disclosed elsewhere in these
financial statements:
(a) entered into a consulting agreement dated August 25, 1998 with a
company having a common director. Under the terms of the agreement the
Company is obligated to pay the consultant $6,000 per month for a term
of three years commencing August 25, 1998;
(b) entered into employment agreements with two directors of the Company
to occupy the positions of President and Chief Executive Officer and
Vice President, Research and Development and Technical Advisor. Under
the terms of these agreements the Company is obligated to pay these
employees $8,500 and $8,000 per month, respectively, for a term of
five years commencing August 31, 1998;
(c) entered into an employment agreement to occupy the position of
Vice-President, Finance and Chief Financial Officer. Under the terms
of the agreement, the Company is obligated to pay this employee $7,000
per month for a term of 3 years commencing September 1, 1998.
(d) entered into a term sheet with IPO Capital Corp. (the "Agent") to
raise seed financing of up to $5,500,000 for a fee of 10% in cash of
gross proceeds raised, plus Agent's Options in an amount equal to 10%
of the common shares sold;
(e) issued 2,300,000 special warrants for net proceeds of $575,000. Each
special warrant comprises one common share. The special warrant holder
has the right to require the Company to repurchase all Special
Warrants not yet exchanged into common shares of the Company for the
initial subscription price at any time prior to December 31, 1998;
(f) issued 536,200 common shares for $134,050 cash; and
(g) adopted a Stock Option Plan. The maximum number of the common shares
reserved for issuance under the Stock Option Plan including options
currently outstanding, is 3,000,000 common shares. As at December 1,
1998 a total of 2,875,000 options are issued and unexercised at an
exercise price of $1.00 per share, expiring December 1, 2008.
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
We have audited the accompanying balance sheets of iQ BATTERY Research &
Development GmbH as of December 31, 1997 and 1996, and the related statements of
operations and of cash flows for each of the years in the three year period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in Germany and the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of iQ BATTERY Research &
Development GmbH as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses, negative operating cash
flows and shareholders' capital deficiency raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche GmbH
Munich, October 28, 1998
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
F-11
<PAGE>
iQ BATTERY Research & Development GmbH
Balance Sheets
(DM in Thousands)
<TABLE>
September 30 December 31
------------------------------
1998 1997 1996
DM DM DM
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash 174 31 31
Receivable from original shareholders 146 36 64
Other receivables, primarily refundable value added taxes 150 241 135
Prepaid expenses - 3
-------------- -------------- --------------
Total current assets 470 311 230
Non-current assets
Equipment-net 109 75 17
============== ============== ==============
Total assets 579 386 247
============== ============== ==============
Liabilities and Shareholders' Deficit
Current liabilities
Short-term bank debt 232 88 82
Trade accounts payable 732 387 272
Due to original shareholders 92 66 70
Accrued payroll 188 138 116
Advances 1,226 663 223
Other accrued liabilities 148 159 113
-------------- -------------- --------------
Total current liabilities 2,618 1,501 876
Long-term bank debt 6 8 -
Non-Current liabilities due to original shareholders 95 155 155
-------------- -------------- --------------
Total liabilities 2,719 1,664 1,031
-------------- -------------- --------------
Commitments and Contingencies
Temporary atypical equity - - -
Shareholders' deficit
Registered capital 100 100 100
Accumulated deficit
Attributable to voting shareholders (2,240) (1,378) (884)
-------------- -------------- --------------
Total shareholders' deficit (2,140) (1,278) (784)
-------------- -------------- --------------
Total liabilities, temporary equity
and shareholders' deficit 579 386 247
============== ============== ==============
</TABLE>
See Notes to Financial Statements
F-12
<PAGE>
iQ BATTERY Research & Development GmbH
Statement of Operations
(DM in Thousands)
<TABLE>
Nine months
ended September 30 Years ended December 31
----------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
DM DM DM DM DM
-------------- -------------- -------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Sales - 5 45 - -
Grants received - - - - 160
-------------- -------------- -------------- -------------- ---------------
- 5 45 - 160
-------------- -------------- -------------- -------------- ---------------
Operating Expenses
Research and development
expenses (1,062) (584) (842) (655) (582)
General administrative and other
expenses (148) (114) (162) (127) (91)
-------------- -------------- -------------- -------------- ---------------
Operating loss (1,210) (693) (959) (782) (513)
Interest income 8 1 1 3 -
Interest and other finance expense (60) (53) (76) (12) (28)
-------------- -------------- -------------- -------------- ---------------
Loss before taxes (1,262) (745) (1,034) (791) (541)
Income taxes - - - - -
-------------- -------------- -------------- -------------- ---------------
Net loss (1,262) (745) (1,034) (791) (541)
Accumulated deficit
beginning of period (1,278) (784) (784) (214) (274)
Adjustment to state temporary atypical
equity at redemption amount 400 360 540 221 601
-------------- -------------- -------------- -------------- ---------------
Accumulated deficit
end of period (2,140) (1,169) (1,278) (784) (214)
============== ============== ============== ============== ===============
</TABLE>
See Notes to Financial Statements
F-13
<PAGE>
iQ BATTERY Research & Development GmbH
Statements of Cash Flows
(DM in Thousands)
<TABLE>
Nine months ended
September 30 Years ended December 31
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
DM DM DM DM DM
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss (1,262) (745) (1,034) (791) (541)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 26 7 21 10 9
Loss on disposal of equipment - - 10
Changes in assets and liabilities:
Other receivables and prepaid expenses (16) (39) (81) (54) (96)
Accounts payable and other current
Liabilities 383 188 182 272 (30)
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (869) (589) (912) (553) (658)
------------ ------------ ------------ ------------ ------------
Investing Activities:
Proceeds from sales of equipment - - - 3 -
Additions to property, plant and equipment (60) (25) (80) (13) (24)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (60) (25) (80) (10) (24)
------------ ------------ ------------ ------------ ------------
Financing Activities:
Temporary atypical capital increases 400 360 540 215 587
Increase (decrease) in short-term debt 144 115 6 28 (1)
Increase ((33)ease) in debt due to shareholders (33) (4) (4) 107 118
Advances received from external parties 563 135 440 223 -
Increase in other long-term debt (2) 8 10 - -
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities 1,072 614 992 573 703
------------ ------------ ------------ ------------ ------------
Increase in Cash 143 - - 10 21
Cash, beginning of period 31 31 31 21 0
============ ============ ============ ============ ============
Cash, end of period 174 31 31 31 21
============ ============ ============ ============ ============
</TABLE>
F-14
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
1 Description of Business
iQ BATTERY Research & Development GmbH ("iQ BATTERY"), established in 1991, is
developing a chargeable battery which allows an improved current output at low
outside temperatures. The process engineering for this chargeable battery and
the know-how is based on a patent acquired from the founding shareholders of iQ
BATTERY Research & Development GmbH.
Patents have been granted for Germany, thirteen other European countries and for
the United States of America. International patents applications have been filed
in nine additional countries.
The Company's legal domicile is Floha, Germany, and it maintains a branch near
Munich, where management has its offices.
The Company intends to grant licenses for this process to the automotive and
related industries in the future.
2 Summary of Significant Accounting Policies
a) Basis of accounting
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended December 31, 1997, 1996 and 1995, the Company
incurred net losses of DM 1,034, DM 791, and DM 541 and had negative operating
cash flows of DM 912, DM 553 and DM 658, respectively. The shareholders capital
deficit of December 31, 1997 was DM 2,140. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing.
Management is continuing its efforts to obtain additional financing as follows:
- - Offering activities
On April 29, 1998, iQ BATTERY and its then prospective parent company IQ
Power Technology Inc. entered into an agreement with a lead agent in
Vancouver/Canada to attempt to raise seed financing of at least US$ 500,000
and, subsequently, an offering of US$ 3,000,000. Of these proceeds, US$
500,000 will be placed in trust and advanced to iQ BATTERY periodically
pursuant to a mutually agreed upon budget and achievement of certain
milestones, among them a share exchange of IQ Power Technology Inc. common
shares to the existing shareholders of iQ BATTERY. The net proceeds
remaining from the offering will be placed in trust and released to IQ
Power Technology Inc. at such time that IQ Power Technology Inc.'s common
shares are eligible for quotation on the NASDAQ OTC system.
- - Additional financing activities
In February 1998, iQ BATTERY filed an application with
"Technologie-Beteiligungs-Gesellschaft mbH der Deutschen Ausgleichsbank" in
Bonn for a participation of DM 3 million. A similar application was filed
in July 1997 with Sachsische Aufbaubank GmbH in Dresden aiming at an
investment grant of DM 1.7 million.
F-15
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
2 Summary of Significant Accounting Policies (Continued)
Management believes that iQ BATTERY will obtain sufficient funds from the
offering and special financing activities during the next twelve months to
continue its operations. Furthermore, management believes that it would be
possible to enter in the short run into agreements with other parties if the
offering with IQ Power Technology, Inc. cannot be completed.
b) 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 at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
c) Equipment
Equipment is recorded at cost. Depreciation is recorded using the straight-line
method based upon the useful lives of the assets, generally estimated at 3-5
years. When assets are sold or retired, the cost and accumulated depreciation
are removed from the accounts and any gain or loss is included in income.
d) Long-term Liabilities to original shareholders
Liabilities due to shareholders including interest only in case the Company has
generated sufficient net assets or liquidation proceeds are shown under
non-current liabilities.
e) Research and Development
Research and development costs are expensed as incurred. DM 400 for the transfer
of intangible assets (patent and registered design) by founding shareholders of
the Company and the related liability are not reflected in the accompanying
financial statements (see also note 11).
f) Earnings per share
Earnings per share are not presented because the Company is privately held.
g) Income taxes
Income taxes have been provided for in accordance with the asset and liability
method. Deferred tax assets, net of valuations allowances, and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss carryforwards.
F-16
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
2 Summary of Significant Accounting Policies (Continued)
h) Supplemental cash flow information
Cash paid for interest and income taxes for the periods ended was as
follows:
<TABLE>
September 30 December 31
------------------------------- ------------------------------------------------
1998 1997 1997 1996 1995
-------------- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest 60 41 55 7 6
Income taxes - - - - -
</TABLE>
3 Equipment
Equipment was as follows:
<TABLE>
September 30 December 31
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
Equipment - at cost 172 112 37
Less accumulated depreciation (63) (37) (20)
- -----------------------------------------------------------------------------------------------------------
Equipment - net 109 75 17
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was DM 26 for the nine months ended September 30, 1998
and DM 22 for the year ended December 31, 1997 (1996: DM 10; 1995: DM 9).
4 Shareholders' Equity and Temporary Atypical Equity
The registered capital of the Company is DM 100, which has been fully paid
in by the Company's shareholders. Such ownership shares are not negotiable.
In addition, the Company has also received a total of DM 1,842 of capital
from the issue of atypical shares. The atypical shareholders have certain
information rights, but no voting powers. Losses and profits are allocated
to the atypical shareholders' capital account as stipulated in the
individual atypical shareholders' agreements. The atypical shareholders are
entitled to terminate the agreements at the end of 1999 or 2002 depending
on their entrance dates; iQ BATTERY can terminate in 2001, 2002 or 2003.
Generally the compensation to be paid to the atypical shareholders upon
their termination is based on the applicable fair value of the company
under exclusion of created goodwill.
The following table presents the movements on temporary atypical equity
(amount in DM):
<TABLE>
September 30 December 31
--------------------------------------------------
1998 1997 1996 1995
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Opening balance - - 6 20
Capital contributions 400 540 215 587
Adjustments to state equity at
redemption amount (400) (540) (221) (601)
--------------------------------------------------------------------------------------------------------------
Redemption amount - - - 6
--------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
4 Shareholders' Equity and Temporary Atypical Equity (Continued)
The Company has received a total of DM 1,842 with respect to atypical
equity with the redemption amount at September 30, 1998 being Nil.
On August 25, 1998, IQ Power Technology, Inc. (IQ Canada) acquired all the
issued and outstanding stock of iQ Battery in exchange for 10,000,000
common shares of iQ Canada. Pursuant to the terms of the Share Exchange
Agreement, the former shareholders of iQ Battery, as a group, have a
limited right to require IQ Canada to repurchase all of the IQ Canada
common shares received by such shareholders (the "Put Option"). The Put
Option is exercisable at and after the four month anniversary of the
initial filing of a prospectus with the Securities and Exchange Commission
if (i) IQ Canada has failed to complete an equity offering with gross
proceeds of at least US$3 Million and (ii) such shareholders have repaid to
IQ Canada the full amount of all funds IQ Canada has advanced or invested
in iQ Battery. As a result of the business combination, the shareholders of
iQ Battery will acquire control of the combined entity. Due to this
acquisition of control, iQ Battery is identified as the acquiror (reverse
acquisition) and the business combination will be accounted for under the
purchase method.
Pursuant to the terms of the Atypical Share Exchange Agreements, IQ Canada
has also issued into escrow an additional 2,800,000 common shares against
the deposit into escrow of the atypical shares of iQ Battery held by
twenty-one atypical shareholders. The common shares and the atypical shares
will be released from escrow to the atypical shareholders and IQ Canada,
respectively, on the completion of a minimum equity financing of US$3
Million. In the event the Put Option is exercised, the common shares and
the atypical shares will be released from escrow and returned to IQ Canada
and the atypical shareholders, respectively.
The following table presents the changes in shareholders deficit for the
period from January 1, 1995 to September 30, 1998 (amounts in DM).
<TABLE>
Registered Accumulated
capital Deficit Total
-------------- ----------------- --------------
<S> <C> <C> <C>
January 1, 1995 100 (374) (274)
Adjustments to redemption value of atypical equity 601 601
Net loss (541) (541)
- ----------------------------------------------------------------------------------------------------------
December 31, 1995 100 (314) (214)
Adjustments to redemption value of atypical equity 221 221
Net loss (791) (791)
- ----------------------------------------------------------------------------------------------------------
December 31 1996 100 (884) (784)
Adjustments to redemption value of atypical equity 540 540
Net loss (1,034) (1,034)
- ----------------------------------------------------------------------------------------------------------
December 31, 1997 100 (1,378) (1,278)
Adjustments to redemption value of atypical equity 400 400
Net loss (1,262) (1,262)
- ----------------------------------------------------------------------------------------------------------
September 30, 1998 100 (2,240) (2,140)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
5 Short-term Bank Debt
Short-term bank debt is summarized as follows (amounts in DM):
<TABLE>
September 30 December 31
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
Commerzbank AG, Ottobrunn 212 65 58
Dresdner Bank AG, Dresden 18 21 24
Current portion of Behncke
Bank GmbH, Hamburg 2 2 -
- -----------------------------------------------------------------------------------------------------------
Total short-term bank debt 232 88 82
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Commerzbank debt is personally guaranteed by four original shareholders
up to a maximum total of DM 320; any cash and deposits maintained with
Commerzbank have been pledged. The Dresdner Bank debt is personally
guaranteed by a founding shareholder up to a maximum total of DM 50.
Interest expense for the short-term bank debt amounts to DM 15 for the nine
months ended September 30, 1998 and to DM 22 for the year ended December
31, 1997 (1996: DM 5; 1995: DM 6). The weighted average interest rates were
11%.
6 Long-term bank debt
Long-term bank debt is determined as follows (amounts in DM):
<TABLE>
September 30 December 31
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
Behncke Bank GmbH, Hamburg 8 10 -
Less current portion (2) (2) -
- -----------------------------------------------------------------------------------------------------------
Long-term debt, excluding current portion 6 8 -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Behncke Bank debt is a financing loan for the telephone equipment in
the Munich office. The loan was contracted in 1997 and the term is over
five years. Current portion of the long term debt is DM 2 (1997: DM 2;
1996: DM 0)
Payments to be made for the years ending December 31 (amounts in DM):
1999 2
2000 2
2001 2
2002 2
F-19
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
7 Non-Current Liabilities Due to Original Shareholders
Non-current liabilities due to shareholders are summarized as follows
(amounts in DM):
<TABLE>
September 30 December 31
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
Due to shareholders 95 155 155
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Interest, which has to be repaid only in case the company has generated
sufficient net assets or liquidation proceeds, has been accrued for 1997
(DM 31). For 1996 and prior years the shareholders have ultimately waived
their interest claims on long-term debt.
Payments are expected for the years ending December 31 (amounts in DM):
1999 95
2000 0
2001 0
2002 0
2003 0
8 Leases
The Company has operating leases for certain equipment and facilities.
Rental expense was DM 29 for the year ended December 31, 1997 (1996: DM 12;
1995: DM 9). As of December 31, 1997 obligations to make future minimum
lease payments were as follows:
Payments to be made in the years ending December 31 (amounts in DM):
1998 50
1999 43
2000 30
2001 4
2002 3
Thereafter 0
F-20
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
9 Income Taxes
The components of the provision for income taxes are as follows for the
years ended December 31:
<TABLE>
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
German
Current 0 0 0
Deferred 0 0 0
Change in valuation allowance 0 0 0
- -----------------------------------------------------------------------------------------------------------
0 0 0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differed from the federal corporation income
tax rate of 45 % because no benefit was realized for the operating losses
incurred in 1995, 1996 and 1997.
As of September 30, 1998, December 31, 1997 and 1996, the Company had total
deferred tax assets relating to loss carryforwards of DM 576, DM 736 and DM
363, respectively, which were reduced to zero by valuation allowances. The
valuation allowance represents the amount of deferred tax assets that may
not be realized based upon expectations of taxable income that are
consistent with the Company's operating history.
As of December 31, 1997, the Company had net operating loss carryforwards
of approximately DM 1,194 for corporation income taxes and DM 2,616 for
municipal trade taxes. Such loss carryforwards have no set expiry dates.
10 Fair Value of Financial Instruments
Management has determined that the carrying values of cash, accounts
receivable, accounts payable and short-term bank debt approximate fair
value at December 31, 1997 and 1996 because of immediate or short-term
maturities. The carrying amount reported for non-current liabilities due to
shareholders approximates fair value because the interest rate of 5.5%
provided for the accrued interest in 1997 approximates the market rate.
11 Related Party Transactions
The Company paid management fees of DM 132 for the year ended December 31,
1997 (1996: DM 132; 1995: DM 132) to the company's two founding
shareholders based on contracts dated October 11, 1991, March 28, 1992 and
August 28, 1994.
iQ BATTERY acquired patents and know-how improving the current output of a
chargeable battery at low outside temperatures and the registered design
"iQ" based on a contract dated March 15, 1995 from two shareholders and
managing directors of iQ BATTERY. The intangibles purchased relate to a
German patent, an international patent application as well as the
registered design "iQ".
The Company and the shareholders agreed that the shareholders would receive
DM 400 from future income. Any amounts paid will be charged to operations
as a current expense. No other amounts are due as the Company has not
realized any applicable revenues or royalties.
F-21
<PAGE>
iQ BATTERY Research & Development GmbH
Notes to the Financial Statements
Information as at September 30, 1998 and for the nine-month period ended
September 30, 1998 and 1997 is unaudited
(DM in Thousands)
12 Commitments and Contingencies
The Company is not currently involved in any legal proceedings in the
ordinary course of business.
F-22
<PAGE>
Selected Unaudited Pro forma
Consolidated Financial Information
The selected unaudited pro forma consolidated financial information for the
Company set forth below gives effect to the acquisition of the shares of IQ
Power Technology Inc. (IQ Canada) and IQ Battery Research and Development GmbH
(IQ Germany). The historical financial information set forth below has been
derived from, and is qualified by reference to, the financial statements of the
Company and IQ Germany and should be read in conjunction with those financial
statements and the notes thereto included elsewhere herein.
The September 30, 1998 pro forma balance sheet has been prepared as if the
transactions described in Notes 1 and 2 had occurred on September 30, 1998, and
represents the consolidation of the September 30, 1998 balance sheet of IQ
Germany with the September 30, 1998 balance sheet of the Company.
The pro forma statements of net loss for the nine month period ended September
30, 1998 and the year ended December 31, 1997 have been prepared as if the
transactions described in Notes 1 and 2 had occurred at the commencement of the
relevant period. They represent the consolidation of the IQ Germany statements
of loss for the nine months ended September 30, 1998 and the year ended December
31, 1997 with the statement of loss of the Company for the nine months ended
September 30, 1998 and the year ended December 31, 1997.
The pro forma consolidated financial statements are not intended to reflect the
results of operations or the financial position of the Company which would have
actually resulted had the proposed transactions described in Notes 1 and 2 been
effected on the dates indicated. Further, the pro forma financial information is
not necessarily indicative of the results of operations or the financial
position that may be obtained in the future.
F-23
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Consolidated Balance Sheet
As at September 30, 1998
(Expressed in Thousands of United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Pro forma
Other after Minimum Pro forma
capital business Offering Consolidated
IQ Canada iQ Germany Acquisition transactions combination
----------- ------------------------------------ --------------------------- --------------
(Note 1) (Note 2) (Note 3)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT
Cash $ 340 $ 103 $ 209 $ 652 $ 3,000 $ 3,092
- (560)
Accounts receivable 8 90 98 98
Receivable from
Shareholders - 87 87 87
Advances to IQ Germany 658 - $ (658) - -
- -----------------------------------------------------------------------------------------------------------------------
1,006 280 (658) 209 837 2,440 3,277
INVESTMENT 2,500 - (2,500) - - - -
EQUIPMENT, net - 52 - - 52 52
- -----------------------------------------------------------------------------------------------------------------------
$ 3,506 $ 332 $(3,158) $ 209 $ 889 $ 2,440 $ 3,329
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 178 $ 437 $ - $ 615 $ - $ 615
Accrued liabilities 5 199 - 204 - 204
Share subscriptions 475 - - (475) - - -
Current portion of
bank debt 138 - 138 138
Due to shareholders - 56 - 56 - 56
Advances from IQ Canada - 732 (732) - - -
- -----------------------------------------------------------------------------------------------------------------------
658 1,562 (732) (475) 1,013 - 1,013
BANK DEBT - 4 - 4 - 4
NON-CURRENT
LIABILITIES DUE TO
SHAREHOLDERS - 56 - 56 - 56
- -----------------------------------------------------------------------------------------------------------------------
658 1,622 (732) (475) 1,073 - 1,073
Temporary equity - - - 100 575 - 575
475
- -----------------------------------------------------------------------------------------------------------------------
658 1,622 (732) 100 1,648 - 1,648
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 3,211 62 (2,887) 133 519 3,000 3,519
Share subscriptions 24 (24) - - -
Cumulative foreign
exchange adjustment - (16) 74 58 - 58
Deficit (387) (1,336) 387 - (1,336) (560) (1,896)
- -----------------------------------------------------------------------------------------------------------------------
2,848 (1,290) (2,426) 109 (759) 2,440 1,681
- -----------------------------------------------------------------------------------------------------------------------
$ 3,506 $ 332 $(3,158) $ 209 $ 889 $ 2,440 $ 3,329
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Statement of Loss
For the nine months ended September 30, 1998
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Business Combination
of iQ Germany
-------------------------------
September 30 Adjustments Pro forma
IQ Canada 1998 Acquisition Consolidated
------------- ---------------- -------------- ----------------
(Note 2)
<S> <C> <C> <C> <C>
OPERATING EXPENSES
Research and development expenses $ - $ 593 $ 593
General administrative and other expenses 241 83 184
- -------------------------------------------------------------------------------------------------------------------
(241) (676) (917)
INTEREST INCOME - 4 4
INTEREST AND OTHER
FINANCE EXPENSE - (34) (34)
- -------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (241) $ (706) $ (947)
- -------------------------------------------------------------------------------------------------------------------
Loss per share $(0.05) $ (0.06)
- -------------------------------------------------------------------------------------------------------------------
Weighted average
common shares
outstanding 4,546,849 15,086,461
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Statement of Loss
For the twelve months ended December 31, 1997
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Acquisition of iQ Germany
--------------------------------
December 31 Adjustments Pro forma
IQ Canada 1997 Acquisition Consolidated
-------------- ----------------- -------------- ----------------
(Note 2)
<S> <C> <C> <C> <C>
REVENUE $ - $ 26 $ 26
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research and development expenses - 486 486
General administrative 135 94 229
- ---------------------------------------------------------------------------------------------------------------------
(135) (580) (715)
INTEREST AND OTHER
FINANCE EXPENSE - (44) (44)
- ---------------------------------------------------------------------------------------------------------------------
(135) (624) (759)
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (135) $ (598) $ (733)
- ---------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.14) $ (0.05)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average
common shares
outstanding 950,294 13,750,294
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Unaudited Pro Forma Consolidated
Financial Information
September 30, 1998
(U.S. Dollars)
- --------------------------------------------------------------------------------
1. BUSINESS COMBINATION
On August 25, 1998, the Company exchanged 10,000,000 common shares for 100%
of the issued and outstanding equity stock of IQ Germany and has the right
to exchange 2,800,000 common shares for 100% of the Atypical shares of IQ
Germany.
The acquisition has been accounted for using the purchase method. The
acquiror in the business combination has been identified as IQ Germany, as
it is the shareholders of IQ Germany who, as a group, has the ability to
control the combined enterprise. The shares of the Company's common stock
that were issued have been recorded at a fair value of $349,000 based on
the fair market value of the Company's net assets acquired.
Intercompany advances have been eliminated.
The effect of the business combination on the unaudited pro forma
consolidated balance sheet at September 30, 1998 is summarized below:
Common stock held by IQ Power Technology Inc. shareholders $ 349
---------------------------------------------------------------------------
Allocation of purchase price
Current assets $ 1,007
Current liabilities 658
---------------------------------------------------------------------------
$ 349
---------------------------------------------------------------------------
Elimination of IQ Power Technology Inc.
Capital stock $ 2,887
Deficit (387)
Investment in IQ Germany (2,500)
Advances to IQ Germany (658)
Advances to IQ Canada 732
Cumulative foreign exchange adjustment (74)
The effect of the business combination on the unaudited pro forma
consolidated statements of loss is summarized below:
Historical results of IQ Germany are summarized as follows:
Period Ended
----------------------------------
September 30 December 31
1998 1997
---------------- ---------------
Revenue $ - $ 26
Operating expenses (676) (580)
Interest income 4 -
Interest expense (34) (44)
---------------------------------------------------------------------------
$ (706) $ (598)
---------------------------------------------------------------------------
F-27
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Unaudited Pro Forma Consolidated
Financial Information
September 30, 1998
(U.S. Dollars)
- --------------------------------------------------------------------------------
2. OTHER CAPITAL TRANSACTIONS
Subsequent to September 30, 1998, the Company completed several issuances
of equity securities. The pro forma financial statements reflect the
following adjustments related to these equity security issuances:
(i) Completion of a 2,300,000 special warrant offering, satisfying
subscriptions received of $475,000 at September 30, 1998 and $100,000
received after that date. The special warrant holder has a right prior
to December 31, 1998 to require the Company to return subscriptions
for any special warrants outstanding at that date.
The pro forma effect of this offering is summarized as follows:
Increase in cash $ 100,000
Reduction of share subscriptions 475,000
Increase in temporary capital 575,000
(ii)Issuance of 536,200 common shares for proceeds of $134,000. The pro
forma effect of the common stock issue is summarized as follows:
Increase in cash $ 109,000
Reduction of share subscriptions 25,000
Increase in share capital 134,000
3. MINIMUM OFFERING OF SHARES OF COMMON STOCK
The pro forma balance sheet reflects the public offering of 3,000,000
shares of common stock for net proceeds, estimated at a minimum of
$2,440,000. The offering agreement entered into with IPO Capital Corp.
contemplates the issuance of a minimum of 3,000,000 shares and a maximum of
5,500,000 shares. The pro forma balance sheet reflects completion of the
minimum offering (see Note 5 for the effect of completing the maximum
offering).
F-28
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Unaudited Pro Forma Consolidated
Financial Information
September 30, 1998
(U.S. Dollars)
- --------------------------------------------------------------------------------
3. MINIMUM OFFERING OF SHARES OF COMMON STOCK (Continued)
The pro forma financial statements reflect the following adjustments
related to the public offering and related transactions:
Balance Sheet
Cash
Gross proceeds from offering $ 3,000,000
10% Agents' financing fee (300,000)
Expenses of offering (260,000)
---------------------------------------------------------------------------
Increase in cash $ 2,440,000
---------------------------------------------------------------------------
Increase in stockholders' equity
Share capital $ 3,000,000
Deficit (560,000)
---------------------------------------------------------------------------
Increase in stockholders' equity $ 2,440,000
---------------------------------------------------------------------------
4. CAPITAL STOCK
Capital stock subsequent to the reverse takeover and the pro forma effect
of share issuances can be summarized as follows:
<TABLE>
Number Amount
----------------- ----------------
<S> <C> <C>
Share capital of IQ Germany 100 $ 62
Effect of reverse takeover 9,999,900 -
Issued to acquire IQ Canada 2,843,225 349
-----------------------------------------------------------------------------------------------------------
12,843,225 411
Exchange of shares for Atypical shares 2,800,000 -
Issued on public placement 436,000 108
-----------------------------------------------------------------------------------------------------------
16,079,225 519
Minimum public offering 3,000,000 3,000
-----------------------------------------------------------------------------------------------------------
19,079,225 $ 3,519
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Unaudited Pro Forma Consolidated
Financial Information
September 30, 1998
(U.S. Dollars)
- --------------------------------------------------------------------------------
5. SUPPLEMENTARY INFORMATION
As disclosed in Note 1, the Company has entered into an offering agreement
providing for the issuance of a minimum of 3,000,000 common shares or a
maximum of 5,500,000 common shares. The following analysis provides the
effect on the pro forma balance sheet (prepared based on the minimum
offering) of the completion of the maximum offering:
<TABLE>
Pro forma Maximum Adjusted
Balance sheet offering Balance Sheet
------------------ ----------------- ------------------
<S> <C> <C> <C>
Assets
Cash $ 3,092 $ 2,250 $ 5,342
Other current assets 185 - 185
Equipment (net) 52 - 52
----------------------------------------------------------------------------------------------------------------
$ 3,329 $ 2,250 $ 5,579
----------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities $ 1,013 $ - $ 1,013
Non-current liabilities 60 - 60
Temporary Atypical equity 575 - 575
Capital stock 3,519 2,500 6,019
Cumulative foreign exchange adjustment 58 - 58
Deficit (1,896) (250) (2,146)
----------------------------------------------------------------------------------------------------------------
$ 3,329 $ 2,250 $ 5,579
----------------------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
Until June 19, 1999 all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
