SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
(REVISED)
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [x]
Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement-Revised
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
[ ] Confidential, For Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
MCKENZIE BAY INTERNATIONAL, LTD.
(Name of Registrant as specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:May 07, 2004
- -------------------------------------------------------------------------------
McKenzie Bay International, Ltd.
3362 Moraine Drive
Brighton, Michigan 48114
May 5, 2004
To Our Stockholders,
You are cordially invited to attend the 2004 Annual Meeting of Stockholders of
McKenzie Bay International, Ltd. The meeting will be held at the Marriott
Hotel, 30559 Flynn Road, Romulus, Michigan, on Thursday, June 3, 2004, at 1:30
p.m., local time.
On the following pages, you will find the Notice of Annual Meeting of
Stockholders and the Proxy Statement. The Proxy Statement and enclosed proxy
card are being furnished to stockholders on or about May 5, 2004. A report on
McKenzie Bay's activities and its outlook for the future also will be presented
at the meeting.
It is important that your shares be represented and voted at the Annual Meeting,
regardless of the size of your holdings. Whether or not you plan to attend the
Annual Meeting, we urge you to sign, date and return as soon as possible the
enclosed proxy card. You may return your proxy card by mail or by facsimile.
Please refer to the enclosed proxy card for instructions. Sending a proxy will
not affect your right to vote in person if you attend the meeting. However, if
you hold your stock in a broker or bank "street" account and wish to vote your
shares in person at the meeting, you must obtain the appropriate documentation
from your broker or bank custodian and bring it with you to the meeting.
Respectfully,
Brighton, Michigan Gary L. Westerholm
May 5, 2004 President and Chief
Executive Officer
Your Vote is Important. Even if You Plan to Attend the Meeting,
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY.
3362 Moraine Drive
Brighton, Michigan 48114
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
The Annual Meeting of Stockholders of McKenzie Bay International, Ltd. will be
held at the Marriott Hotel, 30559 Flynn Road, Romulus, Michigan, on Thursday,
June 3, 2004, at 1:30 p.m., local time, for the following purposes:
(1) To elect nine directors to serve one-year terms expiring in 2005;
(2) To conduct such other business as may properly come before the meeting.
Only stockholders of record as of the close of business on April 21, 2004 are
entitled to notice of and to vote at the Annual Meeting.
A copy of the SEC Form 10-KSB for the fiscal year ended September 30, 2003 is
enclosed with this Notice. The Proxy Statement and enclosed proxy card are
being furnished to stockholders on or about May 5, 2004.
By Order of the Board of Directors,
Brighton, Michigan John W. Sawarin
May 5, 2004 Secretary
Your Vote is Important. Even if You Plan to Attend the Meeting,
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY.
MCKENZIE BAY INTERNATIONAL, LTD.
975 Spaulding
Grand Rapids, Michigan 49546
ANNUAL MEETING OF STOCKHOLDERS
May 5, 2004
PROXY STATEMENT
This Proxy Statement and the enclosed proxy card are being furnished to
stockholders of common stock of McKenzie Bay International, Ltd. (the "Company")
on or about May 5, 2004, in connection with the solicitation of proxies by the
Board of Directors to be voted at the 2004 Annual Meeting of Stockholders which
will be held on Thursday, June 3, 2004, at 1:30 p.m., local time, and at any
adjournment of that meeting. The Annual Meeting will be held at the Marriott
Hotel, 30559 Flynn Road, Romulus, Michigan.
The purpose of this Annual Meeting is to consider and vote upon: (a) the
election of nine directors to serve one-year terms expiring in 2005 and (b) the
transaction of any other business that may properly come before the meeting.
Proxies in the accompanying form, if properly executed, duly returned to the
Company and not revoked, will be voted at the Annual Meeting. If you specify a
choice, the shares represented by proxy will be voted as specified. If you do
not specify a choice, your shares represented by proxy will be voted for the
election of all nominees named in this Proxy Statement and in accordance with
the discretion of the person named as proxy on any other matters that may come
before the meeting or any adjournment of the meeting.
The presence in person or by proxy of the holders of a majority of shares
entitled to vote at the meeting is necessary to constitute a quorum. For
purposes of determining the presence or absence of a quorum for the transaction
of business at the meeting, all shares for which a proxy or vote is received,
including abstentions and shares represented by a broker vote on any matter,
will be counted as present and represented at the meeting.
If you sign and return the enclosed proxy card (either by mail or facsimile) you
may revoke it at any time before it is exercised by delivering a written notice
of revocation to the Secretary of the Company at the address set forth above or
by attending and voting at the Annual Meeting.
The Company does not know of any matter to be presented for consideration at the
Annual Meeting other than that stated in the Notice of Annual Meeting of
Stockholders. If any other matter should properly come before the meeting, the
persons named in the proxy will have discretionary authority to vote in
accordance with their judgment.
ELECTION OF DIRECTORS
The Board of Directors proposes that the following directors be elected to one-
year terms expiring in 2005:
Gary L. Westerholm
Gregory N. Bakeman
John W. Sawarin
Rocco J. Martino
Stephen D. McCormick
Donald C. Harms
Doris F. Galvin
John J. DiMora
John A. Popp
This Proxy Statement contains more information about the director nominees. The
nominees presently are directors of the Company whose terms will expire at the
2004 Annual Meeting of Stockholders. Unless otherwise directed by a
stockholder's proxy, the person named as proxy intends to vote for the nominees
identified above. Each of the nominees has consented to being named in this
Proxy Statement and to serve if elected. If any nominee is unable to serve or
is otherwise unavailable for election, which is not now anticipated, the Board
of Directors may or may not select a substitute nominee. If a substitute
nominee is selected, all proxies will be voted for the election of the
substitute nominee designated by the Board of Directors. If a substitute
nominee is not selected, all proxies will be voted for the election of the
remaining nominees. Proxies will not be voted for a greater number of persons
than the number of nominees named in this Proxy Statement.
A plurality of the shares present in person or represented by proxy and voting
on the election of directors is required to elect directors. For the purpose of
counting votes on this proposal, abstentions, broker non-votes and other shares
not voted will not be counted as shares voted on the election, and these shares
will be deducted from the total shares of which a plurality is required.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR THE ELECTION OF ALL NOMINEES AS DIRECTORS
VOTING SECURITIES
Holders of record of common stock, $0.001 par value ("Common Stock"), at the
close of business on April 21, 2004, are entitled to notice of and to vote at
the Annual Meeting of Stockholders and at any adjournment of the meeting. As of
March 5, 2004, 25,450,504 shares of the Company's Common Stock were issued and
outstanding. You are entitled to one vote on each matter presented for
stockholder action for each share of Common Stock registered in your name at the
close of business on the record date. You cannot vote your shares unless you
are present at the Annual Meeting or represented by proxy.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information as to each person known to the
Company to have been the beneficial owner of more than 5% of the outstanding
shares of Common Stock as of March 5, 2004. The number of shares stated is
based on information provided by each person or entity listed and includes
shares personally owned of record by the person or entity and shares which,
under applicable regulations, are considered to be otherwise beneficially owned
by the person.
Amount and Nature of
Beneficial Ownership of Common Stock
Sole Voting Shared Voting
and or Total Percent
Name of Dispositive Dispositive Beneficial of
Beneficial Owner Power(1) Power(2) Ownership(1) Class(3)
- ---------------------- ------------- ------------- ------------- --------
Gary L. Westerholm
3362 Moraine Drive
Brighton, Michigan 48114 968,000 4,245,200 5,213,200 19.6%
Gregory N. Bakeman,
Chief Financial Officer
, Treasurer and Director
567,500
1,200
568,700
2.2%
John W. Sawarin
3362 Moraine Drive
Brighton, Michigan 48114 1,580,000 814,600 2,394,600 9.1%
Stephen D. and
Karen A. McCormick
3362 Moraine Drive
Brighton, Michigan 48114 6,246,967 3,473,081 9,720,048 30.6%
SOQUEM, INC.
1000, route de l'Eglise,
bureau 500
Sainte-Foy Quebec CANADA
G1V 3V9 1,520,133 -- 1,520,133 6.0%
John A. Popp
P.O. Box 2917
Midland, MI 48640 - - - 1,445,430 1,445,430 5.7%
____________________________________
(1) These numbers include shares that may be acquired through options that
are exercisable within 60 days after March 5, 2004
(2) These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint ownership,
trust or other contract or property right, and shares held by spouses or
children or other relatives over whom the listed person may have substantial
influence by reason of relationship.
(3) These percentages represent the number of shares owned by each
beneficial owner as of February 7, 2003, plus the shares that may be acquired by
each beneficial owner through the exercise of outstanding stock options and/or
warrants within 60 days by each after March 5, 2004, as a percentage of the
total of all outstanding shares as of March 5, 2004, plus the total of all
shares that may be acquired through the exercise of outstanding stock options
and/or warrants by each beneficial owner within 60 days after March 5, 2004.
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock beneficially
owned as of March 5, 2004, by each of the Company's Chief Executive Officer,
directors and all of the Company's directors and executive officers as a group.
The number of shares stated is based on information provided by each person
listed and includes shares personally owned of record by the person and shares
which, under applicable regulations, are considered to be otherwise beneficially
owned by the person.
Amount and Nature of
Beneficial Ownership of Common Stock
Sole Voting Shared Voting
and or Total Percent
Name of Dispositive Dispositive Beneficial of
Beneficial Owner Power(1) Power(2) Ownership(1) Class(3)
- ---------------------- ------------- ------------- ------------- --------
Gary L. Westerholm,
Chief Executive Officer,
President and Director 968,000 4,245,200(4) 5,213,200 19.6%
Gregory N. Bakeman,
Chief Financial Officer,
Treasurer and Director 567,500 1,200 568,700 2.2%
John W. Sawarin,
Secretary,
Vice President-Product
Marketing and Director 1,580,000 814,600(5) 2,394,600 9.1%
Rocco J. Martino,
Director 230,000 604,698(6) 834,698 3.2%
Stephen D. McCormick,
Director 6,246,967 3,473,081(7) 9,720,048 30.6%
Donald C. Harms,
Director 93,750 55,168(8) 148,918 0.6%
Doris F. Galvin 2,000 2,000 *
All directors and executive
officers as a group 9,688,217 9,207,906 18,896,123 54.7%
* Less than 1%
(1) These numbers include shares held directly and shares that may be
acquired through options that are exercisable within 60 days after March 5,
2004. The number of shares that may be acquired through options that are
exercisable within 60 days after March 5, 2004, for each listed person is as
follows:
Gary L. Westerholm 963,500
Gregory N. Bakeman 555,000
John W. Sawarin 780,000
Rocco J. Martino 230,000
Stephen D. McCormick 6,216,667
Donald C. Harms 93,750
Doris F. Galvin - - -
- ------------------------------------------
All directors and executive
officers as a group 8,838,917
=========
(2) These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint ownership,
trust or other contract or property right, and shares held by spouses or
children or other relatives over whom the listed person may have substantial
influence by reason of relationship.
(3) These percentages represent the number of shares owned by each
beneficial owner as of March 5, 2004, plus the shares that may be acquired by
each beneficial owner through the exercise of outstanding stock options within
60 days by each after March 5, 2004, as a percentage of the total of all
outstanding shares as of March 5, 2004, plus the total of all shares that may be
acquired through the exercise of outstanding stock options by each beneficial
owner within 60 days after March 5, 2004.
(4) The shares reported include the following: (a) 3,957,700 shares held by
The Westerholm Family Living Trust, dated June 8, 1995, a revocable trust of
which Mr. Westerholm is co-trustee and a beneficiary; (b) 200,000 shares held by
Mr. Westerholm's spouse; and (c) 87,500 shares owned by Mr. Westerholm's son who
resides in his household.
(5) The shares reported include the following: (a) 754,600 shares held by
Mr. Sawarin's spouse; and (b) 60,000 options that may be acquired by Mr.
Sawarin's spouse through options that are exercisable within 60 days after March
5, 2004.
(6) The shares reported are held by Martino Investment Partners L.P., of
which Mr. Martino and his spouse are general partners.
(7) The shares reported include the following: (a) 2,535,018 shares held
jointly by Mr. McCormick and his spouse; (b) 938,063 shares held by McCormick
Incorporated, a company of which Mr. McCormick is President and a shareholder;
and (c) 6,216,667 shares that may be acquired by Mr. McCormick through the
exercise of outstanding options within 60 days after March 5, 2004.
(8) The shares reported are held by The Harms Family Living Trust, dated
December 31, 1983, a revocable trust of which Mr. Harms is co-trustee and a
beneficiary.
BOARD OF DIRECTORS
The Company's Board of Directors is currently set at nine members, all of whom
are standing for reelection. Biographical information is presented below for
each person who is nominated for election as a director at the 2004 Annual
Meeting of Stockholders. Unless otherwise noted, each nominee for director has
had the same principal employment for the last five years.
Nominees for Election to Terms Expiring in 2005
Gary L. Westerholm (age 59) has been a director since 1999 and has served as
President and Chief Executive Officer since February 1999. In 1996, Mr.
Westerholm co-founded McKenzie Bay Resources. Mr. Westerholm, a certified
public accountant, established the certified public accounting firm of Gary
Westerholm CPA, PC in 1981, which operated until Mr. Westerholm sold the firm in
1995. In 1985, Mr. Westerholm co-founded London Aggregate Ltd., an open-pit
mining company which was sold to SE Johnson & Company in 1994. In 1995, Mr.
Westerholm received his Series 7 marketing securities license from the NASD and
worked as a registered representative of Linsco Private Ledger, a stock
brokerage firm located in Plymouth, Michigan until he resigned in 1997 to found
the Company. Mr. Westerholm is a member of the Michigan Association of
Certified Public Accountants and the American Institute of Certified Public
Accountants.
Gregory N. Bakeman (age 48) has been a director since 2000 and has served as
Chief Financial Officer since February 2001 and Treasurer since December 2001.
Before joining the Company, Mr. Bakeman was President and Chief Executive
Officer of Newlefe Group, Inc., a corporate finance consulting company. From
1999 to 2000, Mr. Bakeman served as Chief Financial Officer of Micro-C
Technologies, Inc., a manufacturer of computer chip production equipment, which
was sold to Kokusai Electric, Ltd. in March 2000. From 1997 to 1999, Mr.
Bakeman was a Vice President in the Investment Banking Department of First of
Michigan Corporation (a Fahnestock & Co. wholly owned subsidiary). From 1996 to
1997, Mr. Bakeman served as Vice President-Business Development with Fleet
Capital Corporation, an asset based lending company.
John W. Sawarin (age 69) has been a director since 1999 and has served as
Secretary since 1999 and Vice President-Product Marketing since January 2003.
Mr. Sawarin previously served as Treasurer from 1999 to March 2002. In 1996,
Mr. Sawarin co-founded McKenzie Bay Resources. From 1961 to 1996, Mr. Sawarin
was employed by Sandoz Canada Inc., a subsidiary of Sandoz Pharma AG, in various
capacities, including from 1982 to 1996 serving as Regional Sales Manager,
National Training and Development Manager and National Sales Manager. From 1987
to 1990, Mr. Sawarin was a director, and from 1990 to 1992 Chairman, of the
Association of Pharmaceutical Medical Representatives (now named Consul for
Continuing Pharmaceutical Education), the education division of the
Pharmaceutical Manufacturers Association of Canada. From 1996 to 1998, Mr.
Sawarin served as a consultant to Novartis Pharma Canada, a division of Novartis
International AG, the company formed as a result of the merger of Sandoz and
Ciba-Giegy Corp.; Bioniche Inc., a biotechnology company then located in London,
Ontario; and to Zymaxx Communications, a publishing company then located in
London, Ontario. Since 1996, Mr. Sawarin has been Secretary, Treasurer and a
director of Xemac Resources, Inc., a Quebec mining company listed on the
Canadian Venture Exchange under the symbol "XEM."
Rocco J. Martino (age 49) has been a director since 1999. Since 1989, Mr.
Martino, a certified public accountant, has been a partner with LaSalle Capital
Group Inc., a private equity group that pursues the acquisition of small- to
middle-market companies, principally in the manufacturing and niche-distribution
sectors. Mr. Martino worked for Price Waterhouse in Chicago from 1979 to 1989,
spending his last six years in the Mergers and Acquisitions Group. After being
promoted to partner at Price Waterhouse, Mr. Martino joined LaSalle Capital
Group. Since 1995, Mr. Martino has been the Chairman of the general partnership
that manages National Metalwares, L.P., a manufacturer, fabricator and finisher
of welded steel tubing and tubular components. Since 1992, Mr. Martino has
served as director of Precision Products Group, Inc., a producer of precision
custom springs and tubes for various industries, including automotive,
electrical, office equipment, agricultural and medical. Since 2000, Mr. Martino
has been Chairman of Simplex Manufacturing Company, a manufacturer of aviation
fire suppression systems, agricultural spraying systems and other airborne
accessory systems. From 1989 to 2000, Mr. Martino was a director and general
partner of one of the two general partners of Wm. E. Wright L.P., a manufacturer
and distributor of various sewing notions and craft items sold through numerous
retail and industrial outlets. Mr. Martino earned a Bachelors degree in
Business Administration- Finance from Notre Dame University in 1976, and a
Masters degree in Business Administration from Loyola University, Chicago, in
1978.
Stephen D. McCormick (age 58) has been a director since July 26, 2002. Since
1997, Mr. McCormick has served as President of McCormick Incorporated, a holding
company that owns businesses involved in the construction industry. Since 1987,
Mr. McCormick has served as Executive Vice President of Northern Improvement
Company, a company focused on road building and movement of earth materials, and
Vice President of McCormick Construction Equipment Company, both subsidiaries of
McCormick Incorporated. Mr. McCormick joined Northern Improvement Company in
1969 and served in various positions, including Field Supervisor from 1969 to
1971, Field Operations Manager from 1971 to 1975, Vice President of Operations
and Equipment from 1975 to 1984 and Senior Vice President of Operation from 1984
to 1987. From 1967 to 1969, Mr. McCormick served in the United States Army in
the US Army Corp of Engineers.
Donald C. Harms (age 62) has been a director since November 12, 2002. Mr. Harms
is a principal of Larson, Harms & Bibeau, P.C., a law firm located in Farmington
Hills, Michigan. Mr. Harms has served as outside general counsel to the Company
since April 1999.
Doris F. Galvin (age 49) has been a director since March 1, 2004. Ms. Galvin is
self-employed as a consultant and is the owner of an art gallery. From 1979 to
2002, Ms. Galvin was a Senior Vice President - Global Development of CMS Energy,
a company engaged in international business development, strategy and
investment.
John J. DiMora (age 56) has been a director since May 1, 2004. Mr. DiMora is
the owner and operating principal of Keller Williams Realty, a regional real
estate sales franchise which owns 22 offices throughout Michigan and northern
Ohio. Mr. DiMora is also the owner and operating principal of Keller Williams
Northville Market Center, a realty office in Northville, Michigan.
John A. Popp (age 67) has been a director since May 1, 2004. Mr. Popp was the
founder and is presently the Chairman of the Board of M.A.P. Mechanical
Contractors, Inc. of Midland, Michigan. He is the founder and presently
Secretary and Treasurer of Enviro Tech Coatings, LLC, a high-tech metal coating
business and is also the founder of Space Venture, LLC, a real estate
development company in the State of Michigan.
SIGNIFICANT EMPLOYEES
Jacquelin Dery (age 63) has been an Executive Officer and Director of Dermond,
Inc. since 1966. He is a professional engineer educated at Ecole Polytechnique,
University of Montreal, with a degree in electrical engineering. In 1996, he
co-formed Dermond, Inc. to improve existing vertical axis wind turbine
technology to fulfill the specific needs of isolated diesel-driven electrical
grids. From 1974 to 1996, he worked for Hydro-Quebec where he was responsible
for overall management of a $140,000,000.00 project to build a new 70MW diesel-
driven power plant, provided technical direction over conceptual engineering,
detail engineering, installation and testing of a $28,000,000.00 project for a
new type of 4MW vertical axis wind power generator, and provided direction of a
technical study aimed at replacing a 10MW emergency diesel power plant in the
Gentilly nuclear facility. Prior to joining Hydro-Quebec from 1971 to 1974, he
worked for Sonatrach, Skikda, Algeria where he implemented a maintenance
management system in a newly-built Natural Gas Liquefaction plant. From
1968-1971, he worked for the Atomic Energy Of Canada Ltd, Whiteshell Nuclear
Research Establishment, Pinawa, Manitoba, Canada, where he performed conceptual
studies and direction of detail engineering for installing experimental research
loops at the Nuclear Research Establishment, including in-core nuclear reactor
experimental loops. Mr. Dery is a Member of "Ordre des IngEnieurs du QuEbec."
Laurent B. Mondou (age 64) has been an executive officer and director of Dermond
since 1966. He is a Professional Engineer, educated at Ecole Polytechnique,
University of Montreal with a degree in Civil Engineering, and Ecole des Hautes
Etudes Commerciales, University of Montreal, Montreal, Quebec, Canada where he
has a degree in Business Administration. In 1996 he co-formed Dermond. From
1995-1996 and 1990-1991, he worked for Kamyr Enterprises Inc. where he prepared
market studies, a 3-year strategic plan, project proposals and was the contact
for senior executives in pulp and paper industries and government authorities.
From 1993 to 1994, he worked for gestion Lehoux et Tremblay Inc. where he
provided engineering for revamping power and pulp and paper plants, prepared
studies on cogeneration plants and gave construction expertise. From 1991 to
1992 he worked for Arno Electric Ltd. where he developed a mechanical and piping
division for industrial sectors, including aluminum, pulp and paper, hydraulic
power, electrical substations and cogeneration. From 1989 to 1990, he worked
for Dominion Bridge where he developed a mechanical and piping division for
industrial sectors including aluminum, pulp and paper, hydraulic power,
electrical substations, cogeneration, refinery and metallurgy. From 1974 to
1989, he worked for BG Checo International Ltd. where he lead business
development for industrial projects such as petro-chemistry, pulp and paper,
metallurgy and oil rigs. From 1963-1973 he provided construction management on
industrial projects for SNC Inc. Mr. Mondou is a Member of "Ordre des
IngEnieurs du QuEbec."
Michel Garon (age 52) has been General Manager of Lac DorE since November 2002.
Mr. Garon's career has been in mining, performing a variety of management
functions for more than 20-years. From 1995 until joining Lac DorE Inc. in
November 2002, Mr. Garon was General Manager for Noranda's Matagami Mine, in
charge of two underground mining operations (annual operating budget - $35MM),
including a concentrator and all the ancillary services. He was also
responsible for the construction and development of a new underground operation
(investment - $85 MM). He was Vice President of smelting operations for the
Brunswick Mining and Smelting Corporation Ltd in New Brunswick, Manager of the
Opemiska Division of Minnova Inc. including three underground mines, a
concentrator and all the ancillary services, and was superintendent of several
operations from 1981 - 1987. Mr. Garon has a Masters in Applied Sciences, Ecole
Polytechnique of Montreal, 1976 and Bachelor in Applied Sciences, Mining
Engineering, Ecole Polytechnique of Montreal, 1975.
Jan Mracek (age 47) has been Director of Technology of Lac Dore since January,
2003. Mr. Mracek is a Metallurgist with 22 years of experience in
hydrometallurgy, in both research and plant operations. Mr. Mracek was
responsible for technical research, design and commissioning of new
technologies, including the development of an innovative vanadium recovery and
refining process for McKenzie Bay. In operations, he focused on new
technologies and improved plant performance. His responsibilities have included
process selection, development and design; preparation of P&IDs and flow sheets;
vendors evaluation; and selection of process equipment. Mr. Mracek has worked
as a Metallurgist for SNC-Lavalin Engineers & Contractors Inc., Toronto, Ontario
and Rustenburg Base Metals Refiners (Pty) Ltd., Rustenburg, South Africa; Plant
Superintendent, Rhombus Vanadium (Pty) Ltd., Rustenburg, South Africa; Technical
Development Manager, Hydrometallurgical Plant Bruntal, Bruntal, Czech Republic,
and Researcher to Head of Metals Productions Department, Research Institute of
Metals, Panenske Brezany, Czech Republic. Mr. Mracek has a PhD, Physical
Metallurgy, Institute of Chemical Technology, Prague, Czech Republic, 1987 and
MSc, Chemical Technology and Metallurgy, Institute of Chemical Technology,
Prague, Czech Republic, 1980.
BOARD COMMITTEES AND MEETINGS
The Company's Board of Directors, which is responsible for the overall
management of the business and affairs of the Company, held eleven meetings
during the last fiscal year. Each director attended 81% or more of the
aggregate of the total number of Board of Directors meetings.
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. The Board of Directors had previously
attempted to establish a Corporate Governance Committee, but during the past
fiscal year, the Board of Directors, as a whole, has acted as the Corporate
Governance Committee.
Audit Committee. The Audit Committee is responsible for, among other things:
(a) retaining, overseeing, evaluating and, if appropriate, terminating the
independent auditors (subject to shareholder approval); (b) annually reviewing
the performance of the independent auditors and the Company's internal audit
function; (c) at least annually, reviewing all relationships between the
independent auditors and the Company to assess independence; (d) overseeing the
Company's financial reporting process on behalf of the Board of Directors; (e)
approving the nature and scope of services to be performed by the independent
auditors and reviewing the range of their fees for such services; (f) reviewing
the Company's financial statements that are included in the Company's reports on
Form 10-KSB and Form 10-QSB; (g) reviewing the Company's accounting and
financial controls, including the Company's policies and systems with respect to
risk assessment and risk management; (h) establishing and maintaining procedures
for the receipt, retention and treatment of complaints regarding accounting and
auditing matters; and (i) reviewing the results of the annual audit and policies
and practices regarding conflicts of interest and compliance with laws, rules
and regulations.
The members of the Audit Committee during the past fiscal year were Messrs.
Martino (Chairman) and McCormick. On March 1, 2004, Ms. Galvin was appointed by
the Board of Directors to the Audit Committee to replace Mr. McCormick. The
Audit Committee operates under a written charter for the Audit Committee, a copy
of which is available from Mr. Rich Kaiser (1-800-631-8127). The Audit
Committee held two meetings during the fiscal year ending September 30, 2003.
Compensation Committee. The Board of Directors has established a charter for
the Compensation Committee which will be responsible for, among other things:
(a) recommending the cash and other incentive compensation, if any, to be paid
to the Company's Executive Officers; (b) determining the individuals to whom and
the terms upon which options will be granted under stock-based compensation
plans approved by the Board of Directors; (c) the number of shares to be subject
to each option; and (d) the form of consideration that may be paid upon the
exercise of an option. In fiscal year ending September 30, 2003, the Board of
Directors acted as a Compensation Committee. In April 2004, the Board of
Directors appointed Mr. McCormick and Ms. Galvin as members of the Compensation
Committee.
Compensation of Directors. The Company does not pay its Directors a retainer
for attendance at board or committee meetings. The Company reimburses Directors
for the reasonable expenses incurred in connection with attending meetings of
the Board of Directors and its committees.
At the beginning of each fiscal year, each Director receives a 10-year option
for the purchase of 50,000 shares of the common stock of the Company exercisable
at the fair market value of the shares on the first trading day of October in
each year. A Director who has or will serve on the Board of Directors for less
than an entire fiscal year will be granted an option to purchase a pro-rata
number of shares. The options are fully vested upon grant.
The Company has no other arrangements pursuant to which any of the Company's
Directors were compensated during the fiscal year ended September 30, 2003 or
are expected to be compensated in the future for any service provided as a
Director.
In February 2004, the Company extended the termination date from March 14, 2004
to September 15, 2008 of options which had been previously granted to purchase
an aggregate of 300, 000 shares of the common stock of the Company. These
options had previously been granted to Gary L. Westerholm, Gregory N. Bakeman,
John W. Sawarin and Rocco J. Martino. The options are exercisable at $1.00 per
share.
Shareholder Nominations. The Board of Directors will consider nominees
recommended by stockholders if the following procedures are satisfied. A
stockholder of record of shares of a class entitled to vote at any meeting of
stockholders called for the election of directors (an "Election Meeting") may
make a nomination at the Election Meeting if, and only if, that stockholder
first has delivered a notice to the Company, not less than 15 days nor more than
45 days before the Election Meeting; provided, however, that if the Company
gives less than 30 days notice of the date of the Election Meeting or if the
only public disclosure of the date of the Election Meeting is the written notice
of the Election Meeting delivered to stockholders, a stockholder must deliver
the notice no later than the close of business on the 10th day following the day
on which the notice of the Election Meeting was mailed or the public disclosure
of the meeting was made.
The stockholder's notice must set forth with respect to each proposed nominee:
(a) the name, age, business address and residence address of the nominee; (b)
the principal occupation or employment of the nominee; (c) the class and number
of shares of capital stock of the Company that are beneficially owned by the
nominee; (d) a statement that the nominee is willing to be nominated and to
serve; and (e) such other information concerning the nominee as would be
required under the rules of the Securities and Exchange Commission to be
included in a proxy statement soliciting proxies for the election of the
nominee. The stockholder's notice also must set forth the stockholder's name,
address and the class and number of shares of capital stock of the Company that
the stockholder beneficially owns.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed the audited financial statements
of McKENZIE BAY INTERNATIONAL, LTD. for the year ended September 30, 2003 with
management. The Audit Committee has discussed with the independent auditors the
matters required to be discussed by SAS 61. The Audit Committee has received
the written disclosures and the letter from the independent accountants required
by Independence Standards Board Standard No. 1 (Independence Standards Board
Standard No. 1, Independence Discussions With Audit Committees) and has
discussed with the independent accountant the independent accountant's
independence. Based on the review and discussions referred to in this
paragraph, the Audit Committee recommended to the Board of Directors that the
audited financial statements be included in the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 2003.
Respectfully submitted,
Rocco J. Martino, Chairman
Doris F. Galvin
EXECUTIVE COMPENSATION
The following table shows certain information concerning the compensation earned
during the fiscal year ended September 30, 2003 by the Chief Executive Officer
and the Chief Financial Officer. No other executive officer of the Company
earned compensation in excess of $100,000 during the fiscal year.
Summary Compensation Table
Long Term
Compensation
------------
Annual
Compensation
------------ Awards
Securities
Underlying Options/SARs
Name and Principal Position Fiscal Year Salary (shares of (common stock)
- --------------------------------------------------------------------------------
Gary L. Westerholm,
President and CEO 2003 $115,500 200,000 shares
Gregory N. Bakeman,
Treasurer and CFO 2003 $110,250 200,000 shares
The Company's stock option plans have historically been administered by the
Board of Directors. The Company last year established a Compensation Committee
of the Board of Directors, but had not arrived at a charter for the Compensation
Committee and so the committee did not become active in making recommendations
concerning compensation matters to the Board of Directors. In March 2004, the
Board of Directors adopted a charter for the Compensation Committee and in
April, 2004, the Board of Directors appointed Stephen D. McCormick and Doris F.
Galvin to the Compensation Committee. It is expected that the committee will
determine the individuals to whom and the terms upon which options will be
granted, the number of shares to be subject to each option and the form of
consideration that may be paid upon the exercise of an option. Through this
point, the full Board of Directors has taken all actions related to compensation
issues of Executive Officers and Directors
The following table sets forth information regarding stock options granted to
the Chief Executive Officer during the fiscal year ended September 30, 2003:
Name Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or
Granted (shares of Fiscal Base Price Expiration
common stock) Year ($/Sh) Date
- ------------------ -------------- --------------- ---------- ------------
Gary L. Westerholm 100,000 $1.00 9/30/07
50,000 18.6% $1.50 9/30/12
50,000 $1.88 2/10/13
Gregory N. Bakeman 100,000 $1.00 9/30/07
50,000 18.6% $1.50 9/30/12
50,000 $1.88 2/10/13
On February 21, 2002, the Company granted options to purchase shares of Common
Stock over a five-year period to Mr. Westerholm under the Company's 2001
Employee Incentive Stock Option Plan. Mr. Westerholm is entitled to exercise
his options at 110% of the fair market value of the Common Stock at the grant
date. These options vest in equal increments over three years. Options
terminate, subject to certain limited exercise provisions, in the event of death
or termination of employment or directorship.
The following table summarizes the total number of options held by the Chief
Executive Officer and the Chief Financial Officer as of September 30, 2003. An
option is considered "in the money" for purposes of this table if its exercise
price was lower than the market value of our common stock as of September 30,
2003 ($1.88 per share).
Name Shares Value Number of Securities
Acquired Realized Underlying Unexercised Value of Unexercised
on ($) Options/SARs at FY-End In-the Money
Exercise (shares of Options/SARs
common stock) at FY-End
Exercisable/ Exercisable/
Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Gary L. Westerholm -0- -0- 863,500/66,500 $669,465/$25,935
Gregory N. Bakeman -0- -0- 455,000/0 $350,900/0
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT, AND
CHANGE IN CONTROL ARRANGEMENTS
On March 21, 2003, we entered into an employment agreement with each of Messrs.
Westerholm, Bakeman and Sawarin pursuant to which they will serve as executive
officers and receive annual base compensation of $121,000, $115,500 and $93,500,
respectively. We have agreed to review the compensation annually during the
last month of each fiscal year and to grant increases in compensation which will
be effective on the first day of the immediately following calendar year, based
upon the respective employee's performance, scope of responsibility assumed,
compensation paid to similar employees in similar companies and such other
factors as may guide us in setting reasonable compensation. In September 2003,
we did not review the compensation because of our financial condition. Unless
sooner terminated as provided for in the agreements, the terms of employment
continue until April 1, 2006, provided, however, that such terms shall
automatically be extended for additional periods of twelve months each unless we
give notice, not less than three months prior to the expiration of the term,
including any extensions, of the termination of the employment effective as of
the next succeeding anniversary date of the expiration of the term or any
extension. Each employee has the right to participate in all senior executive
benefit, bonus and/or stock option plans we maintain and are available to our
senior executive officers generally. In the event of the termination of an
employee's employment as a result of disability, we will pay him an amount equal
to his base annual salary less any credit for sick pay or other benefits
received by him deriving from any private medical insurance or other similar
arrangements entered into by us. Any of the employees may voluntarily terminate
his employment with us at any time on at least 30 days prior written notice to
us and shall then be entitled to receive his base salary until the date his
employment terminates and certain other benefits. If there should be (a) a sale
of substantially all our assets; (b) a merger, amalgamation or consolidation of
us to form a new entity; or (c) a change in control of us and as a result an
employee's employment is terminated but the acquirer or the new entity, as the
case may be, offers the employee employment on terms and conditions that are
essentially the same or better than those provided under his respective
employment agreement, if the employee refuses that offer, the employee will not
be entitled to any compensation under his employment agreement. If, however,
upon any of such three events the employee is not offered employment by the
acquirer or new entity, then the employee shall be entitled to receive his
annual salary for a period of three years from the termination and any accrued
but unpaid vacation pay. All other benefits the employee may have under the
senior executive benefit bonus and/or stock option plans and programs of the
employer shall be determined in accordance with the terms and conditions of such
plans and programs. If we breach any provision of an employee's employment
agreement and such breach is not cured by us within 15 days after receipt of
written notice of the breach, the employee shall be entitled to receive his base
salary for a period of three years and all other rights and benefits the
employee may have under our senior executive benefit, bonus and/or stock option
plans and programs shall be determined in accordance with the terms and
conditions of such plans and programs. We are in breach of each of the
employment agreements because we have not paid the required salaries.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 6, 2001, the Company entered into an agreement with Roberts
Construction Company whereby Roberts Construction Company proposed to purchase
the Kelsey Lake diamond mine, which is owned by Great Western Diamond Company, a
subsidiary of the Company. Roberts Construction Company is a subsidiary of
McCormick Incorporated. Stephen D. McCormick, a director of the Company, is
President and a shareholder of McCormick Incorporated. At the time of entering
into the agreement, however, Mr. McCormick was not a director of the Company.
The sale agreement provided that Roberts Construction Company was required to
pay all operating costs and certain liabilities relating to the Kelsey Lake
diamond mine, which would be applied to the purchase price of the mine if the
deal was completed. If the purchase did not close, Roberts Construction Company
was entitled to reimbursement of these costs. In March 2002, Roberts
Construction Company informed the Company that it was terminating the agreement
and would not complete the purchase. Accordingly, the Company reimbursed
Roberts Construction Company for the costs and liabilities it incurred by
issuing 952,317 shares of Common Stock to Roberts Construction Company and
101,471 shares of Common Stock to Mr. McCormick.
We previously granted Soquem an option to purchase a 20% undivided interest in
the Lac Dore project if Soquem provided funding for 20% of the capital
expenditures for the Lac Dore project. On April 17, 2003, Soquem relinquished
any rights it had relating to the deposits in exchange for 250,000 shares of our
common stock.
The company retained the firm of Larson, Harms & Bibeau, P.C. to perform certain
legal services for the company and we expect to continue to do so in the future.
Since October 1, 2002, we have incurred legal fees and expenses with such firm
of approximately $160,000.00. Donald C. Harms, one of our Directors, is a
principal of Larson, Harms & Bibeau, P.C. On May 15, 2003, we issued 20,000
shares of our common stock in consideration of the forgiveness of $17,100.00 we
owed to Larson, Harms & Bibeau, P.C. At the direction of Larson, Harms &
Bibeau, P.C. 10,000 of the shares were issued to a trust, the sole beneficiaries
and co-trustees of which are Mr. Harms and his spouse. At the time of the
issuance, the market value of our common stock was $.95 per share.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and officers,
and persons who beneficially own more than 10% of the outstanding shares of
Common Stock, to file reports of ownership and changes in ownership of shares of
Common Stock with the Securities and Exchange Commission. Directors, officers
and greater than 10% beneficial owners are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
reports they file. Based on its review of the copies of such reports received
by it, or written representations from certain reporting persons that no reports
on Form 5 were required for those persons for the fiscal year ended September
30, 2003, the Company believes that, except as provided below, its officers and
directors timely complied with applicable filing requirements during the
Company's last fiscal year. Exceptions: Mr. McCormick filed one report late
involving a total of three transactions.
STOCKHOLDER PROPOSALS
Proposals that stockholders intend to present at the next Annual Meeting of
Stockholders and that a stockholder would like to have included in the proxy
statement and form of proxy relating to that meeting must be received by the
Company no later than December 4, 2004, to be considered for inclusion in the
proxy statement and form of proxy relating to that meeting. Such proposals of
stockholders should be made in accordance with Securities and Exchange
Commission Rule 14a-8 and should be addressed to the Secretary of McKenzie Bay
International, Ltd., 975 Spaulding Avenue, Grand Rapids, Michigan 49546. All
other proposals of stockholders that are intended to be presented at the next
Annual Meeting of Stockholders must be received by the Company not later than
fifteen days prior to the announced date of said meeting, or they will be
considered untimely.
SOLICITATION OF PROXIES
The Company will bear all costs of the preparation and solicitation of proxies,
including the charges and expenses of brokerage firms, banks, trustees or other
nominees for forwarding proxy materials to beneficial owners. Solicitation of
proxies will be made initially by mail. In addition, directors, officers and
employees of the Company and its subsidiaries may solicit proxies personally or
by telephone or facsimile without additional compensation. Proxies may be
solicited by nominees and other fiduciaries and by the Company's transfer agent
who may mail materials or otherwise communicate with beneficial owners of shares
held by them.
By Order of the Board of Directors
/s/ John W. Sawarin
---------------
Brighton, Michigan John W. Sawarin
March 3, 2004 Secretary
===========================================
EXHIBIT 'A'-PROXY CARD
PROXY MCKENZIE BAY INTERNATIONAL, LTD. PROXY
975 Spaulding Avenue
Grand Rapids, Michigan 49546
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 3, 2004
The undersigned acknowledges receipt of the Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Stockholders of McKenzie Bay International,
Ltd. to be held on June 3, 2004, and hereby appoints Gary L. Westerholm attorney
and proxy of the undersigned, with full power of substitution, to vote all
shares of the undersigned in McKenzie Bay International, Ltd. at such Annual
Meeting, and at any adjournment thereof, for the purpose of acting upon the
proposals referred to below , and of acting in his discretion upon such other
matters as may properly come before the meeting.
You are encouraged to specify your choices by marking the appropriate boxes.
You need not mark any boxes if you wish to vote in accordance with the Board of
Directors' recommendations. The proxy cannot vote your shares unless you sign
and return this card by mail or facsimile.
Please mark your vote by filling in the box, using dark ink only.
Your Board of Directors Recommends That You VOTE FOR ALL NOMINEES.
For All
1. To elect nine directors for one-year For Withheld Except
terms expiring in 2005.
Nominees: Gary L. Westerholm
Gregory N. Bakeman
John W. Sawarin
Rocco J. Martino
Stephen D. McCormick
Donald C. Harms
Doris F. Galvin
John J. DiMora
John A. Popp
(INSTRUCTION: To withhold authority to vote for any
individual nominee, strike through that nominee's name
in the list at right.)
SIGNATURE(S)
Date: ____________________, 2004
Note: Please sign exactly as your name(s) appears on this Proxy. When signing
on behalf of a corporation, partnership, guardian or trustee, indicate title or
capacity of person signing. If shares are held jointly, each holder should
sign.
PLEASE NOTE: The total amount of shares held in this account is the last number
listed on the top row of the address label above the holder name.
PLEASE SEND THIS PROXY CARD FOR TABULATION TO:
SIGNATURE STOCK TRANSFER, INC. 2301 OHIO DRIVE, SUITE 100 PLANO, TEXAS 75093
FOR FASTER RESULTS FAX THIS PROXY CARD TO SIGNATURE'S OFFICE AT (972) 612-4122
==============================
EXHIBIT 'B'- Year End Report 10KSB for period Ending September 30, 2003
ECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________
Commission File Number: 000-49690
McKENZIE BAY INTERNATIONAL, LTD.
(Name of small Business Issuer in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization) 51-0386871
(I.R.S. Employer Identification No.)
975 Spaulding Avenue SE
Grand Rapids, Michigan
(Address of Principal Executive Offices)
49546
(Zip Code)
(616) 940-3800
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No _X_
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. -
The issuer's revenues for the fiscal year ended September 30, 2003 were $0.
On April 15, 2004, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the issuer was approximately $32,141,239
computed by reference to the price at which the common equity was sold.
On April 15, 2004, the issuer had outstanding 25,663,575 shares of Common Stock,
$0.001 par value.
Transitional small Business Disclosure Format (check one): Yes No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Recent Development
On April 6, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, LP under which Cornell has agreed, subject to our
satisfaction of the conditions described below, to purchase from us, from time
to time, our common stock for a price of up to $15,000,000. The price per share
is to be an amount equal to 99% of the lowest volume weighted average price
("VWAP") of our common stock as quoted by Bloomberg, LP during the five
consecutive trading days after we give notice to Cornell of a sale of our shares
to Cornell. We may require Cornell to purchase shares having a price of up to
$625,000 upon giving notice not less than six trading days prior to the date of
the anticipated purchase. Prior to any purchase shares by Cornell, we must have
satisfied each of the following conditions:
- - Our common stock shall have been authorized for quotation on a principal
market such as the OTC Bulletin Board, the NASDAQsm all Cap Market, the
American Stock Exchange or similar market;
- - We must have deposited the shares of common stock being sold with Cornell's
counsel under an Escrow Agreement;
- - We must file a registration statement with the SEC in order to register the
shares under the Securities Act of 1933 and the registration statement must
have been declared effective by the SEC;
- - We must have obtained any permits required for the offer and sale of the
shares and certain other securities from any state where securities will be
sold or have available an exemption therefrom;
- - We must have filed in a timely manner all reports, notices and other documents
we are required to file under the Securities Exchange Act of 1934;
- - Our transfer agent must meet certain eligibility requirements; and
- - We must pay certain fees as set forth below.
Although there is no time limit in which we must satisfy the conditions, there
can be no assurance that we will be able to satisfy each of them. In addition,
based upon certain positions of the Division of Corporation Finance of the SEC,
we anticipate that it may be difficult or impossible to register the shares
prior to their purchase by Cornell.
1
If the conditions are satisfied, Cornell's obligation to make purchases under
the agreement will terminate 24 months after the date on which the SEC first
declares effective our registration statement relating to the shares to be
purchased by Cornell.
Under the agreement with Cornell, we have agreed to pay the following
- - $15,000 to Cornell's legal counsel for acting as an Escrow Agent in the amount
of and an additional $500 upon each purchase by Cornell;
- - A payment to Cornell of 5% of each of its purchases;
- - 119,984 shares of our common stock as of the date of the Standby Equity
Distribution Agreement and an equal number of shares on the date the
Registration Statement is effective, equal in total to $540,000.00; and
- - A due diligence fee of 2,500.
We have also entered into a Registration Rights Agreement with Cornell under
which we have agreed to file a registration statement with the SEC and cause the
registration statement to be declared effective by the SEC prior to the first
sale of shares to Cornell. We have agreed to maintain the registration
statement's effectiveness until Cornell has sold all of its shares included in
the registration statement.
We have entered into a Placement Agent Agreement with Spencer Clarke, LLC under
which Spencer Clarke agreed to review the terms of the Standby Equity
Distribution Agreement and advise us with respect to the terms. Spencer
Clarke's fee for these services was $10,000 which we satisfied by the issuance
to Spencer Clarke of 4,444 shares of our common stock. We will also pay Spencer
Clarke for its services as a placement agent in introducing us to Cornell an
amount equal to 10% of the gross proceeds of each purchase of our shares advance
of which $25,000 has been paid and the balance shall be paid at the time or
times that Cornell purchases shares from us and we will issue to Spencer Clarke
warrants to purchase shares of our common stock in an amount equal to 10% of the
number of shares sold to Cornell.
Background
Prior to July 2003, we intended to primarily engage in the development of our
Lac Dore vanadium deposit in Chibougamau, Quebec. Based upon a market study,
undertaken as part of the feasibility study by SNC-Lavalin, dated April 2002, we
believe that successful introduction of new vanadium-based bulk-energy storage
devices (large batteries) could generate increased demand for vanadium, which
may make exploitation of the Lac Dore deposit economically feasible. To date,
however, the limited sales growth of vanadium batteries has not generated the
demand for vanadium which we anticipated. We cannot forecast when, if ever, any
meaningful increase in sales for vanadium based batteries may occur. Except for
research and development work on our vanadium refining technology, we have
deferred engaging in any material developmental or operational activities in
connection with the deposit. In order to retain full rights to the mining
claims in the deposit, we must perform and/or fund certain exploration and
development-related work as specified by applicable regulations or we must pay a
total of approximately $38,000 per year.
2
Because of our belief in the growing interest in alternative energy generation
devices, we have altered our business plan in July 2003 to concentrate on wind
powered alternative energy systems.
We do not have the capital to further fund or develop any of our proposed
business activities. Although we have been and are currently seeking funding,
there can be no assurance that we will receive adequate funding, if any, or that
the terms of any such funding will not be unfavorable to us. Other than our
agreement with Cornell, which is subject to conditions we may not be able to
satisfy, we have not received any commitment for funding. Our ability to engage
in the business activities described below is dependant upon our acquisition of
significant funds.
We are in a developmental stage and have never realized any meaningful revenues.
Our independent auditor has stated in its report dated December 23, 2003 that we
have suffered recurring losses and have a deficiency in assets that raise
substantial doubt about our ability to continue as a going concern.
We were incorporated in Delaware on August 17, 1998.
Unless the context in this Annual Report otherwise requires, all references in
this Annual Report to "our," "us" and "we" refer to McKenzie Bay International,
Ltd. and its subsidiaries.
Wind Powered Alternative Energy Systems
Acquisition of Dermond Inc.
On February 12, 2002, we acquired all of the outstanding shares of common stock
of Dermond Inc., a Canadian corporation formed in 1996 from Jacquelin Dery and
Laurent Mondou. Dermond owned the technology referred to as the Dermond Wind
Turbine. The technology relates to improvements to the Darrieus style vertical
axis wind turbine, a generator assembly to produce electricity and a self-
erecting structure for the wind turbine. The purchase price consisted of:
- - The issuance to each of the sellers of 50,000 shares of our common stock;
- - The payment to each of the sellers of CDN$25,000.
In connection with the purchase, we entered into an employment agreement and
royalty agreement with each of the sellers. Pursuant to the employment
agreements, the sellers are employed as Vice Presidents of Dermond until
February 12, 2007, subject to additional periods of one year each unless a party
gives requisite notice of termination. Each of the employees is entitled to
receive an annual salary of CDN $65,000 (approximately $49,000 U.S. on March 31,
2004) which will increase to CDN $85,000 (approximately $64,000 U.S. on March
31, 2004 ) upon our first sale of a Dermond Wind Generator. As of March 31,
2004, we were approximately CDN $16,400 (approximately $12,375 US on March 31,
2004) in arrears in the payment of salaries to each of Messrs. Dery and Mondou.
3
Pursuant to the royalty agreements, we will pay each of the sellers a royalty of
1.25% of the net receipts received by us from sales of the Dermond Wind
Generator utilizing the technology developed by Dermond. In the event that a
Dermond Wind Generator is leased rather than sold, the royalty payable to each
of the sellers will be 1.25% of the net lease payment received by us. In the
event of the resale or re-lease of the same wind generator, the sellers shall
each be entitled to a further such royalty of 1.25%. In the event a Dermond
Wind Generator is leased, each of the sellers may elect to receive the royalty
in a lump sum upon execution of the lease agreement and payment of the first
lease payment. The lump sum royalty will be 1.25% of the then present value of
the lease. The royalties will be payable to the sellers on all Dermond Wind
Generator sold or leased during the 10-year period commencing with the first
sales or lease transaction of a Dermond Wind Generator.
Wind Turbine Technology
Differential heating of the earth's surface by the sun causes large air masses
to move continuously about the surface of the earth. The masses move with such
velocity that they possess significant amounts of kinetic energy. Wind turbines
have been used to convert the kinetic energy of the moving air mass to
electricity.
According to the American Wind Energy Association, horizontal axis wind turbines
dominate the wind turbine market and are used in more than 95% of wind
generating applications around the world. Power production size of horizontal
axis wind turbines generally ranges from approximately 1 kilowatt ("kW") to
approximately four megawatts ("MW").
The predominant aerodynamic principal employed by wind turbine technologies for
operation is lift. As wind attempts to pass by the wind turbine, its blade
design causes the wind to accelerate over one surface of the blade, creating a
low pressure area on that surface which tends to pull the blade in its
direction. Typical wind turbine blade design varies the lift-pulling action
over the blade surface causing rotation, the basis for wind power functionality.
Several natural factors affect a wind turbine's production of electricity,
including temperature, wind direction consistency and wind speed, the most
important turbine performance criteria. Typically, at the same location, wind
speeds will be greater as the height from ground level increases. Configured in
single to multi-blade propellers, horizontal axis wind turbine design requires
the turbines to be elevated into the air to allow propeller rotation. Vertical
axis wind turbine designs have historically been primarily ground mounted.
Horizontal axis wind turbines' dominance of the market today is based on
superior performance from their ability to access higher velocity winds at
elevation. A horizontal axis wind turbine, however, must incorporate a "yaw"
mechanism, which generally consists of an electric motor that turns the
propeller section into the direction of the wind to adjust to shifts in wind
direction.
4
French inventor Georges Jean Marie Darrieus filed the first patent for a modern
type of vertical axis wind turbine in France in 1925 and in the United States in
1931. His name is synonymous with the majority of vertical axis wind turbine
designs of today which are referred to as "Darrieus" style. Vertical axis wind
turbines are very difficult to mount high on a tower to capture the higher level
winds. Accordingly, they are usually forced to accept the lower, more turbulent
winds and produce less in possibly more damaging winds.
At the onset of the Arab oil embargo in 1973, the U.S. Atomic Energy Commission,
a predecessor to the current Department of Energy, asked Sandia National
Laboratories, a national United States laboratory devoted to engineering
research and development, to investigate and develop alternative energy sources.
Sandia's engineers began to look into the feasibility of developing an efficient
wind turbine that industry could manufacture. National Research Council Canada
shared its development work with Sandia and a North American effort to develop
the Darrieus technology began.
In the late 1970's, five companies, including FloWind Corporation, began
production, commercialization and installation of modern Darrieus wind turbines,
culminating in a fleet of nearly 900 vertical axis wind turbines, primarily
located in the Altamont and Tehachapi passes of California, and India. All of
the vertical axis wind turbine commercial enterprises have since ceased
production. We are not aware of the reasons why production ceased.
Potential Wind Turbine Markets
Approximately 6,868 MW of new wind power capacity was installed worldwide in
2002, increasing generating capacity by 28% and increasing total wind power
installation to over 31,000 MW, enough to power 7.5 million average American
homes. Global wind power capacity quadrupled over the five-year period from
1998 to 2002, growing from 7,600 MW to more than 31,000 MW. Wind is the world's
fastest-growing energy source, with installed generating capacity increasing by
an average of 32% annually during that five-year period. Approximately 93% of
the additional wind power capacity installed in 2002 was in Europe and the
United States, and worldwide, 90% of capacity is in those two regions.
Substantially all of the wind energy described above is sold to utilities
providing electricity to their customers. In addition to adding supply to a
utility grid, which is the primary market for wind generated electricity, we
believe that supplying power to off-grid communities and urban, commercial rate
paying buildings may constitute potential market opportunities for wind
generated power.
The factual data under this sub caption was compiled by the American Wind Energy
Association and European Wind Energy Association.
There can be no assurance that our wind turbines, if built, will achieve a
meaningful amount of commercial acceptance, if any, in any of the potential
markets. Off-Grid (Islands & Remote Access) The prohibitive cost of connecting
small, remote communities to a utility grid or, in the case of islands, the lack
of a typical power generation resource such as coal or nuclear energy, causes
thousands of locations worldwide to be dependent upon diesel and gasoline
powered generators for electricity. The fuel, operating and maintenance
expenses for these generators are extremely high, causing electricity generating
costs to be significantly greater than in urban "in-grid" locations.
5
A document titled "Le Developpement de l'Energie Eolienne au Quebec" ("the
development of wind energy in Quebec") dated April 30, 1998, was presented by
Hydro-Quebec at a Quebec Government public hearing on the future of wind energy
in May 1998. Hydro-Quebec estimated at that time that the potential world
wind/diesel (wind generated electricity with diesel generator backup) market
outside Canada was estimated at 25,000 MW, with 11,400 MW of existing diesel
installations and 13,000 MW to come.
Wind turbines have been introduced to off-grid communities in various locations
around the world. We believe the following sites constitute viable off-grid
markets;
- - Thousands of island and remote mining, logging and other off
grid locations;
- - More than 200 Canadian communities;
- - Approximately 250 off-grid communities in Alaska.
- - Urban User Market
We believe that vertical axis wind turbines have the potential to provide
building owners, real estate developers, property managers and other users in
urban locations a means to reduce the overall cost of electricity. Based upon
information compiled by the U.S. Department of Energy, commercial retail rate
users in the U. S. alone consume more than 1.4 million MW of electricity
annually.
We further believe that vertical axis wind turbines may provide a cost-effective
and efficient alternative power supply in commercial buildings, schools,
multistory residential dwellings, light industrial businesses and off-grid
areas. In addition, we believe that vertical axis wind turbines may also be
suitable for peak shaving and load leveling applications.
Proposed Products DWT(sm)
Subject to obtaining sufficient funds, we intend to contract with others for the
manufacture of prototype vertical axis wind turbines which we refer to as
Dermond Wind Turbine or DWT. The DWT has been designed to utilize the following
technology which we have included in our patent application which may result in
the following:
- - Simplification of installation by reducing the number of onsite elevated
assembly steps;
- - Improvement in quality of workmanship by allowing more "in factory"
assembly;
- - Reduction in overall cost of installation; and
- - Relative ease of installation where certain assembly equipment may be
unavailable.
6
The DWT is presently in the design stage and no prototypes have been built.
Accordingly, there can be no assurance that the technology will work as expected
or that any DWT will perform to the extent that we anticipate or will be
commercially viable. We initially intend to obtain two prototypes in 100 kW
configurations during the summer and early fall of 2004. If the prototypes meet
our expectations and we obtain the requisite funding, we intend to have DWTs
manufactured for commercial introduction. The "wind cage," or blade rotating
space, will be approximately 40 feet high and 56 feet wide and is expected to
weigh approximately 6,000 pounds. We selected the 100 kW size because the
configuration meets our initial market focus on the urban, remote, limited
access and extreme climatic environment markets. If we are successful in
marketing 100 kW DWTs, we intend to develop DWTs having increased electrical
output. We believe that we will require funds of approximately $1.2 million to
complete the design stage of the DWT and to obtain two prototypes. If we are
able to obtain the funds, we intend to utilize them as follows:
USE REQUIRED FUNDS ANTICIPATED TIME PERIOD FOR USE OF FUNDS
Design Completion $600,000 2 months
Prototype Construction $300,000 2 months
Installation and Testing $300,000 3 months
Marketing and Working Capital $200,000 2 months
We have received conditional commitments from Canadian governmental agencies for
$330,000 in non-refundable grants and loans of $590,000. Because we do not know
if we can satisfy the conditions, we do not know if we will receive any of the
funds. We have received no commitments for the balance of the requisite funds
and there can be no assurance that we will be successful in obtaining those
funds. The amount in the table for Marketing and Working Capital will only
satisfy our initial requirements. If we do not obtain all of the requisite
funds, we will not be able to produce or sell any DWTs.
WindStorsm
We have begun development of an energy system which is intended to integrate and
manage DWTs and other electricity generating sources with an energy storage
device. We refer to the system as the "WindStor." As is the case with the DWT,
because WindStor is presently in the design stage and no prototypes have been
built, there can be no assurance that the technology will work as expected or
that any WindStor will perform to the extent that we anticipate or will be
commercially viable.
7
WindStor is an electricity management system which will use the Dermond Vertical
Axis Wind Turbine to generate electricity. This electricity will be used by the
customer as generated or stored in a vanadium-based battery. WindStor's
proprietary "system integrator" will be programmed to distribute electricity to
the customer's facility from the lowest cost source at each moment (i.e. from
the wind turbine, from the battery or from the utility), to provide to the
customer the least costly source of electricity.
WindStor is being designed to constantly monitor electricity demand and supply.
We anticipate that because of the monitoring, WindStor will be able to provide
for instant shifting from one power source to another, such as the Vertical Axis
Wind Turbine, a battery and either the grid or a backup diesel generator, in
order to select the lowest cost source of electricity available at any moment in
time and to immediately switch to battery power if other means of power are
interrupted from the supply source.
We believe that WindStor can provide a higher quality, lower cost and
environmentally friendly alternative electricity source than is presently
available for off-grid electricity users dependent upon diesel and gasoline
generators. For urban users, WindStor is planned to provide a means for
providing a system to store relatively low cost electricity and access that
electricity to offset "near peak," "peak" and "demand" charges by grid provided
power companies.
The cost to complete design of WindStor is part of the DWT financing described
above. If we do not obtain all of the requisite funds, we will not be able to
produce or sell any WindStors.
In December 2003, we entered into an agreement with Clark County School District
to install an anemometer at a high school in Las Vegas, Nevada to collect wind
data to finalize an equipment configuration and prepare a long term pricing
structure. We intend to install the anemometer in April 2004 and we expect that
the evaluation period will end in October, 2004. After the evaluation period,
we have agreed to install a DWT at our expense for further evaluation.
Irrespective of the results and price structure, Clark County School District is
under no obligation to purchase or lease any products from us. Since November
2003, we have entered into similar arrangements with others with respect to two
additional locations.
8
Production
If we are able to reach the production stage, we intend to have all DWTs and
WindStors manufactured for us by others. We believe that the necessary parts
and components are readily available from numerous suppliers. We further
believe that there are numerous manufacturing companies that will be able to
manufacture the products for us at reasonable prices.
Marketing
We intend to market the DWTs and WindStors primarily through non-exclusive
independent marketing agents. Four companies in the United States have entered
into agreements with us that provide for a payment to them in the event that one
or more WindStors are sold or leased through their efforts. The payment will
consist of 5% of the capitalized lease cost payable within 60 days of
installation of a system or 5% of the gross sales price of a system, exclusive
of taxes and transportation, payable within 60 days of installation of the
system.
Each of the four companies has represented to us that it has expertise in the
sale and promotion of energy products.
Competition
We are not aware of any organization marketing wind turbines or electricity
management systems such as the WindStor for the urban, commercial-retail rate
user market. Existing alternatives to grid supplied electricity include solar,
micro-turbine and diesel generators. These devices are typically used only as
minor contributors to location demand or as a standby electricity source in the
event of a grid power outage.
Atlantic Orient Corporation, Northern Power Systems and Vergnet offer smaller
sized (less than 100 kW) wind turbines in hybrid diesel/wind systems.
Atlantic Orient Corporation has been designing and installing 10 kW and 50 kW
wind-diesel systems for more than 10 years. Atlantic recently installed a system
in Wales, Alaska and has previously installed systems in Russia and Africa. Five
of its turbines are being used in conjunction with two diesel generators to pump
oil in a very remote and cold region in Siberia. Atlantic is designing a turbine
called, WindLite, to run with any phase power backup and which can either charge
DC batteries or be installed with an inverter to change DC to AC power.
Northern Power Systems has been in the wind turbine business for nearly 25 years
and has expertise with in electrical energy systems employing a wide range of
technologies including wind, photovoltaic (solar energy), and diesel-hybrid
power. Northern has developed, in conjunction with NASA, a 100 kW turbine
synchronous variable speed generator capable of operating under extreme climatic
conditions and installed a prototype in Graniteville, Vermont in 2000. Northern
Power offers a wide range of products, including the NorthWind series, which was
developed for the U.S. Department of Energy.
9
French firm Vergnet, over a period of 20 years, has been developing new hybrid
wind/diesel/lead-acid battery systems to provide self-sufficient electricity
production for remote sites. Vergnet is currently operating a wind/diesel power
plant consisting of twenty-five, 60 kW wind turbines in Guadeloupe. Vergnet has
installed wind turbines of 15 kW in polar environments and 50 kW in many other
places. The off-grid market attracts a variety of alternative electricity
generating technologies. Manufacturers of wind turbines, micro-generators,
biomass and fuel cells have installed prototypes in off-grid locations. We
believe diesel generators will continue to be the preferred primary off-grid
electricity generating source for the foreseeable future, with alternative
energy devices and systems only being used to improve power and cost
performance, not replacing diesel generators.
Substantially all manufacturers and developers of products that will compete
with our products have substantially greater resources than we do. Intense
competitive pressures could have a material adverse effect on our proposed
business.
Companies with substantially greater expertise and resources than those
available to us may develop or market new, similar or virtually identical
products that directly compete with us. Competitors may also develop
technologies or products that render our products less marketable or obsolete.
If we are unable to continually enhance and improve our products, we may be
unable to compete with others. We may not be able to successfully enhance or
improve any product or develop or acquire new products, because of our limited
resources.
Intellectual Property
In January 2003, we filed a patent application in Canada, Japan and with the
European Union, which include, among other countries, France, Germany, Spain and
the United Kingdom. In September 2003, we filed a patent application in the
United States and we expect to file patent applications in additional countries.
The claims in the patent applications are for:
- - A wind system of the type having a rotating shaft perpendicular to the
ground;
- - A blade attachment structure for a windmill;
- - A blade for a windmill;
- - A generator assembly for a windmill to produce electricity;
- - A self erecting structure for a windmill;
and
- - A method for erecting a self-contained windmill.
We believe that the claims in the applications represent potential
improvements to the Darrieus style vertical axis wind turbines. The potential
improvements are in the following areas:
10
- - Blade Assembly
The improvements relate to a rotating shaft perpendicular to the ground,
comprising three blades positioned in a pre-strained triangular rigid
configuration. The potential benefit is allowing the blades to adopt a true
troposkein (turning rope) shape at targeted speed, believed to improve vertical
axis wind turbine performance.
- - Blade Attachment Structure
The improvements relate to the attachment of the blades to the rotating shaft
using a set of securing elements having a tri-dimensional, triangular
configuration designed to maintain a constant troposkein shape. The potential
benefit is the minimizing of the dynamic stress on the turning blades which may
result in cost savings in the fabrication process and could contribute to
extended blade life.
- - Integrated Direct Drive Generator
The improvements relate to reduction of mechanical losses in geared transmission
between the turbine and the generator. The potential benefit is the absence of a
speed-increasing device and its replacement by an integrated generator providing
for a reduction of the friction between mechanical parts which may increase
electrical output and reduce wear.
- - Self-Erecting Design
The improvements relate to a method for fabrication of a self-erecting wind
turbine which may make wind turbines easier to erect.
By letter of January 20, 2004 from the Canadian Intellectual Property Office, we
were advised that each of the claims in our patent application was "indefinite"
and did not comply with certain relevant provisions of the Canadian Patent Act.
We must reply to the letter not later than July 20, 2004. We intend to respond
to the letter and to amend our application to the extent necessary.
We have not received a response from any other patent agency.
There can be no assurance that any patent will be issued, or if issued, that it
will include any meaningful claims. Furthermore the validity of issued patents
are frequently challenged by others. One or more patent applications may have
been filed by others previous to our filing which encompass the same or similar
claims. If we do not receive a patent which provides adequate protection for
us, we may not be able to manufacture our proposed products in our intended
manner.
Because of our limited resources, we may be unable to protect a patent or to
challenge others who may infringe upon a patent. Because many holders of
patents in the alternate energy industry have substantially greater resources
than we do and patent litigation is very expensive, we may not have the
resources necessary to challenge successfully the validity of patents held by
others or withstand claims of infringement or challenges to any patent we may
obtain. Even if we prevail, the cost and management distraction of litigation
could have a material adverse effect on us.
11
Because wind turbines and their related manufacturing processes are covered by a
large number of patents and patent applications, infringement actions may be
instituted against us if we use or are suspected of using technology, processes
or other subject matter that is claimed under patents of others. An adverse
outcome in any future patent dispute could subject us to significant liabilities
to third parties, require disputed rights to be licensed or require us to cease
using the infringed technology.
If trade secrets and other means of protection upon which we may rely may not
adequately protect us, our intellectual property may become available to others.
Although we may rely on trade secrets, copyright law, employee and third party
nondisclosure agreements and other protective measures to protect some of our
intellectual property, these measures may not provide meaningful protection to
us.
The laws of many foreign countries do not protect intellectual property rights
to the same extent as do the laws of the United States, if at all.
Research & Development
During the fiscal year ended September 30, 2003 we expended approximately
$165,000 on research and development related to DWTs and WindStor. The
expenditures consisted primarily of engineering for the DWT and the system
integrator. The foregoing amount does not include amounts expended for vanadium
refining technology. During the fiscal year ended September 30, 2002, we made
no expenditures on research and development related to DWTs and WindStor.
Regulation
Overview
We propose to own and operate wind powered electric generating facilities to be
located on the property of our prospective customers. Certain prospective
customers would be end-users (retail consumers) of electricity, such as
privately-owned commercial office buildings, schools, and government buildings,
who would purchase electricity from us. Each of these types of customers
involves its own regulatory issues.
The electric industry in the United States is governed by both federal and state
law and regulation, with the federal government having jurisdiction over the
sale and transmission of electric power at wholesale in interstate commerce, and
the states having jurisdiction over the siting of electric generating and
transmission facilities and the sale of electricity at retail.
The federal government regulates the wholesale and transmission business through
the Federal Energy Regulatory Commission ("FERC"), which draws its jurisdiction
from the Federal Power Act ("FPA"), and from other legislation such as the
Public Utility Regulatory Policies Act of 1978 ("PURPA") and the Energy Policy
Act of 1992. FERC has comprehensive and plenary jurisdiction over the rates and
terms for sales of power at wholesale, and over the organization, governance and
financing of the companies engaged in such sales. The industry is also subject
to self-governance as to operating standards through regional reliability
councils, and, increasingly, to governance of the operation of interconnected
utility and non-utility operations and wholesale markets through Independent
System Operators, all of which are in turn subject to the plenary jurisdiction
of FERC.
12
The States regulate electric power that is generated or sold at retail in their
state in accordance with individual state laws which can vary widely in material
respects, and which, with a few exceptions such as Nebraska, which has no state
regulatory agency with such jurisdiction, grant plenary jurisdiction over
electric utility operations to a single public service commission or commerce
commission.
Interstate holding companies engaged, through subsidiaries, in the electric
utility business are subject to regulation under the Public Utility Holding
Company Act of 1935 ("PUHCA"). These companies, unless specifically exempted,
are required to submit reports to the SEC providing detailed information
concerning the organization, financial structure, and operations of the holding
company and its subsidiaries. Holding companies are subject to SEC regulations
on matters such as structure of their utility systems, transactions among
companies that are part of the holding company utility system, acquisitions,
business combinations, the issue and sale of securities, and financing
transactions. For purposes of PUHCA, an "electric utility company" means "any
company which owns or operates facilities used for the generation, transmission,
or distribution of electric energy for sale, other than sale to tenants or
employees of the company operating such facilities for their own use and not for
resale."
Federal Regulation
PURPA and Qualifying small Power Production Facility Status
Under PURPA and the regulations of FERC implementing PURPA, a wind-powered
generating facility with a generating capacity less than 30 MW, including all
such facilities owned or operated by the same person within one mile of each
other, no more than 50% of which is owned in the aggregate by electric
utilities, electric utility holding companies, or subsidiaries of either, is
deemed to be a Qualifying small Power Production Facility ("QF"). Certain non-
burdensome filing requirements are required to confirm this status with respect
to each such facility. We believe that our ownership of facilities in foreign
countries such as Canada that might be deemed to be electric utilities were they
located in the U.S. will likely fall under a special Foreign Utility Company
exception to PUHCA that will not make us an electric utility holding company in
the United States for QF ownership purposes.
A QF is automatically exempt from regulation by FERC with respect to any sales
of electricity it may make at wholesale. In addition, its owners and operators
are automatically exempt from all provisions of PUHCA with respect to their
ownership of the QF and any other QFs they may own. Moreover, a QF is exempt
from the laws of the states which otherwise regulate the ownership, rates and
terms of sales, corporate governance, and financing of electric utilities.
Finally, a QF, and its customers have certain rights under FERC regulations,
including the right to require an electric utility to interconnect it with the
utility's electric system, the right to purchase firm power service, back-up
power, and supplementary power from an interconnected electric utility at
reasonable and non-discriminatory rates, and the right to require an electric
utility to purchase electric power generated by the QF at the cost the utility
would have incurred in generating or purchasing the same power elsewhere.
13
State regulatory agencies are required by PURPA to enact regulations and take
other measures to implement FERC's regulations under PURPA, and most have done
so. While these rights are frequently threatened in a number of states by
utilities that attempt to undermine their effectiveness through the state
regulatory process, FERC has not failed to uphold them when required. There
have for many years been attempts in Congress to repeal PURPA, but in each case,
the only repeal that has received serious consideration is the possible repeal
of the PURPA requirement that utilities must purchase QF power. This particular
right under PURPA has become largely irrelevant in any event since the passage
of the Energy Policy Act of 1992, which mandated open access to the nation's
utility grid for QFs and other non-utility power producers.
WindStor is not intended to consist solely of a wind turbine generator, but also
to include a battery for the storage of power, and in some cases a generating
set fueled with diesel fuel or natural gas. In addition, the system is designed
in many applications to be interconnected with a utility grid. Generation and
sale of electricity from a fossil-fuel-fired generator is not eligible for QF
status, and the exemptions from regulation attendant thereto, unless the
generator is a Qualifying Cogeneration Facility as defined by FERC regulations
under PURPA. A Qualifying Cogeneration Facility is one that produces both
electricity and useful thermal energy from the same fuel source, and meets
certain specified standards for fuel efficiency and balance of electric and
thermal output, as well as the ownership requirements for QFs generally.
Moreover, if the battery element of the WindStor system is ever charged with
power from (1) a non-QF generator or (2) the electric utility grid, rather than
solely from the generation of a wind turbine QF, the sales of power from the
battery, and the owners and operators thereof, would to that extent not qualify
for QF exemptions under PURPA. Finally, the electrical distribution system
within the customer's application and site, if owned or operated by us, might
not qualify as part of a QF to the extent that they are used to transmit non-QF
power. On the other hand, there is substantial precedent to support the
proposition that we can lease and/or operate a non-QF generating facility owned
by another person without threat of regulation, provided that it does not sell
the power produced by such facilities, except under the direction of the lessee
or owner.
We intend to structure our WindStor ownership and operating template in order to
secure QF status for all of the elements that we may own and operate where power
is being sold either at wholesale or at retail. We may consider a combination of
ownership and power sales, leases, equipment sales, customer ownership and
operating contracts which divide QF and non-QF elements of any particular
WindStor application. Although those structures are within current practice in
the industry and are FERC precedent, we cannot predict the outcome.
14
Exempt Wholesale Generators
In the event that a WindStor facility were unable to qualify for QF status
because of ownership by electric utilities or utility holding companies, or a
particular element (such as a non-cogeneration diesel generating set) would not
qualify, we as owner/operator could qualify for exemption from PUHCA and
lightened regulation by FERC, if, and only if, the facility or element of the
WindStor system were owned by a special purpose subsidiary operated solely for
sales of electricity at wholesale, and can demonstrate to FERC that it does not
have the power to exclude any competitors from the market. Such an exemption is
available to an Exempt Wholesale Generator ("EWG"), as defined by PUHCA and
certified by FERC. EWG status is gained by application to and subjection to
limited regulation by FERC. Although EWGs are deemed to be electric utilities
subject to FERC jurisdiction, FERC provides for a lightened regulatory regime
for EWGs. Among other things, an EWG is required to file a rate schedule with
FERC (although the rate schedule permits the EWG to sell power at negotiated
rates), to report its power sales on a quarterly basis, and to obtain FERC
approval for any transfer of ownership of either the EWG or any upstream owner.
Interconnection
The FPA, as amended by the Energy Policy Act of 1992, and FERC regulations
thereunder, require electric utilities to interconnect with sellers of power at
wholesale. The process of obtaining a new interconnection for a new generating
facility to operate in parallel with a utility's system can be onerous, time-
consuming, and expensive. FERC has recently published new regulations that
would simplify and standardize this process for small-scale generators, and
WindStor facilities may benefit from those regulations in those limited
circumstances where a particular application would require utility
interconnection in order to serve a wholesale customer.
State Regulation
With few exceptions, state regulatory agencies generally have the jurisdiction,
among other things, to approve the site selection of new electric generating
facilities, and to permit or disapprove the sale of electric power to end-users
(retail sales). Just as importantly, these agencies have plenary jurisdiction
over a utility's rates and terms for service to retail customers, including the
rates and terms for interconnection including the facilities needed for
interconnection, for firm power service, for supplementary power service (power
needed on a firm basis in addition to the power a customer generates for
itself), and for back-up power service (extra power a customer may need from
time to time in the event of an outage of its own generation). In some states,
the agency determines whether a customer may terminate its utility service in
order to meet its needs with self-generated power, or power from a non-utility
third party such as us, and whether the customer must pay a special charge for
the right to "go off the grid" partially or completely. All of these may have
important, and possibly materially adverse, implications for us.
15
In most of our anticipated commercial retail applications, the WindStor system
would supply part but never all of a customer's power requirements. We expect
to sell a portion of the customer's power requirements to the customer, rather
than selling or leasing the system to the customer. The remainder of the
customer's power requirements would be supplied by a local electric utility.
The first issue in any state will be whether a Certificate of Public Convenience
and Necessity ("CPCN") is required to be obtained from the regulatory agency
before construction may begin. In most states, a CPCN is not required for the
construction and operation of small-scale generating facilities with generating
capacity less than 1 MW, which would include most WindStor systems we anticipate
installing. Where a CPCN is required, it typically entails a lengthy and
expensive application process, possibly including an environmental impact
evaluation.
The next critical issue, which will necessarily be resolved in the course of a
CPCN application where one is required, is whether and under what circumstances
a sale of power to an end user at retail will be permitted at all. QF status,
as described above, gives a QF no right to sell power at retail. If the state
permits such sales, however, a QF is legally exempt by FERC regulations under
PURPA from most burdensome utility-type regulation by the state regulatory
authority. Accordingly, if the state permits a QF to make retail sales, the
state will be pre-empted by PURPA from regulating the FRS rates for sales of
retail power, or its corporate governance or financial organization. The extent
to which a state honors such federal preemption, however, is subject to varying
practice. Where a CPCN is required, for instance, the conditions of a CPCN
often impose certain obligations that can have the same effect as some level of
utility-type regulation such as restrictions on the amount of financing that can
be obtained, on any future transfer of ownership of the facility, on the ability
of the facility's owners to engage in other businesses in the State, and certain
periodic reporting requirements.
In Florida, for example, a third party such as us is not permitted to make
retail sales from a generating facility located on the customer's property, or
to have any contract (such as a lease or an operations and maintenance
agreement) with the end user, the price of which is based on the output of the
generating facility. Thus such "inside-the-fence" generating facilities in
Florida are either owned entirely by the electric consumer, or leased to the
consumer with a rental payment that is the same whether or not the facility ever
generates electricity. Similar or more stringent restrictions are found in
Kansas, North Carolina, Georgia, Virginia, Louisiana as well as other states.
Only about 20 states to date have restructured their electric utility regulatory
regimes to permit relatively unrestricted sales of power to end-users by non-
utility generators. In a number of others, existing state law and regulation
have been interpreted by the courts to permit such sales to a limited number of
customers on the grounds that a sale to a limited number of end-users is not
deemed to be a prohibited "sale to the public."
16
Finally, the state regulatory authority determines what physical interconnection
requirements a utility may impose on a customer who wishes to install self-
generation in parallel with the utility's grid regardless of any ownership and
operating arrangements between the customer and us, what charges a utility may
impose on a retail customer for such interconnection, and what charges,
penalties or other restrictions the utility may impose on the customer for
permanently reducing its purchased power load from the utility. Charges imposed
by a state regulatory authority may make the installation of self-generation
uneconomical for some customers. A few states such as New York have published
standardized interconnection requirements for small-scale generators, which
attempt to reduce the burden and cost of the interconnection process, and we and
our customers may benefit from such rules where they apply. QFs and their
"host" customers have the benefit of PURPA's prohibition against unreasonable or
discriminatory rates and charges for these services and for supplementary and
back-up power service, but exercising those rights in particular cases may be
costly and time-consuming.
Extraction and Refining of Vanadium
Acquisition of Lac Dore Mining Inc.
On February 1, 1999, we acquired all of the outstanding equity securities of Lac
Dore Mining Inc., a Canadian corporation formed on August 23, 1996. Lac Dore
Mining Inc. is a development stage mining and refining company that holds 443
contiguous mining claims for the Lac Dore vanadium/titanium deposit. The
deposit, which has never been in production, is located in the Rinfret and
Lemoine townships, approximately 43 miles from Chibougamau, Quebec, Canada. At
the time we acquired Lac Dore Mining Inc., we intended, subject to obtaining
sufficient funds, to build a mine and refinery at Lac Dore for the extraction
and production of high-purity vanadium compounds.
As more fully described above, we have deferred engaging in any material
developmental or operational activities in connection with the deposit. Even if
we determine to commence operational activities, we will not be able to do so
unless we are able to obtain funding to the extent described below.
When we first acquired an interest in the Lac Dore deposit, SOQUEM INC. owned 21
claims covering a portion of the deposit. SOQUEM is a division of SGF Mineral
Inc., which is a subsidiary of Societe Generale de Financement du Quebec, a
corporation owned by the Quebec government. In accordance with an option and
joint venture agreement between SOQUEM and Lac Dore Mining Inc., SOQUEM
transferred an undivided interest in the 21 claims to Lac Dore Mining Inc. in
exchange for 1,000,000 shares of our common stock and warrants to purchase a
like number of shares. SOQUEM did not exercise these warrants and the warrants
have expired.
17
In order to maintain our claims, we are obligated to expend varying amounts of
capital (a complicated formula combining the type of exploration work executed
and the claims on or near to which the work is conducted) or pay approximately
CDN $50,000 per year in claim renewal fees. In the event we fail to fulfill our
obligations, we will lose our claims.
We granted SOQUEM an option to purchase a 20% undivided interest in the Lac Dore
project if SOQUEM funded 20% of the capital expenditures for the Lac Dore
project. The option was to expire 60 days after we delivered to SOQUEM a
"bankable" feasibility study for the Lac Dore project, which we did not do.
SOQUEM had the right to receive back a 50% interest in its original 21 claims.
On April 17, 2003, SOQUEM relinquished any rights it had relating to the
deposits in exchange for 250,000 shares of our common stock.
We have undertaken certain preliminary developmental activities since we
acquired the mining claims for which we expended approximately $6,000,000.
Properties and Uses of Vanadium
Vanadium is a metallic element found in several minerals. Its natural structural
strength makes it useful in industrial and consumer applications, primarily as
an alloying agent for iron, steel and aluminum. Vanadium can act as a carbide
stabilizer, improving the strength and toughness, as well as the rust-
resistance, of steel. Vanadium's high melting point and high creep resistance
(resistance to shear crystals and deformation, resisted with vanadium as an
alloy in steel products) make it useful in a number of applications, including
components for nuclear reactors, aerospace material and aluminum and titanium
alloys.
Processed vanadium comes in varying types or "grades." Grades having less than
99.6% vanadium content are known as metallurgical-grade vanadium. Processed
vanadium with grades above that level are known as chemical or high-purity
vanadium.
According to Roskill, a metals industry periodical and recognized information
resource, more than 90% of world-wide vanadium production is in the form of
vanadium pentoxide and approximately 85% of annual vanadium pentoxide production
is in the form of metallurgical-grade vanadium pentoxide used for the production
of ferro-vanadium, a steel-vanadium pentoxide alloy. Vanadium pentoxide is a
strengthening agent and various amounts are added to steel depending on the
hardness and strength required. Vanadium pentoxide also is used in various
commercial applications, including ceramics, as a catalyst to produce certain
vitamins, for screening ultraviolet rays in glass and other materials, in dyeing
and printing of fabrics and in the production of sulphuric acid.
18
A developing application for high-purity vanadium compounds is energy storage
devices such as batteries. Batteries using vanadium may have the potential to
provide electricity from several configurations and for applications ranging
from powering cellular telephones to providing back-up power to electrical
grids. Although production of vanadium batteries has begun, the markets for
these batteries are in the early stages of development and there can be no
assurance that the markets will develop to the extent that the demand for high-
purity vanadium will significantly increase.
Vanadium Supply
Vanadium is produced through the mining and processing of ores, concentrates,
slag and petroleum residues. Five countries currently produce vanadium compounds
in commercial quantities: South Africa, the United States, Russia, China and
Australia. Vanadium production has historically positively correlated to the
worldwide economy, especially in those industries that are significant consumers
of steel, such as construction and automobile and appliance manufacturing.
South Africa is the single largest producer of vanadium and has traditionally
been the leading exporter of vanadium slag and vanadium pentoxide. United States
production of vanadium has focused on implementing recovery processes on
industrial waste, such as vanadium-bearing ferro-phosphorus slag, iron slag, fly
ash, petroleum residues and spent catalysts. Based on information available to
us, there are eight United States firms that either are currently recovering and
producing or have at one time recovered and produced vanadium and vanadium
compounds as well as vanadium-bearing chemicals.
Lac Dore Deposit Feasibility Study
A feasibility study is a comprehensive study of the economic potential of a
mining project. The study includes deposit geology, mining reserves, processing
methodology, waste material handling, equipment requirements, infrastructure
needs, environmental studies, market analysis, capital needs and projected
investment returns. The feasibility study which began in March 2001 was
conducted by SNC Lavalin Inc., an engineering firm headquartered in Montreal,
Quebec. We funded $1.17 million of the cost of the study and the balance of
the cost of $1.1 million was funded by federal and provincial agencies in
Canada in the form of loans and grants. Reference is made to Note 5 to Notes to
Consolidated Financial Statements included elsewhere in this Annual Report for
a description of the terms of the Canadian funding.
The feasibility study was based upon producing a high-purity vanadium material
to be used in an electrolyte solution that would serve as the energy storage
material for a battery being developed by Sumitomo Electric Industries Ltd.
called the vanadium redox battery. We provided a sample of vanadium material
extracted from our deposit to Sumitomo for analysis. Sumitomo confirmed that the
vanadium material sample was acceptable for use in its vanadium redox battery,
although Sumitomo has not purchased or agreed to purchase any vanadium material
from us. We believe that the economic viability of the deposit is dependant
upon, among other things, substantial production and sales by others of vanadium
redox batteries. We do not believe that any vanadium redox batteries are
presently being produced or sold.
19
SNC Lavalin Inc. completed the feasibility study in April 2002. Although the
analysis of the data considered during a feasibility study is subject to a
number of interpretations and the study involves a number of subjective
decisions, we have been encouraged by the results of the feasibility study. The
feasibility study, however, is not a "bankable" study for purposes of the
agreement with SOQUEM because we have not secured contracts for the sale of the
high-purity vanadium compounds that may be produced at Lac Dore.
The feasibility study concluded that analysis of the Lac Dore project would be
economically feasible if we could sell vanadium electrolyte for a beginning
price of approximately $2.35 per liter, declining over time to approximately
$1.50 per liter. We are not aware of any market for vanadium electrolyte and
there can be no assurance that a market will ever exist or that the price per
liter will be within the parameters set out in the feasibility study.
The feasibility study estimated that the initial capital cost of the Lac Dore
project would be approximately $260 million. Since the feasibility study was
completed, however, we have added other high-purity vanadium products to the
expected production mix necessitating a change in the equipment that would be
required at Lac Dore. The change in equipment would increase the initial capital
cost by approximately $20 million. The feasibility study also concluded that
the Lac Dore project would incur annual operating costs of $50 million and would
incur substantial operating losses during the first two years of production.
Competition
According to Roskill, the largest producer of vanadium-bearing ore is Anglo
American plc, through its Highveld vanadium deposit located in South Africa.
Highveld is the largest known vanadium deposit in the world. Anglo American has
produced vanadium electrolyte for a vanadium redox battery installation. Because
of Anglo American's significantly greater technical and financial resources,
Anglo American may have the ability to improve and price its electrolyte at
prices with which we could not compete. We believe that the only other
significant ore-producing vanadium deposit is Windimurra, owned by Xstrata AG,
located in Australia. Another company currently producing high-purity vanadium
products in commercial quantities is Strategic Minerals Corporation. Based in
the United States, Strategic Minerals Corporation has operations in Hot Springs,
Arkansas and South Africa
The most common method of recovering vanadium from industrial waste involves
steel slag, which is a by-product of steel production. Steel slag contains
vanadium pentoxide, which is removed and converted to different forms of
vanadium product. Currently, there are two South African producers and one
Australian producer, each owned by Xstrata AG, which recover vanadium
exclusively in this manner. Vanadium also is recovered from direct conversion of
ore and can be recovered from power plant ashes, residues and spent catalysts. A
number of companies recover vanadium using these methods.
20
If we begin development and commercialization of our Lac Dore deposit, we will
compete with other larger, more established mining companies with significantly
greater technical and financial resources. In addition, vanadium is an
accessible commodity product and other competitors could enter the market and
effectively compete with us.
Research, Development and Exploration
If we begin development and commercialization of our Lac Dore deposit, our
success will depend, in substantial part, on our ability to respond quickly to
changing technology, market demands and the needs of its future customers. We
have committed significant resources to research, development and exploration
activities. Our recent research, development and exploration expenditures have
primarily related to completion of the feasibility study and the development of
proprietary processes in connection with our laboratory-scale pilot plant. Our
research, development and exploration expenses related to Lac Dore were
approximately $915,000, $2.1 million and $1.0 million for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively.
We intend to continue the development of vanadium refining technologies at a
cost of approximately $1.4 million. A portion of the cost includes the
operating costs associated with a sample product unit constructed by SGS
Lakefield Research, at their facility in Lakefield, Ontario Canada, to produce
customer samples of various vanadium chemicals and continue research and
development on additional possible products. We may receive approximately
$400,000 in loans from Canadian governmental sources. As is the case with our
other proposed business activities, unless we can obtain sufficient capital we
will not be able to proceed with our research and development program.
Governmental and Environmental Regulations
Impact Assessment Process
The Lac Dore project is subject to the environmental and social impact
assessment and review procedures under the Quebec Environment Quality Act, the
James Bay and Northern Quebec Agreement and the Canadian Environmental
Assessment Act. These acts are administered by separate provincial and federal
governmental agencies that have the separate authority to approve or require
changes to a company's impact assessment. Notwithstanding this separate
authority, these federal and provincial governmental agencies generally attempt
to coordinate their review and approval procedures.
In May 1999, Groupe-conseil Entraco filed a project notice with the Quebec
Environment Ministry on our behalf. In June 2000, the Ministry issued its
guidelines (which state the nature, size and scope of the impact assessment) in
accordance with the Quebec Environment Quality Act. The Ministry's guidelines
are valid for a period of three years.
21
An additional project notice was issued during Summer 2002 under the Quebec
Environment Quality Act for equipment located within the territory of the
Domaine du Roy Regional municipality. This additional project notice is covered
by the Ministry's guidelines issued in June 2000.
The review processes undertaken by each provincial and federal governmental
agency are extensive and approval of our impact assessment by each agency could
take up to 18 months. If approved, we will receive a certificate of
authorization. Although we believe that we will ultimately receive a certificate
of authorization, we cannot accurately predict how long the governmental-
approval process will take. In addition, it is common for a certificate of
authorization to be conditioned on the application meeting certain additional
requirements. The Lac Dore project also must comply with the Canadian Fisheries
Act; the Guide for the Administration of Fish Habitats from Fisheries and Oceans
Canada; and the Liquid Effluent from Metal Mining Regulation.
We filed the Lac Dore Environmental Impact Study with the provincial Quebec
Environment Ministry and Canadian federal Fisheries and Oceans Canada bodies on
June 25, 2003.
Quebec Mining Act
Any future mining at the Lac Dore deposit must comply with the provisions of the
Quebec Mining Act and Guideline No. 19 applicable to the mining industry. Under
the Quebec Mining Act, the operator of Lac Dore must file a mining site
rehabilitation plan with the Natural Resources Ministry. This rehabilitation
plan discusses how the operator intends to rehabilitate the property following
its intended use of the property and includes an estimate of the costs involved
in the rehabilitation. If the rehabilitation plan for Lac Dore is approved by
the Natural Resources Ministry, we will be required to put in trust an amount
equal to 70% of the estimated costs to rehabilitate the site.
In addition, we must obtain three types of mining rights from the Natural
Resources Ministry:
- - Mining rights for all mining facilities, with mandatory land surveys;
- - Rights of the surface estate; and
- - Rights for facilities other than those required for mining purposes (for
example, lease for storage of explosives, buildings not related to mining).
Finally, the operator of Lac Dore must obtain permits and distribution rights-
of-way from the Natural Resources Ministry for the construction of the access
roads and power lines.
22
Other Requirements
We will be required to comply with other provisions of the Quebec Environment
Quality Act, including standards related to protection of the soil and water and
air quality. Vanadium is considered an "unconventional" contaminant for purposes
of the Act. Accordingly, the acceptable standards for vanadium criteria are not
set forth in the Quebec Environment Quality Act, but instead are determined in
the discretion of the Quebec Environment Minister.
The feasibility study estimated that, once Lac Dore is operational, the annual
cost of complying with provincial and federal governmental and environmental
regulations will be in the approximate range of $80,000 to $240,000. The
amounts are based on Bank of Canada inflation calculator and current exchange
rate, rounded up to next even thousand.
Employees
On March 31, 2004, we had 7 full time employees and 3 part time employees.
Subject to obtaining sufficient capital, we intend to hire a controller, an
administrative assistant, a project manager, two engineers and a bookkeeper. We
believe that such personnel will be readily available at reasonable rates of
compensation.
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
OUR COMMON STOCK
This Annual Report contains statements which, to the extent they are not
recitations of historical fact, constitute forward-looking statements within the
meaning of federal securities law. The words believe, estimate, anticipate,
project, intend, expect, plan, outlook, scheduled, forecast and similar
expressions are intended to identify forward-looking statements. Statements and
assumptions with respect to future revenues, income and cash flows, program
performance, the outcome of litigation, environmental remediation cost estimates
and planned dispositions of assets are examples of forward-looking statements.
Numerous factors, including potentially the risk factors described in this
section and elsewhere in this Annual Report, could affect our forward-looking
statements and actual performance.
An investment in our common stock involves very substantial risks. Investors
should consider carefully the following information about these risks, together
with the financial and other information, including risks, described elsewhere
in this Annual Report. If any of these risks actually occur, our business,
financial condition and results of operations would likely suffer materially.
BECAUSE WE HAVE NO OPERATING HISTORY, THERE IS NO BASIS ON WHICH YOU CAN
EVALUATE OUR PROPOSED BUSINESS AND PROSPECTS. We are in the development stage
and have no operating history related to our proposed business activities.
Prospective investors customarily consider a company's operating history as a
factor in determining whether to make an investment. Prospective investors who
decide to purchase our shares may decide not to purchase the shares if they had
an operating history to review.
23
WE HAVE HAD LOSSES SINCE INCEPTION AND EXPECT LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE. We incurred net losses of $3,692,392, $5,970,574 and
$4,933,244 during the fiscal years ended September 30, 2003, 2002 and 2001,
respectively. Since our inception through September 30, 2003, we have incurred
aggregate net losses of $18,378,745. Any future operations may not be
sufficient to generate the revenues necessary to reach profitability.
BECAUSE OF OUR LIMITED CAPITAL, UNLESS WE OBTAIN SUBSTANTIAL ADDITIONAL CAPITAL
WE MAY NOT HAVE SUFFICIENT CAPITAL TO ENGAGE IN OUR PROPOSED BUSINESS ACTIVITIES
OR TO CONTINUE AS A GOING CONCERN.
We do not have adequate capital to further fund or develop our proposed business
activities. Although we have been and are currently seeking funding, there can
be no assurance we will obtain adequate funding, if any, or that the terms of
any such funding will not be unfavorable to us. We have not received any
unconditional commitment for funding. Our ability to engage in the business
activities described below is dependant upon our acquisition of significant
funds.
In order for us to engage in continuous improvement and marketing of DWTs and
WindStor energy systems, we will require additional capital of approximately $6
million (excluding $900,000 in grant and loan funding anticipated from Federal,
Provincial and local financial sources in Canada). In order for us to proceed
with the exploitation of the Lac Dore deposits, we will require additional
capital of at least $330 million. There can be no assurance that our capital
estimates are not too low.
Neither we nor our subsidiaries will be able to continue development and
administrative functions for more than a few months unless substantial
additional funding becomes available.
The auditor's report on our consolidated financial statements for the year ended
September 30, 2003 states that the Company suffered recurring losses and has a
deficiency in assets that raise substantial doubt about the our ability to
continue as a going concern.
ALTHOUGH WE INTEND TO OBTAIN ADDITIONAL CAPITAL PRIMARILY THROUGH THE SALE OF
EQUITY SECURITIES TO BE ISSUED BY US, WE CANNOT ASSURE YOU THAT ADDITIONAL
FINANCING WILL BE AVAILABLE ON TERMS NOT UNFAVORABLE TO US, IF AT ALL.
Historically, it has proven difficult and very often impossible for development
stage companies to obtain adequate financing on any terms.
IF WE RAISE ADDITIONAL FUNDS THROUGH THE ISSUANCE OF OUR EQUITY SECURITIES, THE
PERCENTAGE OWNERSHIP OF OUR STOCKHOLDERS WILL BE REDUCED AND STOCKHOLDERS MAY
EXPERIENCE DILUTION WHICH COULD SUBSTANTIALLY DIMINISH THE VALUE OF THEIR COMMON
STOCK. One of the factors which generally affects the market price of
publicly traded equity securities is the number of shares outstanding in
relationship to assets, net worth, earnings or anticipated earnings and other
financial items. If a public market is sustained for our shares, a material
amount of dilution can be expected to cause the market price of our shares to
decline. Furthermore, the public perception of future dilution can have the
same effect even if the actual dilution does not occur.
24
WE MAY HAVE INCURRED SIGNIFICANT CONTINGENT LIABILITIES THROUGH OFFERS AND SALES
OF OUR EQUITY SECURITIES. During the period of October 1, 2002 to March 31,
2004, we issued 2,463,507 shares of our common stock. 1,597,115 shares of our
common stock were issued at prices ranging from $0.77 per share to $2.50 per
share. The weighted average price per share was $0.95. During the same period,
we also exchanged shares for debt owed by us, issuing 541,392 shares for the
equivalent of approximately $0.70 per share, issued 75,000 shares in exchange
for services for an equivalent of approximately $0.93 per share, and sold
options and warrants to purchase an aggregate of 10,975,252 shares of our common
stock at exercise prices ranging from $1.00 to $3.00 per share. We also sold
250,000 shares in exchange for a 20% option held by SOQUEM Inc. for the Lac Dore
deposit. Because we may not have complied with applicable securities laws in
connection with the offer and sale of securities during the period, as well as
prior periods, we could incur civil, administrative and criminal liabilities
and we could be required to refund the purchase price, plus interest.
IF WE VIOLATED CERTAIN SECURITIES LAWS, WE MAY NOT NOW BE ABLE TO PRIVATELY
OFFER OUR EQUITY SECURITIES FOR SALE. Any offering of our equity securities in
or from the United States must be registered with the SEC or be exempt from
registration. If our prior offers and sales were not exempt from registration,
it is likely that they would be deemed integrated with future offerings unless
we do not offer equity securities for at least six months. In the event of such
integration, we would only be permitted to offer and sell equity securities
after we file a registration statement with the SEC and the registration
statement has become effective. The registration process is both expensive and
can be expected to take at least several months and would substantially hinder
our efforts to obtain funds.
BECAUSE OUR PROPRIETARY TECHNOLOGIES PROCESSES MAY PROVE INEFFECTIVE OR
UNFEASIBLE, WE ARE UNABLE TO DETERMINE IF OUR ENGINEERING AND TEST RESULTS CAN
BE DUPLICATED IN COMMERCIAL PRODUCTION. We intend to rely heavily on the
success of our proprietary technologies. We have conducted and plan to continue
to conduct limited laboratory and practical testing of the technologies. If our
proprietary technologies ultimately prove ineffective or unfeasible, we may not
be able to engage in commercial production of our products or we may become
liable to our customers in amounts that we will be unable to sustain.
WE HAVE NOT BEEN ISSUED ANY PATENTS AND WILL NOT FILE FOR PATENTS ON CERTAIN
CAPABILITIES AND PROCESSES THAT WE CONSIDER INTELLECTUAL PROPERTY. In the
absence of patent protection, similar technology could be developed
independently by a third party which could materially harm us. Alternatively, if
we successfully established a commercially viable position in any market, third
parties may independently develop similar technology which could undercut our
market position, particularly if the third party has greater experience and
resources than do we. In addition, any measures that we may take to protect our
technology may prove inadequate, which could result in the eventual use of our
proprietary technology by competitors.
25
If our proprietary technologies are successful, current and new competitors
could enter the market(s). The success of these technologies would generate
greater interest, which would likely lead to increased competition. Increased
competition would lessen the benefits we may derive from our proprietary
processes.
IF WE FAIL TO OBTAIN NEEDED GOVERNMENTAL APPROVALS OR ENCOUNTER SIGNIFICANT
DELAYS IN OBTAINING OR RENEWING GOVERNMENTAL PERMITS OR APPROVALS, WE MAY NOT BE
ABLE TO ENGAGE IN OUR PROPOSED BUSINESS ACTIVITIES. Although we have not
experienced difficulty in obtaining governmental approvals that we have needed
to date, obtaining further necessary permits and approvals could be a complex
and time-consuming process involving numerous local, state, provincial and
federal agencies. The duration and success of each permit and/or approval effort
may be contingent on many variables not within our control, such as new permit
requirements or a change in governmental policy or government leadership. There
can be no assurance that governmental permits and/or approvals will be issued
and/or retained or be issued without conditions that could materially harm our
business operations.
Compliance with laws and regulations may require significant capital outlays or
delays, which may negatively affect operations or may cause material changes or
delays in our intended operations. Further, new or different standards
(environmental or otherwise) imposed by governmental authorities in the future
could materially harm our business operations.
In addition, governmental regulations may negatively impact us indirectly. For
instance, wind turbine site locations and products using high-purity vanadium
may become subject to new regulations. These regulations may curb the market
appeal for our products if the regulations make the purchase or use of such
products so expensive or complex that other products gain a competitive
advantage because they are not subject to such regulatory constraints and are
therefore less expensive or less burdensome to purchase or use. It is difficult
to predict whether new governmental regulations will arise and what form these
regulations will take.
BECAUSE THERE HAS NOT BEEN AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK, AN
INVESTMENT IN THE STOCK IS LESS LIQUID AND INVOLVES INHERENTLY MORE RISK THAN
ARE SECURITIES THAT ARE ACTIVELY TRADED. Our common stock is listed for trading
on the National Quotation Bureau's "Pink Sheets". Trading in our stock must be
done on a manual basis which involves time delays in executing orders. Unlike
securities listed on an exchange or quoted for trading on Nasdaq, a client order
to purchase or sell shares of our common stock is not protected by "order
handling rules" of the SEC. These order handling rules seek to prevent market
makers from trading ahead of client limit orders and also require market makers
to display limit orders that are priced more favorably than the inside market to
ensure that client trades are executed within the inside bid and offer for the
security.
26
THE ABILITY TO SELL SHARES OF OUR COMMON STOCK IN A PUBLIC MARKET MAY BE
SIGNIFICANTLY IMPAIRED BY THE SEC'S PENNY STOCK RULES. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules. In addition the burdens
imposed upon broker dealers by the rules may discourage broker dealers from
effecting transactions in our common stock, which could severely limit its
liquidity.
BECAUSE OF THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK BY A SMALL NUMBER
OF STOCKHOLDERS, IT IS UNLIKELY THAT ANY OTHER HOLDER OF COMMON STOCK WILL BE
ABLE TO AFFECT OUR MANAGEMENT OR DIRECTION. On March 31, 2004, our directors,
officers and certain of their affiliates may be deemed to beneficially own
approximately 55 % of our outstanding common stock. Accordingly, if these
stockholders act together as a group, they would most likely be able to control
the outcome of stockholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in our certificate of
incorporation and bylaws and the approval of significant corporate transactions.
The existence of ownership concentrated in a few persons may have the effect of
delaying or preventing a change in management or voting control.
CERTAIN STOCKHOLDERS HAVE THE RIGHT TO REQUIRE US TO REPURCHASE THEIR SHARES FOR
A MAXIMUM AMOUNT OF APPROXIMATELY $252,000 WHICH COULD MATERIALLY, ADVERSELY
AFFECT OUR FINANCIAL POSITION. The existence of the repurchase rights may,
among other things, also impair our ability to obtain funds.
BECAUSE NONE OF OUR OFFICERS HAS HAD ANY PRIOR EXPERIENCE IN OUR PROPOSED
BUSINESS ACTIVITIES, THEIR JUDGMENT MAY NOT BE SOUND.
27
BECAUSE WE ARE IN ARREARS IN THE PAYMENT OF SALARIES TO OUR EXECUTIVE OFFICERS
AND EMPLOYEES OF OUR SUBSIDIARIES, ANY OR ALL OF THEM MAY RESIGN AND WE MAY BE
LIABLE FOR ADDITIONAL PAYMENTS IN WHICH CASE WE COULD BE MATERIALLY ADVERSELY
AFFECTED. Our employment agreements with our executive officers provide that if
we breach any provision of a respective agreement and the breach is not cured by
us within 15 days after receipt of written notice of the breach, the officer
shall be entitled to receive his base salary for a period of three years and all
other rights and benefits the employee may have under our senior executive
benefit, bonus and/or stock option plans and programs shall be determined in
accordance with the terms and conditions of such plans and programs. In
addition, any of our executive officers may voluntarily terminate his employment
with us at any time on at least 30 days prior written notice to us and shall
then be entitled to receive his base salary until the date his employment
terminates and certain other benefits.
BECAUSE OUR BUSINESS PLAN IS HEAVILY DEPENDENT ON THE SUCCESS OF NEW AND UNTRIED
PRODUCTS SUCCESSFULLY ENTERING THE MARKET PLACE, WE CAN NOT BE SURE THAT THEY
WILL PERFORM AS WE ANTICIPATE.
ALTHOUGH WE PLAN ON MAINTAINING COMMERCIAL INSURANCE TO REDUCE SOME OPERATING
HAZARD RISKS, SUCH INSURANCE MAY NOT BE AVAILABLE TO US AT ECONOMICALLY FEASIBLE
RATES, IF AT ALL.
TECHNOLOGICAL ADVANCES BY OTHERS COULD MAKE OUR PRODUCTS OBSOLETE.
BECAUSE WE PLAN TO RELY ON INDEPENDENT THIRD-PARTY MANUFACTURERS TO FABRICATE
THE DWT AND WINDSTOR PRODUCTS, SUPPLIER CAPACITY, SHORTAGES IN NECESSARY RAW
MATERIALS, WORK STOPPAGES AND TRANSPORTATION PROBLEMS COULD MATERIALLY,
ADVERSELY AFFECT OUR BUSINESS. Any delay in initiating production at third-
party facilities, any inability to have new products manufactured at these
facilities or any failure to meet our customers' demands could damage our
relationships with our customers and may decrease our sales.
RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND REGULATIONS HAVE
AND WILL CONTINUE TO INCREASE OUR ACCOUNTING AND LEGAL COSTS. The Sarbanes-
Oxley Act of 2002 that became law in July 2002 required changes in some of our
corporate governance practices. The Act and rules promulgated by the SEC have
increased our legal and financial compliance costs and made some activities more
difficult, time consuming and more costly.
ITEM 2. DESCRIPTION OF PROPERTY.
Location of and Access to the Lac Dore Deposit
The Lac Dore deposit is located approximately 70 kilometers southeast of the
city of Chibougamau, in the Rinfret and Lemoine townships of northern Quebec.
The deposit is approximately five kilometers south of Chibougamau Lake, which is
in a low, flat ground area, 380 meters above sea level. The deposit is
accessible by road from national highway 167, which is paved and links
Chibougamau to the Lac St-Jean area. At kilometer 200 on national highway 167,
approximately 32 kilometers south of Chibougamau, forest road 210, a dirt road,
leads approximately 35 kilometers east to the deposit and the main exploration
workings. The area has been clear-cut of wood, and, accordingly, provides good
access by four wheel drive vehicles to the various outcrops of the deposits.
28
The Chibougamau/Chapais area has a well-developed infrastructure to support
mining projects, including transportation, a well-trained labor force, service
and maintenance industries and an airport. Lac Dore is approximately 35
kilometers from Hydro-Quebec's Chibougamau electricity substation.
History of Exploration and Geology at Lac Dore
Lac Dore is expected to be an open-pit mine. The deposit has never been in
commercial production. All activity on the deposit to date has been exploration.
A chronology of work on Lac Dore follows:
Historical Deposit Work at Lac Dore
In 1954, the Lac Dore deposit was discovered by an airborne geophysical magnetic
survey. The property was first staked and owned by Dominion GULF Company.
Between 1966 and 1975, the Ministere des Richesses Naturelles du Quebec (the
"Quebec Ministry") staked the property and conducted a series of tests for
vanadium content. In 1977, SOQUEM took over the exploration activities at Lac
Dore from the Quebec Ministry. SOQUEM subsequently carried out detailed
geological mapping, geophysical surveys and a drilling program. In 1983, SOQUEM
reduced the claimed area to 21 claims by allowing its other claims to expire.
Lac Dore Mining Inc. Activities
Beginning in 1996, Lac Dore Mining Inc. began to acquire claims covering
portions of the Lac Dore deposit. In 1997, Lac Dore Mining Inc. purchased 21
claims over a five kilometer strike length of the Lac Dore deposit from SOQUEM.
Lac Dore Mining Inc. currently owns 443 claims. The total cost for acquiring the
443 claims was approximately $113,000, 1,350,000 shares of our common stock and
warrants to purchase 1,000,000 shares of our common stock at CDN $2.00 per
share.
In 1998, Cambior inc., an international mining company, acquired an option from
Lac Dore Mining Inc. to receive a 60% interest in Lac Dore in exchange for
funding 60% of the costs related to developing the deposit. In 1999, Cambior did
extensive verification and audit work at Lac Dore. In 2000, Cambior terminated
its work on the Lac Dore deposit and its option expired.
In April 2001, Lac Dore Mining Inc. engaged SNC-Lavalin Inc. to carry out a
feasibility study of the Lac Dore deposit. SNC-Lavalin reviewed the existing
data, validated the database and drilled additional test holes, all with respect
to the 21 claims acquired from SOQUEM. SNC-Lavalin also organized its own
database and resource block model. In April 2002, SNC-Lavalin completed the
feasibility study and issued its report. SNC-Lavalin estimated that the portion
of the deposit covered by the 21 claims consists of 102 million tons of in-place
mineralized material at 35% magnetite, 17.4% ilmenite and 0.5% vanadium
pentoxide.
29
Topography & Geology
The topography was carved by glaciers more than 10,000 years ago. The deposit,
which is hosted in plutonic rocks, outcrops in a series of west-southwest
rolling hills, some 100 to 150 meters higher in elevation.
There is little dirt or cover on the bedrock in the deposit area, making
geological mapping easier. Vegetation is bushy, typical of harvested forest, and
the rocky surface is rugged.
The Lac Dore property hosts a large deposit containing titanium, a type of
deposit also found in South Africa and other parts of the world, with
Precambrian shield rocks. The deposit is made up of a stratified series of
magnetite beds with ilmenite and amalgamated vanadium, known to outcrop over 17
kilometers on the south shore of Lake Chibougamau and also the north shore, some
25 kilometers away, on either side of the Chibougamau anticline.
Claims
Lac Dore Mining Inc. acquired its 443 claims in Lac Dore by purchasing claims
from third parties and staking claims for itself. We believe that Lac Dore
Mining Inc. has satisfactory title to its claims in accordance with industry
standards and applicable laws and regulations.
A claim is an area of land and/or water "claimed" by a prospector or mining
organization for the purpose of exploring the claim for a certain length of time
and subject to certain conditions as set out by a particular province in Canada.
The claim is staked out physically or by computerized map designation and
recorded in an appropriate provincial claims office. The size of a claim is 40
acres (16.2 hectares).
The claim is the only valid exploration right in Quebec for all kinds of mineral
substances in the public domain. Each claim gives the holder an exclusive right
to search for mineral substances, except sand, gravel, clay and other loose
deposits, on the land subjected to the claim. The claim also guarantees the
holder's right to obtain an extraction right upon the discovery of a mineral
deposit.
The term of a claim is two years from the day the claim is registered, and a
claim can be renewed indefinitely providing the holder meets all the conditions
set out in the Quebec Mining Act, including the obligation to invest a minimum
amount in exploration work determined by regulation. The act includes provisions
to allow any amount disbursed to perform work in excess of the prescribed
requirements to be applied to subsequent terms of the claim. The claim holder
may renew title for rolling two-year periods. To renew a claim, a holder must
submit a renewal application no later than 15 days after a claim expires and pay
the required fees. Renewal costs depend on the date that an application is
received, the title location and surface area and the value of the work
performed on the property during the claim period.
30
In order to maintain our claims, we are obligated to expend varying amounts of
capital (a complicated formula combining the type of exploration work executed
and the claims on or near to which the work is conducted) or pay approximately
CDN $50,000 per year in claim renewal fees. Eligibility of work-related expenses
are defined by regulations and excess value of work can be used to renew claims
within a 3.2 kilometers square area where work was not performed and/or for
future renewal.
Lac Dore is located south of the 52nd parallel, which has different claim
renewal costs than properties located north of that point. Area size also
determines claim cost. Cost of claim renewal ranges from CDN $22 up to $330, per
claim, if more than 100 hectares and depending upon renewal date payment. Work
values must be at least CDN $500 to $3,600, per claim, depending upon hectares
claimed and the location of the claims. The cost of claim renewal also can vary
widely depending on the amount and location of work done on and near a subject
claim.
Our principal executive office which consists of approximately 400 square feet
is located at 975 Spaulding Avenue SE, Grand Rapids, Michigan 49546. The office
is leased at a monthly rental of $225. The lease is month-to-month. We do not
maintain any other offices outside of home offices, for which no rental is
currently paid by us. We believe our employees and proposed future operations
are and will be located in areas in which additional office space can be
obtained, if needed, at reasonable rates. We do not expect to lease or
otherwise acquire any additional facilities during the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceeding that primarily involves a
claim for damages and the amount involved in such proceeding, exclusive of
interest and costs, exceeds 10% of our current assets nor is any of our property
the subject of such a pending legal proceeding. We are not aware of any such
proceeding that a governmental authority is contemplating.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the quarter ended September 30, 2003 to a vote of
our security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is principally traded in the over-the-counter market. The
trading market is limited and sporadic and should not be considered to
constitute an established trading market. The following table sets forth the
range of high and low bid prices for the common stock for the fiscal quarters
indicated. The common stock is listed in the "Pink Sheets." The following
quotations were obtained from BarChart.com.
31
All quotes reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
2003 2002
Quarter Ended Low High Low High
----- ------- ------- ------
December 31 $ 0.57 1.65 $ 1.10 $ 1.85
March 31 0.93 1.70 1.05 2.45
June 30 0.71 1.10 2.00 3.30
September 30 0.75 2.25 1.20 2.43
On March 31, 2004, our common stock was held of record by approximately 320
holders.
We have never paid dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. We intend to retain any earnings for
the operation and expansion of our business. Other than financial ability, we
have no legal, contractual or corporate constraints against the payment of
dividends.
The following information relates to equity securities we sold during the fiscal
year ended September 30, 2003 that were not registered under the securities Act
of 1933.
- - From October 1, 2002 to April 30, 2003 we sold 660,438 shares of common stock
to forty-two private investors upon exercise of outstanding warrants for
approximately $547,000.
- - During November 2002, we sold 125,000 shares and warrants to purchase a like
number of shares at $2.00 per share to three private investors for approximately
$100,000.
- - On November 1, 2002, we granted options to purchase 250,000 shares of common
stock to a new employee in exchange for services to be rendered to us. The
options are exercisable until November 1, 2009 in varying quantities, based upon
milestone achievements, and at varying prices ranging form $1 to $1.30 per
share.
- - During December 2002, we sold 98,100 shares and warrants to purchase a like
number of shares at $2.00 per share to five private investors for approximately
$86,614.
- - On December 9, 2002, we granted options to purchase 200,000 shares of common
stock to four of our directors in exchange for prior period services. The
options are exercisable until September 30, 2007 at $1.00 per share.
32
- - On December 9, 2002, we granted options to purchase 310,417 shares of common
stock to six of our directors in exchange for services rendered to us. The
options are exercisable until September 30, 2012 at $1.00 per share.
- - On December 9, 2002, we granted options to purchase 150,000 shares of common
stock to three employees in exchange for services rendered. The options are
exercisable until September 30, 2007 at $1.00 per share.
- - On January 1, 2003, we granted options to purchase 1,000 shares of common
stock to a private investor in exchange for services. The options are
exercisable until January 1, 2005 at $2.00 per share.
- - On January 6, 2003, we granted options to purchase 250,000 shares of common
stock to a new employee in exchange for services to be rendered. The options
are exercisable until January 6, 2010 in varying quantities, based upon
milestone achievements, at varying prices ranging $1 to $1.30 per share.
- - On February 11, 2003, we granted options to purchase 175,000 shares of common
stock to the five directors of the McKenzie Bay Resources Ltd in exchange for
services rendered. The options are exercisable until February 10, 2113 at $1.50
per share.
- - On February 14, 2003, we sold 7,937 shares of common stock and warrants for
the purchase of a like number of shares, and options for the purchase of 7,500
shares to a private investor, for approximately $10,000. The warrants and
options are exercisable until February 14, 2005 at $2.00 per share.
- - On February 14, 2003, we issued 5,492 shares of common stock to an account
creditor in exchange for cancellation of indebtedness of approximately $7,168.
- - On February 18, 2003 and July 1, 2003, we issued an aggregate of 71,551 shares
of common stock to two individuals in exchange for the cancellation of their
right to require us to repurchase an aggregate of 40,000 shares of our common
stock from them at $2.75 per share.
- - On April 4, 2003, we issued options to purchase 300,000 shares of common stock
to a consultant in exchange for services to be rendered to us. The options are
exercisable until April 13, 2013 in varying quantities, based upon milestone
achievements, at $1.00 per share.
- - On April 17, 2003, we issued 250,000 shares of common stock to SOQUEM Inc. in
exchange for the option to purchase a 20% undivided interest in our Lac Dore
deposits then held by SOQUEM.
- - On May 14, 2003, we issued 20,000 shares of common stock at the direction of
Larson, Harms and Bibeau, P.C. in exchange for legal services provided to us
which we valued at approximately $17,100. Reference is made to the response to
Item 12 of this Annual Report.
33
- - On July 3, 2003, we issued 75,000 shares of common stock to one individual in
exchange for investor-relations services provided to us which we valued at
approximately $70,000.
- - On August 15, 2003, we sold options to 32 private investors to purchase
476,200 shares of common stock for approximately $23,400. The options are
exercisable until August 15, 2005 at $1.00 per share.
- - On August 15, 2003, we issued options to three private investors to purchase
7,776,500 shares of common stock for an approximate value of $527,700, comprised
of the cancellation of the investors' right to require us to repurchase an
aggregate of shares 537,237 of our common stock from them at prices ranging from
$.61 to $3.25 per share, the cancellation of warrants expiring on November 28,
2003 and September 28, 2004 for the purchase of 595,239 shares at prices ranging
from $1.43 to $3.00 per share and a note receivable for $9,350. Options for the
purchase of 137,500 shares are exercisable until August 15, 2005 and the balance
until August 15, 2008, at $1.00 per share.
- - On August 15, 2003, we issued 515,900 shares of common stock to two creditors
in exchange for the release of indebtedness of approximately $356,400.
- - On August 20, 2003, we sold 109,000 shares of common stock and warrants to
acquire 54,500 shares of common stock to a private investor for approximately
$99,190. The warrants are exercisable until August 19, 2005 at $2.41 per share.
There were no principal underwriters in connection with any of the foregoing
transactions.
We claimed exemption from registration provisions of the Securities Act of 1933
pursuant to Section 4(2) thereof and/or Rule 506 thereunder. Although we
believed that the transactions did not involve a public offering and that each
purchaser either received adequate information about us or had access, through
employment or other relationships, to such information, the exemptions may not
have been available to us.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Development of WindStor
We anticipate that, with adequate funding, we can complete engineering and
development of the DWT and WindStor, construct and install prototypes of each
and, assuming successful operation of the prototypes, begin commercial
installations of WindStor in 2004.
34
We believe that we will require additional funds of approximately $1.2 million
to complete development and construct, install and test the DWT and WindStor and
begin a marketing program. We have received conditional commitments from
Canadian governmental agencies for an additional $330,000 in non-refundable
grants and loans of $590,000. Because we do not know if we can satisfy the
conditions, we do not know if we will receive any of the additional funds. We
have received no commitments for the balance of the requisite funds and there
can be no assurance that we will be successful in obtaining those funds. If we
do not obtain all of the requisite funds, we will not be able to produce or sell
any DWTs.
We intend to retain ownership of the WindStor installations and sell the
electricity generated by DWTs to WindStor users. We believe, with successful
testing of WindStor, that WindStor installations will provide adequate cash flow
to allow for debt to be a component of each installation's financial structure.
We will, however, require significant amounts of funds in order to install
WindStor and for general and administrative expenses. If we are successful in
obtaining funds to be utilized in connection with WindStor, we intend to
allocate them as follows:
DWT & WindStor marketing $5,700,000
DWT Prototype design, construction and installation 1,200,000
Operating requirements 9,000,000
----------
TOTAL $15,900,000
===========
Four entities have expressed interested in commercial installations of WindStor.
Prior to any installation of WindStor, we and each prospective customer must be
satisfied that adequate wind power exists at the respective location to provide
sufficient electricity production from a DWT to create an economically feasible
WindStor facility. While wind testing is being conducted, zoning, permitting
and site location issues will be addressed. If wind power is sufficient, all
regulatory issues are resolved, site plans are approved, we are able to obtain
adequate financial resources, we successfully obtain working prototypes and
pricing terms are agreed upon by prospective customers, we intend to begin to
install WindStor.
35
Development of Lac Dore Mining Inc.
If funding becomes available during the fiscal year ending September 30, 2004,
we intend to continue research and development of the vanadium recovery and
refining technology developed for McKenzie Bay during the feasibility study of
the Lac Dore deposit. The next planned step is operation of a Sample Product
Unit (SPU) planned for construction by SGS Lakefield Research at their
facilities in Lakefield, Ontario, Canada. This facility would be used to
advance vanadium refining processes and produce and provide small samples of
high-purity vanadium chemicals to potential customers.
The planned cost to operate the SPU is $1 million over a 16-month period.
Although grants and/or loans may be available to us for part of the cost, we
have not assumed or relied upon their availability.
If results from the SPU project are successful and demand for the chemicals
provided to potential customers of Lac Dore Mining Inc. are sufficient to
warrant additional development, we intend to build a larger production facility,
called the Development Production Pilot Plant (DPPP). If feasible and also
largely dependent upon adequate funding being available, this project would take
place after the end of the fiscal year ending September 30, 2004. The cost to
build the DPPP has been estimated to be approximately $10 million.
Our plans for Lac Dore are dependent upon a number of events coming together
successfully, including, but not limited to, an adequate demand for high-purity
vanadium, our ability to raise between $280 and $350 million to build and
operate the mine and refinery, our ability to find and hire management and
employees to operate the mine and refinery and successful permitting of the mine
and refinery to be built and operated. At a minimum, we believe contemplation
of the building of Lac Dore is several years into the future.
Cash Requirements for 2004 Fiscal Year Administrative Costs
To date our activities have been funded primarily through the sale of equity
securities and financial assistance from Canadian governmental agencies in the
form of loans and grants. As noted above, we must obtain substantial additional
capital to engage in our proposed businesses.
Our cash requirements for administrative costs for the fiscal year ending
September 30, 2004 (including direct support of subsidiary operations) follows:
Use Amount
- -------------------- -----------
Employee salaries $600,000
Professional costs
(includes consultants,
outside accountants,
independent auditors
and legal counsel) $1,400,000
General administrative
(includes lease
obligations, travel and
other administrative costs) $450,000
36
Neither we nor our subsidiaries will be able to continue development and
administrative functions for more than a few months unless substantial
additional funding becomes available.
In its report dated December 23, 2003, the Company's independent auditors state
that the Company has suffered recurring losses and has a deficiency in assets
that raise substantial doubt about the Company's ability to continue as a going
concern.
We cannot be sure that we will be able to obtain adequate financing from outside
sources to fund our proposed operations. If we are unable to obtain the
necessary funding, we will not be able to continue to operate.
Additional Employees
We will need to add a number of employees to DERMOND in anticipation of
successful DWT and WindStor prototype testing. Additions include, project
managers, mechanical, aeronautic and electrical engineers and administrative
personnel. McKenzie Bay intends to add administrative personnel, including a
controller.
ITEM 7. FINANCIAL STATEMENTS.
Our Consolidated Financial Statements and related notes begin on Page F-1 of
this Annual Report.
PAGE NO.
Report of Independent Auditor's........................................F-1
Financial Statements
CONSOLIDATED BALANCE SHEETS............................................F-2
SEPTEMBER 30, 2003 and 2002
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
FROM INCEPTION TO SEPTEMBER 30, 2003............... .................F-3-4
CONSOLIDATED STATEMENT OF LOSS
YEARS ENDED SEPTEMBER 30, 2003 and 2002................................F-5
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 and 2002................................F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003..................................................F-7-23
==============================================================================
MCKENZIE BAY INTERNATIONAL LTD.
(A development-stage company)
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of McKenzie Bay International Ltd.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of McKenzie Bay
International Ltd. and subsidiaries (the "Company"), a development-stage
company, as at September 30, 2003 and the consolidated statements of changes in
stockholders' equity (deficit), loss and cash flows for the year then ended, and
for the period from August 23, 1996 (date of inception) to September 30, 2003.
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. The financial statements of the Company for the period from
inception on August 23, 1996 to September 30, 2002 were audited by other
auditors, whose reports expressed unqualified opinions on those statements and
included an explanatory paragraph regarding matters that raised substantial
doubt about the Company's ability to continue as a going concern. The financial
statements of the Company as of September 30, 2002 and for the year then ended,
were audited by other auditors who expressed an unqualified opinion on those
statements and included explanatory paragraphs in their report dated November
30, 2002 (except as to note 16 as of April 3, 2003), regarding matters that
raised doubt about the Company's ability to continue as a going concern and
regarding their audit of adjustments to restate the 2001 financial statements.
The other auditors' reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for such prior periods, is based solely on
the reports of such other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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. We believe that our audit and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at September 30, 2003, and the results of
its operations and cash flows for the year then ended, and for the period from
August 23, 1996 (date of inception) to September 30, 2003, 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. The Company is a development stage
enterprise engaged in a vanadium/titanium deposit with the development of wind
turbine technology and a diamond mine. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses and has a deficiency in
assets that raise substantial doubt about its 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 LLP
- --------------------------
Deloitte & Touche LLP
Rouyn-Noranda, Canada
December 23, 2003
(April 6, 2004 as to note 17)
<page>F-1
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 and 2002
(Amounts stated in US dollars)
ASSETS
2003 2002
----------- -----------
Current:
Cash and cash equivalents $ 49,208 $ 45,325
Marketable securities - 83,501
Accounts receivable 262,979 186,961
Inventories - 19,562
Prepaid expenses and deposits 145,441 172,057
----------- -----------
Total current assets 457,628 507,406
Reclamation cash bond (note 3) 338,685 338,685
Property and equipment (note 4) 76,263 84,577
Goodwill (note 2) - 146,972
----------- -----------
Total assets 872,576 1,077,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current:
Bank indebtedness (note 10) $ 83,463 $ 47,441
Accounts payable and accrued liabilities 2,162,934 583,378
Current portion of long-term debt (note 5) 32,945 36,156
----------- -----------
Total current liabilities 2,279,342 666,975
Long-term and other liabilities:
Long-term debt (note 5) 1,074,651 888,304
Redeemable capital stock (note 6) 252,175 -
Reclamation and closure liabilities (note 3) 250,000 250,000
----------- -----------
Total long-term and other liabilities 1,576,826 1,138,304
Redeemable capital stock (note 6) - 1,481,854
Stockholders' equity (deficit):
Capital stock (note 6)
75,000,000 common stock authorized, at
$0.001 par value 25,229,958 common stock
issued and outstanding (2002,23,177,640) 23,649 21,607
Additional paid in capital (note 6) 16,781,788 13,618,367
Accumulated deficit (19,564,758) (15,872,366)
Accumulated other comprehensive income(loss) (224,271) 22,899
----------- -----------
Total stockholders' deficit (2,983,592) (2,209,493)
Contingency (note 10)
Commitments (note 11)
Total liabilities and stockholders' deficit $ 872,576 $ 1,077,640
=========== ==========
(See accompanying notes)
<page>F-2
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Deficit)
FROM INCEPTION TO SEPTEMBER 30, 2003
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Accumulated
other Total
Additional comprehensive stockholders'
Common paid in Accumulated income equity
stock capital deficit (loss) (deficit)
---------- --------- ----------- -------------- -------------
Common shares issued for cash $ 200 $ 7,097 $ - - $ 7,297
Common shares issued in exchange of
exploration claims and services 50 1,774 - - 1,824
Net loss for the year - - (7,116) - (7,116)
Change in foreign currency
translation adjustment - - - 12 12
---------- --------- ----------- --------------- ------------
Balance, September 30, 1996 250 8,871 (7,116) 12 2,017
Common shares issued for cash 5,150 748,534 - - 753,684
Common shares issued in exchange of
exploration claims and services 2,804 114,159 - - 116,963
Net loss for the year - - (816,944) - (816,944)
Change in foreign currency
translation adjustment - - - (473) (473)
---------- --------- ----------- --------------- -------------
Balance, September 30, 1997 8,204 871,564 (824,060) (461) 55,247
Common shares issued for cash 517 440,277 - - 440,794
Common shares issued in exchange of
exploration claims and services 1,105 43,719 - - 44,824
Net loss for the year - - (519,123) - (519,123)
Change in foreign currency
translation adjustment - - - (3,557) (3,557)
---------- --------- ----------- --------------- -------------
Balance, September 30, 1998 9,826 1,355,560 (1,343,183) (4,018) 18,185
Common shares issued for cash 1,756 381,685 - - 383,441
Common shares issued in exchange of
exploration claims and services 1,245 1,337,925 - - 1,339,170
Net loss for the year - - (1,608,740) - (1,608,740)
Change in foreign currency
translation adjustment - - - 257 257
---------- --------- ------------ -------------- -------------
Balance, September 30, 1999 12,827 3,075,170 (2,951,923) (3,761) 132,313
Common shares issued for cash 1,734 1,054,409 - - 1,056,143
Common shares issued for services 42 20,958 - - 21,000
Net loss for the year - - (830,612) - (830,612)
Issuance of redeemable capital stock - - (640,075) - (640,075)
Change in foreign currency
translation adjustment - - - (938) (938)
----------- --------- ------------ -------------- -------------
Balance, September 30, 2000 14,603 4,150,537 (4,422,610) (4,699) (262,169)
<page>F-3
Issuance of redeemable capital stock - - (545,938) - (545,938)
Issuance of other capital stock 4,390 4,940,158 - - 4,944,548
Purchase of common stock for treasury (79) (145,174) - - (145,253)
Net loss for the year - - (4,933,244) - (4,933,244)
Change in foreign currency
translation adjustment - - - (12,833) (12,833)
Unrealized holding loss on marketable
securities - - - (371,735) (371,735)
Expiry of redemption rights - 12,000 - - 12,000
Stock options - 902,585 - - 902,585
----------- --------- ------------- ------------- -------------
Balance as at September 30, 2001 18,914 9,860,106 (9,901,792) (389,267) (412,039)
Issuance of capital stock 2,696 2,856,002 - - 2,858,698
Purchase of common stock for treasury (3) (4,366) - - (4,369)
Net loss for the year - - (5,970,574) - (5,970,574)
Change in foreign currency
translation adjustment - - - 40,431 40,431
Reclassification to the consolidated
statement of loss of the holding
loss on marketable securities - - - 371,735 371,735
Expiry of redemption rights - 439,659 - - 439,659
Stock options - 466,966 - - 466,966
----------- --------- ------------- ------------- -------------
Balance as at September 30, 2002 21,607 13,618,367 (15,872,366) 22,899 (2,209,493)
Issuance of capital stock 2,052 1,668,592 - - 1,670,644
Purchase of common stock for treasury (10) (11,290) - - (11,300)
Net loss for the year - - (3,692,392) - (3,692,392)
Change in foreign currency
translation adjustment - - - (247,170) (247,170)
Expiry of redemption rights - 514,471 - - 514,471
Stock options - 991,648 - - 991,648
----------- --------- ------------- ------------- -------------
Balance as at September 30, 2003 $ 23,649 $16,781,788 $(19,564,758) $(224,271) $(2,983,592)
========== ========== ============== ============= ============
(See accompanying notes)
</table>
<page>F-4
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF LOSS
YEARS ENDED SEPTEMBER 30, 2003 and 2002
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Cumulative
from inception
on August 23,
2003 2002 1996
---------- ---------- ---------------
Revenue $ - $ 12,825 $ 12,825
Expenses:
Research, development and exploration (note 7) 1,139,471 2,586,476 7,703,272
General administration 295,642 572,672 1,152,935
Reorganization costs - - 102,914
Wages and benefits 205,134 456,821 1,145,994
Management wages and benefits 797,493 525,648 2,352,800
Professional fees 832,886 314,027 1,574,961
Advertising, promotion and travel 155,512 262,179 823,601
Amortization 18,360 21,070 388,842
Interest and bank charges 50,906 108,896 159,802
Interest on long-term debt 21,182 22,358 90,174
---------- ---------- --------------
3,516,586 4,870,147 15,495,295
---------- ---------- --------------
Loss before the following: (3,516,586) (4,857,322) (15,482,470)
Write-down of assets - - (1,626,821)
Write-off of incorporation and
reorganization costs - (49,137) (49,137)
Write-down of marketable securities (32,731) (1,071,483) (1,104,214)
Gain (loss) on sale of marketable securities 140 (138,168) (138,028)
Interest income 3,757 4,536 27,897
---------- ---------- --------------
Net loss before mining taxes and cumulative
effect of change in accounting principle
for SFAS 142 (3,545,420) (6,111,574) (18,372,773)
Current mining tax recovery (note 9) - 141,000 141,000
---------- ---------- --------------
Net loss before cumulative effect of change
in accounting principle for SFAS 142 $ (3,545,420) $(5,970,574) $ (18,231,773)
---------- ---------- --------------
Cumulative effect of change in accounting
principle for SFAS 142 (note 2) $ (146,972) - (146,972)
---------- ---------- --------------
Net loss $ (3,692,392) $(5,970,574) $ (18,378,745)
---------- ---------- --------------
Comprehensive loss (note 13) $ (3,939,562) $(5,558,408) $ (18,603,016)
========== ========== ==============
Basic and diluted loss per share:
Net loss before cumulative effect of change
in accounting principle for SFAS 142 $ (0.14) $ (0.29)
Cumulative effect of change in accounting principle (0.01) -
----------- -----------
Net loss $ (0.15) $ (0.29)
=========== ===========
Weighted average shares outstanding 24,186,803 20,940,128
========== ==========
(See accompanying notes)
</table>
<page>F-5
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 and 2002
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Cumulative
from inception
on August 23,
2003 2002 1996
---------- ---------- ---------------
Cash flows from (used in) operating activities:
Net loss $ (3,692,392) $(5,970,574) $ (18,378,745)
Items not affecting cash:
Cumulative effect of change in accounting principle 146,972 - 146,972
Amortization 18,360 21,070 388,842
Expenses settled through issuance of common stock 362,992 1,442,670 1,805,662
Capitalized interest on convertible notes payable - 2,571 2,571
Reclamation and closure costs (note 3) - - 250,000
Write-down of assets - - 1,626,821
Write-down of marketable securities 32,731 1,071,483 1,104,214
Write-off of incorporation and reorganization costs - 49,137 49,137
Loss on sale of marketable securities (140) 138,168 138,028
Stock-based compensation 353,278 416,278 1,672,141
Net change in non-cash working capital related to
operations:
Accounts receivable (51,452) (69,811) (205,616)
Inventories 19,562 (19,562) -
Prepaid expenses and deposits 26,616 (76,926) (94,957)
Accounts payable and accrued liabilities 1,446,532 (189,066) 2,136,202
----------- ----------- --------------
(1,336,941) (3,184,562) (9,358,728)
----------- ----------- ---------------
Financing activities:
Issuance of notes payable 350,000 - 350,000
Increase of bank indebtedness 29,755 47,411 77,196
Increase in convertible notes payable - - 23,055
Issuance of long-term debt - - 137,435
Repayment of long-term debt (36,156) (32,794) (104,490)
Receipt of repayable government assistance (note 5) 71,272 855,359 926,631
Proceeds from sale of common stock 847,653 1,265,402 11,877,657
Proceeds on sale of options 33,160 - 33,160
Redemption of redeemable capital stock - (37,500) (37,500)
Purchase of common stock for treasury - (4,369) (149,622)
------------ ----------- --------------
1,295,684 2,093,539 13,133,522
------------ ----------- --------------
Investing activities:
Purchase of marketable securities - - (1,767,835)
Proceeds-sale of marketable securities 50,910 474,683 525,593
Purchase of reclamation cash bond (note 3) - - (338,685)
Purchase of property and equipment (9,273) (1,666) (2,058,006)
Incorporation and reorganization costs - - (81,769)
Acquisition of business net of cash acquired (note 8) - (31,286) (31,286)
------------ ----------- -------------
41,637 441,731 (3,751,988)
Effect of foreign currency
exchange rate changes on cash and equivalents 3,503 40,431 26,402
------------ ----------- -------------
Net increase (decrease) in cash and cash
equivalents 3,883 (608,861) 49,208
Cash and cash equivalents, beginning of period 45,325 654,186 -
------------ ----------- -------------
Cash and cash equivalents, end of period $ 49,208 $ 45,325 $ 49,208
============ =========== =============
Supplemental non-cash financing activities:
Issuance of common stock in lieu of requiring
the Company to repurchase redeemable capital stock $ 110,000 $ - $ 110,000
Issuance of options in lieu of requiring Company
to repurchase redeemable capital stock 605,210 - 605,210
Issuance of common stock in lieu of payment of notes
payable and accrued interest 356,424 - 356,424
Conversion of notes payable into capital stock - 25,626 25,626
------------ ----------- -------------
$ 1,071,634 $ 25,626 $ 1,097,260
============ =========== =============
(See accompanying notes)
<page>F-6
</table>
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Amounts stated in US dollars unless indicated otherwise)
1. Nature of operations
The Company is a development stage company with no operations. The Company
has interests in a vanadium/titanium deposit, with wind turbine technology
and a diamond mine. The Company was incorporated in Delaware on August 17,
1998 under the name Decker Organic Systems, Inc.
2. Accounting policies
The accompanying consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles ("US
GAAP") and reflect the following significant accounting policies:
[a] Basis of presentation
The financial statements of the Company have been prepared on the basis
of the Company continuing as a going concern, which contemplates the
realization of assets and the payment of liabilities in the ordinary
course of business. Should the Company be unable to continue as a going
concern, it may be unable to realize the carrying value of its assets and
to meet its liabilities as they become due.
The Company suffered recurring losses and has a deficiency in assets that
raise substantial doubt about our ability to continue as a going
concern. The Company's continued existence is dependent upon its ability
to raise additional capital and generate profits. Although management
believes that it will be successful at raising additional capital in the
short-term and will have profitable operations in the long-term, it is
unable to disclose firm commitments as of the date of these financial
statements.
As discussed in note 6, the Company may be required to repurchase shares,
at the option of the holders, for an amount of $252,175.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
[b] Consolidation
These consolidated financial statements include the activities of the
Company and its wholly-owned subsidiaries, McKenzie Bay Resources Ltd.,
Great Western Diamond Company, Experts Conseils Dermond Inc. and a 62.5%
interest in Ptarmigan Energie Inc. All intercompany balances and
transactions have been eliminated in consolidation.
<page>F-7
[c] Foreign currency translation
The translation to US dollars for consolidation purposes is performed
using the current rate method whereby balance sheet accounts are
converted at exchange rates in effect at the balance sheet date and
revenue and expense accounts are translated at the weighted-average
exchange rate during the period. The gains and losses resulting from
such translation are included as a foreign currency translation
adjustment in stockholders' equity (deficit). For statutory and other
reporting purposes, the Company's wholly and partially owned
subsidiaries, McKenzie Bay Resources Ltd., Experts Conseils Dermond Inc.
and Ptarmigan Energie Inc. prepare financial statements in Canadian
dollars.
[d] Cash and cash equivalents
Cash and cash equivalents includes those short-term investments which, at
the date of acquisition, have an original term to maturity of three
months or less.
[e] Marketable securities
The Company invests in marketable securities with maturities greater than
three months. The securities are classified as available-for- sale
securities and reported at fair market value with unrealized gains and
losses excluded from earnings and recorded to accumulated other
comprehensive loss.
[f] Inventories
Inventories are valued at the lower of average cost and net realizable
value.
[g] Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the fiscal period. Financial statements items that require
significant estimates from management are the useful life of long-lived
assets for amortization purposes, carrying value of goodwill and
sufficiency of reclamation and closure liabilities. Actual results could
differ from such estimates.
[h] Exploration and development expenditures
Costs related to the exploration and development of resource properties
are expensed as incurred. Amounts are reduced by grants and other
related revenues.
<page>F-9
[i] Research and development
Research and development expenditures are charged to earnings as incurred
and amounted to $629,078 and $0 in the years ended September 31, 2003 and
2002, respectively.
[j] Property and equipment
Property and equipment are recorded at cost and are being amortized over
their estimated useful lives using the declining balance method at the
following annual rates:
Equipment under capital lease 20%
Furniture and fixtures 20%
Computer 30%
Office equipment 20%
[k] Impairment for long-lived assets
The Company evaluates the carrying value of long-lived assets and other
intangible assets, excluding goodwill, based upon current and anticipated
undiscounted cash flows, and recognizes an impairment when such estimated
cash flows will be less than the carrying value of the asset. Measurement
of the amount of impairment, if any, is based upon the difference between
carrying value and fair value.
[l] Income and mining taxes
The Company accounts for income and mining taxes under the asset and
liability method. Under this method, deferred tax assets 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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
set up when it is more likely than not that a deferred tax asset will not
be recovered.
[m] Loss per common share
Basic earnings (loss) per share is computed by dividing net loss (the
numerator) by the weighted-average number of outstanding common shares
(the denominator) for the period. The computation of diluted earnings
(loss) per share includes the same numerator, but the denominator is
increased to include the number of additional common shares that would
have been outstanding if potentially dilutive common shares had been
issued (such as the common share equivalents for stock options). Fully
diluted loss per share has not been presented as it is anti-dilutive.
<page>F-10
[n] Comprehensive loss
In addition to net loss, comprehensive loss includes foreign currency
translation adjustment and unrealized holding loss on marketable
securities.
[o] Stock-based compensation plan
(i) The Company has stock-based compensation plans which are described in
note 6. The Company uses the fair value method of accounting for all
stock options granted to non-employees in accordance with the provisions
of SFAS 123 and the intrinsic value method for those granted to employees
in conformity with Accounting Principles Board Opinion No. 25 and its
related interpretation and allowed by SFAS 123. Under the fair value
based method, compensation cost attributable to awards is measured at the
date of the grant and recognized over the vesting period in operating
expense as it is the case under the intrinsic value method when exercise
price is lower than the current market price at the date of the grant.
No compensation cost is recorded for all other stock-based employee
compensation awards and consideration paid by employees on the exercise
of stock options is recorded as capital stock.
(ii) Fair value disclosure
SFAS 123 encourages but does not require companies to include in compensation
cost the fair value of stock options granted to employees. A company that does
not adopt the fair-value method must disclose the cost of stock compensation
awards, at their fair value, on the date the award is granted. This fair value
was estimated using the Black-Scholes model with assumptions of a 2 to 10 years
expected term, 113% to 130% volatility, interest rates ranging from 1.49% to
4.03% and an expected dividend yield of 0%. Had the compensation cost for stock
options issued to employees, officers and directors been determined based on the
fair value at the grant date consistent with SFAS No. 123, the Company's net
loss and loss per share would have been as follows:
2003 2002
--------- ----------
Net loss (3,692,392) (5,970,574)
--------- ----------
Pro forma (4,603,974) (6,728,768)
--------- ----------
2003 2002
--------- ----------
Net loss per share:
As reported (0.15) (0.29)
--------- ----------
Pro forma (0.19) (0.32)
--------- ----------
<page>F-11
The Company used the Black-Scholes option pricing model to determine the fair
value of grants made in the period ended September 30, 2003 and 2002,
respectively.
2003 2002
--------- ----------
Stock based compensation
expense as reported 290,091 125,269
--------- ----------
Stock based compensation
expense if fair value was used. 1,201,673 883,463
--------- ----------
[p] Goodwill and other intangible assets
Effective October 1, 2002 the Company adopted SFAS 141, "Business
Combinations, "and SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 141 was issued by the FASB in June 2001. SFAS 141 requires that the
purchase method of accounting be used for all business combinations
completed after June 30, 2001. SFAS 141 also specifies the types of
acquired intangible assets that are required to be recognized and
reported separately from goodwill and those acquired intangible assets
that are required to be included in goodwill. The Company's adoption of
this standard did not have any effect on our accounting for prior
business combinations.
SFAS 142 requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually. SFAS 142 requires recognized
intangible assets to be amortized over their respective estimated useful
lives and reviewed for impairment in accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". Any
recognized intangible assets determined to have an indefinite useful life
are not amortized, but instead tested for impairment in accordance with
the standard until its life is determined to no longer be indefinite.
The Company has completed its SFAS 142 transitional impairment review and
determined that the goodwill ("excess cost of investment over net assets
acquired") of $146,972 associated with the fiscal 2002 acquisitions of
DERMOND INC. should be reduced to $0. The fair value of the reporting
unit (DERMOND INC.) was determined using the present value of expected
future cash flows and other valuation measures.
The $146,972 non-cash charge is reflected as a cumulative effect of an
accounting change in the accompanying Consolidated Statements of Loss for
the year ended September 30, 2003. In accordance with SFAS 142 and SFAS
3, "Reporting Accounting Changes in Interim Financial Statements" ("SFAS
3"), when a transitional impairment loss for goodwill (cumulative effect
type accounting change) is measured in other than the first interim
reporting period, it shall be recognized in the first interim period
irrespective of the period in which it is measured. The impact on the
three-month period ended December 31, 2002 is as follows:
<page>F-12
Three months ended December 31, 2002
Net income (loss) Basic loss per share
------------------ ---------------------
Reported net income $(1,097,801) $(0.05)
Less: Impairment charge (146,972) (0.01)
------------------ ---------------------
Adjusted net loss $(1,244,773) $(0.06)
=================== =====================
[q] New accounting pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of
an obligation assumed under a guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual financial statements
about the obligations associated with guarantees issued. The recognition
provisions of FIN 45 are effective for any guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
interim and annual financial statements for periods ending after December
15, 2002. The adoption of FIN 45 had no impact on the Company's
financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock
Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The Company has adopted the requirements of the Statement.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after
January 31, 2003. In addition, FIN 46, as amended in December 2003 (FIN
46R), will be effective by public entities for periods ending after March
15, 2004. The adoption of this interpretation and its revision will not
have a material impact on the Company's financial position or results of
operations.
<page>F-13
[q] New accounting pronouncements (continued)
In October 2001, the Financial Accounting Standards Board issued
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for fiscal years beginning after December 15,
2001. SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement superseded SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of".
The Company's adoption of SFAS 144 on October 1, 2002 did not have a
material effect on its consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity", which is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, to address the
balance sheet classification of certain financial instruments that have
characteristics of both liabilities and equity. As a result of the
adoption of SFAS 150, the Company has reclassified the balance of its
Redeemable Capital Stock at September 30, 2003. SFAS 150 does not permit
the restatement of prior years balances of reclassified financial
instruments. Accordingly, the balances of the Company's Redeemable
Capital Stock have not been reclassified.
In July 2001, the Financial Accounting Standards Board finalized SFAS
143, Accounting for Asset Retirement Obligations ("ARO"), which requires
the recognition of a liability for an asset retirement obligation in the
period in which it is incurred. Retirement obligations associated with
long-lived assets included within the scope of SFAS 143 are those for
which there is a legal obligation to settle under existing or enacted
law, statute, written or oral contract, or by legal construction under
the doctrine of promissory estoppel. Retirement obligations are included
in the scope of the standard only if the legal obligation exists in
connection with or as a result of the permanent retirement, abandonment
or sale of a long-lived asset. When the liability is initially recorded,
the carrying amount of the related long-lived asset is correspondingly
increased. Over time, the liability is accreted to its future value.
The corresponding amount capitalized at inception is depreciated over the
useful life of the asset. The liability must be revalued each period
based on current market prices. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company has adopted the requirements
of the statement.
3. Reclamation cash bond
The Company was required to post a cash bond with the State of Colorado,
Department of Natural Resources to cover future site reclamation and
closure liabilities associated with the Kelsey Lake mine. A liability
for the estimated restoration costs of $250,000 ($250,000 in 2002) has
been accrued in these financial statements.
<page>F-14
4. Property and equipment
The details of property and equipment are as follows:
2003 2002
Accumulated Net Book Net Book
Cost Amortization Value Value
---------- ------------- ---------- -------------
Equipment under
capital lease $ 137,435 $ 73,435 $ 64,000 $ 80,000
Furniture and
fixtures 7,865 4,366 3,499 3,348
Computer 11,333 2,811 8,522 970
Office equipment 639 397 242 259
---------- ------------- ---------- -------------
$ 157,272 $ 81,009 $ 76,263 $ 84,577
========= ============ ========== ============
5. Long-term debt
The Company received financial assistance from the government of Canada and
the province of Quebec in connection with the completion of a feasibility
study of the Vanadium deposits at Lac Dore, Quebec and a test pilot project
for the refining of Vanadium. These financial assistance packages have been
recorded as liabilities in the financial statements.
2003 2002
--------- ------------
Province of Quebec unsecured financial
assistance, non-interest bearing,
repayable in scheduled payments over 4
years after the second year of production
of the mine. This assistance is
forgivable if, after 24 months following the
release of the feasibility study, a
decision is made not to begin production $ 665,190 $ 570,240
Government of Canada unsecured financial
assistance, non-interest bearing,
repayable in quarterly payments of
CDN$62,500 commencing October 1, 2004 369,550 285,119
Government of Canada unsecured financial
assistance, non-interest bearing, repayable
in two equal annual payments,
commencing January 1, 2005 39,911 -
Obligation under capital lease, payable
in monthly blended installments of $3,444,
interest at 10%, due July, 2004 32,945 69,101
----------- ------------
1,107,596 924,460
Less current portion 32,945 36,156
----------- ------------
$ 1,074,651 $ 888,304
=========== ============
<page>F-15
The Company has provided equipment subject to the lease agreement above as
collateral for amounts owing.
Future minimum lease payments required under the lease are as follows:
2004 $34,443
2005 -
-------
34,443
Less amount representing interest 1,498
-------
$32,945
=======
6. Capital stock
Authorized - 75,000,000 common stock, par value $0.001 per share
<table>
<s> <c> <c>
Issued -
Common Paid in Stock
Shares stock capital options Total
--------- -------- -------- -------- ----------
Balance, September 30, 2002 23,177,640 $21,689 $13,767,907 - $13,789,596
Common stock issued for:
Expenses and accounts
payable settled through
issuance of common stock 937,943 938 822,053 - 822,991
Cash 453,337 453 295,414 - 295,867
Exercise of warrants 661,038 661 551,125 - 551,786
Stock options, compensation - - 353,278 - 353,278
Stock options, in lieu of
redemption rights - - 605,210 - 605,210
Stock options, cash - - 33,160 - 33,160
Expiry of redemption rights - - 514,471 - 514,471
---------- -------- ---------- ---- ----------
Balance, September 30, 2003 25,229,958 23,741 16,942,618 - 16,966,359
Less treasury stock at cost (92,000) (92) (160,830) - (160,922)
---------- -------- ---------- ---- ----------
Balance, September 30, 2003 25,137,958 $23,649 $16,781,788 $ - $16,805,437
========== ======== ========== ==== ===========
<page>F-16
</table>
Share-based incentive plans
At September 30, 2003, the Company had three stock-based incentive plans each
being limited so that options to acquire no more than 2,500,000 shares per plan
in the aggregate may be outstanding at any one time.
(i) Under the 2001 Employee Incentive Stock Option Plan, options may be
granted at an exercise price equal to the market price on the date of the grant.
All options expire no later than ten years from the grant date. In the event an
option is granted to an employee who owns 10% or more of the voting power of
stock of the Company, the purchase price of each share shall be 110% of the fair
market value on the date of grant and the expiration date of option shall be no
more than five years after the date of grant of such option.
(ii) Under the 2001 Employee non-qualified Stock Option Plan, options may be
granted to employees or certain non-employees at an exercise price as determined
by the administrator of the plan on the date of the grant, all options expire
ten years after the date of grant.
(iii) Under the 2001 Directors non-qualified Stock Option Plan, options to
purchase common shares of the Company may be granted to directors of the Company
or certain non-employees for terms up to ten years at an exercise price as
determined by the administrator on the date of the grant.
The following table contains information with respect to all options
granted by the Company:
Weighted average
exercise price
Shares US$/share
------------ ----------------
Options outstanding,
September 30, 2001 2,410,000 1.02
Granted 950,000 1.25
Expired (25,000) 0.64
Options outstanding,
September 30, 2002 3,335,000 1.09
Granted 9,896,617 1.03
Expired (100,000) 1.50
------------ ----------------
Options outstanding,
September 30, 2003 13,131,617 1.04
=========== ================
<page>F-17
The following table contains information with respect to all options granted by
the Company at September 30, 2003:
Outstanding options Exercisable options
--------------------- ------------------------
Weighted Weighted
Average average average
life price price
Shares (years) US$/share Shares US$/share
-------- ------- ---------- --------- ----------
$0.74 300,000 3.96 0.74 - -
$1.00 11,121,917 5.26 1.00 10,431,917 1.00
$1.25 476,200 1.88 1.25 476,200 1.25
$1.30-$1.50 1,175,000 6.94 1.38 775,000 1.42
$2.00-$3.00 58,500 0.49 2.85 58,500 2.85
---------- -------- ---------- ---------- ----------
13,131,617 11,741,617
========== ==========
As at September 30, 2003, the following are outstanding:
[a] Stock warrants
Number
of warrants
------------
Outstanding, September 30, 2001 3,544,030
Issued during the year 145,000
Exercised during the year (969,935)
Outstanding, September 30, 2002 2,719,095
Issued during the year 446,762
Exercised during the year (661,038)
Expired during the quarter (1,552,200)
------------
Outstanding, September 30, 2003 952,619
============
The warrants outstanding at September 30, 2003 can be exercised at prices
ranging from US $1.48 to US $3.00. The expiry dates on the warrants
range from November 29, 2003 to August 19, 2005.
During 2003, the Company agreed to a cashless exercise of certain
outstanding warrants for shares of the Company's common stock which would
have expired in February 2003. The Company agreed to a cashless exercise
of the warrants, in effect accepting shares issuable upon exercise as
payment for the exercise. As a result, 15,000 shares of common stock
were issued in exchange for warrants for 75,000 shares based on an
exercise price of $1.28 per share and an exchange price of $1.60 per
share. The exchange price of $1.60 per share was set on a date when the
quoted market price of a share of common stock was the same.
<page>F-18
[b] Treasury stock
During the year, the Company repurchased 10,000 (2,500 in 2002) common
shares for treasury at a cost of $11,300 in settlement of an account
receivable ($4,369 in cash in 2002).
[c] Redeemable capital stock
i) 81,700 common shares of the Company have certain rights attached
permitting the holder to require the Company to repurchase these shares.
Pertaining to subscription agreements, if stockholders decide to exercise
their rights, the Company would be obligated to pay, as at September 30,
2003 or gradually over the next two years a maximum amount of $252,175.
This right requires a repurchase at prices increasing in time from $2.50
to $3.25.
7. Mineral properties and exploration expenditures
The Company's expenditures, net of grant revenues received on vanadium and
diamond exploration are as follows:
2003 2002
--------- ---------
$510,393 $2,586,476
The Lac Dore Vanadium/Titanium Project is located in the Province of
Quebec, Canada.
The Kelsey Lake Diamond Mine is located on the Colorado, USA and
Wyoming, USA border.
At September 30, 2003, the accumulated expenditures incurred by the
Company on mineral properties and exploration expenditures totaled
$7,074,194 (2002 - $6,563,801).
8. Experts Conseils Dermond Inc.
On February 12, 2002, the Company entered into an agreement to purchase all
the issued and outstanding common stock of Experts Conseils Dermond Inc.
(Dermond), a Canadian corporation, which owns technology known as the Dermond
Wind Generator. As consideration for the common stock of Dermond, the
Company paid cash of CDN$50,000 (US$31,369), issued 100,000 of its common
stock and agreed to provide employment contracts and royalty agreements to
the existing shareholders of Dermond.
<page>F-19
The acquisition of Dermond was accounted for using the purchase method
whereby the results of its operations were consolidated since the date of
acquisition.
The net assets acquired were:
Cash $ 83
Accounts receivable 32,712
Computer 606
Goodwill (see note 2) 146,972
Accounts payable and
accrued liabilities (24,004)
-----------
$ 156,369
===========
Consideration for the purchase consisted of:
Cash $ 31,369
Issuance of common stock 125,000
-----------
$ 156,369
===========
9. Income and mining taxes
As the Company operates in a specialized industry and in several tax
jurisdictions, its income is subject to various rates of taxation. Major
items causing the Company's income tax rate to differ from the federal income
tax rate of 34% to which are subject the majority of its operations, were as
follows:
2003 2002
---------- -----------
Loss before taxes and cumulative
effect of change in accounting
principle for SFAS 142 $(3,545,420) $(6,111,574)
---------- -----------
Computed "expected" tax recovery (1,205,443) (2,086,882)
Increase (reduction) in income taxes
resulting from:
Resource allowance deduction 39,246 56,966
Earnings in foreign jurisdiction
taxed at different rates (50,381) (249,614)
Tax benefits of losses not recognized 1,214,804 1,583,361
Tax loss realized on intercompany transaction - 566,637
Non-deductible expenses (stock options) 1,774 129,532
--------- ----------
- -
Income taxes - -
Mining duties - (141,000)
--------- ----------
Total income and mining tax recovery $ - $ (141,000)
<page>F-20
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
As at September 30, 2003 2002
--------- --------
Deferred tax assets:
Loss carried forward and
exploration expenditures $4,193,360 $ 2,959,192
Capital loss carried forward 518,074 516,521
Others 126,399 111,414
--------- ---------
Total gross deferred tax assets 4,837,833 3,587,127
Less valuation allowance (4,837,833) (3,587,127)
--------- ---------
Net deferred tax assets $ - $ -
The Company and certain subsidiaries have accumulated the following losses and
credits for income tax purposes, which may be carried forward to reduce taxable
income and taxes payable in future years.
Expiring
Amounts dates
------------ ------------
Non-capital loss carried forward
for Canadian subsidiaries $ 1,667,960 2004 to 2010
Non-capital loss carried forward for the Company 2,905,840 2019 to 2023
Capital loss carried forward for the Company 1,213,289 2008
Pool of deductible exploration expenditures 6,713,837 Unlimited
============ =============
10. Contingency
As a result of exploration work performed at the Lac Dore Vanadium/Titanium
Project, the Company has a potential environmental liability in the range of
$15,000 to $30,000. This liability will not be incurred if the project goes
into production. As management believes that the project will go into
production, the amount has not been accrued in the financial statements.
Bank indebtedness and other loans
The bank indebtedness of a subsidiary company, Great Western Diamond
Company, carries interest at 8% per annum and is secured by the assets of
Great Western Diamond Company.
The bank indebtedness of a subsidiary company, Experts Conseils Dermond
Inc., carries interest at 7.5% per annum and is secured by an assignment of
the subsidiary's refundable research and development tax credit.
<page>F-21
In addition to the above, the assets of Great Western Diamond Company have
been pledged to secure certain of the accounts payable of Great Western
Diamond Company.
In the normal course of business, the Company and its subsidiaries are
parties to various legal claims, actions and complaints and various other
risks. It is not possible to predict with certainty whether or not the
Company and its subsidiaries will ultimately be successful in any of these
legal matters or, if not, what the impact might be. However, the Company's
management does not expect that the results in any of these legal
proceedings will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
11. Commitments
The Company has provided a 50% lien on the reclamation bond on deposit with
the state of Colorado with payment being made in the event that the Great
Western Diamond Company is sold and the deposit returned.
Royalty Agreements
The Company has entered into agreements with third parties to make royalty
payments based on production from the Kelsey Lake mine and a royalty of 2.5%
of Dermond wind turbine sales.
12. Financial instruments
Financial instruments include cash and cash equivalent, accounts receivable,
accounts payable and accrued liabilities, all of which are carried at cost
which approximates fair value because of the near-term maturity of those
instruments. As at September 30, 2003, fair value of repayable government
assistance could not be determined because no equivalent market exists for
such loans, therefore these loans have been carried at cost.
13. Comprehensive loss
Cumulative
From inception
on August 23,
2003 2002 1996
--------------- --------------- -----------------
Net loss $(3,692,392) $ (5,970,574) $ (18,378,745)
Unrealized holding
loss on marketable
securities - 371,735 -
Foreign currency
translation adjustment (247,170) 40,431 (224,271)
--------------- --------------- -----------------
Comprehensive loss $(3,939,562) $ (5,558,408) $ (18,603,016)
=============== =============== =================
<page>F-22
14. Net basic and diluted loss per common share
2003 2002
----------- -----------
Net loss $ (3,692,392) $ (5,970,574)
----------- -----------
Total weighted average
number of common
shares and equivalent 24,186,803 20,940,128
------------ -----------
Net loss per common share $ (0.15) $ (0.29)
============ ===========
15. Related party transactions
The Company has retained a law firm to perform legal services for which
Company has incurred total expenditure of $125,086 for the year ended
September 30, 2003. A director for the Company is a partner in that law
firm. The transactions were valued at the exchange amount, which is the
amount of consideration agreed to by the related parties. As of September
30, 2003, an amount of $60,294 resulting from these transactions is included
in accounts payable and accrued liabilities. On May 15, 2003, the Company's
Board of Directors approved the cancellation of $17,100 of the amount
outstanding at March 30, 2003, in exchange for the issuance of 20,000 of
common stock shares to certain principals in the law firm, including the
Company's director.
16. Comparative figures
Certain figures from the prior year have been reclassified for comparison
purposes only.
17. Subsequent event
On April 6, 2004 the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Under the agreement and
subject to its terms and conditions, which the Company may not be able to
satisfy, the Company may require Cornell Capital Partners, L.P to purchase
newly issued common shares from the Company, to a maximum market value of
$15 million, over a 24-month period, less certain fees and expenses.
<page>F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The disclosure called for by paragraph (a) of Item 304 of Regulation S-B has
been previously reported as that term is defined in Rule 12b-2 under the
Exchange Act. No disclosure called for by paragraph (b) of such Item was
required.
ITEM 8A. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic filings with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required
to use its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. We have performed an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures within 90
days of the date of this Annual Report. The evaluation was performed by our
Chief Executive Officer and Chief Financial Officer. Based on their evaluation,
they believe that our disclosure controls and procedures were effective.
There have been no significant changes in our internal controls over financial
reporting during the most recently completed fiscal quarter that materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
I.
(a) Directors and Executive Officers
The following are our directors and executive officers. Each director holds
office until the next annual meeting of shareholders and until the director's
successor is elected and qualified or until the director's resignation or
removal. Each executive officer hold offices for the term for which such
officer is elected or appointed and until a successor is elected or appointed
and qualified or until such officer's resignation or removal.
NAME AGE POSITIONS
- ------------------ ----- ------------------------------------------------
Gary L. Westerholm 59 President, Chief Executive Officer and director
Gregory N. Bakeman 48 Treasurer, Chief Financial Officer and director
John W. Sawarin 69 Secretary, Vice President-Product Marketing and
director
Rocco J. Martino 49 Director
Stephen D. McCormick 58 Director
Donald C. Harms 62 Director
Doris F. Galvin 49 Director
Gary L. Westerholm has been a director and our President and Chief Executive
Officer since 1999. Mr. Westerholm is also President and Chief Executive
Officer of McKenzie Bay International Ltd and a director of three of our other
subsidiaries. Mr. Westerholm's term as an executive officer expires in March
2006.
Gregory N. Bakeman has been a director since 2000 and has served as Chief
Financial Officer since February 2001 and Treasurer since December 2001. Mr.
Bakeman is also Chief Financial Officer of each of our subsidiaries and a
director of four of our subsidiaries. From 1999 to 2000, Mr. Bakeman served as
Chief Financial Officer of Micro-C Technologies, Inc., a manufacturer of
computer chip production equipment. From 1997 to 1999, Mr. Bakeman was a Vice
President in the Investment Banking Department of First of Michigan Corporation
(a Fahnestock & Co. wholly owned subsidiary). Mr. Bakeman's term as an
executive officer expires in March 2006.
John W. Sawarin has been a director since 1999 and has served as Secretary since
1999 and Vice President-Product Marketing since January 2003. Mr. Sawarin
previously served as Treasurer from 1999 to March 2002. From 1996 to 1998, Mr.
Sawarin was a self employed consultant. Mr. Sawarin's term as an executive
officer expires in March 2006.
38
Rocco J. Martino has been a director since 1999. Since 1989, Mr. Martino, a
certified public accountant, has been a partner with LaSalle Capital Group Inc.,
a private equity group that pursues the acquisition of small to middle-market
companies, principally in the manufacturing and niche-distribution sectors.
Stephen D. McCormick has been a director since July 26, 2002. Since 1997, Mr.
McCormick has served as President of McCormick Incorporated, a holding company
that owns businesses involved in the construction industry. Since 1987, Mr.
McCormick has served as Executive Vice President of Northern Improvement
Company, a company focused on road building and movement of earth materials, and
Vice President of McCormick Construction Equipment Company, both subsidiaries of
McCormick Incorporated.
Donald C. Harms has been a director since November 12, 2002. Since 1973, Mr.
Harms has been a principal of Larson, Harms & Bibeau, P.C., a law firm located
in Farmington Hills, Michigan. Mr. Harms has served as our outside general
counsel since April 1999.
Doris F. Galvin has been a director since February 2004. Ms. Galvin is self
employed as a consultant. From 1979 to 2002, Ms. Galvin was employed by CMS
Energy, holding numerous positions in with that company, including Vice
President & Treasurer, and leaving the company as Senior Vice President-Global
Development. CMS Energy is a utility holding company.
(b) Significant Employees
Dermond Inc.
Jacquelin Dery - President, Director. Mr. Dery, age 63, has been an executive
officer and director of Dermond since 1996. He is a Professional Engineer,
educated at Ecole Polytechnique, University of Montreal, with a degree in
Electrical Engineering. In 1996 he co-formed Dermond to improve existing
Vertical Axis Wind Turbine technology to fulfill the specific needs of isolated
diesel driven electrical grids. From 1974-1996 he worked for Hydro-Quebec, where
he; was responsible for overall management of a $140,000,000 project to build a
new 70 MW diesel driven power plant; provided technical direction over
conceptual engineering, detail engineering, installation and testing of a $28
million project for a new type of 4 MW, vertical axis Wind power generator; and
provided direction of a technical study aimed at replacing a 10 MW emergency
diesel power plant in the Gentilly nuclear facility. Prior to joining Hydro-
Quebec, from 1971-1974 he worked for Sonatrach, Skikda, Algeria where he
implemented a maintenance management system in a newly built Natural Gas
Liquefaction plant. From 1968-1971, he worked for the Atomic Energy Of Canada
Ltd, Whiteshell Nuclear Research Establishment, Pinawa, Manitoba, Canada, where
he performed conceptual studies and direction of detail engineering for
installing experimental research loops at the Nuclear Research Establishment,
including in-core nuclear reactor experimental loops. Mr. Dery is a Member of
"Ordre des Ingenieurs du Quebec." On March 31, 2004, Dermond was approximately
$12,375 US in arrears in the payment of Mr. Dery's salary.
39
Laurent B. Mondou - Vice President, Director. Mr. Mondou, age 64, has been an
executive officer and director of Dermond since 1996. He is a Professional
Engineer, educated at Ecole Polytechnique, University of Montreal with a degree
in Civil Engineering, and ecole des Hautes Etudes Commerciales, University of
Montreal, Montreal, Quebec, Canada where he has a degree in Business
Administration. In 1996 he co-formed Dermond. From 1995-1996 and 1990-1991, he
worked for Kamyr Enterprises Inc. where he prepared market studies, a 3-year
strategic plan, project proposals and was the contact for senior executives in
pulp and paper industries and government authorities. From 1993 to 1994, he
worked for gestion Lehoux et Tremblay inc. where he provided engineering for
revamping power and pulp and paper plants, prepared studies on cogeneration
plants and gave construction expertise. From 1991 to 1992 he worked for Arno
Electric Ltd. where he developed a mechanical and piping division for industrial
sectors, including aluminum, pulp and paper, hydraulic power, electrical
substations and cogeneration. From 1989 to 1990, he worked for Dominion Bridge
where he developed a mechanical and piping division for industrial sectors
including aluminum, pulp and paper, hydraulic power, electrical substations,
cogeneration, refinery and metallurgy. From 1974 to 1989, he worked for BG
Checo International Ltd. where he lead business development for industrial
projects such as petro-chemistry, pulp and paper, metallurgy and oil rigs.
From 1963-1973 he provided construction management on industrial projects for
SNC Inc. Mr. Mondou is a Member of "Ordre des Ingenieurs du Quebec." On March
31, 2004, Dermond was approximately $12,375 US in arrears in the payment of Mr.
Mondou's salary.
Lac Dore Mining Inc.
Michel Garon - General Manager. Mr. Garon, age 52, has been a General Manager
of Lac Dore since November 2002. Mr. Garon's career has been in mining,
performing a variety of management functions for more than 20-years. From 1995
until joining Lac Dore Inc. in November 2002, Mr. Garon was General Manager for
Noranda's Matagami Mine, in charge of two underground mining operations (annual
operating budget - $35MM), including a concentrator and all the ancillary
services. He was also responsible for the construction and development of a new
underground operation (investment - $85 MM). He was Vice President of smelting
operations for the Brunswick Mining and smelting Corporation Ltd in New
Brunswick, Manager of the Opemiska Division of Minnova Inc. including three
underground mines, a concentrator and all the ancillary services, and was
superintendent of several operations from 1981 - 1987. Mr. Garon has a Master
in Applied Sciences, ecole Polytechnique of Montreal, 1976 and Bachelor in
Applied Sciences, Mining Engineering, ecole Polytechnique of Montreal, 1975. On
March 31, 2004, Lac Dore Mining Inc. was approximately $58,000 US in arrears in
the payment of Mr. Garon's salary.
40
Jan Mracek - Director of Technology. Mr. Mracek, age 47, has been Director of
technology of Lac Dore since January 2003. Mr. Mracek is a Metallurgist with 22
years of experience in hydrometallurgy, in both research and plant operations.
Mr. Mracek was responsible for technical research, design and commissioning of
new technologies, including the development of an innovative vanadium recovery
and refining process for McKenzie Bay. In operations, he focused on new
technologies and improved plant performance. His responsibilities have included
process selection, development and design; preparation of P&IDs and flow sheets;
vendors evaluation; and selection of process equipment. Mr. Mracek has worked
as a Metallurgist for SNC-Lavalin Engineers & Contractors Inc., Toronto, Ontario
and Rustenburg Base Metals Refiners (Pty) Ltd., Rustenburg, South Africa; Plant
Superintendent, Rhombus Vanadium (Pty) Ltd., Rustenburg, South Africa; Technical
Development Manager, Hydrometallurgical Plant Bruntal, Bruntal, Czech Republic,
and Researcher to Head of Metals Productions Department, Research Institute of
Metals, Panenske Brezany, Czech Republic. Mr. Mracek has a PhD, Physical
Metallurgy, Institute of Chemical Technology, Prague, Czech Republic, 1987 and
MSc, Chemical Technology and Metallurgy, Institute of Chemical Technology,
Prague, Czech Republic, 1980. On March 31, 2004, Lac Dore Mining Inc. was
approximately $58,000 US in arrears in the payment of Mr. Mracek's salary.
(c) Family Relationships
There are no family relationships among our directors, executive officers, or
persons nominated or chosen by us to become directors or executive officers.
(d) Involvement in Certain Legal Proceedings
None of the following events occurred during the past five years that is
material to an evaluation of the ability or integrity of any director, person
nominated to become a director, executive officer, promoter or control person:
- - Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
- - Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
- - Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
- - Being found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
41
(e) Audit Committee Financial Expert
Not applicable.
(f) Identification of the Audit Committee
Not applicable.
II. Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of any Forms 3 and 4 and amendments thereto furnished
to us under Rule 16a-3(a) under the Exchange Act during and with respect to our
most recent fiscal year and any Forms 5 and amendments thereto furnished to us
with respect to our most recent fiscal year, and any written representations
referred to in subparagraph (b)(2)(i) of Item 405 of Regulation S-B, other than
as set forth below no person who at any time during the fiscal year ended
September 30, 2003 was a director, officer, or to our knowledge a beneficial
owner of more than 10% of any class of our equity securities registered pursuant
to Section 12 of the Exchange Act, failed to file on a timely basis, as
disclosed in the above Forms, reports required by Section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years.
NAME NUMBER OF LATE REPORTS NUMBER OF TRANSACTIONS
NOT REPORTED ON A TIMELY BASIS
Steven D. McCormick 1 3
To the best of our knowledge, all reports required to be filed with respect to
our fiscal year ended September 30, 2003 have been filed and all late reports
and required reports not filed with respect to prior periods have been disclosed
by us in a prior Annual Report on Form 10-KSB.
III. Code of Ethics
We have adopted a code of ethics that applies to all of our officers, including
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Any
shareholder or interested party may request a copy of the code of ethics. Such
request must be made by contacting Richard Kaiser at (757) 306-6090 or by email
at: yes@yesinternational.com.
42
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table discloses all plan and non-plan compensation awarded to,
earned by, or paid to the following for all services rendered in all capacities
to us and our subsidiaries: (a) all individuals serving as our chief executive
officer (CEO) or acting in a similar capacity during the fiscal year ended
September 30, 2003, regardless of compensation level and (b) our four most
highly compensated executive officers other than the CEO who were serving as
executive officers at September 30, 2003 and whose total annual salary and
bonus, as so determined, was in excess of $100,000; (c) up to two additional
individuals for whom disclosure would have been provided pursuant to (b) of this
paragraph but for the fact that the individual was not serving as an executive
officer of us at September 30, 2003 and whose total annual salary and bonus, as
so determined, was in excess of $100,000 (the "Named Executive Officers"):
Long Term
Compensation
------------
Annual Awards
Compensation
Name and Principal Position Fiscal Year Salary Securities
Underlying Options/SARs
(shares of (common stock)
- --------------------------------------------------------------------------------
Gary L. Westerholm,
President and CEO 2003 $115,500 200,000 shares
2002 $102,262 200,000 shares
2001 $28,571 430,000 shares
Gregory N. Bakeman,
Treasurer and CFO 2003 $110,250 200,000 shares
2002 $89,282 50,000 shares
2001 $21,429 155,000 shares
During the fiscal year ended September 30, 2003, we did not adjust or amend the
exercise price of stock options or SARs previously awarded to any of the Named
Executive Officers, whether through amendment, cancellation or replacement
grants, or any other means.
Option/SAR Grants Table
The following table provides certain information concerning individual grants of
stock options (whether or not in tandem with SARs), and freestanding SARs
(including options and SARs that subsequently have been transferred) made during
the fiscal year ended September 30, 2003 to each of the Named Executive
Officers:
43
Option/SAR Grants in Fiscal Year Ended September 30, 2003
Individual Grants
Name Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or
Granted (shares of Fiscal Base Price Expiration
common stock) Year ($/Sh) Date
- ------------------ -------------- --------------- ---------- ------------
Gary L. Westerholm 100,000 $1.00 9/30/07
50,000 18.6% $1.00 9/30/12
50,000 $1.50 2/10/13
Gregory N. Bakeman 100,000 $1.00 9/30/07
50,000 18.6% $1.00 9/30/12
50,000 $1.50 2/10/13
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table provides certain information concerning each exercise of
stock options (or tandem SARs) and freestanding SARs during the fiscal year
ended September 30, 2003 by each of the Named Executive Officers and the fiscal
year-end value of unexercised options and SARs:
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<table>
<s> <c> <c> <c>
Name Shares Value Number of Securities
Acquired Realized Underlying Unexercised Value of Unexercised
on ($) Options/SARs at FY-End In-the Money
Exercise (shares of common stock) Options/SARs
at FY-End
Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------
Gary L. Westerholm -0- -0- 863,500/66,500 $669,465/$25,935
Gregory N. Bakeman -0- -0- 455,000/0 $350,900/0
</table>
An option in considered "in the money" for purposes of this table if its
exercise price was lower than the market value of our common stock as of
September 30, 2003 ($1.88 per share).
Long-Term Incentive Plans - Awards in Last Fiscal Year
44
We made no awards to a Named Executive Officer in the fiscal year ended
September 30, 2003 under any Long-Term Incentive Plans other than as set forth
in the Option/SAR Grants Table above.
Compensation of Directors
At the beginning of each of our fiscal years, each of our directors receives a
10-year option for the purchase of 50,000 shares of our common stock,
exercisable at the fair market value of the shares on the first trading day of
October in each year. A director who has or will serve on the Board of
Directors for less than an entire fiscal year will be granted an option to
purchase a pro-rata number of shares. The options are fully vested upon grant.
We have no other arrangements pursuant to which any of our directors were
compensated during the fiscal year ended September 30, 2003 or are expected to
be compensated in the future for any service provided as a director.
In February 2004, we extended the termination date from March 14, 2004 to
September 15, 2008 of options to purchase an aggregate of 300,000 shares of our
common stock previously granted to Gary L. Westerholm, Gregory N. Bakeman, John
W. Sawarin and Rocco J. Martino. The options are exercisable at $1.00 per
share.
Employment Contracts and Termination of Employment, and Change in Control
Arrangements.
On March 21, 2003, we entered into an employment agreement with each of Messrs.
Westerholm, Bakeman and Sawarin pursuant to which they will serve as executive
officers and receive annual base compensation of $121,000, $115,500 and $93,500,
respectively. We have agreed to review the compensation annually during the
last month of each fiscal year and to grant increases in compensation which will
be effective on the first day of the immediately following calendar year, based
upon the respective employee's performance, scope of responsibility assumed,
compensation paid to similar employees in similar companies and such other
factors as may guide us in setting reasonable compensation. In September 2003,
we did not review the compensation because of our financial condition. Unless
sooner terminated as provided for in the agreements, the terms of employment
continue until April 1, 2006, provided, however, that such terms shall
automatically be extended for additional periods of twelve months each unless we
give notice, not less than three months prior to the expiration of the term,
including any extensions, of the termination of the employment effective as of
the next succeeding anniversary date of the expiration of the term or any
extension. Each employee has the right to participate in all senior executive
benefit, bonus and/or stock option plans we maintain and are available to our
senior executive officers generally. In the event of the termination of an
employee's employment as a result of disability, we will pay him an amount equal
to his base annual salary less any credit for sick pay or other benefits
received by him deriving from any private medical insurance or other similar
45
arrangements entered into by us. Any of the employees may voluntarily terminate
his employment with us at any time on at least 30 days prior written notice to
us and shall then be entitled to receive his base salary until the date his
employment terminates and certain other benefits. If there should be (a) a sale
of substantially all our assets; (b) a merger, amalgamation or consolidation of
us to form a new entity; or (c) a change in control of us and as a result an
employee's employment is terminated but the acquirer or the new entity, as the
case may be, offers the employee employment on terms and conditions that are
essentially the same or better than those provided under his respective
employment agreement, if the employee refuses that offer, the employee will not
be entitled to any compensation under his employment agreement. If, however,
upon any of such three events the employee is not offered employment by the
acquirer or new entity, then the employee shall be entitled to receive his
annual salary for a period of three years from the termination and any accrued
but unpaid vacation pay. All other benefits the employee may have under the
senior executive benefit bonus and/or stock option plans and programs of the
employer shall be determined in accordance with the terms and conditions of such
plans and programs. If we breach any provision of an employee's employment
agreement and such breach is not cured by us within 15 days after receipt of
written notice of the breach, the employee shall be entitled to receive his base
salary for a period of three years and all other rights and benefits the
employee may have under our senior executive benefit, bonus and/or stock option
plans and programs shall be determined in accordance with the terms and
conditions of such plans and programs. We are in breach of each of the
employment agreements because we have not paid the required salaries. As of
March 31, 2004, we were in arrears in salary payments under the employment
agreements in the amounts of approximately $81,000, $72,000 and $54,500,
respectively. We have not received written notice of the breaches from any of
our executive officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Securities Authorized for Issuance With Respect to Compensation Plans
The following table provides certain information as of September 30, 2003 with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance:.
46
Plan Category Number of shares Weighted average Number of shares
of common stock to exercise price of of common stock
be issued upon outstanding options, remaining available
exercise of warrants and rights for future issuance
outstanding other than securities
options, warrants to be issued upon
and rights exercise of the
outstanding options,
warrants and rights
disclosed elsewhere
in this table. (1)
- ------------- --------------- ------------------- ----------------------
Equity
compensation
plans approved
by security
holders 3,420,417 $1.13 4,079,583
Equity
compensation
plans not
approved by
security holders
(2)(3) 700,000 $1.00 -0-
(1) We have three stockholder-approved equity compensation plans, each of which
provides for a maximum of 2,500,000 shares of common stock which may be issued
upon exercise of options that have and may be granted under adjustment as
described in the plans.
(2) Prior the adoption of the shareholder approved equity compensation plans, we
granted options to various individuals who provided services to us (including
services as employees and/or directors) as partial payment for those services.
(3) The figures in this row include options for the purchase of an aggregate of
150,000 shares of common stock granted to our directors. These options were not
considered granted under the stockholder-approved 2001 Directors Non-Qualified
Stock Option Plan because the vesting schedules for these options varied from
the terms of the plan.
Other than as set forth above, we do not have any compensation plan under which
equity securities are authorized for issuance that was adopted without the
approval of our security holders.
47
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 31, 2004 with
respect to any person (including any "group") who is known to us to be the
beneficial owner of more than 5% of any class of our common stock and as to each
class of our equity securities beneficially owned by our directors and directors
and officers as a group:
Name and Shares of Common Stock Approximate
Address of Beneficial Owner Beneficially Owned (1)(2) Percent of Class
- --------------------------- ------------------------- ----------------
Gary L. Westerholm
3362 Moraine Drive
Brighton, Michigan 48114 5,213,200 shares (3) 19.6 %
John W. Sawarin
143 Windsor Ave.
London, ONT Canada N6C 2A1 2,394,600 shares (4) 9.1 %
Stephen D. and
Karen A. McCormick
PO Box 1254
Bismarck, ND 58502 9,720,048 shares (5) 30.6 %
SOQUEM, INC.
1000, route de l'Eglise,
bureau 500
Sainte-Foy Quebec Canada
G1V 3V9 1,520,123 shares 6.0 %
Gregory N. Bakeman
975 Spaulding Avenue SE
Grand Rapids, Michigan 49546 568,700 shares (6) 2.2 %
Rocco J. Martino
1468 Gary Wood Drive
Bass Ridge, Illinois 60527 834,698 shares (7) 3.2 %
Donald C. Harms
37899 Twelve Mile Road
Farmington Hills, Michigan 48331 149,918 shares (8) (9)
Doris F. Galvin
19495 Sibley Road
Chelsea, MI 48118 2,000 shares (9)
John A. Popp
PO Box 2917
Midland, MI 48640 1,445,430 shares (10) 5.7 %
Officers and directors
as a group (7 persons) 18,946,664 shares (11) 54.7 %
(1) Unless otherwise noted below, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
48
(2) For purposes hereof, a person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of warrants or options or the conversion of convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that any such warrants, options or convertible securities that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date hereof, have been exercised.
(3) Includes (a) 200,000 shares owned by Mr. Westerholm's spouse, (b) 87,500
shares owned by Mr. Westerholm's son who resides in his household, (c)
3,957,700 shares held by the Westerholm Family Living Trust as to which Mr.
Westerholm and his spouse are co-trustees and (d) 963,500 shares that can be
acquired by Mr. Westerholm upon exercise of options and warrants. Does not
include 66,500 shares that can be acquired by Mr. Westerholm upon exercise of
options and warrants that are not exercisable within 60 days of the date hereof.
(4) Includes (a) 754,600 shares owned by Mr. Sawarin's spouse, (b) 780,000
shares that can be acquired by Mr. Sawarin upon exercise of options, and (c)
60,000 shares that can be acquired by Mr. Sawarin's spouse upon exercise of
options.
(5) Includes (a) 2,535,018 shares owned jointly by Mr. McCormick and his spouse,
(b) 938,063 shares owned by a company of which Mr. McCormick is an affiliate and
(c) 6,216,667 shares that can be acquired by Mr. McCormick upon exercise of
options.
(6) Includes (a) 500 shares owned by Mr. Bakeman's spouse, (b) 700 shares owned
by Mr. Bakeman's minor children, and (c) 555,000 shares that can be acquired by
Mr. Bakeman upon exercise of options.
(7) Represents (a) 560,055 shares owned by Martino Investment Partners, the
general partners of which are Mr. Martino and his spouse, (b) 230,000 shares
that can be acquired upon exercise of options and (c) 44,643 shares that can be
acquired upon exercise of warrants.
(8) Represents (a)55,168 shares owned by Harms Family Living Trust, the sole
beneficiaries and co-trustees of which are Mr. Harms and his spouse and (b)
93,970 shares that can be acquired upon exercise of options.
49
(9) Less than 1%.
(10) Represents (a) an aggregate of 106,140 shares held by Mr. Popp and his
Individual Retirement Accounts. (b) 19,990 shares owned by Mr. Popp's spouse,
(c) 928,600 shares owned by MAP Mechanical Contractors, Inc. of which Mr. Popp
is an affiliate, (d) 175,100 shares owned by MAP Mechanical Contractors, Inc.
Profit Sharing Plan and (e) 215,600 shares owned by MAP Mechanical Contractors,
Inc. Pension Plan.
(11) See notes above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On September 6, 2001, we entered into an agreement with Roberts Construction
Company whereby Roberts proposed to purchase the Kelsey Lake diamond mine, which
is owned by one of our subsidiaries. Roberts is a subsidiary of McCormick
Incorporated. Stephen D. McCormick, one of our directors, is President and a
shareholder of McCormick Incorporated. At the time of entering into the
agreement, however, Mr. McCormick was not one of our directors. The agreement
provided that Roberts was required to pay all operating costs and certain
liabilities relating to the Kelsey Lake diamond mine, which would be applied to
the purchase price of the mine if the transaction was completed. Roberts was
entitled to reimbursement of the costs and payments if the transaction was not
completed. In March 2002, Roberts informed us that it was terminating the
agreement and would not complete the purchase. Accordingly, we reimbursed
Roberts for the costs and liabilities it incurred by issuing 952,317 shares of
common stock to Roberts Construction and 101,471 shares of common stock to Mr.
McCormick.
We previously granted SOQUEM an option to purchase a 20% undivided interest in
the Lac Dore project. On Aril 17, 2003, SOQUEM relinquished any
rights it had relating to the deposits in exchange for 250,000 shares of our
common stock.
We have retained the law firm of Larson, Harms & Bibeau, P.C. to perform certain
legal services for us and expect to continue to do so in the future. Since
October 1, 2002, we have incurred legal fees and expenses with such firm of
approximately $160,000. Donald C. Harms, one of our a directors, is a principal
of Larson, Harms & Bibeau, P.C. On May 15, 2003, we issued 20,000 shares of our
common stock in consideration of the forgiveness of $17,100 we owed to Larson,
Harms & Bibeau, P.C. At the direction pf Larson, Harms & Bibeau, P.C., 10,000
of the shares were issued to a trust the sole beneficiaries and co-trustees of
which are Mr. Harms and his spouse. At the time of the issuance, the market
value of our common stock was $.95 per share.
50
Other than as otherwise described in Items 10 and 12 of this Annual Report,
during the last two years there have been no transactions, or are there any
proposed transactions, to which we were or are to be a party, in which any of
the following persons had or is to have a direct or indirect material interest
and the amount involved in the transaction or a series of similar transactions
does not exceed $60,000
- - Any of our directors or executive officers;
- - Any nominee for election as a director;
- - Any security holder named in Item 11 of this Annual Report; and
- - Any member of the immediate family (including spouse, parents, children,
siblings, and in-laws) of any of the above persons.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
2.1 Share Purchase Agreement between McKenzie Bay International,
Ltd. and Jacquelin Dery, Laurent Mondou and Experts Conseils
Dermond Inc. of February 12, 2002. Previously filed as an
exhibit to Amendment No. 2 to our registration statement on Form
10-SB and hereby incorporated by reference.
3.1 Certificate of Incorporation, as amended. Previously filed as
an exhibit to our registration statement on Form 10-SB and
hereby incorporated by reference.
3.2 Bylaws. Previously filed as an exhibit to our registration
statement on Form 10-SB and hereby incorporated by reference.
4.1 See Exhibits 3.1 and 3.2.
4.3 Specimen Stock Certificate. Previously filed as an exhibit to
our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2002 and hereby incorporated by reference.
4.4 Form of Warrant. Previously filed as an exhibit to our Annual
Report on Form 10-KSB for the fiscal year ended September 30,
2002, and hereby incorporated by reference.
51
4.5 Form of Subscription Agreement. Previously filed as an exhibit
to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2002 and hereby incorporated by reference.
10.1 Employment Agreement between Experts Conseils Dermond Inc. and
Jacquelin Dery, dated February 12, 2002.* Previously filed as
an exhibit to our Annual Report on Form 10-KSB for the fiscal
year ended September 30, 2002 and hereby incorporated by
reference.
10.2 Royalty Agreement between McKenzie Bay International, Ltd. and
Jacquelin Dery as of February 12, 2002.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2002 and hereby incorporated by reference.
10.3 Employment Agreement between Experts Conseils Dermond Inc. and
Lauren Mondou, dated February 12, 2002.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2002 and hereby incorporated by reference.
10.4 Royalty Agreement between McKenzie Bay International, Ltd. and
Lauren Mondou as of February 12, 2002.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2002, and incorporated herein by reference.
10.5 Employment Agreement between McKenzie Bay Resources, Ltd. and
Michel Garon, dated November 1, 2002.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2002 and hereby incorporated by reference.
10.6 2001 Employee Non-qualified Stock Option Plan.* Previously
filed as an exhibit to our Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2002 and hereby incorporated by
reference.
10.7 Amended 2001 Directors Non-qualified Stock Option Plan.*
Previously filed as an exhibit to Amendment No. 1 to our Annual
Report on Form 10-KSB for the fiscal year ended September 30,
2002 and hereby incorporated by reference.
10.8 2001 Employee Incentive Stock Option Plan.* Previously filed as
an exhibit to our Annual Report on Form 10-KSB for the fiscal
year ended September 30, 2002, and incorporated herein by
reference.
52
10.9 Agreement dated April 17, 2003 between McKenzie Bay Resources
Ltd. and SOQUEM Inc. terminating prior agreements. ++
10.10 Employment Agreement dated March 21, 2003 between Gary L.
Westerholm and McKenzie Bay International, Ltd. * ++
10.11 Employment Agreement dated March 21, 2003 between Gregory N.
Bakeman and McKenzie Bay International, Ltd. * ++
10.12 Employment Agreement dated March 21, 2003 between John W.
Sawarin and McKenzie Bay International, Ltd. * ++
10.13 Consulting Agreement as of February 15, 2003 between McKenzie
Bay Resources, Inc.(now known as Lac Dore Mining Inc.) and
Savanco, (Pty) Ltd, incorporated. ++
10.14 Agreement of August 19, 2003 between McKenzie Bay International,
Ltd. Resources, Inc. and Yes International Inc. ++
10.15 Standby Equity Distribution Agreement Agreement as of April 6,
2004 between Cornell Capital Partners, LP and McKenzie Bay
International Ltd. ++
10.16 Registration Rights Agreement as of April 6, 2004 between
Cornell Capital Partners, LP and McKenzie Bay International Ltd.
++
10.17 Placement Agent Agreement as of April 6, 2004 between McKenzie
Bay International Ltd. and Spencer Clarke LLC. ++
10.18 Escrow Agreement as April 6, 2004 between McKenzie Bay
International Ltd., and Butler Gonzalez LLP. ++
14.1 Code of Ethics. ++
53
21.1 Subsidiaries. ++
31.1 Rule 13a-14(a) Certification of Gary L. Westerholm. ++
31.2 Rule 13a-14(a) Certification of Gregory N. Bakeman. ++
32.1 Certification Pursuant to 18 U.S.C. Section 1350 of Gary L.
Westerholm. ++
32.2 Certification Pursuant to 18 U.S.C. Section 1350 of Gregory N.
Bakeman. ++
99.1 Lac Dore Feasibility Study - Executive Summary. Previously
filed as an exhibit to Amendment No. 2 to our registration
statement on Form 10- SB and hereby incorporated by reference.
* Management contract or compensatory plan or arrangement.
++ Filed herewith.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended
September 30, 2003:
Date of Report Item(s) Reported
July 9, 2003 5 and 7
July 9, 2003 7 and 9
July 24, 2003 5 and 7
August 18, 2003 5 and 7
September 3, 2003 5 and 7
September 8, 2003 5 and 7
September 29, 2003 5 and 7
ITEM 14. PRINCIPAL ACCOUNTANT FEE AND SERVICES.
Not applicable.
54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April_16, 2004 MCKENZIE BAY INTERNATIONAL, LTD.
By: /s/ Gary L. Westerholm
-------------------
Gary L. Westerholm
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- ------------------ --------------------------- ------------------
/s/Gary L. Westerholm
- ------------------
Gary L. Westerholm President, Chief Executive April 16, 2004
Officer and Director
(Principal Executive Officer)
/s/Gregory N. Bakeman
- -----------------
Gregory N. Bakeman Treasurer, Chief Financial April 16, 2004
Officer and Director
(Principal Financial and
Accounting Officer)
John W. Sawarin Director
Rocco J. Martino Director
/s/Stephen D. McCormick
- --------------------
Stephen D. McCormick Director April 16, 2004
/s/Donald C. Harms
- ----------------
Donald C. Harms Director April 16, 2004
/s/ Doris F. Galvin
- ---------------
Doris F. Galvin Director April 16, 2004
56
EXHIBITS:
==================
EX-10.09
AGREEMENT
This Agreement is made by and between MCKENZIE BAY RESOURCES, LTD., a
corporation duly incorporated under the Business Corporations Act (Ontario)
having its registered office at 143 Windsor Avenue, London, Ontario, CANADA N6C
2A1, (hereafter referred to as "MCKENZIE BAY"), and SOQUEM, INC., a corporation
continued under Part 1A of the Companies Act (Quebec) having its registered
office at 2500-2600 boulevard Laurier, Fifth Floor, Sainte-Foy, Quebec, CANADA
G1V 4M6 (hereafter referred to as "SOQUEM").
WHEREAS, the parties have previously entered into a letter agreement dated
January 17, 1997 as amended August 28, 1997 and an Option and Joint Venture
Agreement dated August 31, 1998 as amended on June 21, 2001 and June 18, 2002
(the "Agreements"), and
WHEREAS, the parties wish to terminate all Agreements between themselves;
NOW, THEREFORE, the parties hereby agree as follows:
1. For and in consideration of the delivery to SOQUEM within 30 days of the
date of this agreement of a certificate or certificates evidencing 250,000
shares of the common stock of MCKENZIE BAY INTERNATIONAL, LTD., a Delaware
corporation, properly titled in the name of SOQUEM, INC., SOQUEM agrees to and
does by these presents release and relinquish any right, claim of interest,
mining claim, claim of any option or any other interest whatsoever which it may
have or assert with respect to an area located in the Rinfret and Lemoine
Townships near Chibougamau, Quebec, Canada, commonly referred to as the "Lac
Dore" property.
2. Each party with the intention of binding itself and its successors and
assigns and in consideration of the mutual promises herein contained does hereby
remise, release and discharge the other party, its officers, agents, employees,
successors and assigns of and from all liabilities, obligations, claims and
demands whatsoever under or arising from the above-mentioned Agreements. It is
the intention of the parties that the Agreements shall herewith cease and
terminate and be of no further force or effect.
3. SOQUEM understands that the Shares being issued have not been registered
under the U.S. Securities Act and the U.S. Exchange Act or any United States
State Securities Laws by reason of their issuance by MCKENZIE BAY INTERNATIONAL,
LTD. in a transaction exempt from the registration requirements thereof. The
Shares are "restricted securities" within the meaning of Rule 144 under the U.S.
Securities Act, are restricted from trading for 12 months from the date of
issuance of the certificate, and may not be sold unless such disposition is
registered under the U.S. Securities Act and applicable United States State
Securities Laws or is exempt from registration thereunder. The purchasers also
understand that none of the Shares are listed on an exchange, no trading or
other market exists for those Shares except for quotations of the Shares on the
Pink Sheets Section of the National Quotation Service, and the Shares may never
be listed on an exchange and no trading or other market may ever exist for the
Shares. All certificates issued pursuant to this agreement will bear a legend
to the following effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND ARE RESTRICTED SECURITIES AS THAT TERM IS
DEFINED IN RULE 144 UNDER THE ACT AND REQUIRES WRITTEN RELEASE FROM EITHER
ISSUING COMPANY OR THEIR ATTORNEY PRIOR TO LEGEND REMOVAL."
4. The parties shall use all reasonable efforts to insure that public
announcements or reports (including press releases) by either party of any
information relating to this Agreement shall be made on the basis of agreed
texts approved in good faith in advance of issuance by the other party.
IN WITNESS WHEREOF, the parties have executed this agreement as of April 17,
2003.
MCKENZIE BAY RESOURCES, LTD.
By: /s/ Gregory N. Bakeman
Gregory N. Bakeman
Its: Vice President
SOQUEM, INC.
By: /s/ Yves Harvey
Yves Harvey, Eng. Ph.D.
Its: President and Chief Executive Officer
MCKENZIE BAY INTERNATIONAL, LTD. does, by these presents, agree to issue 250,000
shares of its common stock in accordance with Paragraph 1, above.
MCKENZIE BAY INTERNATIONAL
By: _______/s/ Gary L. Westerholm
Gary L. Westerholm
Its: President
==================================
EX-10.10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into on March 21, 2003.
BETWEEN: GARY L. WESTERHOLM, domiciled and residing at Brighton, Michigan;
(hereinafter referred to as the "Employee")
AND: McKENZIE BAY INTERNATIONAL, LTD. (hereinafter referred to as "MKBY"), a
corporation duly incorporated under the laws of the State of Delaware,,
United States of America, having its registered office at 975 Spaulding
Avenue, Grand Rapids, Michigan, U.S.A., 49546, represented herein by Gary
L. Westerholm, President, duly authorized as he so declares;
WHEREAS MKBY wishes to retain the Employee;
WHEREAS the Employee and MKBY are desirous of entering into an agreement for the
Employee's employment, all subject to the terms and conditions set forth in this
Agreement;
NOW IT IS HEREBY AGREED:
1. INTERPRETATION
1.1 Definitions
In this Agreement, the following words and expressions have the respective
meanings ascribed to them below:
(a) "Affiliate" with respect to a Person means a Person that controls, is
controlled by or under common control with such Person. For purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meaning collative to the
foregoing;
(b) "Agreement" means this employment agreement;
(c) "Board of Directors" means the board of directors of MKBY
(d) "Business" means the mining and processing of vanadium compounds, including
vanadium-based electrolyte and the marketing of vanadium-based electricity
energy solutions, including uninterrupted power, off-grid power applications of
all types and vanadium-based energy storage applications;
(e) "Cause" shall mean
1. The Employee has committed a willful, serious act such as fraud,
embezzlement or theft, committed any act against the Employer intending to
enrich himself at the expense of the Employer or made an unauthorized use or
disclosure of secret or confidential information pertaining to the business of
the Employer;
2. The Employee has been convicted of a felony or commits an act
constituting a felony;
3. The Employee has engaged in conduct which has caused demonstrable and
serious injury, monetary or otherwise, to the Employer;
4. The Employee, in carrying out his duties hereunder, has been guilty of
willful, gross neglect or willful misconduct, or
5. The Employee has materially breached this Agreement (including without
limitation any failure to perform the duties assigned to him in accordance with
this Agreement; provided, however, that the mere failure to reach established
financial performance targets shall not in itself constitute a failure to
perform if Employee has otherwise performed such actions as have been requested
or assigned to him in connection with such financial performance targets) and
has not remedied such breach within 15 days after receipt of written notice from
the Employer specifying in reasonable detail, the nature of the breach.
(f) "Commencement Date" means April 1, 2003;
(g) "Disability" shall mean the inability or incapacity (by reason of a
medically-determinable physical or mental impairment) of the Employee to perform
the duties and responsibilities related to the job or position with the Employer
described in Section 3 of this Agreement for a period that lasts or that can be
reasonably expected to last more than 180 days. Such inability or incapacity
shall be documented to the reasonable satisfaction of the Employer by
appropriate correspondence from registered physicians reasonably satisfactory to
Employer.
(h) "Discoveries and Works" includes by way of example but without limitation,
intellectual property, trade secrets and other confidential information, patents
and patent applications, trademarks and trademark registrations and
applications, service marks and service mark registrations and applications,
trade names, copyrights and copyright registrations and applications;
(i) "Employment Year" means the period beginning on January 1, 2003 and ending
on December 31, 2003, and each consecutive calendar year;
(j) "Parties" means MKBY and the Employee and "Party" means one or the other as
the case may be;
(k) "Person" means any individual, corporation, proprietorship, firm,
partnership, limited partnership, limited liability company, trust, association
or other entity;
(l) "Restriction Period" means the period of time covering the Term plus a
period equivalent to twelve (12) months following Employee's Termination Date;
(m) "Subsidiary" means a corporation controlled by MKBY, or by another
subsidiary of MKBY;
(n) "Term", "Initial Term", and "Additional Term" shall have the meaning set
forth in Section 4;
(o) "Termination Date" means the effective date of the Employee's termination of
employment with MKBY, regardless of the reason;
(p)"Territory" means the world.
2. EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts
employment with the Employer upon the terms and subject to the conditions set
forth herein.
3. DUTIES AND RESPONSIBILITIES
3.1 During the Term of this Agreement, the Employee shall initially be
employed as President of the Employer and shall perform the services and
functions relating to the office or offices in which he is from time to time
elected or otherwise reasonably incident to such office or offices, all in
accordance with the job description which is attached hereto and which is
incorporated herein by reference and made a part hereof, and such amendments or
modifications to said job description as shall be directed by the Board of
Directors. The Employee shall be subject to the direction of the Board of
Directors of the Employer and such other officer or officers of the Employer as
the Board of Directors of the Employer may determine.
3.2 During the Term of this Agreement, the Employee will devote his best
efforts and his time and attention to the performance of his duties under this
Agreement except for vacation periods and reasonable absences due to injury or
illness as permitted by Employer's general policies. The employment
relationship between the parties shall be governed by the general employment
policies and practices of the Employer, except that when the terms of this
Agreement differ from or are in conflict with the Employer's general employment
policies or practices, this Agreement shall control.
3.3 It is contemplated that the Employee will be obliged from time to time
and for reasonable periods of time to travel in the performance of his duties
and obligations under this Agreement. However, the principal place of employment
of the Employee which the Employee shall report for work will be at Brighton,
Michigan.
3.4 It is expressly understood and agreed that the Employee shall not engage
in any other business or business opportunity whether or not such business
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that:
(a) The Employee may engage in personal, charitable, professional and
investment activities to the extent such activities do not conflict or interfere
with the Employee's duties and obligations under this Agreement or with
Employee's ability to perform his duties and responsibilities under this
Agreement; and,
(b) The Employee shall not be prevented from investing his assets in such
form or manner as will not require any substantial amount of time or services on
the part of the Employee in the operation of the affairs of the enterprises in
which such investments are made.
4. TERM
Unless sooner terminated as provided for in this Agreement, the terms of the
Employee's employment shall commence on April 1, 2003 and shall continue for
three (3) years (the "Initial Term"), provided, however, that the Initial Term
of the Employee's employment under this Agreement shall automatically be
extended for additional periods of twelve (12) months each (an "Additional
Term") unless and until MKBY shall have given Employee notice, not less than
three (3) months prior to the expiration of the Initial Term or any subsequent
Additional Term, of the termination by MKBY of the Employee's employment
effective as of the next succeeding anniversary date of the expiration of the
Initial Term or Additional Term (the Initial Term and any Additional Term(s) are
collectively referred to as the "Term" in this Agreement).
5. COMPENSATION
The Employee shall be paid an annual base salary of One Hundred Twenty-One
Thousand ($121,000.00) Dollars (US) payable in accordance with the then-current
payroll policies of the Employer. Employer agrees to review Employee's
compensation annually during the last month of each fiscal year and to grant
increases in compensation which will be effective on the first day of the
immediately-following calendar year, based upon the Employee's performance,
scope of responsibility assumed, compensation paid to similar employees in
similar companies and such other factors as may guide the Employer in setting
reasonable compensation.
6. EXPENSES
MKBY shall reimburse the Employee for all necessary and reasonable expenses
incurred by him in the performance of his duties under this Agreement. The
Employee shall, on being so required, provide MKBY with vouchers or other
evidence of actual payment of the said expenses in a form satisfactory to MKBY.
7. BENEFITS
Subject to the right of the Employer to amend or terminate any employee and/or
group or senior executive benefit, bonus and/or stock option plan or program and
to the terms and conditions of such plans and programs, the Employee shall be
entitled to receive the following employee benefits:
7.1 Employee Plans
The Employee shall have the right to participate in such medical and dental
plans as are maintained by the Employer and are available to its exempt,
salaried employees generally (including without limitation disability, accident,
medical, life insurance and hospitalization plans which are normal and
customary).
7.2 Bonus Plans
The Employee shall have the right to participate in all senior executive
benefit, bonus and/or stock option plans as are maintained by the Employer and
are available to the Employer's senior executive officers generally, all in
accordance with the Employer's regular practices with respect to senior
executive officers.
7.3 Vacation
The Employee shall be entitled to vacation days and holiday pay in accordance
with the policies applicable to the Employer's senior executive officers
generally.
8. RETURN OF DOCUMENTS AND PROPERTY
Upon the termination of Employee's employment with MKBY, or at anytime upon the
request of MKBY, Employee (or his heirs or personal representatives) shall
deliver to MKBY (a) all documents and materials (including without limitation,
computer files) containing trade secrets or other confidential information
relating to the business and affairs of MKBY, and (b) all documents, materials
and other property (including, without limitation, computer files) belonging to
MKBY, which in either case are in the possession or under the control of
Employee (or his heirs or personal representatives).
9. DISCOVERIES AND WORKS
All Discoveries and Works made or conceived by Employee during his employment by
MKBY, jointly or with others, that relate to the present or anticipated
activities of MKBY, or are used or usable by MKBY shall be owned by MKBY.
Employee shall (a) promptly notify, make full disclosure to, and execute and
deliver any documents requested by MKBY to evidence or better assure title to
Discoveries and Works in MKBY, as so requested, (b) renounce any and all claims,
including but not limited to claims of ownership and royalty, with respect to
all Discoveries and Works and all other property owned or licensed by MKBY, (c)
assist MKBY in obtaining or maintaining for itself at its own expense American
and foreign patents, copyrights, trade secret protection or other protection of
any and all Discoveries and Works, and (d) promptly execute, whether during his
employment with MKBY or thereafter, all applications or other endorsements
necessary or appropriate to maintain patents and other rights for MKBY and to
protect the title of MKBY thereto, including but not limited to assignments of
such patents and other rights. Any Discoveries and Works which, within six (6)
months after the Termination Date, are made, disclosed, reduced to a tangible or
written form or description, or are reduced to practice by Employee and which
pertain to the business carried on or products or services being sold or
developed by MKBY at the time of such termination shall, as between Employee and
MKBY be presumed to have been made during Employee's employment by MKBY.
10. DEATH
The Employee's employment under this Agreement shall terminate upon his death.
In the event of the termination of the Employee's employment as a result of his
death, MKBY shall promptly pay to any one or more beneficiaries designated by
the Employee pursuant to a notice to MKBY or, failing such designation, to the
Employee's estate, the annual base salary provided for in this Agreement through
the conclusion of the month in which such termination occurs. All other
benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
11. DISABILITY
The Employee's employment under this Agreement may be terminated as a result of
Disability at the option of MKBY by notice to the Employee. Such termination to
be effective upon the receipt by the Employee of such notice. In the event of
the termination of the Employee's employment as a result of Disability, MKBY
shall pay the Employee one (1) times his full annual base salary less any credit
for sick pay or other benefits received by the Employee deriving from any
private medical insurance or other similar arrangements entered into by MKBY.
All other benefits the Employee may have under the Employee and/or Group or
senior executive benefit bonus and/or stock option plans and programs of the
Employer shall be determined in accordance with the terms and conditions of such
plans and programs.
12. TERMINATION FOR CAUSE BY MKBY
The Employee's employment under this Agreement may be terminated by MKBY for
Cause. In the event that the Employee's employment under this Agreement shall
validly be terminated by MKBY for Cause pursuant to this Section 12, MKBY shall
promptly pay accrued but unpaid salary and reimburse or pay any other accrued
but unpaid amounts due under this Agreement as of the date of termination, and
thereafter MKBY shall have no further obligations under this Agreement. All
other benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
13. VOLUNTARY EARLY TERMINATION
The Employee may voluntarily terminate his employment under this Agreement at
any time by providing at least 30 days prior written notice to the Employer. In
such event, the Employee shall be entitled to receive his base salary until the
date his employment terminates, and all other benefits the Employee may have
under the Employee and/or Group or senior executive benefit bonus and/or stock
option plans and programs of the Employer shall be determined in accordance with
the terms and conditions of such plans and programs.
14. TERMINATION RESULTING FROM SALE OF BUSINESS
If there should be (a) a sale of substantially all the assets of MKBY to another
Person; (b) a merger, amalgamation or consolidation of MKBY with another Person
to form a new entity; or (c) a change in control of MKBY and as a result the
Employee's employment hereunder is terminated but the acquirer or the new
entity, as the case may be, offers the Employee employment on terms and
conditions that are essentially the same or better than those provided under
this Agreement, then in the event the Employee refuses that offer of employment,
Employee will not be entitled to any compensation hereunder. However, if there
should be (a) a sale of substantially all the assets of MKBY to another Person;
(b) a merger, amalgamation or consolidation of MKBY with another Person to form
a new entity; or (c) a change in control of MKBY and as a result the Employee's
employment hereunder is terminated and the Employee is not offered employment by
the acquirer or new entity, then the Employee shall be entitled to receive his
annual salary for a period of three years from and after the Effective Date of
termination and any accrued but unpaid vacation pay payable in a lump sum (but
discounted by a reasonable factor as mutually determined by MKBY and the
Employee) or in accordance with the then-payroll policies of the Employer at the
option of the Employer. All other benefits the Employee may have under the
Employee and/or Group or senior executive benefit bonus and/or stock option
plans and programs of the Employer shall be determined in accordance with the
terms and conditions of such plans and programs.
15. CONSTRUCTIVE TERMINATION PRIOR TO EXPIRATION OF EMPLOYMENT TERM
15.1 Constructive Termination
If prior to the expiration of the Term of this Agreement, the Employer:
(a) terminates the employment of the Employee other than for Due Cause as a
result of the death of the Employee or because of a Disability;
(b) demotes the Employee to a lesser position than as provided in Section 3
of this Agreement (including a material diminution in the nature or status of
the Employee's responsibilities, authorities, powers or duties);
(c) decreases the Employee's Base Salary and benefits below the levels
provided for by the terms of Sections 5, 6 and 7 of this Agreement (other than
as a result of any amendment or termination of any employee and/or group or
senior executive benefit, bonus and/or stock option plan which amendment or
termination is applicable to all employees or executives of the Employer, as the
case may be, eligible to participate in such plan prior to its termination);
(d) assigns to the Employee any duties materially inconsistent with the
status and responsibilities of the position provided for in Section 2 of this
Agreement and such action is not cured by the Employer within 15 days after
receipt of written notice from the Employee specifying in reasonable detail the
nature of such inconsistency; or
(e) materially breaches any provision of this Agreement and such breach is
not cured by the Employer within 15 days after receipt of written notice from
the Employee specifying in reasonable detail the nature of the breach,
then such action by the Employer, unless consented to in writing by the
Employee, shall be deemed to be a Constructive Termination by the Employer of
the Employee's employment ("Constructive Termination"); provided, however, that
except in the case of clause (a) above, no Constructive Termination shall be
deemed to have occurred unless the Employee notifies the Employer of the
Employee's election to treat such event as a Constructive Termination within 30
days of the occurrence of such event.
15.2 Result of Constructive Termination
In the event of a Constructive Termination:
(a) the Employee shall be entitled to receive his base salary for a period
of three years from and after the effective date of Constructive Termination,
payable in a lump sum (but discounted by a reasonable factor as mutually
determined by the Employer and the Employee) or in accordance with the then
payroll policies of the Employer at the option of the Employer;
(b) the provisions of Sections 17 and 18 shall apply for the balance of the
Employment Term but shall not apply for the period after the Employment Term.
(c) all other rights and benefits the Employee may have under the employee
and/or group or senior executive benefit, bonus and/or stock option plans and
programs of the Employer shall be determined in accordance with the terms and
conditions of such plans and programs.
15.3 In the event of the death or disability of the Employee following a
Constructive Termination, the amounts set forth in Section 15.2 of this
Agreement shall continue to be owing and shall be paid to the estate of the
Employee or the Employee as applicable.
15.4 The Employer agrees that in the event of a Constructive Termination, the
Employee shall not be required to seek other employment or to attempt in any way
to reduce any amount payable to the Employee by the Employer pursuant to this
Agreement and that any amounts due to the Employee hereunder shall not be
reduced by any compensation earned by the Employee as a result of employment by
another employer or by any retirement benefits paid to the Employee.
16. CONFLICT OF INTEREST
During the Term of this Agreement, the Employee shall not, either directly or in
conjunction with any person, firm, association, syndicate, company or
corporation as principal, agent, shareholder, or in any other manner whatsoever,
carry on or be engaged in, or advise, lend money to, guarantee the debts or
obligations of, or permit his name or any part of it to be used or employed by
any person, firm, association, syndicate, company or corporation engaged in any
business in competition with the business then carried on by MKBY or a
Subsidiary, provided that the holding of not more than two per cent (2%) of the
issued shares of a public company listed on any recognized stock exchange in the
United States or Canada or traded in the United States or Canadian over-the-
counter market, shall not be deemed a breach of this covenant.
17. CONFIDENTIALITY
During the Term of this Agreement and for a period of two (2) years thereafter,
the Employee shall keep secret and retain in strictest confidence, and shall not
use for his benefit or for the benefit or others, directly or indirectly, any
and all confidential information relating to MKBY and its Subsidiaries of which
the Employee shall obtain knowledge by reason of his employment under this
Agreement, including, without limitation, trade and business secrets or any
other non-public or proprietary information concerning the business, customer
lists, financial plans or projections, pricing policies, marketing plans or
strategies, business acquisition or divestiture plans, new personnel acquisition
plans, technical processes, inventions and other research projects, and except
in connection with the performance of his duties under this Agreement, he shall
not disclose any such information to anyone outside MKBY and any of its
Subsidiaries, except as required by law (provided prior written notice is given
by the Employee to MKBY) or except with the prior written consent of MKBY,
unless such information is known generally to the public or the trade through
sources other than the unauthorized disclosure by the Employee.
18. NON-COMPETITION AND NON-SOLICITATION
18.1 The Employee acknowledges and understands that (i) he has access to
MKBY's and MKBY's clients, channels for developing clients and recruiting
executives for employment, and other confidential information of MKBY, (ii) he
has direct substantial responsibility to maintain MKBY's business relationship
with clients of MKBY whose affairs he handles, (iii) the non-competition and
non-solicitation provisions set forth in this Section 18 constitute a material
part of the consideration received by MKBY under this Agreement, (iv) due to the
specific nature and limited market for MKBY's activities, the definition of
Territory as set forth in subsection 1.1(p) hereof is reasonable and justified,
(v) it would be unfair to MKBY if the Employee were to appropriate for himself
or for others the benefits of MKBY's many years of developing such business
relationships, especially when the Employee enjoys a relationship with clients
of MKBY as a result of his being introduced to the client's personnel as the
representative of MKBY, (vi) it would be unfair to MKBY if the Employee were to
appropriate for himself or for others the benefits of the business, technical
processes, personnel and other confidential information which MKBY has developed
in the conduct of its business, and (vii) it is therefore fair that reasonable
restrictions as set forth below should be placed on certain activities of the
Employee after his employment with MKBY terminates.
18.2 The Employee shall not, without the prior written consent of MKBY, at
any time during the Restriction Period, either individually or in partnership or
jointly or in connection with any Person, as principal, agent, consultant,
lender, contractor, employer, employee, investor or shareholder, or in any other
manner, directly or indirectly, anywhere within the Territory:
(a) advise, manage, carry on, establish, acquire control of, work for,
perform, render, or engage in, any business or service or activity that is
similar to or competitive with the Business or any portion of the Business; or
(b) invest in or lend money to, or guarantee the debts or obligations of,
any business or service or activity, or any Person engaged in any business or
service or activity, that is similar to or competitive with the Business or any
portion of the Business; or
(c) permit the Employee's name or any part thereof to be used or employed by
any Person that operates, is engaged in or has an interest in any business or
service or activity that is similar to or competitive with the Business or any
portion of the Business. Without limiting the effect of the foregoing, competing
with or competitive with the Business, includes without limitation, directly or
indirectly, engaging in or permitting the solicitation or sale of any products
or services of the type included within the meaning of the term Business as of
the termination of the Employee's employment with MKBY.
18.3 The Employee shall not during the Restriction Period, without the
written consent of MKBY, directly or indirectly (as owner, principal, agent,
partner, officer, employee, independent contractor, consultant, stockholder, or
otherwise), (i) solicit any Client (as this term is defined below) for a purpose
or objective of providing to such Client, or obtaining an engagement from such
Client to provide, any services, businesses or products included within the term
Business or (ii) solicit for employment or otherwise induce any employee
employed by MKBY or any of MKBY Affiliates at the date of termination of the
Employee's employment with MKBY to leave such employ or offer to employ or
employ such employee. The term "Client" shall mean one or more of the following:
(a) any current or former client or customer of MKBY or MKBY Affiliates;
(b) any current client or current customer of MKBY or MKBY Affiliates if at
any time since the Commencement Date the Employee had contact with such client
or customer, or personally solicited such client or customer, or rendered
services to such client or customer, or otherwise developed any relationship
with such client or customer, or
(c) any former client or former customer of MKBY or MKBY Affiliates who was,
during the thirty-six (36) months preceding the Termination Date, a client or
customer of MKBY or MKBY Affiliates, if at any time since the Commencement Date
the Employee had contact with such client or customer, or solicited such client
or customer, or rendered services to such client or customer, or otherwise
developed any relationship with such client or customer.
18.4 Upon the termination of the Employee's employment for whatever reason,
the Employee shall deliver to MKBY all documents, papers, records, accounts of
all and any description relating to the affairs of MKBY and its Affiliates
within his possession or under his control, it being the intention of the
Employee and MKBY that all such notes or memoranda made by the Employee during
the course of his employment under this Agreement shall be the property of MKBY
and its Affiliates and shall be left at its registered office or principal place
of business upon the termination of the Employee's employment.
18.5 The Employee acknowledges that the provisions of this Section 18 of this
Agreement are expressly for the benefit of the Employer, that the Employer would
be irreparably injured by a violation of the provisions of this Section and that
the Employer would have no adequate remedy at law in the event of such
violation. Therefore, the Employee acknowledges and agrees that in addition to
any other remedies available, injunctive relief, specific performance or any
other appropriate equitable remedy (without any bond or other security being
required) are appropriate remedies to enforce compliance by the Employee with
the provisions of this Section 18.
19. WITHHOLDING
MKBY shall be entitled to withhold from any and all amounts payable to the
Employee under this Agreement such amounts as from time to time be required to
be withheld pursuant to applicable tax laws and regulations.
20. GENERAL PROVISIONS
20.1 Further Assurances
Each of the parties upon the request of any other party, whether before or after
the date hereof, shall do, execute, acknowledge and deliver or cause to be done,
executed, acknowledged or delivered all such further acts, deeds, documents,
assignments, transfers, conveyances, powers of attorney and assurances as may be
reasonably necessary or desirable to effect complete consummation of the
transactions contemplated by this Agreement.
20.2 Successors in Interest
This Agreement and the provisions hereof shall enure to the benefit of and be
binding upon the Parties and their respective successors and assigns.
20.3 Notices
Any notice, direction or other instrument required or permitted to be given
hereunder shall be in writing and given by delivery or sent by (i) registered or
certified mail, (ii) reputable overnight courier, (iii) personal delivery, (iv)
telecopier or similar telecommunication device and addressed:
(a) in the case of MKBY at:
McKenzie Bay International, Ltd.
975 Spaulding Avenue
Grand Rapids, Michigan
U.S.A., 49546
Attention: Gregory N. Bakeman
Telecopier: 616-940-9194
with a copy to:
Donald C. Harms
LARSON, HARMS & BIBEAU, P.C.
37899 Twelve Mile Road, Suite 300
Farmington Hills, MI
U.S.A., 48331
(b) in the case of the Employee at:
3362 Moraine Drive
Brighton, MI 48114
Any notice, direction or other instrument given as aforesaid shall be deemed to
have been effectively given and received, if sent by mail on the fourth (4th)
business day following such mailing, if sent by telecopier or similar
telecommunications device on the next business day following such transmission
or, if delivered, to have been given and received on the date of such delivery.
Any party may change its address for service by written notice given as
aforesaid.
20.4 Amendments
This agreement may not be amended except by written instrument duly executed by
or on behalf of all parties hereto.
20.5 Governing Laws
This Agreement shall be governed by and construed in accordance with the laws of
the State of Michigan, United States of America.
20.6 Gender
Any reference in this Agreement to any gender shall include all genders and
words used herein importing the singular number only shall include the plural
and vice versa.
20.7 Headings
The division of this Agreement into articles, sections, subsections and other
subdivisions and the insertion of headings are for convenience of reference only
and shall not affect or be utilized in the construction or interpretation
hereof.
20.8 Severability
Any article, section, subsection or other subdivision of this Agreement or any
other provision of this Agreement which is, or becomes, illegal, invalid or
unenforceable shall be severed herefrom and shall be ineffective to the extent
of such illegality, invalidity or unenforceability and shall not affect or
impair the remaining provisions hereof, which provisions shall be severed from
any illegal, invalid or unenforceable article, section, subsection or other
subdivision of this Agreement or any other provision of this Agreement.
20.9 Waiver
No waiver of any of the provisions of this Agreement shall be deemed to
constitute a waiver of any other provision (whether or not similar) nor shall
such waiver constitute a continuing waiver unless otherwise expressly provided
in a written document duly executed by the party to be bound thereby.
20.10 Attorney's Fees
If any legal proceeding is necessary to enforce or interpret the terms of this
Agreement or to recover damages for breach hereof, the prevailing party shall be
entitled to reasonable attorney's fees as well as costs and disbursements in
addition to any other relief to which he or it may be entitled.
20.11 Waiver of Jury Trial
TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE RELATIONSHIP CONTEMPLATED HEREBY.
Language
The Parties hereby acknowledge that they have requested that this Agreement and
all related documents be drawn up in the English language. Les parties aux
presentes reconnaissent qu'elles ont exige que la presente convention et tous
les documents qui s'y rattachent soient rediges en anglais.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
McKENZIE BAY INTERNATIONAL, LTD.
per: /s/ Gary L. Westerholm
GARY L. WESTERHOLM, PRESIDENT
/s/ Gary L. Westerholm
Witness Gary L. Westerholm, Employee
=======================================
EX-10.11
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into on March 21, 2003.
BETWEEN: GREGORY N. BAKEMAN, domiciled and residing at Grand Rapids, Michigan;
(hereinafter referred to as the "Employee")
AND: McKENZIE BAY INTERNATIONAL, LTD. (hereinafter referred to as "MKBY"), a
corporation duly incorporated under the laws of the State of Delaware,, United
States of America, having its registered office at 975 Spaulding Avenue, Grand
Rapids, Michigan, U.S.A., 49546, represented herein by Gary L. Westerholm,
President, duly authorized as he so declares;
WHEREAS MKBY wishes to retain the Employee;
WHEREAS the Employee and MKBY are desirous of entering into an agreement for the
Employee's employment, all subject to the terms and conditions set forth in this
Agreement;
NOW IT IS HEREBY AGREED:
1. INTERPRETATION
1.1 Definitions
In this Agreement, the following words and expressions have the respective
meanings ascribed to them below:
(a) "Affiliate" with respect to a Person means a Person that controls, is
controlled by or under common control with such Person. For purposes of this
definition, "control"when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling"and "controlled"have meaning collative to the
foregoing;
(b) "Agreement" means this employment agreement;
(c) "Board of Directors" means the board of directors of MKBY
(d) "Business" means the mining and processing of vanadium compounds,
including vanadium-based electrolyte and the marketing of vanadium-based
electricity energy solutions, including uninterrupted power, off-grid power
applications of all types and vanadium-based energy storage applications;
(e) "Cause" shall mean
1. The Employee has committed a willful, serious act such as fraud,
embezzlement or theft, committed any act against the Employer intending to
enrich himself at the expense of the Employer or made an unauthorized use or
disclosure of secret or confidential information pertaining to the business of
the Employer;
2. The Employee has been convicted of a felony or commits an act
constituting a felony;
3. The Employee has engaged in conduct which has caused demonstrable and
serious injury, monetary or otherwise, to the Employer;
4. The Employee, in carrying out his duties hereunder, has been guilty of
willful, gross neglect or willful misconduct, or
5. The Employee has materially breached this Agreement (including without
limitation any failure to perform the duties assigned to him in accordance with
this Agreement; provided, however, that the mere failure to reach established
financial performance targets shall not in itself constitute a failure to
perform if Employee has otherwise performed such actions as have been requested
or assigned to him in connection with such financial performance targets) and
has not remedied such breach within 15 days after receipt of written notice from
the Employer specifying in reasonable detail, the nature of the breach.
(f) "Commencement Date" means April 1, 2003;
(g) "Disability" shall mean the inability or incapacity (by reason of a
medically-determinable physical or mental impairment) of the Employee to perform
the duties and responsibilities related to the job or position with the Employer
described in Section 3 of this Agreement for a period that lasts or that can be
reasonably expected to last more than 180 days. Such inability or incapacity
shall be documented to the reasonable satisfaction of the Employer by
appropriate correspondence from registered physicians reasonably satisfactory to
Employer.
(h) "Discoveries and Works" includes by way of example but without
limitation, intellectual property, trade secrets and other confidential
information, patents and patent applications, trademarks and trademark
registrations and applications, service marks and service mark registrations and
applications, trade names, copyrights and copyright registrations and
applications;
(i) "Employment Year" means the period beginning on January 1, 2003 and
ending on December 31, 2003, and each consecutive calendar year;
(j) "Parties" means MKBY and the Employee and "Party" means one or the other
as the case may be;
(k) "Person" means any individual, corporation, proprietorship, firm,
partnership, limited partnership, limited liability company, trust, association
or other entity;
(l) "Restriction Period" means the period of time covering the Term plus a
period equivalent to twelve (12) months following Employee's Termination Date;
(m) "Subsidiary" means a corporation controlled by MKBY, or by another
subsidiary of MKBY;
(n) "Term", "Initial Term", and "Additional Term" shall have the meaning set
forth in Section 4;
(o) "Termination Date" means the effective date of the Employee's
termination of employment with MKBY, regardless of the reason;
(p) "Territory" means the world.
2. EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts
employment with the Employer upon the terms and subject to the conditions set
forth herein.
3. DUTIES AND RESPONSIBILITIES
3.1 During the Term of this Agreement, the Employee shall initially be
employed as Chief Financial Officer of the Employer and shall perform the
services and functions relating to the office or offices in which he is from
time to time elected or otherwise reasonably incident to such office or offices,
all in accordance with the job description which is attached hereto and which is
incorporated herein by reference and made a part hereof, and such amendments or
modifications to said job description as shall be directed by the Board of
Directors. The Employee shall be subject to the direction of the Board of
Directors of the Employer and such other officer or officers of the Employer as
the Board of Directors of the Employer may determine.
3.2 During the Term of this Agreement, the Employee will devote his best
efforts and his time and attention to the performance of his duties under this
Agreement except for vacation periods and reasonable absences due to injury or
illness as permitted by Employer's general policies. The employment
relationship between the parties shall be governed by the general employment
policies and practices of the Employer, except that when the terms of this
Agreement differ from or are in conflict with the Employer's general employment
policies or practices, this Agreement shall control.
3.3 It is contemplated that the Employee will be obliged from time to time
and for reasonable periods of time to travel in the performance of his duties
and obligations under this Agreement. However, the principal place of employment
of the Employee which the Employee shall report for work will be at Grand
Rapids, Michigan.
3.4 It is expressly understood and agreed that the Employee shall not engage
in any other business or business opportunity whether or not such business
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that:
(a) The Employee may engage in personal, charitable, professional and
investment activities to the extent such activities do not conflict or interfere
with the Employee's duties and obligations under this Agreement or with
Employee's ability to perform his duties and responsibilities under this
Agreement; and,
(b) The Employee shall not be prevented from investing his assets in such
form or manner as will not require any substantial amount of time or services on
the part of the Employee in the operation of the affairs of the enterprises in
which such investments are made.
4. TERM
Unless sooner terminated as provided for in this Agreement, the terms of the
Employee's employment shall commence on April 1, 2003 and shall continue for
three (3) years (the "Initial Term"), provided, however, that the Initial Term
of the Employee's employment under this Agreement shall automatically be
extended for additional periods of twelve (12) months each (an "Additional
Term") unless and until MKBY shall have given Employee notice, not less than
three (3) months prior to the expiration of the Initial Term or any subsequent
Additional Term, of the termination by MKBY of the Employee's employment
effective as of the next succeeding anniversary date of the expiration of the
Initial Term or Additional Term (the Initial Term and any Additional Term(s) are
collectively referred to as the "Term" in this Agreement).
5. COMPENSATION
The Employee shall be paid an annual base salary of One Hundred Fifteen Thousand
Five Hundred ($115,500.00) Dollars (US) payable in accordance with the then-
current payroll policies of the Employer. Employer agrees to review Employee's
compensation annually during the last month of each fiscal year and to grant
increases in compensation which will be effective on the first day of the
immediately-following calendar year, based upon the Employee's performance,
scope of responsibility assumed, compensation paid to similar employees in
similar companies and such other factors as may guide the Employer in setting
reasonable compensation.
6. EXPENSES
MKBY shall reimburse the Employee for all necessary and reasonable expenses
incurred by him in the performance of his duties under this Agreement. The
Employee shall, on being so required, provide MKBY with vouchers or other
evidence of actual payment of the said expenses in a form satisfactory to MKBY.
7. BENEFITS
Subject to the right of the Employer to amend or terminate any employee and/or
group or senior executive benefit, bonus and/or stock option plan or program and
to the terms and conditions of such plans and programs, the Employee shall be
entitled to receive the following employee benefits:
7.1 Employee Plans
The Employee shall have the right to participate in such medical and dental
plans as are maintained by the Employer and are available to its exempt,
salaried employees generally (including without limitation disability, accident,
medical, life insurance and hospitalization plans which are normal and
customary).
7.2 Bonus Plans
The Employee shall have the right to participate in all senior executive
benefit, bonus and/or stock option plans as are maintained by the Employer and
are available to the Employer's senior executive officers generally, all in
accordance with the Employer's regular practices with respect to senior
executive officers.
7.3 Vacation
The Employee shall be entitled to vacation days and holiday pay in accordance
with the policies applicable to the Employer's senior executive officers
generally.
8. RETURN OF DOCUMENTS AND PROPERTY
Upon the termination of Employee's employment with MKBY, or at anytime upon the
request of MKBY, Employee (or his heirs or personal representatives) shall
deliver to MKBY (a) all documents and materials (including without limitation,
computer files) containing trade secrets or other confidential information
relating to the business and affairs of MKBY, and (b) all documents, materials
and other property (including, without limitation, computer files) belonging to
MKBY, which in either case are in the possession or under the control of
Employee (or his heirs or personal representatives).
9. DISCOVERIES AND WORKS
All Discoveries and Works made or conceived by Employee during his employment by
MKBY, jointly or with others, that relate to the present or anticipated
activities of MKBY, or are used or usable by MKBY shall be owned by MKBY.
Employee shall (a) promptly notify, make full disclosure to, and execute and
deliver any documents requested by MKBY to evidence or better assure title to
Discoveries and Works in MKBY, as so requested, (b) renounce any and all claims,
including but not limited to claims of ownership and royalty, with respect to
all Discoveries and Works and all other property owned or licensed by MKBY, (c)
assist MKBY in obtaining or maintaining for itself at its own expense American
and foreign patents, copyrights, trade secret protection or other protection of
any and all Discoveries and Works, and (d) promptly execute, whether during his
employment with MKBY or thereafter, all applications or other endorsements
necessary or appropriate to maintain patents and other rights for MKBY and to
protect the title of MKBY thereto, including but not limited to assignments of
such patents and other rights. Any Discoveries and Works which, within six (6)
months after the Termination Date, are made, disclosed, reduced to a tangible or
written form or description, or are reduced to practice by Employee and which
pertain to the business carried on or products or services being sold or
developed by MKBY at the time of such termination shall, as between Employee and
MKBY be presumed to have been made during Employee's employment by MKBY.
10. DEATH
The Employee's employment under this Agreement shall terminate upon his death.
In the event of the termination of the Employee's employment as a result of his
death, MKBY shall promptly pay to any one or more beneficiaries designated by
the Employee pursuant to a notice to MKBY or, failing such designation, to the
Employee's estate, the annual base salary provided for in this Agreement through
the conclusion of the month in which such termination occurs. All other
benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
11. DISABILITY
The Employee's employment under this Agreement may be terminated as a result of
Disability at the option of MKBY by notice to the Employee. Such termination to
be effective upon the receipt by the Employee of such notice. In the event of
the termination of the Employee's employment as a result of Disability, MKBY
shall pay the Employee one (1) times his full annual base salary less any credit
for sick pay or other benefits received by the Employee deriving from any
private medical insurance or other similar arrangements entered into by MKBY.
All other benefits the Employee may have under the Employee and/or Group or
senior executive benefit bonus and/or stock option plans and programs of the
Employer shall be determined in accordance with the terms and conditions of such
plans and programs.
12. TERMINATION FOR CAUSE BY MKBY
The Employee's employment under this Agreement may be terminated by MKBY for
Cause. In the event that the Employee's employment under this Agreement shall
validly be terminated by MKBY for Cause pursuant to this Section 12, MKBY shall
promptly pay accrued but unpaid salary and reimburse or pay any other accrued
but unpaid amounts due under this Agreement as of the date of termination, and
thereafter MKBY shall have no further obligations under this Agreement. All
other benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
13. VOLUNTARY EARLY TERMINATION
The Employee may voluntarily terminate his employment under this Agreement at
any time by providing at least 30 days prior written notice to the Employer. In
such event, the Employee shall be entitled to receive his base salary until the
date his employment terminates, and all other benefits the Employee may have
under the Employee and/or Group or senior executive benefit bonus and/or stock
option plans and programs of the Employer shall be determined in accordance with
the terms and conditions of such plans and programs.
14. TERMINATION RESULTING FROM SALE OF BUSINESS
If there should be (a) a sale of substantially all the assets of MKBY to another
Person; (b) a merger, amalgamation or consolidation of MKBY with another Person
to form a new entity; or (c) a change in control of MKBY and as a result the
Employee's employment hereunder is terminated but the acquirer or the new
entity, as the case may be, offers the Employee employment on terms and
conditions that are essentially the same or better than those provided under
this Agreement, then in the event the Employee refuses that offer of employment,
Employee will not be entitled to any compensation hereunder. However, if there
should be (a) a sale of substantially all the assets of MKBY to another Person;
(b) a merger, amalgamation or consolidation of MKBY with another Person to form
a new entity; or (c) a change in control of MKBY and as a result the Employee's
employment hereunder is terminated and the Employee is not offered employment by
the acquirer or new entity, then the Employee shall be entitled to receive his
annual salary for a period of three years from and after the Effective Date of
termination and any accrued but unpaid vacation pay payable in a lump sum (but
discounted by a reasonable factor as mutually determined by MKBY and the
Employee) or in accordance with the then-payroll policies of the Employer at the
option of the Employer. All other benefits the Employee may have under the
Employee and/or Group or senior executive benefit bonus and/or stock option
plans and programs of the Employer shall be determined in accordance with the
terms and conditions of such plans and programs.
15. CONSTRUCTIVE TERMINATION PRIOR TO EXPIRATION OF EMPLOYMENT TERM
15.1 Constructive Termination
If prior to the expiration of the Term of this Agreement, the Employer:
(a) terminates the employment of the Employee other than for Due Cause as a
result of the death of the Employee or because of a Disability;
(b) demotes the Employee to a lesser position than as provided in Section 3
of this Agreement (including a material diminution in the nature or status of
the Employee's responsibilities, authorities, powers or duties);
(c) decreases the Employee's Base Salary and benefits below the levels
provided for by the terms of Sections 5, 6 and 7 of this Agreement (other than
as a result of any amendment or termination of any employee and/or group or
senior executive benefit, bonus and/or stock option plan which amendment or
termination is applicable to all employees or executives of the Employer, as the
case may be, eligible to participate in such plan prior to its termination);
(d) assigns to the Employee any duties materially inconsistent with the
status and responsibilities of the position provided for in Section 2 of this
Agreement and such action is not cured by the Employer within 15 days after
receipt of written notice from the Employee specifying in reasonable detail the
nature of such inconsistency; or
(e) materially breaches any provision of this Agreement and such breach is
not cured by the Employer within 15 days after receipt of written notice from
the Employee specifying in reasonable detail the nature of the breach,
then such action by the Employer, unless consented to in writing by the
Employee, shall be deemed to be a Constructive Termination by the Employer of
the Employee's employment ("Constructive Termination"); provided, however, that
except in the case of clause (a) above, no Constructive Termination shall be
deemed to have occurred unless the Employee notifies the Employer of the
Employee's election to treat such event as a Constructive Termination within 30
days of the occurrence of such event.
15.2 Result of Constructive Termination
In the event of a Constructive Termination:
(a) the Employee shall be entitled to receive his base salary for a period
of three years from and after the effective date of Constructive Termination,
payable in a lump sum (but discounted by a reasonable factor as mutually
determined by the Employer and the Employee) or in accordance with the then
payroll policies of the Employer at the option of the Employer;
(b) the provisions of Sections 17 and 18 shall apply for the balance of the
Employment Term but shall not apply for the period after the Employment Term.
(c) all other rights and benefits the Employee may have under the employee
and/or group or senior executive benefit, bonus and/or stock option plans and
programs of the Employer shall be determined in accordance with the terms and
conditions of such plans and programs.
15.3 In the event of the death or disability of the Employee following a
Constructive Termination, the amounts set forth in Section 15.2 of this
Agreement shall continue to be owing and shall be paid to the estate of the
Employee or the Employee as applicable.
15.4 The Employer agrees that in the event of a Constructive Termination, the
Employee shall not be required to seek other employment or to attempt in any way
to reduce any amount payable to the Employee by the Employer pursuant to this
Agreement and that any amounts due to the Employee hereunder shall not be
reduced by any compensation earned by the Employee as a result of employment by
another employer or by any retirement benefits paid to the Employee.
16. CONFLICT OF INTEREST
During the Term of this Agreement, the Employee shall not, either directly or in
conjunction with any person, firm, association, syndicate, company or
corporation as principal, agent, shareholder, or in any other manner whatsoever,
carry on or be engaged in, or advise, lend money to, guarantee the debts or
obligations of, or permit his name or any part of it to be used or employed by
any person, firm, association, syndicate, company or corporation engaged in any
business in competition with the business then carried on by MKBY or a
Subsidiary, provided that the holding of not more than two per cent (2%) of the
issued shares of a public company listed on any recognized stock exchange in the
United States or Canada or traded in the United States or Canadian over-the-
counter market, shall not be deemed a breach of this covenant.
17. CONFIDENTIALITY
During the Term of this Agreement and for a period of two (2) years thereafter,
the Employee shall keep secret and retain in strictest confidence, and shall not
use for his benefit or for the benefit or others, directly or indirectly, any
and all confidential information relating to MKBY and its Subsidiaries of which
the Employee shall obtain knowledge by reason of his employment under this
Agreement, including, without limitation, trade and business secrets or any
other non-public or proprietary information concerning the business, customer
lists, financial plans or projections, pricing policies, marketing plans or
strategies, business acquisition or divestiture plans, new personnel acquisition
plans, technical processes, inventions and other research projects, and except
in connection with the performance of his duties under this Agreement, he shall
not disclose any such information to anyone outside MKBY and any of its
Subsidiaries, except as required by law (provided prior written notice is given
by the Employee to MKBY) or except with the prior written consent of MKBY,
unless such information is known generally to the public or the trade through
sources other than the unauthorized disclosure by the Employee.
18. NON-COMPETITION AND NON-SOLICITATION
18.1 The Employee acknowledges and understands that (i) he has access to
MKBY's and MKBY's clients, channels for developing clients and recruiting
executives for employment, and other confidential information of MKBY, (ii) he
has direct substantial responsibility to maintain MKBY's business relationship
with clients of MKBY whose affairs he handles, (iii) the non-competition and
non-solicitation provisions set forth in this Section 18 constitute a material
part of the consideration received by MKBY under this Agreement, (iv) due to the
specific nature and limited market for MKBY's activities, the definition of
Territory as set forth in subsection 1.1(p) hereof is reasonable and justified,
(v) it would be unfair to MKBY if the Employee were to appropriate for himself
or for others the benefits of MKBY's many years of developing such business
relationships, especially when the Employee enjoys a relationship with clients
of MKBY as a result of his being introduced to the client's personnel as the
representative of MKBY, (vi) it would be unfair to MKBY if the Employee were to
appropriate for himself or for others the benefits of the business, technical
processes, personnel and other confidential information which MKBY has developed
in the conduct of its business, and (vii) it is therefore fair that reasonable
restrictions as set forth below should be placed on certain activities of the
Employee after his employment with MKBY terminates.
18.2 The Employee shall not, without the prior written consent of MKBY, at
any time during the Restriction Period, either individually or in partnership or
jointly or in connection with any Person, as principal, agent, consultant,
lender, contractor, employer, employee, investor or shareholder, or in any other
manner, directly or indirectly, anywhere within the Territory:
(a) advise, manage, carry on, establish, acquire control of, work for,
perform, render, or engage in, any business or service or activity that is
similar to or competitive with the Business or any portion of the Business; or
(b) invest in or lend money to, or guarantee the debts or obligations of,
any business or service or activity, or any Person engaged in any business or
service or activity, that is similar to or competitive with the Business or any
portion of the Business; or
(c) permit the Employee's name or any part thereof to be used or employed by
any Person that operates, is engaged in or has an interest in any business or
service or activity that is similar to or competitive with the Business or any
portion of the Business. Without limiting the effect of the foregoing, competing
with or competitive with the Business, includes without limitation, directly or
indirectly, engaging in or permitting the solicitation or sale of any products
or services of the type included within the meaning of the term Business as of
the termination of the Employee's employment with MKBY.
18.3 The Employee shall not during the Restriction Period, without the
written consent of MKBY, directly or indirectly (as owner, principal, agent,
partner, officer, employee, independent contractor, consultant, stockholder, or
otherwise), (i) solicit any Client (as this term is defined below) for a purpose
or objective of providing to such Client, or obtaining an engagement from such
Client to provide, any services, businesses or products included within the term
Business or (ii) solicit for employment or otherwise induce any employee
employed by MKBY or any of MKBY Affiliates at the date of termination of the
Employee's employment with MKBY to leave such employ or offer to employ or
employ such employee. The term "Client" shall mean one or more of the following:
(a) any current or former client or customer of MKBY or MKBY Affiliates;
(b) any current client or current customer of MKBY or MKBY Affiliates if at
any time since the Commencement Date the Employee had contact with such client
or customer, or personally solicited such client or customer, or rendered
services to such client or customer, or otherwise developed any relationship
with such client or customer, or
(c) any former client or former customer of MKBY or MKBY Affiliates who was,
during the thirty-six (36) months preceding the Termination Date, a client or
customer of MKBY or MKBY Affiliates, if at any time since the Commencement Date
the Employee had contact with such client or customer, or solicited such client
or customer, or rendered services to such client or customer, or otherwise
developed any relationship with such client or customer.
18.4 Upon the termination of the Employee's employment for whatever reason,
the Employee shall deliver to MKBY all documents, papers, records, accounts of
all and any description relating to the affairs of MKBY and its Affiliates
within his possession or under his control, it being the intention of the
Employee and MKBY that all such notes or memoranda made by the Employee during
the course of his employment under this Agreement shall be the property of MKBY
and its Affiliates and shall be left at its registered office or principal place
of business upon the termination of the Employee's employment.
18.5 The Employee acknowledges that the provisions of this Section 18 of this
Agreement are expressly for the benefit of the Employer, that the Employer would
be irreparably injured by a violation of the provisions of this Section and that
the Employer would have no adequate remedy at law in the event of such
violation. Therefore, the Employee acknowledges and agrees that in addition to
any other remedies available, injunctive relief, specific performance or any
other appropriate equitable remedy (without any bond or other security being
required) are appropriate remedies to enforce compliance by the Employee with
the provisions of this Section 18.
19. WITHHOLDING
MKBY shall be entitled to withhold from any and all amounts payable to the
Employee under this Agreement such amounts as from time to time be required to
be withheld pursuant to applicable tax laws and regulations.
20. GENERAL PROVISIONS
20.1 Further Assurances
Each of the parties upon the request of any other party, whether before or after
the date hereof, shall do, execute, acknowledge and deliver or cause to be done,
executed, acknowledged or delivered all such further acts, deeds, documents,
assignments, transfers, conveyances, powers of attorney and assurances as may be
reasonably necessary or desirable to effect complete consummation of the
transactions contemplated by this Agreement.
20.2 Successors in Interest
This Agreement and the provisions hereof shall enure to the benefit of and be
binding upon the Parties and their respective successors and assigns.
20.3 Notices
Any notice, direction or other instrument required or permitted to be given
hereunder shall be in writing and given by delivery or sent by (i) registered or
certified mail, (ii) reputable overnight courier, (iii) personal delivery, (iv)
telecopier or similar telecommunication device and addressed:
(a) in the case of MKBY at:
McKenzie Bay International, Ltd.
975 Spaulding Avenue
Grand Rapids, Michigan
U.S.A., 49546
Attention: Gregory N. Bakeman
Telecopier: 616-940-9194
with a copy to:
Donald C. Harms
LARSON, HARMS & BIBEAU, P.C.
37899 Twelve Mile Road, Suite 300
Farmington Hills, MI
U.S.A., 48331
(b) in the case of the Employee at:
4815 Greenhill Court
Grand Rapids, MI 49546
Any notice, direction or other instrument given as aforesaid shall be deemed to
have been effectively given and received, if sent by mail on the fourth (4th)
business day following such mailing, if sent by telecopier or similar
telecommunications device on the next business day following such transmission
or, if delivered, to have been given and received on the date of such delivery.
Any party may change its address for service by written notice given as
aforesaid.
20.4 Amendments
This agreement may not be amended except by written instrument duly executed by
or on behalf of all parties hereto.
20.5 Governing Laws
This Agreement shall be governed by and construed in accordance with the laws of
the State of Michigan, United States of America.
20.6 Gender
Any reference in this Agreement to any gender shall include all genders and
words used herein importing the singular number only shall include the plural
and vice versa.
20.7 Headings
The division of this Agreement into articles, sections, subsections and other
subdivisions and the insertion of headings are for convenience of reference only
and shall not affect or be utilized in the construction or interpretation
hereof.
20.8 Severability
Any article, section, subsection or other subdivision of this Agreement or any
other provision of this Agreement which is, or becomes, illegal, invalid or
unenforceable shall be severed herefrom and shall be ineffective to the extent
of such illegality, invalidity or unenforceability and shall not affect or
impair the remaining provisions hereof, which provisions shall be severed from
any illegal, invalid or unenforceable article, section, subsection or other
subdivision of this Agreement or any other provision of this Agreement.
20.9 Waiver
No waiver of any of the provisions of this Agreement shall be deemed to
constitute a waiver of any other provision (whether or not similar) nor shall
such waiver constitute a continuing waiver unless otherwise expressly provided
in a written document duly executed by the party to be bound thereby.
20.10 Attorney's Fees
If any legal proceeding is necessary to enforce or interpret the terms of this
Agreement or to recover damages for breach hereof, the prevailing party shall be
entitled to reasonable attorney's fees as well as costs and disbursements in
addition to any other relief to which he or it may be entitled.
20.11 Waiver of Jury Trial
TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE RELATIONSHIP CONTEMPLATED HEREBY.
Language
The Parties hereby acknowledge that they have requested that this Agreement and
all related documents be drawn up in the English language. Les parties aux
presentes reconnaissent qu'elles ont exige que la presente convention et tous
les documents qui s'y rattachent soient rediges en anglais.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
McKENZIE BAY INTERNATIONAL, LTD.
per: /s/ Gary L. Westerholm
GARY L. WESTERHOLM, PRESIDENT
/s/ Gregory N. Bakeman
Witness Gregory N. Bakeman, Employee
==============================
EX10-12
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into on March 21, 2003.
BETWEEN: JOHN W. SAWARIN, domiciled and residing at London, Ontario, CANADA;
(hereinafter referred to as the "Employee")
AND: McKENZIE BAY INTERNATIONAL, LTD. (hereinafter referred to as "MKBY"), a
corporation duly incorporated under the laws of the State of Delaware,,
United States of America, having its registered office at 975 Spaulding
Avenue, Grand Rapids, Michigan, U.S.A., 49546, represented herein by Gary
L. Westerholm, President, duly authorized as he so declares;
WHEREAS MKBY wishes to retain the Employee;
WHEREAS the Employee and MKBY are desirous of entering into an agreement for the
Employee's employment, all subject to the terms and conditions set forth in this
Agreement;
NOW IT IS HEREBY AGREED:
1. INTERPRETATION
1.1 Definitions
In this Agreement, the following words and expressions have the respective
meanings ascribed to them below:
(a) "Affiliate" with respect to a Person means a Person that controls, is
controlled by or under common control with such Person. For purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meaning collative to the
foregoing;
(b) "Agreement" means this employment agreement;
(c) "Board of Directors" means the board of directors of MKBY
(d) "Business" means the mining and processing of vanadium compounds,
including vanadium-based electrolyte and the marketing of vanadium-based
electricity energy solutions, including uninterrupted power, off-grid power
applications of all types and vanadium-based energy storage applications;
(e) "Cause" shall mean
1. The Employee has committed a willful, serious act such as fraud,
embezzlement or theft, committed any act against the Employer intending to
enrich himself at the expense of the Employer or made an unauthorized use or
disclosure of secret or confidential information pertaining to the business of
the Employer;
2. The Employee has been convicted of a felony or commits an act
constituting a felony;
3. The Employee has engaged in conduct which has caused demonstrable and
serious injury, monetary or otherwise, to the Employer;
4. The Employee, in carrying out his duties hereunder, has been guilty of
willful, gross neglect or willful misconduct, or
5. The Employee has materially breached this Agreement (including without
limitation any failure to perform the duties assigned to him in accordance with
this Agreement; provided, however, that the mere failure to reach established
financial performance targets shall not in itself constitute a failure to
perform if Employee has otherwise performed such actions as have been requested
or assigned to him in connection with such financial performance targets) and
has not remedied such breach within 15 days after receipt of written notice from
the Employer specifying in reasonable detail, the nature of the breach.
(f) "Commencement Date" means April 1, 2003;
(g) "Disability" shall mean the inability or incapacity (by reason of a
medically-determinable physical or mental impairment) of the Employee to perform
the duties and responsibilities related to the job or position with the Employer
described in Section 3 of this Agreement for a period that lasts or that can be
reasonably expected to last more than 180 days. Such inability or incapacity
shall be documented to the reasonable satisfaction of the Employer by
appropriate correspondence from registered physicians reasonably satisfactory to
Employer.
(h) "Discoveries and Works" includes by way of example but without
limitation, intellectual property, trade secrets and other confidential
information, patents and patent applications, trademarks and trademark
registrations and applications, service marks and service mark registrations and
applications, trade names, copyrights and copyright registrations and
applications;
(i) "Employment Year" means the period beginning on January 1, 2003 and
ending on December 31, 2003, and each consecutive calendar year;
(j) "Parties" means MKBY and the Employee and "Party" means one or the other
as the case may be;
(k) "Person" means any individual, corporation, proprietorship, firm,
partnership, limited partnership, limited liability company, trust, association
or other entity;
(l) "Restriction Period" means the period of time covering the Term plus a
period equivalent to twelve (12) months following Employee's Termination Date;
(m) "Subsidiary" means a corporation controlled by MKBY, or by another
subsidiary of MKBY;
(n) "Term", "Initial Term", and "Additional Term" shall have the meaning set
forth in Section 4;
(o) "Termination Date" means the effective date of the Employee's
termination of employment with MKBY, regardless of the reason;
(p) "Territory" means the world.
2. EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts
employment with the Employer upon the terms and subject to the conditions set
forth herein.
3. DUTIES AND RESPONSIBILITIES
3.1 During the Term of this Agreement, the Employee shall initially be
employed as Secretary of the Employer and shall perform the services and
functions relating to the office or offices in which he is from time to time
elected or otherwise reasonably incident to such office or offices, all in
accordance with the job description which is attached hereto and which is
incorporated herein by reference and made a part hereof, and such amendments or
modifications to said job description as shall be directed by the Board of
Directors. The Employee shall be subject to the direction of the Board of
Directors of the Employer and such other officer or officers of the Employer as
the Board of Directors of the Employer may determine.
3.2 During the Term of this Agreement, the Employee will devote his best
efforts and his time and attention to the performance of his duties under this
Agreement except for vacation periods and reasonable absences due to injury or
illness as permitted by Employer's general policies. The employment
relationship between the parties shall be governed by the general employment
policies and practices of the Employer, except that when the terms of this
Agreement differ from or are in conflict with the Employer's general employment
policies or practices, this Agreement shall control.
3.3 It is contemplated that the Employee will be obliged from time to time
and for reasonable periods of time to travel in the performance of his duties
and obligations under this Agreement. However, the principal place of employment
of the Employee which the Employee shall report for work will be at London,
Ontario, Canada.
3.4 It is expressly understood and agreed that the Employee shall not engage
in any other business or business opportunity whether or not such business
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that:
(a) The Employee may engage in personal, charitable, professional and
investment activities to the extent such activities do not conflict or interfere
with the Employee's duties and obligations under this Agreement or with
Employee's ability to perform his duties and responsibilities under this
Agreement; and,
(b) The Employee shall not be prevented from investing his assets in such
form or manner as will not require any substantial amount of time or services on
the part of the Employee in the operation of the affairs of the enterprises in
which such investments are made.
4. TERM
Unless sooner terminated as provided for in this Agreement, the terms of the
Employee's employment shall commence on April 1, 2003 and shall continue for
three (3) years (the "Initial Term"), provided, however, that the Initial Term
of the Employee's employment under this Agreement shall automatically be
extended for additional periods of twelve (12) months each (an "Additional
Term") unless and until MKBY shall have given Employee notice, not less than
three (3) months prior to the expiration of the Initial Term or any subsequent
Additional Term, of the termination by MKBY of the Employee's employment
effective as of the next succeeding anniversary date of the expiration of the
Initial Term or Additional Term (the Initial Term and any Additional Term(s) are
collectively referred to as the "Term" in this Agreement).
5. COMPENSATION
The Employee shall be paid an annual base salary of Ninety-Three Thousand Five
Hundred ($93,500.00) Dollars (US) payable in accordance with the then-current
payroll policies of the Employer. Employer agrees to review Employee's
compensation annually during the last month of each fiscal year and to grant
increases in compensation which will be effective on the first day of the
immediately-following calendar year, based upon the Employee's performance,
scope of responsibility assumed, compensation paid to similar employees in
similar companies and such other factors as may guide the Employer in setting
reasonable compensation.
6. EXPENSES
MKBY shall reimburse the Employee for all necessary and reasonable expenses
incurred by him in the performance of his duties under this Agreement. The
Employee shall, on being so required, provide MKBY with vouchers or other
evidence of actual payment of the said expenses in a form satisfactory to MKBY.
7. BENEFITS
Subject to the right of the Employer to amend or terminate any employee and/or
group or senior executive benefit, bonus and/or stock option plan or program and
to the terms and conditions of such plans and programs, the Employee shall be
entitled to receive the following employee benefits:
7.1 Employee Plans
The Employee shall have the right to participate in such medical and dental
plans as are maintained by the Employer and are available to its exempt,
salaried employees generally (including without limitation disability, accident,
medical, life insurance and hospitalization plans which are normal and
customary).
7.2 Bonus Plans
The Employee shall have the right to participate in all senior executive
benefit, bonus and/or stock option plans as are maintained by the Employer and
are available to the Employer's senior executive officers generally, all in
accordance with the Employer's regular practices with respect to senior
executive officers.
7.3 Vacation
The Employee shall be entitled to vacation days and holiday pay in accordance
with the policies applicable to the Employer's senior executive officers
generally.
8. RETURN OF DOCUMENTS AND PROPERTY
Upon the termination of Employee's employment with MKBY, or at anytime upon the
request of MKBY, Employee (or his heirs or personal representatives) shall
deliver to MKBY (a) all documents and materials (including without limitation,
computer files) containing trade secrets or other confidential information
relating to the business and affairs of MKBY, and (b) all documents, materials
and other property (including, without limitation, computer files) belonging to
MKBY, which in either case are in the possession or under the control of
Employee (or his heirs or personal representatives).
9. DISCOVERIES AND WORKS
All Discoveries and Works made or conceived by Employee during his employment by
MKBY, jointly or with others, that relate to the present or anticipated
activities of MKBY, or are used or usable by MKBY shall be owned by MKBY.
Employee shall (a) promptly notify, make full disclosure to, and execute and
deliver any documents requested by MKBY to evidence or better assure title to
Discoveries and Works in MKBY, as so requested, (b) renounce any and all claims,
including but not limited to claims of ownership and royalty, with respect to
all Discoveries and Works and all other property owned or licensed by MKBY, (c)
assist MKBY in obtaining or maintaining for itself at its own expense American
and foreign patents, copyrights, trade secret protection or other protection of
any and all Discoveries and Works, and (d) promptly execute, whether during his
employment with MKBY or thereafter, all applications or other endorsements
necessary or appropriate to maintain patents and other rights for MKBY and to
protect the title of MKBY thereto, including but not limited to assignments of
such patents and other rights. Any Discoveries and Works which, within six (6)
months after the Termination Date, are made, disclosed, reduced to a tangible or
written form or description, or are reduced to practice by Employee and which
pertain to the business carried on or products or services being sold or
developed by MKBY at the time of such termination shall, as between Employee and
MKBY be presumed to have been made during Employee's employment by MKBY.
10. DEATH
The Employee's employment under this Agreement shall terminate upon his death.
In the event of the termination of the Employee's employment as a result of his
death, MKBY shall promptly pay to any one or more beneficiaries designated by
the Employee pursuant to a notice to MKBY or, failing such designation, to the
Employee's estate, the annual base salary provided for in this Agreement through
the conclusion of the month in which such termination occurs. All other
benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
11. DISABILITY
The Employee's employment under this Agreement may be terminated as a result of
Disability at the option of MKBY by notice to the Employee. Such termination to
be effective upon the receipt by the Employee of such notice. In the event of
the termination of the Employee's employment as a result of Disability, MKBY
shall pay the Employee one (1) times his full annual base salary less any credit
for sick pay or other benefits received by the Employee deriving from any
private medical insurance or other similar arrangements entered into by MKBY.
All other benefits the Employee may have under the Employee and/or Group or
senior executive benefit bonus and/or stock option plans and programs of the
Employer shall be determined in accordance with the terms and conditions of such
plans and programs.
12. TERMINATION FOR CAUSE BY MKBY
The Employee's employment under this Agreement may be terminated by MKBY for
Cause. In the event that the Employee's employment under this Agreement shall
validly be terminated by MKBY for Cause pursuant to this Section 12, MKBY shall
promptly pay accrued but unpaid salary and reimburse or pay any other accrued
but unpaid amounts due under this Agreement as of the date of termination, and
thereafter MKBY shall have no further obligations under this Agreement. All
other benefits the Employee may have under the Employee and/or Group or senior
executive benefit bonus and/or stock option plans and programs of the Employer
shall be determined in accordance with the terms and conditions of such plans
and programs.
13. VOLUNTARY EARLY TERMINATION
The Employee may voluntarily terminate his employment under this Agreement at
any time by providing at least 30 days prior written notice to the Employer. In
such event, the Employee shall be entitled to receive his base salary until the
date his employment terminates, and all other benefits the Employee may have
under the Employee and/or Group or senior executive benefit bonus and/or stock
option plans and programs of the Employer shall be determined in accordance with
the terms and conditions of such plans and programs.
14. TERMINATION RESULTING FROM SALE OF BUSINESS
If there should be (a) a sale of substantially all the assets of MKBY to another
Person; (b) a merger, amalgamation or consolidation of MKBY with another Person
to form a new entity; or (c) a change in control of MKBY and as a result the
Employee's employment hereunder is terminated but the acquirer or the new
entity, as the case may be, offers the Employee employment on terms and
conditions that are essentially the same or better than those provided under
this Agreement, then in the event the Employee refuses that offer of employment,
Employee will not be entitled to any compensation hereunder. However, if there
should be (a) a sale of substantially all the assets of MKBY to another Person;
(b) a merger, amalgamation or consolidation of MKBY with another Person to form
a new entity; or (c) a change in control of MKBY and as a result the Employee's
employment hereunder is terminated and the Employee is not offered employment by
the acquirer or new entity, then the Employee shall be entitled to receive his
annual salary for a period of three years from and after the Effective Date of
termination and any accrued but unpaid vacation pay payable in a lump sum (but
discounted by a reasonable factor as mutually determined by MKBY and the
Employee) or in accordance with the then-payroll policies of the Employer at the
option of the Employer. All other benefits the Employee may have under the
Employee and/or Group or senior executive benefit bonus and/or stock option
plans and programs of the Employer shall be determined in accordance with the
terms and conditions of such plans and programs.
15. CONSTRUCTIVE TERMINATION PRIOR TO EXPIRATION OF EMPLOYMENT TERM
15.1 Constructive Termination
If prior to the expiration of the Term of this Agreement, the Employer:
(a) terminates the employment of the Employee other than for Due Cause as a
result of the death of the Employee or because of a Disability;
(b) demotes the Employee to a lesser position than as provided in Section 3
of this Agreement (including a material diminution in the nature or status of
the Employee's responsibilities, authorities, powers or duties);
(c) decreases the Employee's Base Salary and benefits below the levels
provided for by the terms of Sections 5, 6 and 7 of this Agreement (other than
as a result of any amendment or termination of any employee and/or group or
senior executive benefit, bonus and/or stock option plan which amendment or
termination is applicable to all employees or executives of the Employer, as the
case may be, eligible to participate in such plan prior to its termination);
(d) assigns to the Employee any duties materially inconsistent with the
status and responsibilities of the position provided for in Section 2 of this
Agreement and such action is not cured by the Employer within 15 days after
receipt of written notice from the Employee specifying in reasonable detail the
nature of such inconsistency; or
(e) materially breaches any provision of this Agreement and such breach is
not cured by the Employer within 15 days after receipt of written notice from
the Employee specifying in reasonable detail the nature of the breach,
then such action by the Employer, unless consented to in writing by the
Employee, shall be deemed to be a Constructive Termination by the Employer of
the Employee's employment ("Constructive Termination"); provided, however, that
except in the case of clause (a) above, no Constructive Termination shall be
deemed to have occurred unless the Employee notifies the Employer of the
Employee's election to treat such event as a Constructive Termination within 30
days of the occurrence of such event.
15.2 Result of Constructive Termination
In the event of a Constructive Termination:
(a) the Employee shall be entitled to receive his base salary for a period
of three years from and after the effective date of Constructive Termination,
payable in a lump sum (but discounted by a reasonable factor as mutually
determined by the Employer and the Employee) or in accordance with the then
payroll policies of the Employer at the option of the Employer;
(b) the provisions of Sections 17 and 18 shall apply for the balance of the
Employment Term but shall not apply for the period after the Employment Term.
(c) all other rights and benefits the Employee may have under the employee
and/or group or senior executive benefit, bonus and/or stock option plans and
programs of the Employer shall be determined in accordance with the terms and
conditions of such plans and programs.
15.3 In the event of the death or disability of the Employee following a
Constructive Termination, the amounts set forth in Section 15.2 of this
Agreement shall continue to be owing and shall be paid to the estate of the
Employee or the Employee as applicable.
15.4 The Employer agrees that in the event of a Constructive Termination, the
Employee shall not be required to seek other employment or to attempt in any way
to reduce any amount payable to the Employee by the Employer pursuant to this
Agreement and that any amounts due to the Employee hereunder shall not be
reduced by any compensation earned by the Employee as a result of employment by
another employer or by any retirement benefits paid to the Employee.
16. CONFLICT OF INTEREST
During the Term of this Agreement, the Employee shall not, either directly or in
conjunction with any person, firm, association, syndicate, company or
corporation as principal, agent, shareholder, or in any other manner whatsoever,
carry on or be engaged in, or advise, lend money to, guarantee the debts or
obligations of, or permit his name or any part of it to be used or employed by
any person, firm, association, syndicate, company or corporation engaged in any
business in competition with the business then carried on by MKBY or a
Subsidiary, provided that the holding of not more than two per cent (2%) of the
issued shares of a public company listed on any recognized stock exchange in the
United States or Canada or traded in the United States or Canadian over-the-
counter market, shall not be deemed a breach of this covenant.
17. CONFIDENTIALITY
During the Term of this Agreement and for a period of two (2) years thereafter,
the Employee shall keep secret and retain in strictest confidence, and shall not
use for his benefit or for the benefit or others, directly or indirectly, any
and all confidential information relating to MKBY and its Subsidiaries of which
the Employee shall obtain knowledge by reason of his employment under this
Agreement, including, without limitation, trade and business secrets or any
other non-public or proprietary information concerning the business, customer
lists, financial plans or projections, pricing policies, marketing plans or
strategies, business acquisition or divestiture plans, new personnel acquisition
plans, technical processes, inventions and other research projects, and except
in connection with the performance of his duties under this Agreement, he shall
not disclose any such information to anyone outside MKBY and any of its
Subsidiaries, except as required by law (provided prior written notice is given
by the Employee to MKBY) or except with the prior written consent of MKBY,
unless such information is known generally to the public or the trade through
sources other than the unauthorized disclosure by the Employee.
18. NON-COMPETITION AND NON-SOLICITATION
18.1 The Employee acknowledges and understands that (i) he has access to
MKBY's and MKBY's clients, channels for developing clients and recruiting
executives for employment, and other confidential information of MKBY, (ii) he
has direct substantial responsibility to maintain MKBY's business relationship
with clients of MKBY whose affairs he handles, (iii) the non-competition and
non-solicitation provisions set forth in this Section 18 constitute a material
part of the consideration received by MKBY under this Agreement, (iv) due to the
specific nature and limited market for MKBY's activities, the definition of
Territory as set forth in subsection 1.1(p) hereof is reasonable and justified,
(v) it would be unfair to MKBY if the Employee were to appropriate for himself
or for others the benefits of MKBY's many years of developing such business
relationships, especially when the Employee enjoys a relationship with clients
of MKBY as a result of his being introduced to the client's personnel as the
representative of MKBY, (vi) it would be unfair to MKBY if the Employee were to
appropriate for himself or for others the benefits of the business, technical
processes, personnel and other confidential information which MKBY has developed
in the conduct of its business, and (vii) it is therefore fair that reasonable
restrictions as set forth below should be placed on certain activities of the
Employee after his employment with MKBY terminates.
18.2 The Employee shall not, without the prior written consent of MKBY, at
any time during the Restriction Period, either individually or in partnership or
jointly or in connection with any Person, as principal, agent, consultant,
lender, contractor, employer, employee, investor or shareholder, or in any other
manner, directly or indirectly, anywhere within the Territory:
(a) advise, manage, carry on, establish, acquire control of, work for,
perform, render, or engage in, any business or service or activity that is
similar to or competitive with the Business or any portion of the Business; or
(b) invest in or lend money to, or guarantee the debts or obligations of,
any business or service or activity, or any Person engaged in any business or
service or activity, that is similar to or competitive with the Business or any
portion of the Business; or
(c) permit the Employee's name or any part thereof to be used or employed by
any Person that operates, is engaged in or has an interest in any business or
service or activity that is similar to or competitive with the Business or any
portion of the Business. Without limiting the effect of the foregoing, competing
with or competitive with the Business, includes without limitation, directly or
indirectly, engaging in or permitting the solicitation or sale of any products
or services of the type included within the meaning of the term Business as of
the termination of the Employee's employment with MKBY.
18.3 The Employee shall not during the Restriction Period, without the
written consent of MKBY, directly or indirectly (as owner, principal, agent,
partner, officer, employee, independent contractor, consultant, stockholder, or
otherwise), (i) solicit any Client (as this term is defined below) for a purpose
or objective of providing to such Client, or obtaining an engagement from such
Client to provide, any services, businesses or products included within the term
Business or (ii) solicit for employment or otherwise induce any employee
employed by MKBY or any of MKBY Affiliates at the date of termination of the
Employee's employment with MKBY to leave such employ or offer to employ or
employ such employee. The term "Client" shall mean one or more of the following:
(a) any current or former client or customer of MKBY or MKBY Affiliates;
(b) any current client or current customer of MKBY or MKBY Affiliates if at
any time since the Commencement Date the Employee had contact with such client
or customer, or personally solicited such client or customer, or rendered
services to such client or customer, or otherwise developed any relationship
with such client or customer, or
(c) any former client or former customer of MKBY or MKBY Affiliates who was,
during the thirty-six (36) months preceding the Termination Date, a client or
customer of MKBY or MKBY Affiliates, if at any time since the Commencement Date
the Employee had contact with such client or customer, or solicited such client
or customer, or rendered services to such client or customer, or otherwise
developed any relationship with such client or customer.
18.4 Upon the termination of the Employee's employment for whatever reason,
the Employee shall deliver to MKBY all documents, papers, records, accounts of
all and any description relating to the affairs of MKBY and its Affiliates
within his possession or under his control, it being the intention of the
Employee and MKBY that all such notes or memoranda made by the Employee during
the course of his employment under this Agreement shall be the property of MKBY
and its Affiliates and shall be left at its registered office or principal place
of business upon the termination of the Employee's employment.
18.5 The Employee acknowledges that the provisions of this Section 18 of this
Agreement are expressly for the benefit of the Employer, that the Employer would
be irreparably injured by a violation of the provisions of this Section and that
the Employer would have no adequate remedy at law in the event of such
violation. Therefore, the Employee acknowledges and agrees that in addition to
any other remedies available, injunctive relief, specific performance or any
other appropriate equitable remedy (without any bond or other security being
required) are appropriate remedies to enforce compliance by the Employee with
the provisions of this Section 18.
19. WITHHOLDING
MKBY shall be entitled to withhold from any and all amounts payable to the
Employee under this Agreement such amounts as from time to time be required to
be withheld pursuant to applicable tax laws and regulations.
20. GENERAL PROVISIONS
20.1 Further Assurances
Each of the parties upon the request of any other party, whether before or after
the date hereof, shall do, execute, acknowledge and deliver or cause to be done,
executed, acknowledged or delivered all such further acts, deeds, documents,
assignments, transfers, conveyances, powers of attorney and assurances as may be
reasonably necessary or desirable to effect complete consummation of the
transactions contemplated by this Agreement.
20.2 Successors in Interest
This Agreement and the provisions hereof shall enure to the benefit of and be
binding upon the Parties and their respective successors and assigns.
20.3 Notices
Any notice, direction or other instrument required or permitted to be given
hereunder shall be in writing and given by delivery or sent by (i) registered or
certified mail, (ii) reputable overnight courier, (iii) personal delivery, (iv)
telecopier or similar telecommunication device and addressed:
(a) in the case of MKBY at:
McKenzie Bay International, Ltd.
975 Spaulding Avenue
Grand Rapids, Michigan
U.S.A., 49546
Attention: Gregory N. Bakeman
Telecopier: 616-940-9194
with a copy to:
Donald C. Harms
LARSON, HARMS & BIBEAU, P.C.
37899 Twelve Mile Road, Suite 300
Farmington Hills, MI
U.S.A., 48331
(b) in the case of the Employee at:
143 Windsor Avenue
London, ON Canada
N6C 2A1
Any notice, direction or other instrument given as aforesaid shall be deemed to
have been effectively given and received, if sent by mail on the fourth (4th)
business day following such mailing, if sent by telecopier or similar
telecommunications device on the next business day following such transmission
or, if delivered, to have been given and received on the date of such delivery.
Any party may change its address for service by written notice given as
aforesaid.
20.4 Amendments
This agreement may not be amended except by written instrument duly executed by
or on behalf of all parties hereto.
20.5 Governing Laws
This Agreement shall be governed by and construed in accordance with the laws of
the State of Michigan, United States of America.
20.6 Gender
Any reference in this Agreement to any gender shall include all genders and
words used herein importing the singular number only shall include the plural
and vice versa.
20.7 Headings
The division of this Agreement into articles, sections, subsections and other
subdivisions and the insertion of headings are for convenience of reference only
and shall not affect or be utilized in the construction or interpretation
hereof.
20.8 Severability
Any article, section, subsection or other subdivision of this Agreement or any
other provision of this Agreement which is, or becomes, illegal, invalid or
unenforceable shall be severed herefrom and shall be ineffective to the extent
of such illegality, invalidity or unenforceability and shall not affect or
impair the remaining provisions hereof, which provisions shall be severed from
any illegal, invalid or unenforceable article, section, subsection or other
subdivision of this Agreement or any other provision of this Agreement.
20.9 Waiver
No waiver of any of the provisions of this Agreement shall be deemed to
constitute a waiver of any other provision (whether or not similar) nor shall
such waiver constitute a continuing waiver unless otherwise expressly provided
in a written document duly executed by the party to be bound thereby.
20.10 Attorney's Fees
If any legal proceeding is necessary to enforce or interpret the terms of this
Agreement or to recover damages for breach hereof, the prevailing party shall be
entitled to reasonable attorney's fees as well as costs and disbursements in
addition to any other relief to which he or it may be entitled.
20.11 Waiver of Jury Trial
TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE RELATIONSHIP CONTEMPLATED HEREBY.
Language
The Parties hereby acknowledge that they have requested that this Agreement and
all related documents be drawn up in the English language. Les parties aux
presentes reconnaissent qu'elles ont exige que la presente convention et tous
les documents qui s'y rattachent soient rediges en anglais.
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
McKENZIE BAY INTERNATIONAL, LTD.
per: /s/ Gary L. Westerholm
GARY L. WESTERHOLM, PRESIDENT
/s/ John W. Sawarin
Witness John W. Sawarin, Employee
==============================
EX10.13
INVESTOR RELATIONS CONTRACT
Between
McKENZIE BAY INTERNATIONAL LTD and YES INTERNATIONAL
OUTLINE:
1. Mckenzie Bay International Ltd. (MKBY) provides specifically designed
materials and information of which YES INTERNATIONAL can distribute to its
international investment community at large and to both new and existing YES
followers and other interested parties.
2. Heighten the awareness of current and potential investors in the investment
opportunities from the activities of MKBY.
3. YES will broaden the current shareholder and brokerage industry support base
in
MKBY through the use of telephone, radio interviews, internet activities, trade
shows, road shows and other investment awareness activities.
4. Focus and target activities to obtain sponsorship in N. American /
European markets. If needed, YES International will provide any and all EDGAR
support for necessary filings to the United States Securities and Exchange
Commission (EDGAR fees base outside of this agreement). YES International will
distribute the appropriate documents, news releases, specially items, and audio
tapes to the investment community. (NOTE: placing news releases on the wire
service will be the responsibility of MKBY's management)
*These combined efforts should continue to provide MKBY with the necessary
momentum and a support structure to launch new fundraising programs as the need
arises.
5. MKBY's website will be co-hosted on YESINTERNATIONAL.COM during this 1-year
term.
SCHEDULE OF COMPENSATION
McKENZIE BAY INTERNATIONAL LTD., AGREES TO COMPENSATE YES
INTERNATIONAL for its services in accordance with the following schedule.
1. Cash Disbursements
McKenzie Bay International Ltd. agrees to pay, to YES International the sum of
Two
Thousand Three Hundred Dollars ($2300.00 US) per month for no longer than 1-
Year beginning Tuesday July 01, 2003 ending Wednesday, June 30, 2004. This
includes 800# cost, employee, phone services, mail cost, internet cost and other
incidentals in the course of doing business. Monetary compensation expected
within 5-working days from the beginning of each month.
2. Extraordinary Expenses
In the event the activities of McKenzie Bay International Ltd. shall cause YES
International to incur any extraordinary expenses beyond the outlined in #1
above. McKenzie Bay International Ltd. must first approve of any and all
extraordinary expenses. Upon approval McKenzie Bay International Ltd. will
fully and promptly reimburse YES. Inclusive expenses are: travel,
accommodations, food, and whatever expenditures to fulfill the mandate of the
" Investor Relations Program" .
3. Shares and/or Warrants and/or Options
McKenzie Bay International Ltd. will issue 75,000 shares of MKBY restricted 144
stock in the name of YES INTERNATIONAL and extentend, until July 2005 its
current options of :
50,000 shares for 1.00 US,
and
50,000 shares for 3.00 US
All USSEC rules apply on these stock issuances.
4. Indemnification:
YES INTERNATIONAL will be indemnified if management at provides false and
misleading statements which would produces onerous market conditions.
CONTRACT TERM
The Initial Term of this Agreement shall be for 1-Year but may be extended by
the mutual consent of the parties.
The Parties hereto may be contacted as follows:
YES International McKenzie Bay International Ltd
3419 Virginia Beach Blvd. #252 975 Spaulding Ave.
Virginia Beach, VA. 23452 Grand Rapids, MI 49546
Tel: (757) 306-6090 Tel:(616)-940-3800
Fax: (757) 306-6092 Fax:(616)-940-9194
IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date
below written.
YES INTERNATIONAL McKENZIE BAY INTERNATIONAL LTD.
_/s/ Rich Kaiser__________ __/s/ Gary L. Westerholm_____
Rich Kaiser- President Gary L. Westerholm-President
Date: July 1, 2003 Date: July 1, 2003
=================================
EX-10.14
CONSULTING AGREEMENT
This agreement is made as of the 15th day of February, 2003 between
MCKENZIE BAY RESOURCES, LTD., incorporated in the Province of Ontario,
whose address is 143 Windsor Avenue, London, Ontario, Canada N6C 2A1,
hereinafter referred to as MCKENZIE BAY, and SAVANCO, (Pty) Ltd.,
incorporated in Gauteng Province, SOUTH AFRICA, with offices at 6
Eastern Services Road, Eastgate Ext 3, Sandton, 2199, SOUTH AFRICA,
hereafter referred to as SAVANCO.
WHEREAS, SAVANCO has in the past performed vanadium process recovery
consulting services for MCKENZIE BAY, and
WHEREAS, MCKENZIE BAY wishes to retain SAVANCO to continue to render
such consulting services,
NOW, THEREFORE, in consideration of the mutual promises herein contained, it is
agreed between the parties as follows:
1. MCKENZIE BAY does hereby retain and employ SAVANCO to supply vanadium
process recovery consulting services, and SAVANCO accepts such employment on
the terms and conditions herein set forth.
2. SAVANCO agrees to render such vanadium process recovery consulting
services as may be reasonably requested by MCKENZIE BAY.
3. SAVANCO shall bill MCKENZIE BAY for such consulting services at an
initial rate of Ninety Dollars ($90.00) per hour. The hourly rate shall not
include billings for travel time. SAVANCO shall also bill MCKENZIE BAY for its
reasonable out-of-pocket travel and lodging expenses incurred in the
performance of its consulting duties for MCKENZIE BAY. Time records and
expense details shall be submitted on such format as may be reasonably
requested by MCKENZIE BAY. SAVANCO shall submit its billing to MCKENZIE BAY by
the 10th day of each calendar month for services rendered during the preceding
calendar month.
4. MCKENZIE BAY shall pay a minimum cumulative monthly fee advance of Ten
Thousand Dollars ($10,000.00) per month payable on the 1st day of each month
throughout the life of this agreement. The amount of this payment shall be
prorated for the first and last months of this agreement. Of this monthly
payment, the sum of Two Thousand Dollars ($2000.00) per month shall be
considered as a retainer fee as compensation to SAVANCO for its confidentiality
agreement and its agreement to refrain as hereafter set forth. The remaining
Eight Thousand Dollars ($8000.00) per month shall be a cumulative monthly fee
advance. If, as a result of any monthly billing SAVANCO's cumulative billings
for fees and costs exceed the cumulative monthly fee advances, then and in that
event, MCKENZIE BAY shall remit to SAVANCO an amount equal to the excess of
cumulative billings for fees and costs over and above cumulative fee advances,
said amount to be remitted by the last day of the calendar month. By way of
illustration, assuming that the contract began January 1, if SAVANCO performed
no consulting services in January and then performed Thirty Thousand Dollars
($30,000.00) worth of consulting services in February, then when the billing
was received by MCKENZIE BAY on March 10, MCKENZIE BAY would deduct the
cumulative monthly payments in the amount of Twenty-Four Thousand Dollars
($24,000.00) for January, February and March and would pay the net amount due
of Six Thousand Dollars ($6000.00) on or before March 31.
5. SAVANCO agrees that during the term of this consulting agreement, it
will not perform vanadium process recovery consulting services for any other
company but shall perform such services exclusively for MCKENZIE BAY. SAVANCO
also agrees that it will not perform any consulting services for any other
company regarding vanadium without the prior written consent of MCKENZIE BAY.
This agreement to refrain shall not apply to consulting services involving any
mineral other than vanadium.
6. SAVANCO agrees that during the term of this consulting agreement,
including any renewal term or thereafter, SAVANCO will not disclose other than
to an employee of MCKENZIE BAY any confidential information relating to
vanadium process recovery including any information relating to processes,
trade secrets or know-how without the prior consent of MCKENZIE BAY, and that
upon termination of this consulting agreement for any reason, SAVANCO will not
retain without MCKENZIE BAY's express consent any programs, figures,
calculations, letters, papers, drawings, process descriptions or copies thereof
or other confidential information relating to the vanadium process recovery.
7. On March 1, 2004 and on March 1 of each subsequent year through the
term of this agreement including any renewal terms, the hourly consulting fee
shall be increased by an amount equal to five percent (5%) of the previous
year's fee. By way of illustration on March 1, 2004, the hourly consulting fee
will be increased by Four and 50/100 Dollars ($4.50) to Ninety-Four and 50/100
Dollars ($94.50) per hour.
8. Until further notice from Savanco, all payments to Savanco shall be
made to Chemplant Projects BV at ING Bank, Dordrecht, The Netherlands, Swift
address ING BNL2A, Account number 02.00.78.641.
9. This agreement shall expire February 28, 2007 provided, however, that
this agreement shall be automatically renewed for successive three-year terms
(the "renewal terms") unless either party shall give written notice to the
other of termination of this agreement at least 60 days prior to the expiration
of the original term or any renewal term.
10. SAVANCO represents and warrants to MCKENZIE BAY that it is a
corporation duly incorporated and is in good standing under the laws of the
jurisdiction of its incorporation and is authorized, qualified and licensed to
own its own properties and to carry on its business as presently owned and
carried on by it. Further, the Board of Directors of SAVANCO has duly
authorized and approved the transactions contemplated by this agreement and the
performance of its obligations hereunder. No other corporate action by SAVANCO
or otherwise is required in connection with this agreement or the performance
of SAVANCO's obligations under this agreement.
11. MCKENZIE BAY represents and warrants to SAVANCO that it is a
corporation duly incorporated and is in good standing under the laws of the
jurisdiction of its incorporation and is authorized, qualified and licensed to
own its own properties and to carry on its business as presently owned and
carried on by it. Further, the Board of Directors of MCKENZIE BAY has duly
authorized and approved the transactions contemplated by this agreement and the
performance of its obligations hereunder. No other corporate action by
MCKENZIE BAY or otherwise is required in connection with this agreement or the
performance of MCKENZIE BAY's obligations under this agreement.
12. The parties shall execute and procure the execution of all such further
documents or other things as shall be required to secure the full performance
and implementation of the terms of this agreement and shall undertake all such
further acts as shall be necessary to bring into effect the terms of this
agreement.
13. Any notice to be delivered hereunder shall be in writing signed by a
duly-authorized representative of the party serving such notice and shall be
delivered to the other party by hand, facsimile, or by registered post to the
address shown below or such other address as shall be specified in writing. In
the case of service by post, such notice shall be deemed to be received four
days after dispatch: in the case of MCKENZIE BAY, MCKENZIE BAY RESOURCES,
LTD., 143 Windsor Avenue, London, Ontario, CANADA N6C 2A1, ATTN: JOHN W.
SAWARIN; in the case of SAVANCO, SAVANCO, INC., PO Box 782511, Sandton 2146,
South Africa ATTN: DS Bradbury.
14. This agreement constitutes the entire agreement the parties pertaining
to the subject matter of this agreement and supersedes all prior agreements,
understandings, negotiations and discussions whether oral or written. Any
amendment to this agreement shall be in writing executed by both of the parties
hereto.
IN WITNESS WHEREOF, the agreement has been executed by the parties hereto as of
the date written above.
MCKENZIE BAY RESOURCES, LTD.
By: /s/ Robert C . Bryce
Robert C. Bryce
Its: President
SAVANCO, INC.
By: /s/ David Stuart Bradbury
David Stuart Bradbury
Its: Managing Director
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EX-10.15
STANDBY EQUITY DISTRIBUTION AGREEMENT
AGREEMENT dated as of the 6th day of April 2004 (the "Agreement") between
CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"),
and MCKENZIE BAY INTERNATIONAL LTD., a corporation organized and existing under
the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to the Investor, from time to
time as provided herein, and the Investor shall purchase from the Company up to
Fifteen Million Dollars ($15,000,000) of the Company's common stock, par value
$.001 per share (the "Common Stock"); and
WHEREAS, such investments will be made in reliance upon the provisions of
Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder (the "Securities Act"), and or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments to be made hereunder.
WHEREAS, the Company has engaged Spencer Clarke LLC, to act as the Company's
exclusive placement agent in connection with the sale of the Company's Common
Stock to the Investor hereunder pursuant to the Placement Agent Agreement dated
the date hereof by and among the Company, the Placement Agent and the Investor
(the "Placement Agent Agreement").
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I.
Certain Definitions
Section 1.1. "Advance" shall mean the portion of the Commitment Amount
requested by the Company in the Advance Notice.
Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow
Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as
the Investor's Counsel, is in possession of free trading shares from the Company
and therefore an Advance by the Investor to the Company can be made and Butler
Gonzalez LLP can release the free trading shares to the Investor. No Advance
Date shall be less than six (6) Trading Days after an Advance Notice Date.
Section 1.3. "Advance Notice" shall mean a written notice to the Investor
setting forth the Advance amount that the Company requests from the Investor and
the Advance Date.
Section 1.4. "Advance Notice Date" shall mean each date the Company delivers
to the Investor an Advance Notice requiring the Investor to advance funds to the
Company, subject to the terms of this Agreement. No Advance Notice Date shall
be less than seven (7) business days after the prior Advance Notice Date.
Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as
reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if
the Common Stock is not traded on a Principal Market, the highest reported bid
price for the Common Stock, as furnished by the National Association of
Securities Dealers, Inc.
Section 1.6. "Closing" shall mean one of the closings of a purchase and sale
of Common Stock pursuant to Section 2.3.
Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to
Fifteen Million Dollars ($15,000,000) which the Investor has agreed to provide
to the Company in order to purchase the Company's Common Stock pursuant to the
terms and conditions of this Agreement.
Section 1.8. "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have made payment
of Advances pursuant to this Agreement in the aggregate amount of Fifteen
Million Dollars ($15,000,000), (y) the date this Agreement is terminated
pursuant to Section 2.5, or (z) the date occurring twenty-four (24) months after
the Effective Date.
Section 1.9. "Common Stock" shall mean the Company's common stock, par value
$.001 per share.
Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth
in Section 7.2.
Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs
and expenses (including, without limitation, reasonable attorney's fees and
disbursements and costs and expenses of expert witnesses and investigation).
Section 1.12. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the
Company, the Investor, and Butler Gonzalez LLP dated the date hereof.
Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
Section 1.15. "Material Adverse Effect" shall mean any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to enter into and perform any of its obligations
under this Agreement or the Registration Rights Agreement in any material
respect.
Section 1.16. "Market Price" shall mean the lowest VWAP of the Common Stock
during the Pricing Period.
Section 1.17. "Maximum Advance Amount" shall be Six Hundred Twenty Five
Thousand Dollars ($625,000) per Advance Notice.
Section 1.18 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.19 "Person" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Section 1.20 "Placement Agent" shall mean Spencer Clarke LLC, a registered
broker-dealer.
Section 1.21 "Pricing Period" shall mean the five (5) consecutive Trading
Days after the Advance Notice Date.
Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or
the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.
Section 1.23 "Purchase Price" shall be set at ninety nine percent (99%) of
the Market Price during the Pricing Period.
Section 1.24 "Registrable Securities" shall mean the shares of Common Stock
to be issued hereunder (i) in respect of which the Registration Statement has
not been declared effective by the SEC, (ii) which have not been sold under
circumstances meeting all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") or (iii)
which have not been otherwise transferred to a holder who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend.
Section 1.25 "Registration Rights Agreement" shall mean the Registration
Rights Agreement dated the date hereof, regarding the filing of the Registration
Statement for the resale of the Registrable Securities, entered into between the
Company and the Investor.
Section 1.26 "Registration Statement" shall mean a registration statement on
Form S-1 or SB-2 (if use of such form is then available to the Company pursuant
to the rules of the SEC and, if not, on such other form promulgated by the SEC
for which the Company then qualifies and which counsel for the Company shall
deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered there under in accordance with the
provisions of this Agreement and the Registration Rights Agreement, and in
accordance with the intended method of distribution of such securities), for the
registration of the resale by the Investor of the Registrable Securities under
the Securities Act.
Section 1.27 "Regulation D" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.28 "SEC" shall mean the Securities and Exchange Commission.
Section 1.29 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.30 "SEC Documents" shall mean Annual Reports on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and Proxy
Statements of the Company as supplemented to the date hereof, filed by the
Company for a period of at least twelve (12) months immediately preceding the
date hereof or the Advance Date, as the case may be, until such time as the
Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.31 "Trading Day" shall mean any day during which the New York Stock
Exchange shall be open for business.
Section 1.32 "VWAP" shall mean the volume weighted average price of the
Company's common stock as quoted by Bloomberg, LP.
ARTICLE II.
Advances
Section 2.1. Investments.
(a) Advances. Upon the terms and conditions set forth herein (including,
without limitation, the provisions of Article VII hereof), on any Advance Notice
Date the Company may request an Advance by the Investor by the delivery of an
Advance Notice. The number of shares of Common Stock that the Investor shall
receive for each Advance shall be determined by dividing the amount of the
Advance by the Purchase Price. No fractional shares shall be issued. Fractional
shares shall be rounded to the next higher whole number of shares. The
aggregate maximum amount of all Advances that the Investor shall be obligated to
make under this Agreement shall not exceed the Commitment Amount.
Section 2.2. Mechanics.
(a) Advance Notice. At any time during the Commitment Period, the Company
may deliver an Advance Notice to the Investor, subject to the conditions set
forth in Section 7.2; provided, however, the amount for each Advance as
designated by the Company in the applicable Advance Notice, shall not be more
than the Maximum Advance Amount. The aggregate amount of the Advances pursuant
to this Agreement shall not exceed the Commitment Amount. The Company
acknowledges that the Investor may sell shares of the Company's Common Stock
corresponding with a particular Advance Notice on the day the Advance Notice is
received by the Investor. There will be a minimum of seven (7) Trading Days
between each Advance Notice Date.
(b) Date of Delivery of Advance Notice. An Advance Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or otherwise by the
Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii)
the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Advance Notice may be deemed delivered, on a day
that is not a Trading Day.
(c) Hardship. In the event the Investor sells the Company's Common Stock
pursuant to subsection (c) above and the Company fails to perform its
obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to
provide the Investor with the shares of Common Stock for the applicable Advance,
the Company acknowledges that the Investor shall suffer financial hardship and
therefore shall be liable for any and all losses, commissions, fees, or
financial hardship caused to the Investor.
Section 2.3. Closings. On each Advance Date, which shall be six (6) Trading
Days after an Advance Notice Date, (i) the Company shall deliver to the
Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the
Company's Common Stock, representing the amount of the Advance by the Investor
pursuant to Section 2.1 herein, registered in the name of the Investor which
shall be delivered to the Investor, or otherwise in accordance with the Escrow
Agreement and (ii) the Investor shall deliver to Butler Gonzalez LLP (the
"Escrow Agent") the amount of the Advance specified in the Advance Notice by
wire transfer of immediately available funds which shall be delivered to the
Company, or otherwise in accordance with the Escrow Agreement. In addition, on
or prior to the Advance Date, each of the Company and the Investor shall deliver
to the other through the Investor's Counsel all documents, instruments and
writings required to be delivered by either of them pursuant to this Agreement
in order to implement and effect the transactions contemplated herein. Payment
of funds to the Company and delivery of the Company's Common Stock to the
Investor shall occur in accordance with the conditions set forth above and those
contained in the Escrow Agreement; provided, however, that to the extent the
Company has not paid the fees, expenses, and disbursements of the Investor
and/or the Investor's counsel in accordance with Section 12.4, the amount of
such fees, expenses, and disbursements may be deducted by the Investor (and
shall be paid to the relevant party) from the amount of the Advance with no
reduction in the amount of shares of the Company's Common Stock to be delivered
on such Advance Date.
Section 2.4. Termination of Investment. The obligation of the Investor to
make an Advance to the Company pursuant to this Agreement shall terminate
permanently (including with respect to an Advance Date that has not yet
occurred) in the event that (i) there shall occur any stop order or suspension
of the effectiveness of the Registration Statement for an aggregate of fifty
(50) Trading Days, other than due to the acts of the Investor, during the
Commitment Period, and (ii) the Company shall at any time fail materially to
comply with the requirements of Article VI and such failure is not cured within
thirty (30) days after receipt of written notice from the Investor, provided,
however, that this termination provision shall not apply to any period
commencing upon the filing of a post-effective amendment to such Registration
Statement and ending upon the date on which such post effective amendment is
declared effective by the SEC.
Section 2.5. Agreement to Advance Funds.
(a) The Investor agrees to advance the amount specified in the Advance
Notice to the Company after the completion of each of the following conditions
and the other conditions set forth in this Agreement:
(i) the execution and delivery by the Company, and the Investor, of this
Agreement, and the Exhibits hereto;
(ii) the Company's Common Stock shall have been authorized for quotation on
the Principal Market .
(iii) Investor's Counsel shall have received the shares of Common Stock
applicable to the Advance in accordance with Section 2.2(c) hereof;
(iv) the Company's Registration Statement with respect to the resale of the
Registrable Securities in accordance with the terms of the Registration Rights
Agreement shall have been declared effective by the SEC;
(v) the Company shall have obtained all material permits and qualifications
required by any applicable state for the offer and sale of the Registrable
Securities, or shall have the availability of exemptions therefrom. The sale
and issuance of the Registrable Securities shall be legally permitted by all
laws and regulations to which the Company is subject;
(vi) the Company shall have filed with the Commission in a timely manner all
reports, notices and other documents required of a "reporting company" under the
Exchange Act and applicable Commission regulations;
(vii) the fees as set forth in Section 12.4 below shall have been paid or can
be withheld as provided in Section 2.3;
(viii) the conditions set forth in Section 7.2 shall have been satisfied; and
(ix) The Company's transfer agent shall be DWAC eligible.
Section 2.6. Lock Up Period.
(i) During the Commitment Period, the Company shall not, without fifteen
(15) calendar days prior written notice to the Investor, issue or sell (i) any
Common Stock or Preferred Stock without consideration or for a consideration per
share less than the Bid Price on the date of issuance or (ii) issue or sell any
warrant, option, right, contract, call, or other security or instrument granting
the holder thereof the right to acquire Common Stock without consideration or
for a consideration per share less than the Bid Price on the date of issuance.
(ii) On the date hereof, the Company shall obtain from each officer and
director a lock-up agreement, as defined below, in the form annexed hereto as
Schedule 2.6 agreeing to only sell in compliance with the volume limitation of
Rule 144.
ARTICLE III.
Representations and Warranties of Investor
Investor hereby represents and warrants to, and agrees with, the Company that
the following are true and as of the date hereof and as of each Advance Date:
Section 3.1. Organization and Authorization. The Investor is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority to
purchase and hold the securities issuable hereunder. The decision to invest and
the execution and delivery of this Agreement by such Investor, the performance
by such Investor of its obligations hereunder and the consummation by such
Investor of the transactions contemplated hereby have been duly authorized and
requires no other proceedings on the part of the Investor. The undersigned has
the right, power and authority to execute and deliver this Agreement and all
other instruments (including, without limitations, the Registration Rights
Agreement), on behalf of the Investor. This Agreement has been duly executed
and delivered by the Investor and, assuming the execution and delivery hereof
and acceptance thereof by the Company, will constitute the legal, valid and
binding obligations of the Investor, enforceable against the Investor in
accordance with its terms.
Section 3.2. Evaluation of Risks. The Investor has such knowledge and
experience in financial tax and business matters as to be capable of evaluating
the merits and risks of, and bearing the economic risks entailed by, an
investment in the Company and of protecting its interests in connection with
this transaction. It recognizes that its investment in the Company involves a
high degree of risk.
Section 3.3. No Legal Advice From the Company. The Investor acknowledges
that it had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with his or its own legal counsel and investment
and tax advisors. The Investor is relying solely on such counsel and advisors
and not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.
Section 3.4. Investment Purpose. The securities are being purchased by the
Investor for its own account, for investment and without any view to the
distribution, assignment or resale to others or fractionalization in whole or in
part. The Investor agrees not to assign or in any way transfer the Investor's
rights to the securities or any interest therein and acknowledges that the
Company will not recognize any purported assignment or transfer except in
accordance with applicable Federal and state securities laws. No other person
has or will have a direct or indirect beneficial interest in the securities.
The Investor agrees not to sell, hypothecate or otherwise transfer the
Investor's securities unless the securities are registered under Federal and
applicable state securities laws or unless, in the opinion of counsel
satisfactory to the Company, an exemption from such laws is available.
Section 3.5. Accredited Investor. The Investor is an "Accredited Investor"
as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act.
Section 3.6. Information. The Investor and its advisors (and its counsel),
if any, have been furnished with all materials relating to the business,
finances and operations of the Company and information it deemed material to
making an informed investment decision. The Investor and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and its
management. Neither such inquiries nor any other due diligence investigations
conducted by such Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor's right to rely on the Company's
representations and warranties contained in this Agreement. The Investor
understands that its investment involves a high degree of risk. The Investor is
in a position regarding the Company, which, based upon employment, family
relationship or economic bargaining power, enabled and enables such Investor to
obtain information from the Company in order to evaluate the merits and risks of
this investment. The Investor has sought such accounting, legal and tax advice,
as it has considered necessary to make an informed investment decision with
respect to this transaction.
Section 3.7. Receipt of Documents. The Investor and its counsel has received
and read in their entirety: (i) this Agreement and the Exhibits annexed hereto;
(ii) all due diligence and other information necessary to verify the accuracy
and completeness of such representations, warranties and covenants; (iii) the
Company's Form 10-KSB for the year ended year ended September 30, 2003 and Form
10-QSB for the period ended December 31, 2003 and (iv) answers to all questions
the Investor submitted to the Company regarding an investment in the Company;
and the Investor has relied on the information contained therein and has not
been furnished any other documents, literature, memorandum or prospectus.
Section 3.8. Registration Rights Agreement and Escrow Agreement. The parties
have entered into the Registration Rights Agreement and the Escrow Agreement,
each dated the date hereof.
Section 3.9. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the shares of Common Stock offered hereby.
Section 3.10. Not an Affiliate. The Investor is not an officer, director or a
person that directly, or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with the Company or any
"Affiliate" of the Company (as that term is defined in Rule 405 of the
Securities Act). Neither the Investor nor its Affiliates has an open short
position in the Common Stock of the Company, and the Investor agrees that it
will not, and that it will cause its Affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock, provided that
the Company acknowledges and agrees that upon receipt of an Advance Notice the
Investor will sell the Shares to be issued to the Investor pursuant to the
Advance Notice, even if the Shares have not been delivered to the Investor.
Section 3.11. Trading Activities. The Investor's trading activities with
respect to the Company's Common Stock shall be in compliance with all applicable
federal and state securities laws, rules and regulations and the rules and
regulations of the Principal Market on which the Company's Common Stock is
listed or traded. Neither the Investor nor its affiliates has an open short
position in the Common Stock of the Company and, except as set forth below, the
Investor shall not and will cause its affiliates not to engage in any short sale
as defined in any applicable SEC or National Association of Securities Dealers
rules on any hedging transactions with respect to the Common Stock. Without
limiting the foregoing, the Investor agrees not to engage in any naked short
transactions in excess of the amount of shares owned (or an offsetting long
position) during the Commitment Period. The Investor shall be entitled to sell
Common Stock during the applicable Pricing Period.
ARTICLE IV.
Representations and Warranties of the Company
Except as stated below, on the disclosure schedules attached hereto or in the
SEC Documents (as defined herein), the Company hereby represents and warrants
to, and covenants with, the Investor that the following are true and correct as
of the date hereof:
Section 4.1. Organization and Qualification. The Company is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority
corporate power to own its properties and to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.
Section 4.2. Authorization, Enforcement, Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Placement Agent Agreement and any related agreements, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Placement Agent Agreement and any related agreements by the Company and the
consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements have
been duly executed and delivered by the Company, (iv) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Placement Agent
Agreement and assuming the execution and delivery thereof and acceptance by the
Investor and any related agreements constitute the valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
Section 4.3. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of _____________ shares of Common Stock, par value
$____ per share and ___________shares of Preferred Stock of which ___________
shares of Common Stock and __________ shares of Preferred Stock were issued and
outstanding. All of such outstanding shares have been validly issued and are
fully paid and nonassessable. Except as disclosed in the SEC Documents, no
shares of Common Stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company.
Except as disclosed in the SEC Documents, as of the date hereof, (i) there are
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities (iii) there are no outstanding registration
statements other than on Form S-8 and (iv) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the Securities Act (except
pursuant to the Registration Rights Agreement). There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by this Agreement or any related agreement or the consummation of the
transactions described herein or therein. The Company has furnished to the
Investor true and correct copies of the Company's Certificate of Incorporation,
as amended and as in effect on the date hereof (the "Certificate of
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
Section 4.4. No Conflict. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Certificate of
Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or By-laws or (ii) conflict with or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market on which the Common Stock is quoted) applicable to the Company
or any of its subsidiaries or by which any material property or asset of the
Company or any of its subsidiaries is bound or affected and which would cause a
Material Adverse Effect. Except as disclosed in the SEC Documents, neither the
Company nor its subsidiaries is in violation of any term of or in default under
its Certificate of Incorporation or By-laws or their organizational charter or
by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted in violation of any
material law, ordinance, regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement or the Registration Rights Agreement in accordance with the terms
hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any fact or circumstance which might
give rise to any of the foregoing.
Section 4.5. SEC Documents; Financial Statements. Since 2002, the Company
has filed all reports, schedules, forms, statements and other documents required
to be filed by it with the SEC under of the Exchange Act. The Company has
delivered to the Investor or its representatives, or made available through the
SEC's website at http://www.sec.gov, true and complete copies of the SEC
Documents. As of their respective dates, the financial statements of the
Company disclosed in the SEC Documents (the "Financial Statements") complied as
to form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and, fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Investor which is not included in the SEC Documents contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
Section 4.6. 10b-5. The SEC Documents do not include any untrue statements
of material fact, nor do they omit to state any material fact required to be
stated therein necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
Section 4.7. No Default. Except as disclosed in the SEC Documents, the
Company is not in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust or other material instrument or agreement to which it is
a party or by which it is or its property is bound and neither the execution,
nor the delivery by the Company, nor the performance by the Company of its
obligations under this Agreement or any of the exhibits or attachments hereto
will conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under its
Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of
trust or other material agreement applicable to the Company or instrument to
which the Company is a party or by which it is bound, or any statute, or any
decree, judgment, order, rules or regulation of any court or governmental agency
or body having jurisdiction over the Company or its properties, in each case
which default, lien or charge is likely to cause a Material Adverse Effect on
the Company's business or financial condition.
Section 4.8. Absence of Events of Default. Except for matters described in
the SEC Documents and/or this Agreement, no Event of Default, as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing, which would have a
Material Adverse Effect on the Company's business, properties, prospects,
financial condition or results of operations.
Section 4.9. Intellectual Property Rights. The Company and its subsidiaries
own or possess adequate rights or licenses to use all material trademarks, trade
names, service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, and, to the knowledge of the Company, there is no
claim, action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
Section 4.10. Employee Relations. Except for matters described in the SEC
Documents and/or this Agreement, neither the Company nor any of its subsidiaries
is involved in any labor dispute nor, to the knowledge of the Company or any of
its subsidiaries, is any such dispute threatened. None of the Company's or its
subsidiaries' employees is a member of a union and the Company and its
subsidiaries believe that their relations with their employees are good.
Section 4.11. Environmental Laws. The Company and its subsidiaries are (i) in
compliance with any and all applicable material foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval.
Section 4.12. Title. Except as set forth in the SEC Documents, the Company
has good and marketable title to its properties and material assets owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than such as are not material to the business of the
Company. Any real property and facilities held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.
Section 4.13. Insurance. The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
Section 4.14. Regulatory Permits. Except for matters described in the SEC
Documents and/or this Agreement, the Company and its subsidiaries possess all
material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
Section 4.15. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the
SEC Documents, neither the Company nor any of its subsidiaries is subject to any
charter, corporate or other legal restriction, or any judgment, decree, order,
rule or regulation which in the judgment of the Company's officers has or is
expected in the future to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries. Except as set forth in the SEC Documents,
neither the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company's officers, has or is
expected to have a Material Adverse Effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.
Section 4.17. Absence of Litigation. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending against or affecting the Company, the Common Stock or any of the
Company's subsidiaries, wherein an unfavorable decision, ruling or finding would
(i) have a Material Adverse Effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein, or (iii) except as expressly disclosed in the SEC
Documents, have a Material Adverse Effect on the business, operations,
properties, financial condition or results of operation of the Company and its
subsidiaries taken as a whole.
Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
Section 4.19. Tax Status. Except as disclosed in the SEC Documents, the
Company and each of its subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
Section 4.20. Certain Transactions. Except as set forth in the SEC Documents
none of the officers, directors, or employees of the Company is presently a
party to any transaction with the Company (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
Section 4.21. Fees and Rights of First Refusal. The Company is not obligated
to offer the securities offered hereunder on a right of first refusal basis or
otherwise to any third parties including, but not limited to, current or former
shareholders of the Company, underwriters, brokers, agents or other third
parties.
Section 4.22. Use of Proceeds. The Company represents that the net proceeds
from this offering will be used for general corporate purposes. However, in no
event shall the net proceeds from this offering be used by the Company for the
payment (or loaned to any such person for the payment) of any judgment, or other
liability, incurred by any executive officer, officer, director or employee of
the Company, except for any liability owed to such person for services rendered,
or if any judgment or other liability is incurred by such person originating
from services rendered to the Company, or the Company has indemnified such
person from liability.
Section 4.23. Further Representation and Warranties of the Company. For so
long as any securities issuable hereunder held by the Investor remain
outstanding, the Company acknowledges, represents, warrants and agrees that it
will maintain the listing of its Common Stock on the Principal Market
Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter
from Reisman and Associates, P.A., counsel to the Company on the date hereof.
Section 4.25. Opinion of Counsel. The Company will obtain for the Investor,
at the Company's expense, any and all opinions of counsel which may be
reasonably required in order to sell the securities issuable hereunder without
restriction.
Section 4.26. Dilution. The Company is aware and acknowledges that issuance
of shares of the Company's Common Stock could cause dilution to existing
shareholders and could significantly increase the outstanding number of shares
of Common Stock.
ARTICLE V.
Indemnification
The Investor and the Company represent to the other the following with respect
to itself:
Section 5.1. Indemnification.
(a) In consideration of the Investor's execution and delivery of this
Agreement, and in addition to all of the Company's other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Investor, and all of its officers, directors, partners, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Investor
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Investor Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "Indemnified
Liabilities"), incurred by the Investor Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement or the Registration Rights
Agreement or any other certificate, instrument or document contemplated hereby
or thereby, or (c) any cause of action, suit or claim brought or made against
such Investor Indemnitee not arising out of any action or inaction of an
Investor Indemnitee, and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Investor
Indemnitees. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
(b) In consideration of the Company's execution and delivery of this
Agreement, and in addition to all of the Investor's other obligations under this
Agreement, the Investor shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, shareholders, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Company
Indemnitees") from and against any and all Indemnified Liabilities incurred by
the Company Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Investor in this Agreement, the Registration Rights
Agreement, or any instrument or document contemplated hereby or thereby executed
by the Investor, (b) any breach of any covenant, agreement or obligation of the
Investor(s) contained in this Agreement, the Registration Rights Agreement or
any other certificate, instrument or document contemplated hereby or thereby
executed by the Investor, or (c) any cause of action, suit or claim brought or
made against such Company Indemnitee based on misrepresentations or due to a
breach by the Investor and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Company
Indemnitees. To the extent that the foregoing undertaking by the Investor may
be unenforceable for any reason, the Investor shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.
(c) The obligations of the parties to indemnify or make contribution under
this Section 5.1 shall survive termination.
ARTICLE VI.
Covenants of the Company
Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 6.2. Listing of Common Stock. The Company shall obtain and maintain
the Common Stock's authorization for quotation on the Principal Market.
Section 6.3. Exchange Act Registration. The Company will cause its Common
Stock to continue to be registered under Section 12(g) of the Exchange Act, will
file in a timely manner all reports and other documents required of it as a
reporting company under the Exchange Act and will not take any action or file
any document (whether or not permitted by Exchange Act or the rules thereunder
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said Exchange Act.
Section 6.4. Transfer Agent Instructions. Not later than two (2) business
days after each Advance Notice Date and prior to each Closing and the
effectiveness of the Registration Statement and resale of the Common Stock by
the Investor, the Company will deliver instructions to its transfer agent to
issue shares of Common Stock free of restrictive legends.
Section 6.5. Corporate Existence. The Company will take all steps necessary
to preserve and continue the corporate existence of the Company.
Section 6.6. Notice of Certain Events Affecting Registration; Suspension of
Right to Make an Advance. The Company will immediately notify the Investor upon
its becoming aware of the occurrence of any of the following events in respect
of a registration statement or related prospectus relating to an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other Federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other Federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus of any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Advance Notice during the
continuation of any of the foregoing events.
Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company must notify the Investor, in
writing, as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Advance
Notices. Such notification shall constitute only the Company's good faith
estimate and shall in no way obligate the Company to raise such amount, or any
amount, or otherwise limit its ability to deliver Advance Notices. The failure
by the Company to comply with this provision can be cured by the Company's
notifying the Investor, in writing, at any time as to its reasonable
expectations with respect to the current calendar quarter.
Section 6.8. Restriction on Sale of Capital Stock. During the Commitment
Period, the Company shall not issue or sell (i) any Common Stock or Preferred
Stock without consideration or for a consideration per share less than the bid
price of the Common Stock determined immediately prior to its issuance, (ii)
issue or sell any Preferred Stock warrant, option, right, contract, call, or
other security or instrument granting the holder thereof the right to acquire
Common Stock without consideration or for a consideration per share less than
such Common Stock's Bid Price determined immediately prior to its issuance, or
(iii) without thirty (30 calendar days prior written notice to the Investor file
any registration statement on Form S-8.
Section 6.9. Consolidation; Merger. The Company shall not, at any time after
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all the assets of the Company to another
entity (a "Consolidation Event") unless the resulting successor or acquiring
entity (if not the Company) assumes by written instrument the obligation to
deliver to the Investor such shares of stock and/or securities as the Investor
is entitled to receive pursuant to this Agreement.
Section 6.10. Issuance of the Company's Common Stock. The sale of the shares
of Common Stock shall be made in accordance with the provisions and requirements
of Regulation D and any applicable state securities law.
ARTICLE VII.
Conditions for Advance and Conditions to Closing
Section 7.1. Conditions Precedent to the Obligations of the Company. The
obligation hereunder of the Company to issue and sell the shares of Common Stock
to the Investor incident to each Closing is subject to the satisfaction, or
waiver by the Company, at or before each such Closing, of each of the conditions
set forth below.
(a) Accuracy of the Investor's Representations and Warranties. The
representations and warranties of the Investor shall be true and correct in all
material respects.
(b) Performance by the Investor. The Investor shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement and the Registration Rights Agreement to
be performed, satisfied or complied with by the Investor at or prior to such
Closing.
Section 7.2. Conditions Precedent to the Right of the Company to Deliver an
Advance Notice and the Obligation of the Investor to Purchase Shares of Common
Stock. The right of the Company to deliver an Advance Notice and the obligation
of the Investor hereunder to acquire and pay for shares of the Company's Common
Stock incident to a Closing is subject to the fulfillment by the Company, on (i)
the date of delivery of such Advance Notice and (ii) the applicable Advance Date
(each a "Condition Satisfaction Date"), of each of the following conditions:
(a) Listing of the Company's Common Stock. The Company's Common Stock shall
have been authorized for quotation on the Principal Market .
(b) Registration of the Common Stock with the SEC. The Company shall have
filed with the SEC a Registration Statement with respect to the resale of the
Registrable Securities in accordance with the terms of the Registration Rights
Agreement. As set forth in the Registration Rights Agreement, the Registration
Statement shall have previously become effective and shall remain effective on
each Condition Satisfaction Date and (i) neither the Company nor the Investor
shall have received notice that the SEC has issued or intends to issue a stop
order with respect to the Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so (unless the
SEC's concerns have been addressed and the Investor is reasonably satisfied that
the SEC no longer is considering or intends to take such action), and (ii) no
other suspension of the use or withdrawal of the effectiveness of the
Registration Statement or related prospectus shall exist. The Registration
Statement must have been declared effective by the SEC prior to the first
Advance Notice Date.
(c) Authority. The Company shall have obtained all permits and
qualifications required by any applicable state in accordance with the
Registration Rights Agreement for the offer and sale of the shares of Common
Stock, or shall have the availability of exemptions therefrom. The sale and
issuance of the shares of Common Stock shall be legally permitted by all laws
and regulations to which the Company is subject.
(d) Fundamental Changes. There shall not exist any fundamental changes to
the information set forth in the Registration Statement which would require the
Company to file a post-effective amendment to the Registration Statement.
(e) Performance by the Company. The Company shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement (including, without limitation, the
conditions specified in Section 2.5 hereof) and the Registration Rights
Agreement to be performed, satisfied or complied with by the Company at or prior
to each Condition Satisfaction Date.
(f) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
or directly and adversely affects any of the transactions contemplated by this
Agreement, and no proceeding shall have been commenced that may have the effect
of prohibiting or adversely affecting any of the transactions contemplated by
this Agreement.
(g) No Suspension of Trading in or Delisting of Common Stock. The trading
of the Common Stock is not suspended by the SEC or the Principal Market (if the
Common Stock is traded on a Principal Market). The issuance of shares of Common
Stock with respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the Principal Market (if the Common Stock
is traded on a Principal Market). The Company shall not have received any
notice threatening the continued listing of the Common Stock on the Principal
Market (if the Common Stock is traded on a Principal Market).
(h) Maximum Advance Amount. The amount of any Advance requested by the
Company shall not exceed the Maximum Advance Amount. In addition, in no event
shall the number of shares issuable to the Investor pursuant to an Advance cause
the Investor to own in excess of nine and 9/10 percent (9.9%) of the then
outstanding Common Stock of the Company.
(i) No Knowledge. The Company has no knowledge of any event which would be
more likely than not to have the effect of causing such Registration Statement
to be suspended or otherwise ineffective.
(j) Other. On each Condition Satisfaction Date, the Investor shall have
received the certificate executed by an officer of the Company in the form of
Exhibit A attached hereto.
ARTICLE VIII.
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 8.1. Due Diligence Review. Prior to the filing of the Registration
Statement the Company shall make available for inspection and review by the
Investor, advisors to and representatives of the Investor, any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose non-public information to the Investor,
advisors to or representatives of the Investor unless prior to disclosure of
such information the Company identifies such information as being non-public
information and provides the Investor, such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review. The Company may, as a condition to disclosing any non-public
information hereunder, require the Investor's advisors and representatives to
enter into a confidentiality agreement in form reasonably satisfactory to the
Company and the Investor.
(b) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate non-public information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting non-
public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 8.2 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE IX.
Choice of Law/Jurisdiction
Section 9.1. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Delaware without regard
to the principles of conflict of laws. The parties further agree that any
action between them shall be heard in Hudson County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Hudson County, New Jersey and the United States District Court of New
Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action
asserted pursuant to this paragraph.
ARTICLE X.
Assignment/Termination
Section 10.1. Assignment. Neither this Agreement nor any rights of the
Company hereunder may be assigned to any other Person.
Section 10.2. Termination. The obligations of the Investor to make Advances
under Article II hereof shall terminate twenty-four (24) months after the
Effective Date.
ARTICLE XI.
Notices
Section 11.1. Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company, to: McKenzie Bay International Ltd.
975 Spaulding Avenue Grand Rapids, MI 49546 Attention: Gregory
Bakeman Telephone: (616) 940-3800 Facsimile: (616) 940-9194
With a copy to: Donald C. Harms, Esq. 37899 12 Mile Road Suite 300 Farmington
Hills, MI 48331 Telephone: (248) 489-8520 Facsimile: (248)
489-4163
If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street Suite
3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager
Telephone: (201) 985-8300 Facsimile: (201) 985-8266
With a Copy to: Butler Gonzalez LLP 1416 Morris Avenue - Suite 207 Union, NJ
07083 Attention: David Gonzalez, Esq. Telephone: (908)
810-8588 Facsimile: (908) 810-0973
Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.
ARTICLE XII.
Miscellaneous
Section 12.1. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof, though failure to deliver such copies shall not affect the
validity of this Agreement.
Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
Section 12.3. Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 12.4. Fees and Expenses. The Company hereby agrees to pay the
following fees:
(a) Legal Fees. Each of the parties shall pay its own fees and expenses
(including the fees of any attorneys, accountants, appraisers or others engaged
by such party) in connection with this Agreement and the transactions
contemplated hereby, except that upon the execution of this Agreement the
Company will pay Fifteen Thousand Dollars ($15,000) to Butler Gonzalez LLP for
legal, administrative, and escrow fees. Subsequently on each advance date, the
Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500)
for legal, administrative and escrow fees directly out the proceeds of any
Advances hereunder.
(b) Commitment Fees.
(i) On each Advance Date the Company shall pay to the Investor, directly
from the gross proceeds held in escrow, an amount equal to five percent (5%) of
the amount of each Advance. The Company hereby agrees that if such payment, as
is described above, is not made by the Company on the Advance Date, such payment
will be made at the direction of the Investor as outlined and mandated by
Section 2.3 of this Agreement.
(ii) The Company shall issue to the Investor shares of the Company's Common
Stock in an amount equal to Five Hundred Forty Thousand Dollars ($540,000)
divided by the VWAP of the Company's Common Stock, as quoted by Bloomberg, LP,
on the date hereof of which an amount equal to Two Hundred Seventy Thousand
Dollars ($270,000) divided by the VWAP of the Company's Common Stock, as quoted
by Bloomberg, LP, on the date hereof shall be issued upon the execution of this
Agreement (the "First Tranch of the Investor's Shares") and an amount equal to
Two Hundred Seventy Thousand Dollars ($270,000) divided by the VWAP of the
Company's Common Stock, as quoted by Bloomberg, LP, on the date hereof shall be
issued to the Investor on the date the Registration Statement is declared
effective by the SEC (the "Second Tranch of the Investor's Shares")
(collectively referred to as the "Investor's Shares") .
(iii) Fully Earned. The First Tranch of the Investor's Shares shall be
deemed fully earned as of the date hereof the Second Tranch of the Investor's
Shares shall be deemed fully earned as of the date the Registration Statement is
declared effective by the SEC.
(iv) Registration Rights. The Investor's Shares will have "piggy-back"
registration rights.
(v). Due Diligence Fee. Upon the execution of this Agreement the Company
shall pay to the Investor Two Thousand Five Hundred Dollars ($2,500) to defray
the costs of due diligence.
Section 12.5. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker,
other than Spencer Clarke, who will demand payment of any fee or commission from
the other party. The Company on the one hand, and the Investor, on the other
hand, agree to indemnify the other against and hold the other harmless from any
and all liabilities to any person claiming brokerage commissions or finder's
fees on account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
Section 12.6. Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information without retaining copies thereof, previously furnished by it
as a result of this Agreement or in connection herein.
IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity
Distribution Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above. COMPANY: MCKENZIE BAY
INTERNATIONAL LTD.
By: /s/ Gregory N. Bakeman Name: Gregory Bakeman Title:
Chief Financial Officer
INVESTOR: CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC Its: General Partner
By: /s/ Mark Angelo Name: Mark Angelo Title: Portfolio Manager
EXHIBIT A ADVANCE NOTICE/COMPLIANCE CERTIFICATE MCKENZIE BAY INTERNATIONAL LTD.
The undersigned, _______________________ hereby certifies, with respect to the
sale of shares of Common Stock of McKenzie Bay International Ltd., (the
"Company"), issuable in connection with this Advance Notice and Compliance
Certificate dated ___________________ (the "Notice"), delivered pursuant to the
Standby Equity Distribution Agreement (the "Agreement"), as follows:
1. The undersigned is the duly elected President of the Company.
2. There are no fundamental changes to the information set forth in the
Registration Statement which would require the Company to file a post effective
amendment to the Registration Statement.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Advance Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.
4. The Advance requested is _____________________.
The undersigned has executed this Certificate this ____ day of
_________________.
MCKENZIE BAY INTERNATIONAL LTD.
By: Name: Title:
SCHEDULED 2.6
MCKENZIE BAY INTERNATIONAL LTD.
The undersigned hereby agrees that for a period commencing on the date hereof
and expiring on the termination of the Agreement dated April __, 2004 between
McKenzie Bay International Ltd.., (the "Company"), and Cornell Capital Partners,
LP, (the "Investor") (the "Lock-up Period"), he, she or it will not, directly or
indirectly, without the prior written consent of the Investor, issue, offer,
agree or offer to sell, sell, grant an option for the purchase or sale of,
transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of except pursuant to Rule 144 of the General Rules and Regulations
under the Securities Act of 1933, any securities of the Company, including
common stock or options, rights, warrants or other securities underlying,
convertible into, exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any common stock (whether or not beneficially owned by
the undersigned), or any beneficial interest therein (collectively, the
"Securities").
In order to enable the aforesaid covenants to be enforced, the undersigned
hereby consents to the placing of legends and/or stop-transfer orders with the
transfer agent of the Company's securities with respect to any of the Securities
registered in the name of the undersigned or beneficially owned by the
undersigned, and the undersigned hereby confirms the undersigned's investment in
the Company.
Dated: _______________, 2004
Signature
Address: City, State, Zip Code:
Print Social Security Number or Taxpayer I.D. Number
=============================
EX10-16
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 6, 2004 by
and between MCKENZIE BAY INTERNATIONAL LTD., a Delaware corporation, with its
principal office located at 975 Spaulding Avenue Grand Rapids, Michigan 49546
(the "Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited
partnership (the "Investor").
WHEREAS:
A. In connection with the Standby Equity Distribution Agreement by and
between the parties hereto of even date herewith (the "Standby Equity
Distribution Agreement"), the Company has agreed, upon the terms and subject to
the conditions of the Standby Equity Distribution Agreement, to issue and sell
to the Investor that number of shares of the Company's common stock, par value
$.001 per share (the "Common Stock"), which can be purchased pursuant to the
terms of the Standby Equity Distribution Agreement for an aggregate purchase
price of up to Fifteen Million Dollars ($15,000,000) . Capitalized terms not
defined herein shall have the meaning ascribed to them in the Standby Equity
Distribution Agreement.
B. To induce the Investor to execute and deliver the Standby Equity
Distribution Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Investor
hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
b. "Register," "registered," and "registration" refer to a registration
effected by preparing and filing one or more Registration Statements (as defined
below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933
Act or any successor rule providing for offering securities on a continuous or
delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of
such Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
c. "Registrable Securities" means the Investor's Shares, as defined in the
Standby Equity Distribution Agreement and shares of Common Stock issuable to
Investors pursuant to the Standby Equity Distribution Agreement.
d. "Registration Statement" means a registration statement under the 1933
Act which covers the Registrable Securities.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and file with the SEC
a Registration Statement on Form S-1, SB-2 or on such other form as is
available. The Company shall cause such Registration Statement to be declared
effective by the SEC prior to the first sale to the Investor of the Company's
Common Stock pursuant to the Standby Equity Distribution Agreement.
b. Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities which the Investor
has purchased pursuant to the Standby Equity Distribution Agreement, the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefore, if applicable), or both, so as to cover all
of such Registrable Securities which the Investor has purchased pursuant to the
Standby Equity Distribution Agreement as soon as practicable, but in any event
not later than fifteen (15) days after the necessity therefore arises. The
Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
Securities issuable on an Advance Notice Date is greater than the number of
shares available for resale under such Registration Statement.
3. RELATED OBLIGATIONS.
a. The Company shall keep the Registration Statement effective pursuant to
Rule 415 at all times until the date on which the Investor shall have sold all
the Registrable Securities covered by such Registration Statement (the
"Registration Period"), which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K
or any analogous report under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), the Company shall have incorporated such report by reference
into the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall furnish to the Investor without charge, (i) at least
one copy of such Registration Statement as declared effective by the SEC and any
amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, all exhibits and each preliminary
prospectus, (ii) ten (10) copies of the final prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents as such Investor may reasonably request from time to time in order to
facilitate the disposition of the Registrable Securities owned by such Investor.
d. The Company shall use its best efforts to (i) register and qualify the
Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such jurisdictions in the United States as the
Investor reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (w) make any
change to its certificate of incorporation or by-laws, (x) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify the Investor of the receipt by
the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or "blue sky" laws of any jurisdiction in the United States
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
e. As promptly as practicable after becoming aware of such event or
development, the Company shall notify the Investor in writing of the happening
of any event as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and promptly prepare a supplement or amendment
to such Registration Statement to correct such untrue statement or omission, and
deliver ten (10) copies of such supplement or amendment to the Investor. The
Company shall also promptly notify the Investor in writing (i) when a prospectus
or any prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to the Investor
by facsimile on the same day of such effectiveness), (ii) of any request by the
SEC for amendments or supplements to a Registration Statement or related
prospectus or related information, and (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.
f. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement, or
the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction within the United States of America and, if such an
order or suspension is issued, to obtain the withdrawal of such order or
suspension at the earliest possible moment and to notify the Investor of the
issuance of such order and the resolution thereof or its receipt of actual
notice of the initiation or threat of any proceeding for such purpose.
g. At the reasonable request of the Investor, the Company shall furnish to
the Investor, on the date of the effectiveness of the Registration Statement and
thereafter from time to time on such dates as the Investor may reasonably
request (i) a letter, dated such date, from the Company's independent certified
public accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
and (ii) an opinion, dated as of such date, of counsel representing the Company
for purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the Investor.
h. The Company shall make available for inspection by (i) the Investor and
(ii) one firm of accountants or other agents retained by the Investor
(collectively, the "Inspectors") all pertinent financial and other records, and
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably deemed necessary by each Inspector, and cause
the Company's officers, directors and employees to supply all information which
any Inspector may reasonably request; provided, however, that each Inspector
shall agree, and the Investor hereby agrees, to hold in strict confidence and
shall not make any disclosure (except to an Investor) or use of any Record or
other information which the Company determines in good faith to be confidential,
and of which determination the Inspectors are so notified, unless (a) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement or is otherwise required under the 1933
Act, (b) the release of such Records is ordered pursuant to a final, non-
appealable subpoena or order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement of which the Inspector and the Investor has knowledge. The
Investor agrees that it shall, upon learning that disclosure of such Records is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential.
i. The Company shall hold in confidence and not make any disclosure of
information concerning the Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning the Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to the Investor and allow the Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
j. The Company shall use its best efforts either to cause all the
Registrable Securities covered by a Registration Statement (i) to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or to secure the
inclusion for quotation on the Principal Market as this term is defined in the
Standby Equity Distribution Agreement. The Company shall pay all fees and
expenses in connection with satisfying its obligation under this Section 3(j).
k. The Company shall cooperate with the Investor to the extent applicable,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legend) representing the Registrable Securities to be offered
pursuant to a Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Investor may reasonably
request and registered in such names as the Investor may request.
l. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
m. The Company shall make generally available to its security holders as
soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act), as required by law.
n. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
o. Within two (2) business days after a Registration Statement which covers
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investor)
confirmation that such Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit A.
p. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investor of Registrable Securities
pursuant to a Registration Statement.
4. OBLIGATIONS OF THE INVESTOR.
The Investor agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), the Investor will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until the Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or receipt of
notice that no supplement or amendment is required. Notwithstanding anything to
the contrary, the Company shall cause its transfer agent to deliver unlegended
certificates for shares of Common Stock to a transferee of the Investor in
accordance with the terms of the Standby Equity Distribution Agreement in
connection with any sale of Registrable Securities with respect to which the
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(f) or the first sentence of 3(e) and for which the Investor has not
yet settled.
5. EXPENSES OF REGISTRATION.
All expenses incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers, legal and accounting
fees shall be paid by the Company.
6. INDEMNIFICATION.
With respect to Registrable Securities which are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend the Investor, the directors, officers,
partners, employees, agents, representatives of, and each Person, if any, who
controls the Investor within the meaning of the 1933 Act or the 1934 Act (each,
an "Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; (ii) any untrue statement or alleged untrue statement of
a material fact contained in any final prospectus (as amended or supplemented,
if the Company files any amendment thereof or supplement thereto with the SEC)
or the omission or alleged omission to state therein any material fact necessary
to make the statements made therein, in light of the circumstances under which
the statements therein were made, not misleading; or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation there under relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "Violations"). The Company shall
reimburse the Investor and each such controlling person promptly as such
expenses are incurred and are due and payable, for any legal fees or
disbursements or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; (y) shall not be
available to the extent such Claim is based on a failure of the Investor to
deliver or to cause to be delivered the prospectus made available by the
Company, if such prospectus was timely made available by the Company pursuant to
Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim
if such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person.
b. In connection with a Registration Statement, the Investor agrees to
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement and each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act (each an
"Indemnified Party"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or is based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by the Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), the Investor will
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in Section 7 shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of the Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not exceed the net proceeds to the Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section 6(b)
with respect to any prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
prospectus was corrected and such new prospectus was delivered to the Investor
prior to the Investor's use of the prospectus to which the Claim relates.
c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and
any other party represented by such counsel in such proceeding. The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent, provided, however, that
the indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the prior written consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment or
enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such claim or litigation. Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to (i)
any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investor the benefits of Rule 144
promulgated under the 1933 Act or any similar rule or regulation of the SEC that
may at any time permit the Investors to sell securities of the Company to the
public without registration ("Rule 144") the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 6.3 of the Standby
Equity Distribution Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to the Investor so long as the Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investor to
sell such securities pursuant to Rule 144 without registration.
9. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only by a written agreement between the Company and the
Investor. Any amendment or waiver effected in accordance with this Section 9
shall be binding upon the Investor and the Company. No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of this Agreement unless the same consideration also is
offered to all of the parties to this Agreement.
10. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities whenever
such Person owns or is deemed to own of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more Persons with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company, to: McKenzie Bay International Ltd.
975 Spaulding Avenue
Grand Rapids, MI 49546
Attention: Gregory Bakeman
Telephone: (616) 940-3800
Facsimile: (616) 940-9194
With a copy to: Donald C. Harms, Esq.
37899 12 Mile Road - Suite 300
Farmington Hills, MI 48331
Telephone: (248) 489-8520
Facsimile: (248) 489-4163
If to the Investor, to: Cornell Capital Partners, LP
101 Hudson Street - Suite 3606
Jersey City, New Jersey 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With copy to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
Any party may change its address by providing written notice to the other
parties hereto at least five days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a courier or overnight courier service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall govern all issues
concerning the relative rights of the Company and the Investor. All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
Jersey, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New Jersey or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New Jersey. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the Superior Courts of the State of New Jersey, sitting in
Hudson County, New Jersey and the Federal District Court for the District of New
Jersey sitting in Newark, New Jersey, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the Standby Equity Distribution Agreement, the Escrow
Agreement, and the Placement Agent Agreement constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement, the Standby
Equity Distribution Agreement, the Escrow Agreement, and the Placement Agent
Agreement supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.
f. This Agreement shall inure to the benefit of and be binding upon the
permitted successors and assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.
k. This Agreement is intended for the benefit of the parties hereto and
their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement
to be duly executed as of day and year first above written.
COMPANY:
MCKENZIE BAY INTERNATIONAL LTD.
By: /s/ Gregory N. Bakeman
Name: Gregory Bakeman
Title: Chief Financial Officer
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
Name: Mark Angelo
Title: Portfolio Manager
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
INSERT
Attention:
Re: MCKENZIE BAY INTERNATIONAL LTD.
Ladies and Gentlemen:
We are counsel to McKenzie Bay International Ltd., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Standby Equity Distribution Agreement (the "Standby Equity Distribution
Agreement") entered into by and between the Company and Cornell Capital
Partners, LP (the "Investor") pursuant to which the Company issued to the
Investor shares of its Common Stock, par value $.001 per share (the "Common
Stock"). Pursuant to the Standby Equity Distribution Agreement, the Company
also has entered into a Registration Rights Agreement with the Investor (the
"Registration Rights Agreement") pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement) under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the
Registration Rights Agreement, on ____________ ____, the Company filed a
Registration Statement on Form ________ (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names the Investor as a
selling stockholder thereunder. In connection with the foregoing, we advise you
that a member of the SEC's staff has advised us by telephone that the SEC has
entered an order declaring the Registration Statement effective under the 1933
Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we
have no knowledge, after telephonic inquiry of a member of the SEC's staff, that
any stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the SEC and
the Registrable Securities are available for resale under the 1933 Act pursuant
to the Registration Statement. Very truly yours,
By:
cc: Cornell Capital Partners, LP
=============================================
EX-10.17
MCKENZIE BAY INTERNATIONAL LTD. PLACEMENT AGENT AGREEMENT
Dated as of: April 6, 2004
Spencer Clarke LLC 505 Park Avenue, 4th Floor New York, NY 10022
Ladies and Gentlemen:
The undersigned, McKenzie Bay International Ltd., a Delaware corporation (the
"Company"), hereby agrees with Spencer Clarke LLC (the "Placement Agent") and
Cornell Capital Partners, LP, a Delaware Limited Partnership (the "Investor"),
as follows:
1. Offering. The Company hereby engages the Placement Agent to act as its
exclusive placement agent in connection with the Standby Equity Distribution
Agreement dated the date hereof (the "Standby Equity Distribution Agreement"),
pursuant to which the Company shall issue and sell to the Investor, from time to
time, and the Investor shall purchase from the Company (the "Offering") up to
Fifteen Million Dollars ($15,000,000) of the Company's common stock (the
"Commitment Amount"), par value $.001 per share (the "Common Stock"), at price
per share equal to the Purchase Price, as that term is defined in the Standby
Equity Distribution Agreement. The Placement Agent services shall consist of
reviewing the terms of the Standby Equity Distribution Agreement and advising
the Company with respect to those terms.
All capitalized terms used herein and not otherwise defined herein shall have
the same meaning ascribed to them as in the Standby Equity Distribution
Agreement. The Investor will be granted certain registration rights with
respect to the Common Stock as more fully set forth in the Registration Rights
Agreement between the Company and the Investor dated the date hereof (the
"Registration Rights Agreement"). The documents to be executed and delivered in
connection with the Offering, including, but not limited, to the Company's
latest Quarterly Report on Form 10-QSB as filed with the United States
Securities and Exchange Commission, this Agreement, the Standby Equity
Distribution Agreement, the Registration Rights Agreement, and the Escrow
Agreement dated the date hereof (the "Escrow Agreement"), are referred to
sometimes hereinafter collectively as the "Offering Materials." The Company's
Common Stock purchased by the Investor hereunder or to be issued in connection
with the conversion of any debentures are sometimes referred to hereinafter as
the "Securities." The Placement Agent shall not be obligated to sell any
Securities.
2. Compensation.
A. Upon the execution of this Agreement, the Company shall issue to the
Placement Agent or its designee shares of the Company's Common Stock in an
amount equal to Ten Thousand ($10,000) divided by the volume weighted average
price of the Company's Common Stock, as quoted by Bloomberg, LP, on the date
hereof (the "Placement Agent's Shares"). The Placement Agent shall be entitled
to "piggy-back" registration rights, which shall be triggered upon registration
of any shares of Common Stock by the Investor with respect to the Placement
Agent's Shares pursuant to the Registration Rights Agreement dated the date
hereof.
3. Representations, Warranties and Covenants of the Placement Agent.
A. The Placement Agent represents, warrants and covenants as follows:
(i) The Placement Agent has the necessary power to enter into this Agreement
and to consummate the transactions contemplated hereby.
(ii) The execution and delivery by the Placement Agent of this Agreement and
the consummation of the transactions contemplated herein will not result in any
violation of, or be in conflict with, or constitute a default under, any
agreement or instrument to which the Placement Agent is a party or by which the
Placement Agent or its properties are bound, or any judgment, decree, order or,
to the Placement Agent's knowledge, any statute, rule or regulation applicable
to the Placement Agent. This Agreement when executed and delivered by the
Placement Agent, will constitute the legal, valid and binding obligations of the
Placement Agent, enforceable in accordance with their respective terms, except
to the extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect and affecting the rights of creditors generally, (b) the
enforceability hereof or thereof is subject to general principles of equity, or
(c) the indemnification provisions hereof or thereof may be held to be in
violation of public policy.
(iii) Upon receipt and execution of this Agreement, the Placement Agent will
promptly forward copies of this Agreement to the Company or its counsel and the
Investor or its counsel.
(iv) The Placement Agent will not intentionally take any action that it
reasonably believes would cause the Offering to violate the provisions of the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
of 1934 (the "1934 Act"), the respective rules and regulations promulgated
thereunder (the "Rules and Regulations") or applicable "Blue Sky" laws of any
state or jurisdiction.
(v) The Placement Agent is a member of the National Association of
Securities Dealers, Inc., and is a broker-dealer registered as such under the
1934 Act and under the securities laws of the states in which the Securities
will be offered or sold by the Placement Agent unless an exemption for such
state registration is available to the Placement Agent. The Placement Agent is
in material compliance with the rules and regulations applicable to the
Placement Agent generally and applicable to the Placement Agent's participation
in the Offering.
4. Representations and Warranties of the Company.
A. The Company represents and warrants as follows:
(i) The execution, delivery and performance of each of this Agreement, the
Standby Equity Distribution Agreement, the Escrow Agreement, and the
Registration Rights Agreement has been or will be duly and validly authorized by
the Company and is, or with respect to this Agreement, the Standby Equity
Distribution Agreement, the Escrow Agreement, and the Registration Rights
Agreement will be, a valid and binding agreement of the Company, enforceable in
accordance with its respective terms, except to the extent that (a) the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect and
affecting the rights of creditors generally, (b) the enforceability hereof or
thereof is subject to general principles of equity or (c) the indemnification
provisions hereof or thereof may be held to be in violation of public policy.
The Securities to be issued pursuant to the transactions contemplated by this
Agreement, the Standby Equity Distribution Agreement have been duly authorized
and, when issued and paid for in accordance with this Agreement, the Standby
Equity Distribution Agreement and the certificates/instruments representing such
Securities, will be valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except to the extent that (1) the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws from time to time in effect and affecting the rights
of creditors generally, and (2) the enforceability thereof is subject to general
principles of equity. All corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken by the Company.
(ii) The Company has a duly authorized, issued and outstanding capitalization
as set forth herein and in the Standby Equity Distribution Agreement. The
Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement, the agreements described
herein and as described in the Standby Equity Distribution Agreement, dated the
date hereof and the agreements described therein. All issued and outstanding
securities of the Company, have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
or preemptive rights with respect thereto and are not subject to personal
liability solely by reason of being security holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company. As of the date hereof, the authorized capital
stock of the Company consists of ___________ shares of Common Stock, par value
$____ per share and _____________ shares of Preferred Stock of which
______________ shares of Common Stock and ______________ shares of Preferred
Stock were issued and outstanding as of the date thereof.
(iii) The Common Stock to be issued in accordance with this Agreement, the
Standby Equity Distribution Agreement have been duly authorized and, when issued
and paid for in accordance with this Agreement, the Standby Equity Distribution
Agreement and the certificates/instruments representing such Common Stock will
be validly issued, fully-paid and non-assessable; the holders thereof will not
be subject to personal liability solely by reason of being such holders; such
Securities are not and will not be subject to the preemptive rights of any
holder of any security of the Company.
(iv) The Company has good and marketable title to, or valid and enforceable
leasehold estates in, all items of real and personal property necessary to
conduct its business (including, without limitation, any real or personal
property stated in the Offering Materials to be owned or leased by the Company),
free and clear of all liens, encumbrances, claims, security interests and
defects of any material nature whatsoever, other than those set forth in the
Offering Materials and liens for taxes not yet due and payable.
(v) There is no litigation or governmental proceeding pending or, to the
best of the Company's knowledge, threatened against, or involving the properties
or business of the Company, except as set forth in the Offering Materials.
(vi) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Except as
set forth in the Offering Materials, the Company does not own or control,
directly or indirectly, an interest in any other corporation, partnership,
trust, joint venture or other business entity. The Company is duly qualified or
licensed and in good standing as a foreign corporation in each jurisdiction in
which the character of its operations requires such qualification or licensing
and where failure to so qualify would have a material adverse effect on the
Company. The Company has all requisite corporate power and authority, and all
material and necessary authorizations, approvals, orders, licenses, certificates
and permits of and from all governmental regulatory officials and bodies
(domestic and foreign) to conduct its businesses (and proposed business) as
described in the Offering Materials. Any disclosures in the Offering Materials
concerning the effects of foreign, federal, state and local regulation on the
Company's businesses as currently conducted and as contemplated are correct in
all material respects and do not omit to state a material fact. The Company has
all corporate power and authority to enter into this Agreement, the Standby
Equity Distribution Agreement, the Registration Rights Agreement, and the Escrow
Agreement, to carry out the provisions and conditions hereof and thereof, and
all consents, authorizations, approvals and orders required in connection
herewith and therewith have been obtained. No consent, authorization or order
of, and no filing with, any court, government agency or other body is required
by the Company for the issuance of the Securities or execution and delivery of
the Offering Materials except for applicable federal and state securities laws.
The Company, since its inception, has not incurred any liability arising under
or as a result of the application of any of the provisions of the 1933 Act, the
1934 Act or the Rules and Regulations.
(vii) There has been no material adverse change in the condition or prospects
of the Company, financial or otherwise, from the latest dates as of which such
condition or prospects, respectively, are set forth in the Offering Materials,
and the outstanding debt, the property and the business of the Company conform
in all material respects to the descriptions thereof contained in the Offering
Materials.
(viii) Except as set forth in the Offering Materials, the Company is not in
breach of, or in default under, any term or provision of any material indenture,
mortgage, deed of trust, lease, note, loan or Standby Equity Distribution
Agreement or any other material agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which it is
a party or by which it or any of its properties may be bound or affected. The
Company is not in violation of any provision of its charter or by-laws or in
violation of any franchise, license, permit, judgment, decree or order, or in
violation of any material statute, rule or regulation. Neither the execution
and delivery of the Offering Materials nor the issuance and sale or delivery of
the Securities, nor the consummation of any of the transactions contemplated in
the Offering Materials nor the compliance by the Company with the terms and
provisions hereof or thereof, has conflicted with or will conflict with, or has
resulted in or will result in a breach of, any of the terms and provisions of,
or has constituted or will constitute a default under, or has resulted in or
will result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or pursuant to the terms of any
indenture, mortgage, deed of trust, note, loan or any other agreement or
instrument evidencing an obligation for borrowed money, or any other agreement
or instrument to which the Company may be bound or to which any of the property
or assets of the Company is subject except (a) where such default, lien, charge
or encumbrance would not have a material adverse effect on the Company and (b)
as described in the Offering Materials; nor will such action result in any
violation of the provisions of the charter or the by-laws of the Company or,
assuming the due performance by the Placement Agent of its obligations
hereunder, any material statute or any material order, rule or regulation
applicable to the Company of any court or of any foreign, federal, state or
other regulatory authority or other government body having jurisdiction over the
Company.
(ix) Subsequent to the dates as of which information is given in the Offering
Materials, and except as may otherwise be indicated or contemplated herein or
therein the Company has not (a) issued any securities or incurred any liability
or obligation, direct or contingent, for borrowed money, or (b) entered into any
transaction other than in the ordinary course of business, or (c) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock. Except as described in the Offering Materials, the Company has no
outstanding obligations to any officer or director of the Company.
(x) There are no claims for services in the nature of a finder's or
origination fee, other than Spencer Clarke, with respect to the sale of the
Common Stock or any other arrangements, agreements or understandings that may
affect the Placement Agent's compensation, as determined by the National
Association of Securities Dealers, Inc.
(xi) The Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, the requisite
licenses or other rights to use all trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and licenses necessary
to conduct its business (including, without limitation, any such licenses or
rights described in the Offering Materials as being owned or possessed by the
Company) and, except as set forth in the Offering Materials, there is no claim
or action by any person pertaining to, or proceeding, pending or threatened,
which challenges the exclusive rights of the Company with respect to any
trademarks, service marks, copyrights, service names, trade names, patents,
patent applications and licenses used in the conduct of the Company's businesses
(including, without limitation, any such licenses or rights described in the
Offering Materials as being owned or possessed by the Company) except any claim
or action that would not have a material adverse effect on the Company; the
Company's current products, services or processes do not infringe or will not
infringe on the patents currently held by any third party.
(xii) Except as described in the Offering Materials, the Company is not under
any obligation to pay royalties or fees of any kind whatsoever to any third
party with respect to any trademarks, service marks, copyrights, service names,
trade names, patents, patent applications, licenses or technology it has
developed, uses, employs or intends to use or employ, other than to their
respective licensors.
(xiii) Subject to the performance by the Placement Agent of its obligations
hereunder the offer and sale of the Securities complies, and will continue to
comply, in all material respects with the requirements of Rule 506 of Regulation
D promulgated by the SEC pursuant to the 1933 Act and any other applicable
federal and state laws, rules, regulations and executive orders. Neither the
Offering Materials nor any amendment or supplement thereto nor any documents
prepared by the Company in connection with the Offering will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All statements of
material facts in the Offering Materials are true and correct as of the date of
the Offering Materials.
(xiv) All material taxes which are due and payable from the Company have been
paid in full or adequate provision has been made for such taxes on the books of
the Company, except for those taxes disputed in good faith by the Company
(xv) None of the Company nor any of its officers, directors, employees or
agents, nor any other person acting on behalf of the Company, has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency or instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who is or may be in a position to help or hinder the
business of the Company (or assist it in connection with any actual or proposed
transaction) which (A) might subject the Company to any damage or penalty in any
civil, criminal or governmental litigation or proceeding, or (B) if not given in
the past, might have had a materially adverse effect on the assets, business or
operations of the Company as reflected in any of the financial statements
contained in the Offering Materials, or (C) if not continued in the future,
might adversely affect the assets, business, operations or prospects of the
Company in the future.
5. Representations, Warranties and Covenants of the Investor.
A. The Investor represents, warrants and covenants as follows:
(i) The Investor has the necessary power to enter into this Agreement and to
consummate the transactions contemplated hereby.
(ii) The execution and delivery by the Investor of this Agreement and the
consummation of the transactions contemplated herein will not result in any
violation of, or be in conflict with, or constitute a default under, any
agreement or instrument to which the Investor is a party or by which the
Investor or its properties are bound, or any judgment, decree, order or, to the
Investor's knowledge, any statute, rule or regulation applicable to the
Investor. This Agreement when executed and delivered by the Investor, will
constitute the legal, valid and binding obligations of the Investor, enforceable
in accordance with their respective terms, except to the extent that (a) the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect and
affecting the rights of creditors generally, (b) the enforceability hereof or
thereof is subject to general principles of equity, or (c) the indemnification
provisions hereof or thereof may be held to be in violation of public policy.
(iii) The Investor will promptly forward copies of any and all due diligence
questionnaires compiled by the Investor to the Placement Agent.
(iv) The Investor is an Accredited Investor (as defined under the 1933 Act).
(v) The Investor is acquiring the Securities for the Inventor's own account
as principal, not as a nominee or agent, for investment purposes only, and not
with a view to, or for, resale, distribution or fractionalization thereof in
whole or in part and no other person has a direct or indirect beneficial
interest in such Securities. Further, the Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
(vi) The Investor acknowledges the Investor's understanding that the offering
and sale of the Securities is intended to be exempt from registration under the
1933 Act by virtue of Section 3(b) of the 1933 Act and the provisions of
Regulation D promulgated thereunder ("Regulation D"). In furtherance thereof,
the Investor represents and warrants as follows:
(a) The Investor has the financial ability to bear the economic risk of the
Investor's investment, has adequate means for providing for the Inventor's
current needs and personal contingencies and has no need for liquidity with
respect to the Investor's investment in the Company; and
(b) The Investor has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of the prospective
investment. The Inventor also represents it has not been organized for the
purpose of acquiring the Securities.
(vii) The Investor has been given the opportunity for a reasonable time prior
to the date hereof to ask questions of, and receive answers from, the Company or
its representatives concerning the terms and conditions of the Offering, and
other matters pertaining to this investment, and has been given the opportunity
for a reasonable time prior to the date hereof to obtain such additional
information in connection with the Company in order for the Investor to evaluate
the merits and risks of purchase of the Securities, to the extent the Company
possesses such information or can acquire it without unreasonable effort or
expense. The Investor is not relying on the Placement Agent or any of its
affiliates with respect to the accuracy or completeness of the Offering
Materials or for any economic considerations involved in this investment.
6. Certain Covenants and Agreements of the Company.
The Company covenants and agrees at its expense and without any expense to the
Placement Agent as follows:
A. To advise the Placement Agent and the Investor of any material adverse
change in the Company's financial condition, prospects or business or of any
development materially affecting the Company or rendering untrue or misleading
any material statement in the Offering Materials occurring at any time as soon
as the Company is either informed or becomes aware thereof.
B. To use its commercially reasonable efforts to cause the Common Stock
issuable in connection with the Standby Equity Distribution Agreement to be
qualified or registered for sale on terms consistent with those stated in the
Registration Rights Agreement and under the securities laws of such
jurisdictions as the Placement Agent and the Investor shall reasonably request.
Qualification, registration and exemption charges and fees shall be at the sole
cost and expense of the Company.
C. Upon written request, to provide and continue to provide the Placement
Agent and the Investor copies of all quarterly financial statements and audited
annual financial statements prepared by or on behalf of the Company, other
reports prepared by or on behalf of the Company for public disclosure and all
documents delivered to the Company's stockholders.
D. To deliver, during the registration period of the Standby Equity
Distribution Agreement, to the Investor upon the Investor's request, within
forty five (45) days, a statement of its income for each such quarterly period,
and its balance sheet and a statement of changes in stockholders' equity as of
the end of such quarterly period, all in reasonable detail, certified by its
principal financial or accounting officer; (ii) within ninety (90) days after
the close of each fiscal year, its balance sheet as of the close of such fiscal
year, together with a statement of income, a statement of changes in
stockholders' equity and a statement of cash flow for such fiscal year, such
balance sheet, statement of income, statement of changes in stockholders' equity
and statement of cash flow to be in reasonable detail and accompanied by a copy
of the certificate or report thereon of independent auditors if audited
financial statements are prepared; and (iii) a copy of all documents, reports
and information furnished to its stockholders at the time that such documents,
reports and information are furnished to its stockholders.
E. To comply with the terms of the Offering Materials.
F. To ensure that any transactions between or among the Company, or any of
its officers, directors and affiliates be on terms and conditions that are no
less favorable to the Company, than the terms and conditions that would be
available in an "arm's length" transaction with an independent third party.
7. Indemnification and Limitation of Liability.
A. The Company hereby agrees that it will indemnify and hold the Placement
Agent and each officer, director, shareholder, employee or representative of the
Placement Agent and each person controlling, controlled by or under common
control with the Placement Agent within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act or the SEC's Rules and Regulations promulgated
thereunder (the "Rules and Regulations"), harmless from and against any and all
loss, claim, damage, liability, cost or expense whatsoever (including, but not
limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which the Placement Agent or such indemnified person of the
Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules
and Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in (a) Section 4 of this
Agreement, (b) the Offering Materials (except those written statements relating
to the Placement Agent given by the Placement Agent for inclusion therein), (c)
any application or other document or written communication executed by the
Company or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Common Stock under the securities laws
thereof, or any state securities commission or agency; (ii) the omission or
alleged omission from documents described in clauses (a), (b) or (c) above of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; or (iii) the breach of any representation, warranty,
covenant or agreement made by the Company in this Agreement. The Company
further agrees that upon demand by an indemnified person, at any time or from
time to time, it will promptly reimburse such indemnified person for any loss,
claim, damage, liability, cost or expense actually and reasonably paid by the
indemnified person as to which the Company has indemnified such person pursuant
hereto. Notwithstanding the foregoing provisions of this Paragraph 7(A), any
such payment or reimbursement by the Company of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final judgment by
a court of competent jurisdiction (after all appeals or the expiration of time
to appeal) is entered against the Placement Agent or such indemnified person
based upon specific finding of fact that the Placement Agent or such indemnified
person's gross negligence or willful misfeasance will be promptly repaid to the
Company.
B. The Placement Agent hereby agrees that it will indemnify and hold the
Company and each officer, director, shareholder, employee or representative of
the Company, and each person controlling, controlled by or under common control
with the Company within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act or the Rules and Regulations, harmless from and against any and
all loss, claim, damage, liability, cost or expense whatsoever (including, but
not limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which the Company or such indemnified person of the Company may
become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or
any other federal or state law or regulation, common law or otherwise, arising
out of or based upon (i) the material breach of any representation, warranty,
covenant or agreement made by the Placement Agent in this Agreement, or (ii) any
false or misleading information provided to the Company in writing by one of the
Placement Agent's indemnified persons specifically for inclusion in the Offering
Materials.
C. The Investor hereby agrees that it will indemnify and hold the Placement
Agent and each officer, director, shareholder, employee or representative of the
Placement Agent, and each person controlling, controlled by or under common
control with the Placement Agent within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from
and against any and all loss, claim, damage, liability, cost or expense
whatsoever (including, but not limited to, any and all reasonable legal fees and
other expenses and disbursements incurred in connection with investigating,
preparing to defend or defending any action, suit or proceeding, including any
inquiry or investigation, commenced or threatened, or any claim whatsoever or in
appearing or preparing for appearance as a witness in any action, suit or
proceeding, including any inquiry, investigation or pretrial proceeding such as
a deposition) to which the Placement Agent or such indemnified person of the
Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules
and Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) the conduct of the Investor or its
officers, employees or representatives in its acting as the Investor for the
Offering, (ii) the material breach of any representation, warranty, covenant or
agreement made by the Investor in the Offering Materials, or (iii) any false or
misleading information provided to the Placement Agent by one of the Investor's
indemnified persons.
D. The Placement Agent hereby agrees that it will indemnify and hold the
Investor and each officer, director, shareholder, employee or representative of
the Investor, and each person controlling, controlled by or under common control
with the Investor within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act or the Rules and Regulations, harmless from and against any and
all loss, claim, damage, liability, cost or expense whatsoever (including, but
not limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which the Investor or such indemnified person of the Investor may
become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or
any other federal or state law or regulation, common law or otherwise, arising
out of or based upon the material breach of any representation, warranty,
covenant or agreement made by the Placement Agent in this Agreement.
E. Promptly after receipt by an indemnified party of notice of commencement
of any action covered by Section 7(A), (B), (C) or (D), the party to be
indemnified shall, within five (5) business days, notify the indemnifying party
of the commencement thereof; the omission by one (1) indemnified party to so
notify the indemnifying party shall not relieve the indemnifying party of its
obligation to indemnify any other indemnified party that has given such notice
and shall not relieve the indemnifying party of any liability outside of this
indemnification if not materially prejudiced thereby. In the event that any
action is brought against the indemnified party, the indemnifying party will be
entitled to participate therein and, to the extent it may desire, to assume and
control the defense thereof with counsel chosen by it which is reasonably
acceptable to the indemnified party. After notice from the indemnifying party
to such indemnified party of its election to so assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under such
Section 7(A), (B), (C), or (D) for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof, but
the indemnified party may, at its own expense, participate in such defense by
counsel chosen by it, without, however, impairing the indemnifying party's
control of the defense. Subject to the proviso of this sentence and
notwithstanding any other statement to the contrary contained herein, the
indemnified party or parties shall have the right to choose its or their own
counsel and control the defense of any action, all at the expense of the
indemnifying party if (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action at the expense of the indemnifying party, or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying party; provided, however, that the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstance, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for all such indemnified parties. No
settlement of any action or proceeding against an indemnified party shall be
made without the consent of the indemnifying party.
F. In order to provide for just and equitable contribution in circumstances
in which the indemnification provided for in Section 7(A) or 7(B) is due in
accordance with its terms but is for any reason held by a court to be
unavailable on grounds of policy or otherwise, the Company and the Placement
Agent shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with the
investigation or defense of same) which the other may incur in such proportion
so that the Placement Agent shall be responsible for such percent of the
aggregate of such losses, claims, damages and liabilities as shall equal the
percentage of the gross proceeds paid to the Placement Agent and the Company
shall be responsible for the balance; provided, however, that no person guilty
of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933
Act shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7(F), any person
controlling, controlled by or under common control with the Placement Agent, or
any partner, director, officer, employee, representative or any agent of any
thereof, shall have the same rights to contribution as the Placement Agent and
each person controlling, controlled by or under common control with the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
and each officer of the Company and each director of the Company shall have the
same rights to contribution as the Company. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against the other party under this Section 7(F), notify such party from
whom contribution may be sought, but the omission to so notify such party shall
not relieve the party from whom contribution may be sought from any obligation
they may have hereunder or otherwise if the party from whom contribution may be
sought is not materially prejudiced thereby.
G. The indemnity and contribution agreements contained in this Section 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified person or any termination
of this Agreement.
H. The Company hereby waives, to the fullest extent permitted by law, any
right to or claim of any punitive, exemplary, incidental, indirect, special,
consequential or other damages (including, without limitation, loss of profits)
against the Placement Agent and each officer, director, shareholder, employee or
representative of the placement agent and each person controlling, controlled by
or under common control with the Placement Agent within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations
arising out of any cause whatsoever (whether such cause be based in contract,
negligence, strict liability, other tort or otherwise). Notwithstanding
anything to the contrary contained herein, the aggregate liability of the
Placement Agent and each officer, director, shareholder, employee or
representative of the Placement Agent and each person controlling, controlled by
or under common control with the Placement Agent within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations
shall not exceed the compensation received by the Placement Agent pursuant to
Section 2 hereof. This limitation of liability shall apply regardless of the
cause of action, whether contract, tort (including, without limitation,
negligence) or breach of statute or any other legal or equitable obligation.
8. Payment of Expenses.
The Company hereby agrees to bear all of the expenses in connection with the
Offering, including, but not limited to the following: filing fees, printing and
duplicating costs, advertisements, postage and mailing expenses with respect to
the transmission of Offering Materials, registrar and transfer agent fees,
escrow agent fees and expenses, fees of the Company's counsel and accountants,
issue and transfer taxes, if any.
9. Conditions of Closing.
The Closing shall be held at the offices of the Investor or its counsel. The
obligations of the Placement Agent hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company and the Investor
herein as of the date hereof and as of the Date of Closing (the "Closing Date")
with respect to the Company or the Investor, as the case may be, as if it had
been made on and as of such Closing Date; the accuracy on and as of the Closing
Date of the statements of the officers of the Company made pursuant to the
provisions hereof; and the performance by the Company and the Investor on and as
of the Closing Date of its covenants and obligations hereunder and to the
following further conditions:
A. Upon the effectiveness of a registration statement covering the Standby
Equity Distribution Agreement, the Investor and the Placement Agent shall
receive the opinion of Counsel to the Company, dated as of the date thereof,
which opinion shall be in form and substance reasonably satisfactory to the
Investor, their counsel and the Placement Agent.
B. At or prior to the Closing, the Investor and the Placement Agent shall
have been furnished such documents, certificates and opinions as it may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Agreement and the Offering Materials, or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
C. At and prior to the Closing, (i) there shall have been no material
adverse change nor development involving a prospective change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the Offering
Materials; (ii) there shall have been no transaction, not in the ordinary course
of business entered into by the Company on the date hereof which has not been
disclosed in the Offering Materials or to the Placement Agent in writing; (iii)
except as set forth in the Offering Materials, the Company shall not be in
default under any provision of any instrument relating to any outstanding
indebtedness for which a waiver or extension has not been otherwise received;
(iv) except as set forth in the Offering Materials, the Company shall not have
issued any securities (other than those to be issued as provided in the Offering
Materials) or declared or paid any dividend or made any distribution of its
capital stock of any class and there shall not have been any change in the
indebtedness (long or short term) or liabilities or obligations of the Company
(contingent or otherwise) and trade payable debt; (v) no material amount of the
assets of the Company shall have been pledged or mortgaged, except as indicated
in the Offering Materials; and (v) no action, suit or proceeding, at law or in
equity, against the Company or affecting any of its properties or businesses
shall be pending or threatened before or by any court or federal or state
commission, board or other administrative agency, domestic or foreign, wherein
an unfavorable decision, ruling or finding could materially adversely affect the
businesses, prospects or financial condition or income of the Company, except as
set forth in the Offering Materials.
D. If requested at Closing the Investor and the Placement Agent shall
receive a certificate of the Company signed by an executive officer and chief
financial officer, dated as of the applicable Closing, to the effect that the
conditions set forth in subparagraph (C) above have been satisfied and that, as
of the applicable closing, the representations and warranties of the Company set
forth herein are true and correct.
E. The Placement Agent shall have no obligation to insure that (x) any
check, note, draft or other means of payment for the Common Stock will be
honored, paid or enforceable against the Investor in accordance with its terms,
or (y) subject to the performance of the Placement Agent's obligations and the
accuracy of the Placement Agent's representations and warranties hereunder, (1)
the Offering is exempt from the registration requirements of the 1933 Act or any
applicable state "Blue Sky" law or (2) the Investor is an Accredited Investor.
10. Termination.
This Agreement shall be co-terminus with, and terminate upon the same terms and
conditions as those set forth in, the Standby Equity Distribution Agreement.
The rights of the Investor and the obligations of the Company under the
Registration Rights Agreement, and the rights of the Placement Agent and the
obligations of the Company shall survive the termination of this Agreement
unabridged.
11. Miscellaneous.
A. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all which shall be deemed to be one
and the same instrument.
B. Any notice required or permitted to be given hereunder shall be given in
writing and shall be deemed effective when deposited in the United States mail,
postage prepaid, or when received if personally delivered or faxed (upon
confirmation of receipt received by the sending party), addressed as follows to
such other address of which written notice is given to the others):
If to Placement Agent, to: Spencer Clarke LLC
505 Park Avenue, 4th Floor
New York, NY 10022
Attention: Reid Drescher
Telephone: (212) 371-2047
Facsimile: (212) 446-6191
If to the Company, to: McKenzie Bay International Ltd.
975 Spaulding Avenue
Grand Rapids, MI 49546
Attention: Gregory Bakeman
Telephone: (616) 940-3800
Facsimile: (616) 940-9194
With a copy to: Donald C. Harms, Esq.
37899 12 Mile Road - Suite 300
Farmington Hills, MI 48331
Telephone: (248) 489-8520
Facsimile: (248) 489-4163
If to the Investor: Cornell Capital Partners, LP
101 Hudson Street - Suite 3606
Jersey City, New Jersey 07302
Attention: Mark A. Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With Copies to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Facsimile: (908) 810-0973
Butler Gonzalez LLP
C. This Agreement shall be governed by and construed in all respects under
the laws of the State of Delaware, without reference to its conflict of laws
rules or principles. Any suit, action, proceeding or litigation arising out of
or relating to this Agreement shall be brought and prosecuted in such federal or
state court or courts located within the State of New Jersey as provided by law.
The parties hereby irrevocably and unconditionally consent to the jurisdiction
of each such court or courts located within the State of New Jersey and to
service of process by registered or certified mail, return receipt requested, or
by any other manner provided by applicable law, and hereby irrevocably and
unconditionally waive any right to claim that any suit, action, proceeding or
litigation so commenced has been commenced in an inconvenient forum.
D. This Agreement and the other agreements referenced herein contain the
entire understanding between the parties hereto and may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
E. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above. COMPANY:
MCKENZIE BAY INTERNATIONAL LTD.
By: /s/ Gregory N. Bakeman
Name: Gregory Bakeman
Title: Chief Financial Officer
PLACEMENT AGENT:
SPENCER CLARKE LLC
By: /s/ Reid Drescher
Name: Reid Drescher
Title: President
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
Name: Mark A. Angelo
Title: Portfolio Manager
======================================
EX-10.18
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of April 6,
2004 by MCKENZIE BAY INTERNATIONAL LTD., a Delaware corporation (the "Company");
CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor");
and BUTLER GONZALEZ LLP (the "Escrow Agent").
BACKGROUND
WHEREAS, the Company and the Investor have entered into an Standby Equity
Distribution Agreement (the "Standby Equity Distribution Agreement") dated as
of the date hereof, pursuant to which the Investor will purchase the Company's
Common Stock, par value $.001 per share (the "Common Stock"), at a price per
share equal to the Purchase Price, as that term is defined in the Standby Equity
Distribution Agreement, for an aggregate price of up to Fifteen Million
Dollars ($15,000,000). The Standby Equity Distribution Agreement provides that
on each Advance Date the Investor, as that term is defined in the Standby Equity
Distribution Agreement, shall deposit the Advance pursuant to the Advance Notice
in a segregated escrow account to be held by Escrow Agent and the Company shall
deposit shares of the Company's Common Stock, which shall be purchased by the
Investor as set forth in the Standby Equity Distribution Agreement, with the
Escrow Agent, in order to effectuate a disbursement to the Company of the
Advance by the Escrow Agent and a disbursement to the Investor of the shares of
the Company's Common Stock by Escrow Agent at a closing to be held as set forth
in the Standby Equity Distribution Agreement (the "Closing").
WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds and the
shares of the Company's Common Stock deposited with it in accordance with the
terms of this Agreement.
WHEREAS, in order to establish the escrow of funds and shares to effect the
provisions of the Standby Equity Distribution Agreement, the parties hereto have
entered into this Agreement.
NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as
follows:
1. Definitions. The following terms shall have the following meanings when
used herein:
a. "Escrow Funds" shall mean the Advance funds deposited with the Escrow
Agent pursuant to this Agreement.
b. "Joint Written Direction" shall mean a written direction executed by the
Investor and the Company directing Escrow Agent to disburse all or a portion of
the Escrow Funds or to take or refrain from taking any action pursuant to this
Agreement.
c. "Common Stock Joint Written Direction" shall mean a written direction
executed by the Investor and the Company directing Investor's Counsel to
disburse all or a portion of the shares of the Company's Common Stock or to
refrain from taking any action pursuant to this Agreement.
2. Appointment of and Acceptance by Escrow Agent.
a. The Investor and the Company hereby appoint Escrow Agent to serve as
Escrow Agent hereunder. Escrow Agent hereby accepts such appointment and, upon
receipt by wire transfer of the Escrow Funds in accordance with Section 3 below,
agrees to hold, invest and disburse the Escrow Funds in accordance with this
Agreement.
b. The Investor and the Company hereby appoint the Escrow Agent to serve as
the holder of the shares of the Company's Common Stock which shall be purchased
by the Investor. The Escrow Agent hereby accepts such appointment and, upon
receipt via D.W.A.C or the certificates representing of the shares of the
Company's Common Stock in accordance with Section 3 below, agrees to hold and
disburse the shares of the Company's Common Stock in accordance with this
Agreement.
c. The Company hereby acknowledges that the Escrow Agent is counsel to the
Investor in connection with the transactions contemplated and referenced herein.
The Company agrees that in the event of any dispute arising in connection with
this Escrow Agreement or otherwise in connection with any transaction or
agreement contemplated and referenced herein, the Escrow Agent shall be
permitted to continue to represent the Investor and the Company will not seek to
disqualify such counsel.
3. Creation of Escrow Account/Common Stock Account.
a. On or prior to the date of this Agreement the Escrow Agent shall
establish an escrow account for the deposit of the Escrow Funds entitled as
follows: McKenzie Bay International Ltd./Cornell Capital Partners, LP. The
Investor will wire funds to the account of the Escrow Agent as follows:
Bank: Wachovia, N.A. of New Jersey
Routing #: 031201467
Account #: 2020000659170
Name on Account: Butler Gonzalez LLP as Escrow Agent
Name on Sub-Account: McKenzie Bay International Ltd./Cornell Capital
Partners, LP Escrow account
b. On or prior to the date of this Agreement the Escrow Agent shall
establish an account for the D.W.A.C. of the shares of Common Stock. The Company
will D.W.A.C. shares of the Company's Common Stock to the account of the Escrow
Agent as follows:
Brokerage Firm: Crown Financial Group
Clearing House: Fiserv
Account #: 56797702
DTC #: 0632
Name on Account: Butler Gonzalez LLP Escrow Account
4. Deposits into the Escrow Account. The Investor agrees that it shall
promptly deliver all monies for the payment of the Common Stock to the Escrow
Agent for deposit in the Escrow Account.
5. Disbursements from the Escrow Account.
a. At such time as Escrow Agent has collected and deposited instruments of
payment in the total amount of the Advance and has received such Common Stock
via D.W.A.C from the Company which are to be issued to the Investor pursuant to
the Standby Equity Distribution Agreement, the Escrow Agent shall notify the
Company and the Investor. The Escrow Agent will continue to hold such funds
until the Investor and Company execute and deliver a Joint Written Direction
directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint
Written Direction at which time the Escrow Agent shall wire the Escrow Funds to
the Company. In disbursing such funds, Escrow Agent is authorized to rely upon
such Joint Written Direction from Company and may accept any signatory from the
Company listed on the signature page to this Agreement and any signature from
the Investor that Escrow Agent already has on file. Simultaneous with delivery
of the executed Joint Written Direction to the Escrow Agent the Investor and
Company shall execute and deliver a Common Stock Joint Written Direction to the
Escrow Agent directing the Escrow Agent to release via D.W.A.C to the Investor
the shares of the Company's Common Stock. In releasing such shares of Common
Stock the Escrow Agent is authorized to rely upon such Common Stock Joint
Written Direction from Company and may accept any signatory from the Company
listed on the signature page to this Agreement and any signature from the Escrow
Agent has on file.
In the event the Escrow Agent does not receive the amount of the Advance from
the Investor or the shares of Common Stock to be purchased by the Investor from
the Company, the Escrow Agent shall notify the Company and the Investor.
In the event that the Escrow Agent has not received the Common Stock to be
purchased by the Investor from the Company, in no event will the Escrow Funds be
released to the Company until such shares are received by the Escrow Agreement.
For purposes of this Agreement, the term "Common Stock certificates" shall mean
Common Stock certificates to be purchased pursuant to the respective Advance
Notice pursuant to the Standby Equity Distribution Agreement.
6. Deposit of Funds. The Escrow Agent is hereby authorized to deposit the
wire transfer proceeds in the Escrow Account.
7. Suspension of Performance: Disbursement Into Court.
a. Escrow Agent. If at any time, there shall exist any dispute between the
Company and the Investor with respect to holding or disposition of any portion
of the Escrow Funds or the Common Stock or any other obligations of Escrow Agent
hereunder, or if at any time Escrow Agent is unable to determine, to Escrow
Agent's sole satisfaction, the proper disposition of any portion of the Escrow
Funds or Escrow Agent's proper actions with respect to its obligations
hereunder, or if the parties have not within thirty (30) days of the furnishing
by Escrow Agent of a notice of resignation pursuant to Section 9 hereof,
appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in
its sole discretion, take either or both of the following actions:
i. Suspend the performance of any of its obligations (including without
limitation any disbursement obligations) under this Escrow Agreement until such
dispute or uncertainty shall be resolved to the sole satisfaction of Escrow
Agent or until a successor Escrow Agent shall be appointed (as the case may be);
provided however, Escrow Agent shall continue to invest the Escrow Funds in
accordance with Section 8 hereof; and/or
ii. Petition (by means of an interpleader action or any other appropriate
method) any court of competent jurisdiction in any venue convenient to Escrow
Agent, for instructions with respect to such dispute or uncertainty, and to the
extent required by law, pay into such court, for holding and disposition in
accordance with the instructions of such court, all funds held by it in the
Escrow Funds, after deduction and payment to Escrow Agent of all fees and
expenses (including court costs and attorneys' fees) payable to, incurred by, or
expected to be incurred by Escrow Agent in connection with performance of its
duties and the exercise of its rights hereunder.
iii. Escrow Agent shall have no liability to the Company, the Investor, or
any person with respect to any such suspension of performance or disbursement
into court, specifically including any liability or claimed liability that may
arise, or be alleged to have arisen, out of or as a result of any delay in the
disbursement of funds held in the Escrow Funds or any delay in with respect to
any other action required or requested of Escrow Agent.
8. Investment of Escrow Funds. The Escrow Agent shall deposit the Escrow
Funds in a non-interest bearing money market account.
If Escrow Agent has not received a Joint Written Direction at any time that an
investment decision must be made, Escrow Agent may retain the Escrow Fund, or
such portion thereof, as to which no Joint Written Direction has been received,
in a non-interest bearing money market account.
9. Resignation and Removal of Escrow Agent. Escrow Agent may resign from
the performance of its duties hereunder at any time by giving thirty (30) days'
prior written notice to the parties or may be removed, with or without cause, by
the parties, acting jointly, by furnishing a Joint Written Direction to Escrow
Agent, at any time by the giving of ten (10) days' prior written notice to
Escrow Agent as provided herein below. Upon any such notice of resignation or
removal, the representatives of the Investor and the Company identified in
Sections 13a.(iv) and 13b.(iv), below, jointly shall appoint a successor Escrow
Agent hereunder, which shall be a commercial bank, trust company or other
financial institution with a combined capital and surplus in excess of
$10,000,000.00. Upon the acceptance in writing of any appointment of Escrow
Agent hereunder by a successor Escrow Agent, such successor Escrow Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be
discharged from its duties and obligations under this Escrow Agreement, but
shall not be discharged from any liability for actions taken as Escrow Agent
hereunder prior to such succession. After any retiring Escrow Agent's
resignation or removal, the provisions of this Escrow Agreement shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall
transmit all records pertaining to the Escrow Funds and shall pay all funds held
by it in the Escrow Funds to the successor Escrow Agent, after making copies of
such records as the retiring Escrow Agent deems advisable and after deduction
and payment to the retiring Escrow Agent of all fees and expenses (including
court costs and attorneys' fees) payable to, incurred by, or expected to be
incurred by the retiring Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder.
10. Liability of Escrow Agent.
a. Escrow Agent shall have no liability or obligation with respect to the
Escrow Funds except for Escrow Agent's willful misconduct or gross negligence.
Escrow Agent's sole responsibility shall be for the safekeeping, investment, and
disbursement of the Escrow Funds in accordance with the terms of this Agreement.
Escrow Agent shall have no implied duties or obligations and shall not be
charged with knowledge or notice or any fact or circumstance not specifically
set forth herein. Escrow Agent may rely upon any instrument, not only as to its
due execution, validity and effectiveness, but also as to the truth and accuracy
of any information contained therein, which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or parties
purporting to sign the same and conform to the provisions of this Agreement. In
no event shall Escrow Agent be liable for incidental, indirect, special, and
consequential or punitive damages. Escrow Agent shall not be obligated to take
any legal action or commence any proceeding in connection with the Escrow Funds,
any account in which Escrow Funds are deposited, this Agreement or the Standby
Equity Distribution Agreement, or to appear in, prosecute or defend any such
legal action or proceeding. Escrow Agent may consult legal counsel selected by
it in the event of any dispute or question as to construction of any of the
provisions hereof or of any other agreement or its duties hereunder, or relating
to any dispute involving any party hereto, and shall incur no liability and
shall be fully indemnified from any liability whatsoever in acting in accordance
with the opinion or instructions of such counsel. The Company and the Investor
jointly and severally shall promptly pay, upon demand, the reasonable fees and
expenses of any such counsel and Escrow Agent is hereby authorized to pay such
fees and expenses from funds held in escrow.
b. The Escrow Agent is hereby authorized, in its sole discretion, to comply
with orders issued or process entered by any court with respect to the Escrow
Funds, without determination by the Escrow Agent of such court's jurisdiction in
the matter. If any portion of the Escrow Funds is at any time attached,
garnished or levied upon under any court order, or in case the payment,
assignment, transfer, conveyance or delivery of any such property shall be
stayed or enjoined by any court order, or in any case any order judgment or
decree shall be made or entered by any court affecting such property or any part
thereof, then and in any such event, the Escrow Agent is authorized, in its sole
discretion, to rely upon and comply with any such order, writ judgment or decree
which it is advised by legal counsel selected by it, binding upon it, without
the need for appeal or other action; and if the Escrow Agent complies with any
such order, writ, judgment or decree, it shall not be liable to any of the
parties hereto or to any other person or entity by reason of such compliance
even though such order, writ judgment or decree may be subsequently reversed,
modified, annulled, set aside or vacated.
11. Indemnification of Escrow Agent. From and at all times after the date
of this Agreement, the parties jointly and severally, shall, to the fullest
extent permitted by law and to the extent provided herein, indemnify and hold
harmless Escrow Agent and each director, officer, employee, attorney, agent and
affiliate of Escrow Agent (collectively, the "Indemnified Parties") against any
and all actions, claims (whether or not valid), losses, damages, liabilities,
costs and expenses of any kind or nature whatsoever (including without
limitation reasonable attorney's fees, costs and expenses) incurred by or
asserted against any of the Indemnified Parties from and after the date hereof,
whether direct, indirect or consequential, as a result of or arising from or in
any way relating to any claim, demand, suit, action, or proceeding (including
any inquiry or investigation) by any person, including without limitation the
parties to this Agreement, whether threatened or initiated, asserting a claim
for any legal or equitable remedy against any person under any statute or
regulation, including, but not limited to, any federal or state securities laws,
or under any common law or equitable cause or otherwise, arising from or in
connection with the negotiation, preparation, execution, performance or failure
of performance of this Agreement or any transaction contemplated herein, whether
or not any such Indemnified Party is a party to any such action or proceeding,
suit or the target of any such inquiry or investigation; provided, however, that
no Indemnified Party shall have the right to be indemnified hereunder for
liability finally determined by a court of competent jurisdiction, subject to no
further appeal, to have resulted solely from the gross negligence or willful
misconduct of such Indemnified Party. If any such action or claim shall be
brought or asserted against any Indemnified Party, such Indemnified Party shall
promptly notify the Company and the Investor hereunder in writing, and the and
the Company shall assume the defense thereof, including the employment of
counsel and the payment of all expenses. Such Indemnified Party shall, in its
sole discretion, have the right to employ separate counsel (who may be selected
by such Indemnified Party in its sole discretion) in any such action and to
participate and to participate in the defense thereof, and the fees and expenses
of such counsel shall be paid by such Indemnified Party, except that the
Investor and/or the Company shall be required to pay such fees and expense if
(a) the Investor or the Company agree to pay such fees and expenses, or (b) the
Investor and/or the Company shall fail to assume the defense of such action or
proceeding or shall fail, in the sole discretion of such Indemnified Party, to
employ counsel reasonably satisfactory to the Indemnified Party in any such
action or proceeding, (c) the Investor and the Company are the plaintiff in any
such action or proceeding or (d) the named or potential parties to any such
action or proceeding (including any potentially impleaded parties) include both
Indemnified Party the Company and/or the Investor and Indemnified Party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Company or the Investor. The Investor and the Company shall be jointly and
severally liable to pay fees and expenses of counsel pursuant to the preceding
sentence, except that any obligation to pay under clause (a) shall apply only to
the party so agreeing. All such fees and expenses payable by the Company and/or
the Investor pursuant to the foregoing sentence shall be paid from time to time
as incurred, both in advance of and after the final disposition of such action
or claim. The obligations of the parties under this section shall survive any
termination of this Agreement, and resignation or removal of the Escrow Agent
shall be independent of any obligation of Escrow Agent.
12. Expenses of Escrow Agent. Except as set forth in Section 11 the Company
shall reimburse Escrow Agent for all of its reasonable out-of-pocket expenses,
including attorneys' fees, travel expenses, telephone and facsimile transmission
costs, postage (including express mail and overnight delivery charges), copying
charges and the like as outlined in Section 12.4 of the Standby Equity
Distribution Agreement dated the date hereof. All of the compensation and
reimbursement obligations set forth in this Section shall be payable by the
Company, upon demand by Escrow Agent. The obligations of the Company under this
Section shall survive any termination of this Agreement and the resignation or
removal of Escrow Agent.
13. Warranties.
a. The Investor makes the following representations and warranties to the
Escrow Agent and Investor's Counsel:
i. The Investor has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder.
ii. This Agreement has been duly approved by all necessary action of the
Investor, including any necessary approval of the limited partner of the
Investor, has been executed by duly authorized officers of the Investor's
general partner, enforceable in accordance with its terms.
iii. The execution, delivery, and performance of the Investor of this
Agreement will not violate, conflict with, or cause a default under the
agreement of limited partnership of the Investor, any applicable law or
regulation, any court order or administrative ruling or degree to which the
Investor is a party or any of its property is subject, or any agreement,
contract, indenture, or other binding arrangement.
iv. Mark A. Angelo has been duly appointed to act as the representative of
Investor hereunder and has full power and authority to execute, deliver, and
perform this Agreement, to execute and deliver any Joint Written Direction, to
amend, modify, or waive any provision of this Agreement, and to take any and all
other actions as the Investor's representative under this Agreement, all without
further consent or direction form, or notice to, the Investor or any other
party.
v. No party other than the parties hereto have, or shall have, any lien,
claim or security interest in the Escrow Funds or any part thereof. No
financing statement under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing (whether specifically
or generally) the Escrow Funds or any part thereof.
vi. All of the representations and warranties of the Investor contained
herein are true and complete as of the date hereof and will be true and complete
at the time of any disbursement from the Escrow Funds.
b. The Company makes the following representations and warranties to Escrow
Agent and, the Investor:
i. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder.
ii. This Agreement has been duly approved by all necessary corporate action
of the Company, including any necessary shareholder approval, has been executed
by duly authorized officers of the Company, enforceable in accordance with its
terms.
iii. The execution, delivery, and performance by the Company of this Escrow
Agreement is in accordance with the Standby Equity Distribution Agreement and
will not violate, conflict with, or cause a default under the certificate of
incorporation or bylaws of the Company, any applicable law or regulation, any
court order or administrative ruling or decree to which the Company is a party
or any of its property is subject, or any agreement, contract, indenture, or
other binding arrangement.
iv. Gary Westerholm and/or Gregory Bakeman has been duly appointed to act as
the representative of the Company hereunder and has full power and authority to
execute, deliver, and perform this Agreement, to execute and deliver any Joint
Written Direction, to amend, modify or waive any provision of this Agreement and
to take all other actions as the Company's Representative under this Agreement,
all without further consent or direction from, or notice to, the Company or any
other party.
v. No party other than the parties hereto shall have, any lien, claim or
security interest in the Escrow Funds or any part thereof. No financing
statement under the Uniform Commercial Code is on file in any jurisdiction
claiming a security interest in or describing (whether specifically or
generally) the Escrow Funds or any part thereof.
vi. All of the representations and warranties of the Company contained
herein are true and complete as of the date hereof and will be true and complete
at the time of any disbursement from the Escrow Funds.
14. Consent to Jurisdiction and Venue. In the event that any party hereto
commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree that the United States District Court for
the District of New Jersey shall have the sole and exclusive jurisdiction over
any such proceeding. If all such courts lack federal subject matter
jurisdiction, the parties agree that the Superior Court Division of New Jersey,
Chancery Division of Hudson County shall have sole and exclusive jurisdiction.
Any of these courts shall be proper venue for any such lawsuit or judicial
proceeding and the parties hereto waive any objection to such venue. The
parties hereto consent to and agree to submit to the jurisdiction of any of the
courts specified herein and agree to accept the service of process to vest
personal jurisdiction over them in any of these courts.
15. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mail, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
delivery to any overnight courier, or when transmitted by facsimile transmission
and addressed to the party to be notified as follows:
If to Investor, to: Cornell Capital Partners, LP
101 Hudson Street - Suite 3606
Jersey City, New Jersey 07302
Attention: Mark Angelo
Facsimile: (201) 985-8266
If to Escrow Agent, to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Facsimile: (908) 810-0973
If to Company, to: McKenzie Bay International Ltd.
975 Spaulding Avenue
Grand Rapids, MI 49546
Attention: Gregory Bakeman
Telephone: (616) 940-3800
Facsimile: (616) 940-9194
With a copy to: Donald C. Harms, Esq.
37899 12 Mile Road - Suite 300
Farmington Hills, MI 48331
Telephone: (248) 489-8520
Facsimile: (248) 489-4163
Or to such other address as each party may designate for itself by like notice.
16. Amendments or Waiver. This Agreement may be changed, waived, discharged or
terminated only by a writing signed by the parties of the Escrow Agent. No
delay or omission by any party in exercising any right with respect hereto shall
operate as waiver. A waiver on any one occasion shall not be construed as a bar
to, or waiver of, any right or remedy on any future occasion.
17. Severability. To the extent any provision of this Agreement is prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition, or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
18. Governing Law. This Agreement shall be construed and interpreted in
accordance with the internal laws of the State of Delaware without giving effect
to the conflict of laws principles thereof.
19. Entire Agreement. This Agreement constitutes the entire Agreement between
the parties relating to the holding, investment, and disbursement of the Escrow
Funds and sets forth in their entirety the obligations and duties of the Escrow
Agent with respect to the Escrow Funds.
20. Binding Effect. All of the terms of this Agreement, as amended from time to
time, shall be binding upon, inure to the benefit of and be enforceable by the
respective heirs, successors and assigns of the Investor, the Company, or the
Escrow Agent.
21. Execution of Counterparts. This Agreement and any Joint Written Direction
may be executed in counter parts, which when so executed shall constitute one
and same agreement or direction.
22. Termination. Upon the first to occur of the termination of the Standby
Equity Distribution Agreement dated the date hereof or the disbursement of all
amounts in the Escrow Funds and Common Stock into court pursuant to Section 7
hereof, this Agreement shall terminate and Escrow Agent shall have no further
obligation or liability whatsoever with respect to this Agreement or the Escrow
Funds or Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day
and year above set forth.
MCKENZIE BAY INTERNATIONAL LTD.
By: /s/ Gregory N. Bakeman
Name: Gregory Bakeman
Title: Chief Financial Officer
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
Name: Mark A. Angelo
Title: Portfolio Manager
BUTLER GONZALEZ LLP
By: /s/ David Gonzalez
Name: David Gonzalez, Esq.
Title: Partner
==================================
EX-14.1
CODE OF ETHICS
MCKENZIE BAY COMPANIES
The officers of McKenzie Bay International, Ltd. and its subsidiaries hold an
important and elevated role in corporate governance. Each of the officers of
the McKenzie Bay companies is involved to some degree in the financial
organization of the parent company or its subsidiaries and, therefore, bears a
responsibility to the shareholders, the employees of the McKenzie Bay companies
and the general public. This Code of Ethics is intended to reflect the high
priority which the McKenzie Bay companies place on the ethical conduct of its
business throughout the world. Officers of McKenzie Bay International, Ltd. and
its subsidiaries are expected to adhere to and advocate the following ethical
guidelines:
I.
All officers shall:
A. conduct the business of the McKenzie Bay companies fairly, impartially in
an ethical and proper manner and in full compliance with all laws and
regulations.
B. approach and handle all relationships with integrity including those with
shareholders, customers, suppliers, employees and the communities in
which business is conducted.
C. refrain from any conduct or activity that may raise questions as to the
McKenzie Bay companies' honesty or reputation or otherwise cause
embarrassment to any of the McKenzie Bay companies.
D. adopt, practice and advocate the following values:
1. we will be a world-class leader in every aspect of our business.
2. we will always take the high road by practicing the highest ethical standards
and by honoring our commitments.
3. we will take personal responsibility for our actions and treat everyone
fairly and with trust and respect.
E. ensure that all employees are encouraged to address questions or concerns
regarding any of the McKenzie Bay companies' ethics or standards of
conduct with management.
F. demonstrate personal support for the code of ethics through periodic
communication reinforcing these ethical standards throughout the
organization.
II.
The Chief Financial Officer shall:
A. prohibit and eliminate the appearance or occurrence of conflicts between
what is in the best interests of the enterprise and what could result in
material personal gain for a member of the financial organization
including the Chief Financial Officer.
B. provide a specific mechanism for members of the finance organization to
inform senior management of deviations in practice from policies and
procedures governing honest and ethical behavior.
C. establish reporting systems and procedures to ensure that business
transactions are properly authorized and completely and accurately
recorded on the books and records of the McKenzie Bay companies in
accordance with Generally-Accepted Accounting Principles and established
company financial policy.
D. establish systems and procedures to ensure that the retention or proper
disposal of company records will be in accordance with established
financial policies and applicable legal and regulatory requirements.
E. establish systems and procedures to ensure that periodic financial
communications and reports will be delivered in a manner that facilitates
the highest degree of clarity of content and meaning so that readers and
users will quickly and accurately determine their significance and
consequence.
F. establish reporting systems and procedures to monitor the compliance of
the finance organization with any applicable federal, state or local
statute, regulation or administrative rule.
G. establish reporting systems and procedures to identify, report and
correct in a swift and certain manner any detected deviations from
applicable federal, state or local statute or regulation.
III.
The Corporate Governance Committee shall:
A. establish and publicize to all employees procedures whereby an employee
may confidentially communicate to the Corporate Governance Committee or a
member of the Corporate Governance Committee concerning any alleged
violations of this Code of Ethics.
B. establish appropriate procedures for the prompt investigation and
disposition of any and all employee communications regarding violations
of this Code of Ethics or regarding any harassment of or retaliatory
conduct towards an employee who may have previously reported an alleged
violation of this Code of Ethics.
C. promptly submit to the full Board of Directors a report setting forth the
allegations received, the investigatory steps taken by the committee, a
final judgment by the committee as to whether or not in the opinion of
the committee there has been a violation of the Code of Ethics or any
harassment or retaliatory action taken toward an employee who has
previously submitted correspondence to the committee and if the committee
finds that there has been a breach of this Code of Ethics or harassing or
retaliatory conduct toward an employee, then its recommendation regarding
the appropriate disciplinary action to be taken.
==============================
EX-21.1
LISTING OF SUBSIDIARIES
OF
MCKENZIE BAY INTERNATIONAL, LTD.
As of September 30, 2003
(excluding inactive subsidiaries, none of which is material)
Great Western Diamond Company Jurisdiction of Incorporation: Michigan
Lac Dore Mining Inc. Jurisdiction of Incorporation: federal Canadian
corporation
DERMOND INC. Jurisdiction of Incorporation: federal Canadian
corporation
WindStor Power Co. Jurisdiction of Incorporation: Michigan
========================
EXHIBIT 32.1
CERTIFICATION
I, Gary L Westerholm, certify that:
(1) I have reviewed the report;
(2) based on my knowledge, the report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which such statements
were made, not misleading;
(3) based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition and results of operations of the issuer as of, and for, the
periods presented in the report;
(4) I and the Principal Financial Officer (the "Signing Officers"):
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information
relating to the issuer and its consolidated subsidiaries is made known to such
officers by others within those entities, particularly during the period in
which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer's internal controls as of
a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness
of their internal controls based on their evaluation as of that date;
(5) the Signing Officers have disclosed to the issuer's auditors and the
audit committee of the board of directors (or persons fulfilling the equivalent
function):
(A) all significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record, process,
summarize, and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
(6) the Signing Officers have indicated in the report whether or not there
were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 16, 2004
/s/ Gary L. Westerholm
Principal Executive Officer
==================================
EXHIBIT 31.2
CERTIFICATION
I, Gregory N. Bakeman, certify that:
(1) I have reviewed this Annual Report on Form 10-KSB of McKenzie Bay
International, Ltd.;
(2) Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
(4) The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
(5) The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: April 16, 2004
/s/ Gregory N. Bakeman
Principal Financial Officer
==============================
Exhibit 32.1 - Certification of CEO and CF0 Section 906
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
In connection with the Annual Report of McKenzie Bay International, Ltd. (the
"Company") on Form 10-KSB for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Harry Masuda, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
14th day of April 2004.
/s/Gary L. Westerholm
- ------------------
Gary L. Westerholm
President, Chief Executive April 16, 2004
Officer and Director
(Principal Executive Officer)
=======================
Exhibit 32.1 - Certification of CEO and CF0 Section 906
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
In connection with the Annual Report of McKenzie Bay International, Ltd. (the
"Company") on Form 10-KSB for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Harry Masuda, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
14th day of April 2004.
/s/Gregory N. Bakeman
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Gregory N. Bakeman
Treasurer, Chief Financial April 16, 2004
Officer and Director
(Principal Financial and Accounting Officer)