As filed with the Securities and Exchange Commission on September 6, 2005
File No. 333-119493
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT No. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
McKENZIE BAY INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
Delaware
(State or jurisdiction of incorporation or organization)
4911
(Primary Standard Industrial Classification Code Number)
51-0386871
(I.R.S. Employer Identification No.)
37899 Twelve Mile Road, Suite 300, Farmington Hills, MI 48331
(248) 489-1961
(Address and telephone number of principal executive
offices and principal place of business)
Donald C. Harms, Esq.
37899 Twelve Mile Road
Suite 300
Farmington Hills, MI 48331
(248) 489-1961
(Name, address and telephone number of agent for service)
Copies to:
Jonathan B. Reisman, Esq.
Reisman & Associates, P.A.
6975 NW 62nd Terrace
Parkland, Florida 33067
(954) 344-0809
Telecopier No.: (928) 569-8195
Approximate Date of Commencement of Proposed Sale To The Public: As soon as
practicable after this Amendment becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [x]
If this Form is filed to register additional securities for an offering pursuant
to 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
=========================================================================
McKENZIE BAY INTERNATIONAL, LTD.
21,626,604 shares of Common Stock
This prospectus relates to an offering of up to (a) 17,823,326 shares of our
common stock by Cornell Capital Partners, LP ("Cornell Capital Partners") issued
and which may be issued by us to Cornell Capital Partners under a Standby Equity
Distribution Agreement, (b) 2,004,444 shares by Spencer Clarke LLC, ("Spencer
Clarke") of which up to 2,000,000 shares may be acquired by Spencer Clarke upon
exercise of warrants, (c) 113,534 shares of our common stock which have been and
may be issued upon conversion of convertible promissory notes issued by us, (d)
1,620,300 shares which may be acquired upon exercise of warrants we issued in
connection with the promissory notes, and (e) 65,000 shares issued to a
creditor. If the actual number of shares purchased and to be purchased are less
than the number utilized in the assumptions, the effective discount could be
substantially higher. The net cash price to be paid by Cornell Capital Partners
to us will be 94% of the lowest volume weighted average price of our common
stock as quoted by Bloomberg, LP during the five consecutive trading day period
immediately following the respective dates we give notice to Cornell Capital
Partners of our intention to sell shares to Cornell Capital Partners under the
Standby Equity Distribution Agreement with respect to each purchase. Based
upon the number of shares actually purchased by Cornell Capital Partners, under
the assumptions described and explained elsewhere in this prospectus, the
effective discount could be as high as 19.5%. See "Prospectus Summary" and
"The Standby Equity Distribution Agreement and Related Transactions."
In connection with the issuance of the convertible promissory notes and warrants
issued in connection with the convertible promissory notes referred to above, we
paid a commission to Spencer Clarke of $109,375.
We are not selling any securities in this offering and therefore will not
receive any proceeds from this offering. As more fully described in this
prospectus however, we will receive proceeds from any sale of common stock under
the Standby Equity Distribution Agreement and upon any exercise of the warrants.
The selling stockholders may sell their shares in one or more transactions on
the over-the-counter market, in negotiated transactions, or through a
combination of those methods of distribution, at prices related to prevailing
market prices or at negotiated prices.
Each of the selling stockholders is an "underwriter" as that term is defined in
the Securities Act of 1933.
AN INVESTMENT IN THE SHARES INVOLVES SUBSTANTIAL RISKS AND IS HIGHLY
SPECULATIVE. SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is 2005.
IN MAKING A DECISION WHETHER TO BUY OUR COMMON STOCK, YOU SHOULD ONLY RELY ON
THE INFORMATION CONTAINED IN THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS
MAY ONLY BE ACCURATE ON THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................10
Our proposed business........................................................10
Corporate information........................................................11
The offering by the Selling Stockholders.....................................11
Summary Financial Information................................................13
RISK FACTORS..................................................................14
FORWARD LOOKING STATEMENTS....................................................20
USE OF PROCEEDS...............................................................21
MANAGEMENT'S PLAN OF OPERATION................................................24
WindStor.....................................................................24
Lac Dore Mining Inc..........................................................26
Cash Requirements for 2004 Fiscal Year Administrative Costs..................27
Additional Employees.........................................................27
Revenues.....................................................................27
Expenses.....................................................................27
Net Loss.....................................................................27
Liquidity and Capital Resources..............................................27
Off-balance sheet arrangements...............................................28
<page>3
PROPOSED BUSINESS.............................................................28
Background...................................................................28
Wind Powered Alternative Energy Systems......................................29
Acquisition of Dermond Inc...................................................29
Wind Turbine Technology......................................................29
Potential Wind Turbine Markets...............................................30
Off-Grid (Islands & Remote Access)...........................................31
Urban User Market............................................................32
Proposed Products............................................................32
Production...................................................................34
Marketing....................................................................34
Competition..................................................................36
Intellectual Property........................................................37
Research and Development.....................................................39
Regulation...................................................................39
Extraction and Refining of Vanadium..........................................43
Acquisition of Lac Dore Mining Inc...........................................43
Properties and Uses of Vanadium..............................................44
Vanadium Supply..............................................................45
Lac Dore Deposit Preliminary Feasibility Study...............................45
Competition..................................................................46
Exploration and commercialization............................................47
Governmental and Environmental Regulations...................................48
Properties...................................................................49
Employees....................................................................52
Offices......................................................................52
<page>4
MANAGEMENT....................................................................52
Executive Officers, Directors and Significant Employees......................52
Executive Compensation.......................................................57
Summary Compensation Table...................................................57
Option Grants Table..........................................................58
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values.......................................58
Long-Term Incentive Plans - Awards in Last Fiscal Year.......................59
Compensation of Directors....................................................59
Employment Contracts and Termination of Employment
and Change in Control Arrangements...........................................60
Equity Securities Authorized for Issuance
With Respect to Compensation Plans...........................................62
THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND RELATED TRANSACTIONS............63
Summary......................................................................63
Certain Terms of the Standby Equity Distribution Agreement Explained.........65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................70
MARKET FOR COMMON EQUITY AND CERTAIN RELATED STOCKHOLDER MATTERS..............72
DESCRIPTION OF COMMON STOCK...................................................73
CERTAIN TRANSACTIONS..........................................................74
SHARES ELIGIBLE FOR FUTURE SALE...............................................74
THE SELLING STOCKHOLDERS......................................................75
<page>5
PLAN OF DISTRIBUTION..........................................................79
INDEMNIFICATION...............................................................80
LEGALITY OF SHARES............................................................80
LEGAL PROCEEDINGS.............................................................81
EXPERTS.......................................................................81
ADDITIONAL INFORMATION........................................................81
FINANCIAL STATEMENTS.........................................................F-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE WILL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE
DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
PROSPECTUS SUMMARY
This summary may not contain all the information you should consider before
investing in our shares. You should read the entire prospectus carefully before
making an investment decision. In this prospectus, unless the context otherwise
requires, references to "we" "us" and "our" refer to McKenzie Bay International,
Ltd., a Delaware corporation.
Our proposed business
We intend to concentrate our efforts on the development and sale of wind powered
alternative energy systems. The systems are designed to utilize vertical axis
wind turbines which we refer to as WindStor Wind Turbine or WWT and an energy
system which is intended to integrate and manage WWTs and other electricity
generating sources with an energy storage device which we refer to as
"WindStor." Our products are presently in the design stage. We have recently
installed a prototype WWT. Testing of the prototype has not been completed and
is ongoing. No other prototypes of our products have been built.
<page>6
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.
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. We also 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.
Because, both WWT and WindStor are presently in the design and development
stage, there can be no assurance that the technology will work as expected or
that they will perform to the extent that we anticipate or will be commercially
viable.
We have claims to a vanadium/titanium deposit in Chibougamau, Quebec which we
refer to as the Lac Dore deposit. Except for expenditures to maintain the
claims, we do not intend to proceed with further exploration of the deposit.
Accordingly, we have decided to seek a buyer or strategic partner for the Lac
Dore deposit.
We do not have the capital to further fund or develop our proposed business
activities. If we obtain sufficient capital, we intend to complete the
development of our wind powered alternative energy systems and planning of their
commercial rollout. We have never realized any meaningful revenues. As stated
in the notes to our consolidated financial statements, because we have suffered
recurring losses and a have a deficiency in assets and working capital, there is
substantial doubt about our ability to continue as a going concern. Our
auditors have included a statement to that effect in their report dated January
12, 2005.
<page>7
Corporate information
We were incorporated in Delaware on August 17, 1998. Our principal office is
located at 37899 Twelve Mile Road, Suite 300, Farmington Hills, MI 48331 and our
telephone number is (248) 489-1961. The information contained in, or that can be
accessed through, our website is not part of this prospectus.
The offering by the Selling Stockholders
This prospectus relates to an offering of up to (a) 17,823,326 shares of our
common stock by Cornell Capital Partners, LP ("Cornell Capital Partners") issued
and which may be issued by us to Cornell Capital Partners under a Standby Equity
Distribution Agreement, (b) 2,004,444 shares by Spencer Clarke LLC, ("Spencer
Clarke") of which up to 2,000,000 shares may be acquired by Spencer Clarke upon
exercise of warrants, (c) 113,534 shares stock which have been and may be issued
upon conversion of convertible promissory notes issued by us, (d) 1,620,300
shares which may be acquired upon exercise of warrants we issued in connection
with the promissory notes, and (e) 65,000 shares issued to The Stephen Lindsay
Group, a creditor. As of August 31, 2005, we had issued 2,416,642 shares to
Cornell Capital Partners under the Standby Equity Distribution Agreement.
The Standby Equity Distribution Agreement with Cornell Capital Partners provides
that, we may, at our discretion, periodically issue and sell to Cornell Capital
Partners shares of our common stock for a total purchase price of $15 million.
The maximum amount of each sale is $625,000, and we may not notify Cornell
Capital Partners of any sale to be made by us to Cornell Capital Partners within
seven trading days of a prior such notice. Cornell Capital Partners has agreed
to pay us an amount per share of 99% of, which amounts to a 1% discount on, the
lowest volume weighted average price of our common stock as quoted by Bloomberg,
LP during the five consecutive trading day period immediately following the
respective dates we give notice to Cornell Capital Partners of our intention to
sell shares to Cornell Capital Partners under the Standby Equity Distribution
Agreement. Because we have also agreed to allow Cornell Capital Partners to
retain 5% of the proceeds from our sale of shares to Cornell Capital Partners,
the net cash price to be paid by Cornell Capital Partners to us will be 94% of
the computed lowest volume weighted average price with respect to each purchase.
We also agreed to issue to Cornell Capital Partners shares of our common stock
having a market value, similarly determined, of $540,000 as a commitment fee for
the Standby Equity Distribution Agreement which we satisfied by the issuance of
239,968 shares. The issuance of the shares effectively reduces the per share
price we receive from Cornell Capital Partners. See "The Standby Equity
Distribution Agreement and Related Transactions."
<page>8
We have paid and will continue to pay Spencer Clarke for its services as a
placement agent in introducing us to Cornell Capital Partners an amount equal to
10% of the gross proceeds of each purchase of our shares by Cornell Capital
Partners under the Standby Equity Distribution Agreement. We have agreed to
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 Capital Partners.
Although the exercise price of the warrants has not yet been determined, it will
not be less than the weighted average price computed as described above. As of
the date of this prospectus, such weighted average price was $0.85 . After
giving effect to the 10% fee payable to Spencer Clarke, the net cash price we
will retain on purchases by Cornell Capital Partners, without regard to the
additional issuances of shares and warrants to Cornell Capital Partners and
Spencer Clarke, escrow fees of $500 per purchase and fees and interest paid and
payable to Stone Street Advisors, LLC, will be 84.15% of the computed lowest
volume weighted average price with respect to each purchase.
Based upon the number of shares actually purchased by Cornell Capital Partners,
under the assumptions described and explained elsewhere in this prospectus, the
effective discount from such computed price could be as high as 19.5%. If the
actual number of shares purchased and to be purchased are less than the number
utilized in the assumptions, the effective discount could be substantially
higher. For example, although unlikely, if we sell only 5,000,000 million
shares to Cornell Capital Partners, the effective discount would be
approximately 26.16%.
There is no cap on the number of shares that can be issued under the Standby
Equity Distribution Agreement. Based upon our current capital needs and the
market price of our common stock, we presently have no intention of drawing
down the entire $15 million amount. Accordingly, our estimate of the number of
shares that we will issue pursuant to the equity line is 5 million shares. If
our circumstances change and we have no other source of financing, we may
ultimately have to draw down the entire $15 million assuming that we will then
be in a position to satisfy all of the relevant conditions.
There is a large number of shares of common stock underlying the Standby
Equity Distribution Agreement that will be available for future sale and the
sale of these shares will cause dilution to our existing shareholders. The
resale of such shares can be expected to depress the market price of our shares.
In 2004 we borrowed an aggregate of $1,093,750 and issued our 12% convertible
promissory notes in that aggregate amount. We have issued 1,100,009 shares of
our common stock upon conversion of the promissory notes of which 33,334 shares
remain unsold by the lenders as of the date of this prospectus and have been
registered with the SEC for resale in the registration statement of which this
prospectus is a part. An additional 80,200 shares we may issue upon conversion
of the 12% convertible promissory notes which remained outstanding as of the
date of this prospectus have been similarly registered. In connection with the
issuance of the convertible promissory notes, we issued warrants to the lenders
for the purchase of an aggregate of 1,623,300 shares of our common stock. The
warrants as to 750,000 shares are exercisable on or before August 13, 2006 at
$1.07 per share. The remaining warrants are exercisable on or before September
7, 2006 at $1.42 per share. The shares which may be acquired upon exercise of
the warrants have also been registered with the SEC for resale in the
registration statement of which this prospectus is a part.
We are not selling any securities in this offering and therefore will not
receive any proceeds from the sale by the selling stockholders. As more fully
described in this prospectus however, we expect to receive proceeds from the
sale of common stock to Cornell Capital Partners under the Standby Equity
Distribution Agreement and upon exercise of the warrants referred to above.
<page>9
The terms of the Standby Equity Distribution Agreement, the effective price we
will receive and our arrangements with Spencer Clarke are more fully described
below in this prospectus.
Common Stock to be offered by the selling stockholders 21,626,604 shares (1)(2)
Common Stock outstanding before the offering 30,416,805 shares (2)
Common Stock outstanding after the offering 52,043,409 shares (3)
Proceeds We will not receive any
proceeds from the sale
of the shares by the
selling stockholders.
Any proceeds we receive
from the sale of shares
to Cornell Capital
Partners under the
Standby Equity
Distribution Agreement,
and Spencer Clarke and
the holders of our
convertible promissory
notes upon exercise of
warrants, will be used
as descried under the
caption "Use of
Proceeds" in this
prospectus.
Risk Factors The securities offered
by this prospectus
involve a high degree
of risk. See "Risk
Factors."
___________________
(1) Represents the number of shares that we have registered with the SEC in our
registration statement of which this prospectus is a part less the number of
shares which have been sold by the selling stockholders. The number of
shares that we may actually sell to Cornell Capital Partners depends upon,
among other things, the prevailing market prices at the times of the sales.
If the number of shares we have registered with the SEC becomes
insufficient, we may register additional shares.
<page>10
(2) Does not include 15,015,707 shares which may be issued upon exercise of
presently outstanding warrants and options not referred to in Note (3)
below.
(3) Includes (a) 17,823,326 shares of our common stock by Cornell Capital
Partners, LP ("Cornell Capital Partners") issued and which may be issued by
us to Cornell Capital Partners under a Standby Equity Distribution
Agreement, (b) 2,004,444 shares by Spencer Clarke LLC, ("Spencer Clarke") of
which up to 2,000,000 shares may be acquired by Spencer Clarke upon exercise
of warrants, (c) 113,534 shares of our common stock which have been and may
be issued upon conversion of convertible promissory notes issued by us, (d)
1,620,300 shares which may be acquired upon exercise of warrants we issued
in connection with the promissory notes, and (e) 65,000 shares issued to a
creditor.
Summary Financial Information
The following table summarizes our statements of loss and balance sheet data for
and as of the periods indicated. The summary should be read in conjunction with
Management's Plan of Operation and our financial statements and notes thereto
included in the Incorporated Documents. The amounts for the fiscal years ended
September 30, 2003 and 2004 have been derived from our audited financial
statements.
<table>
<s> <c> <c> <c>
Nine Month ended Fiscal Year ended From inception
June 30, September 30, to March 31,
2005 2004 2004 2003 2005
(unaudited) (unaudited) (unaudited)
------------- ------------- ------------- ------------ ---------------
Revenues $ - $ - $ - $ - $ 12,825
Loss from operations $ (5,098,517) $(2,337,497) $(3,456,228) $(3,545,420) $(26,927,518)
------------- ------------ -------------- ------------ --------------
Net loss $ (5,098,517) $(2,337,497) $(3,456,228) $(3,692,392) $(26,933,490)
------------- ------------ -------------- ------------ --------------
Net loss attributable to
stockholders' $ (5,098,517) $(2,337,497) $(3,456,228) $(3,692,392) $(26,933,490)
============= ============ ============== ============ ==============
Basic and diluted net loss
per share $ (0.18) $(0.09) $(0.13) $(0.15)
============= ============ ============== ============
Weighted average shares
outstanding used in
basic and diluted net
loss per share
calculations 27,783,450 25,691,524 25,872,662 24,186,803
============= ============ =========== ===========
June 30, 2005
Balance Sheet Data (unaudited)
--------------
Cash $ 151,435
Working capital (deficiency) $(4,381,815)
Total assets $ 1,385,099
Total liabilities $ 6,759,043
Total stockholders' capital deficiency $(5,373,944)
</table>
<page>10
RISK FACTORS
An investment in our common stock involves substantial risks. You should
consider carefully the following information about these risks, together with
the financial and other information, including risks, contained elsewhere in
this prospectus, before you decide whether to buy our common stock. If any of
the described events actually occur, our business, financial condition and
results of operations would likely suffer and the market price, if any, of our
common stock would decline. In such case, you may lose all or part of your
investment.
BECAUSE WE HAVE NO OPERATING HISTORY, THERE IS NO BASIS ON WHICH YOU CAN
EVALUATE OUR PROPOSED BUSINESS AND PROSPECTS. 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
have decided not to purchase the shares if they had an operating history to
review.
WE HAVE HAD LOSSES SINCE INCEPTION AND EXPECT LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE. We incurred net losses of $3,456,228, $3,692,392 and
$5,970,574 during the fiscal years ended September 30, 2004, 2003 and 2002,
respectively. During the nine months ended June 30, 2005, we had a net loss of
$5,098,517. Since our inception through June 30, 2005, we have incurred
aggregate net losses of $26,933,490. Any future operations may not be
sufficient to generate the revenues necessary to reach profitability.
UNLESS WE OBTAIN ADDITIONAL CAPITAL, WE WILL NOT BE ABLE TO PAY OUR AUDITORS FOR
THEIR SERVICES. If the auditors are not fully paid, they will likely refuse to
do any additional work necessary to file certain periodic reports with the SEC.
The timely filing of such reports is one of the conditions to the obligation of
Cornell Capital Partners to purchase our shares under the Standby Equity
Distribution Agreement. In addition, if we fail to timely file the requisite
reports, we will have violated the reporting requirements of the Securities
Exchange Act of 1934.
BECAUSE OF OUR LIMITED CAPITAL, UNLESS WE OBTAIN SUBSTANTIAL ADDITIONAL CAPITAL
WE MAY NOT HAVE SUFFICIENT CAPITAL TO ENGAGE IN OUR PROPOSED BUSINESS
ACTIVITIES. On June 30, 2005, we had current assets of $1,320,093 and current
liabilities of $5,701,908. We do not have adequate capital to further fund,
develop or explore our proposed business activities.
<page>11
There Can Be No Assurance That Cornell Capital Partners Will Comply Or That We
Will Be Able To Comply With The Terms Or Satisfy The Conditions Of The Standby
Equity Distribution Agreement Or That The Conditions To Cornell Capital
Partner'S Obligations Will Be Satisfied. Furthermore there can be no assurance
that Cornell Capital Partners will have the financial resources to comply with
the Agreement. Furthermore, Cornell Capital Partners is not obligated to
purchase any shares from us to the extent that its holdings would exceed 9.9% of
our then outstanding common stock. Even if Cornell Capital Partners does
purchase the full amount of shares from us under the Standby Equity Distribution
Agreement and Spencer Clarke exercises all of the warrants that we may issue to
it, we will still require substantial additional capital to implement our
business plan.
In order for us to begin to engage in marketing and rollout of WWTs and WindStor
energy systems, we will require a minimum additional capital of approximately $5
million.
Neither we nor our subsidiaries will be able to continue development or
administrative functions for more than a few months unless substantial
additional funding from Cornell Capital Partners or otherwise becomes available.
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. Our ability to engage
in the business activities described below is dependant upon our acquisition of
significant funds.
BECAUSE OF OUR LIMITED CAPITAL, UNLESS WE OBTAIN SUBSTANTIAL ADDITIONAL CAPITAL
WE MAY NOT HAVE SUFFICIENT CAPITAL TO CONTINUE AS A GOING CONCERN. As stated in
the notes to our consolidated financial statements, because we have suffered
recurring losses and a have a deficiency in assets and working capital, there is
substantial doubt about our ability to continue as a going concern. Our
auditors have included a statement to that effect in their report dated January
12, 2005.
IF CERTAIN PAYMENTS ARE NOT MADE WHEN DUE, WE COULD LOSE OUR MINING CLAIMS FOR
THE LAC DORe VANADIUM/TITANIUM DEPOSIT. Subsequent to December 31, 2004, Lac
Dore Mining Inc., which is one of our wholly owned subsidiaries, did not remit
scheduled quarterly repayments of approximately $106,000 due under two separate
interest free loan agreements with the Government of Canada. These loans are
unsecured and are the obligations solely of Lac Dore Mining Inc. Quarterly
payments that would have been due in March, 2005 were deferred until September
2005 by agreement of the lender. As a result, there is currently no default
under these obligations as restructured, but if subsequent payments are not made
when due, a default will occur that would give the lender the right to demand
immediate repayment of all amounts due.
<page>12
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. It is
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, WE MAY UNDERGO A
CHANGE IN CONTROL 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. Our Board of Directors has
authorized a private offering of our equity securities at prices determined by
our President in order to seek $20 million of additional capital. There can be
no assurance that the offering can be completed on terms not unfavorable to us,
if at all. In addition, our Board of Directors may, subject to stockholder
approval, authorize an increase in the number of shares we may issue. 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.
WE MAY HAVE INCURRED SIGNIFICANT CONTINGENT LIABILITIES THROUGH OFFERS AND SALES
OF OUR EQUITY SECURITIES. Since September 30, 2003, we sold 1,568,890 shares of
our common stock for both cash and non cash consideration at prices ranging from
$0.60 to $2.50 per share. The weighted average price per share was $1.07. During
the same period, we sold; debt in the form of convertible promissory notes,
options and warrants which permit the holders to obtain an aggregate of
2,093,593 shares of our common stock at conversion or exercise prices ranging
from $0.67 to $3.00 per share. If we did not comply 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. In response to a letter from a regulatory agency of the state of
Michigan, we have provided it with certain information concerning the offer and
cash sale of our shares and promissory notes. We believe that since December
31, 2002, we have sold an aggregate of 9,000 shares of our common stock to two
Michigan investors for approximately $7,253 in violation of the registration
provisions of the Michigan Uniform Securities Act. We made an offer to those
investors to refund their purchase price with interest at 6% per year from the
date of payment. The investors did not accept our offer.
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 one or more new registration statements with the SEC and the
registration statements have 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.
<page>13
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 establish 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 we do. 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.
IF OUR PROPRIETARY TECHNOLOGIES ARE SUCCESSFUL, CURRENT AND NEW COMPETITORS
COULD ENTER THE MARKET(S) WHICH WOULD MATERIALLY DIMINISH THE VALUE OF OUR
TECHNOLOGIES. Any success of our technologies can be expected to generate
greater interest, which would likely lead to increased competition. Increased
competition would lessen the benefits we may derive from our proprietary
processes. If other products enter the marketplace that are technologically
superior to our products, the then value, if any, of our products will be
diminished.
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. Obtaining 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.
<page>14
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. We are not able
to predict whether new governmental regulations will arise and, if so, what form
these regulations will take.
BECAUSE WE HAVE ONLY ENGAGED IN THE PRELIMINARY EVALUATION PART OF THE
EXPLORATION STAGE FOR THE LAC DORe DEPOSIT, THERE CAN BE NO ASSURANCE THAT A
COMMERCIALLY VIABLE MINERAL DEPOSIT EXISTS ON ANY OR ALL OF THE PROPERTY.
Further exploration, for which we do not have the funds, will be required before
a final evaluation as to the economic and legal feasibility of the deposit is
determined. Furthermore, if we ever make the determination, there can be no
assurance that it will be accurate.
OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY LIMITED TRADING VOLUME AND THE
MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY NEGATIVELY AFFECT OUR
STOCKHOLDERS' ABILITY TO SELL THEIR SHARES. Prior to this offering, there has
been a limited public market for our common stock and there can be no assurance
that an active trading market will develop or be sustained. An absence of an
active trading market can be expected to adversely affect our stockholders'
ability to sell their shares. Our common stock has experienced, and is likely to
experience in the future, significant price and volume fluctuations, which could
adversely affect the market price without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially. These fluctuations may also cause short sellers to enter the
market from time to time in the belief that our share price will decline. We
cannot predict whether the market for our shares will be stable or appreciate
over time.
BECAUSE OUR COMMON STOCK IS CONSIDERED TO BE A "PENNY STOCK," OUR STOCKHOLDERS'
ABILITY TO SELL THEIR SHARES 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 is or
becomes subject to the penny stock rules. In addition the burdens imposed upon
broker dealers by the penny stock rules may discourage broker dealers from
effecting transactions in our common stock, which could severely limit its
liquidity.
<page>15
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 June 30, 2005, our directors,
officers and certain of their affiliates were deemed to beneficially own
approximately 40% 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. Furthermore,
the interests of our controlling stockholders could conflict with those of our
other stockholders
BECAUSE NONE OF OUR OFFICERS HAS HAD PRIOR EXPERIENCE IN OUR PROPOSED BUSINESS
ACTIVITIES, THEIR JUDGMENT AS IT RELATES TO THOSE ACTIVITIES MAY NOT BE SOUND.
OUR PROPOSED BUSINESS ACTIVITIES ARE OF A HIGHLY TECHNICAL NATURE. The success
of technical businesses is generally determined in substantial part by the prior
experience of its executive personnel.
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. The aggregate arrearage on August 31, 2005 was approximately $505,000.
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.
BECAUSE EACH OF OUR EXECUTIVE OFFICERS MAY VOLUNTARILY TERMINATE HIS EMPLOYMENT
WITH US AT ANY TIME ON AT LEAST 30 DAYS PRIOR WRITTEN NOTICE TO US, WE CAN NOT
BE SURE IF ANY OF THEM WILL MAINTAIN THEIR POSITION WITH US FOR THE FORESEEABLE
FUTURE. In the event any of our executive officers terminate their employment
with us, we may not be able to find suitable replacements on similar terms, if
at all.
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. No determination can be made with reasonable
certainty until the products have been produced, installed and utilized in the
field in significant quantities.
<page>16
ALTHOUGH WE PLAN ON ACQUIRING AND MAINTAINING COMMERCIAL INSURANCE TO REDUCE
SOME OPERATING HAZARD RISKS, SUCH INSURANCE MAY NOT BE AVAILABLE TO US AT
ECONOMICALLY FEASIBLE RATES, IF AT ALL. In the absence of suitable insurance, we
may be exposed to claims and litigation which we will not be financially able to
defend or we may be subject to judgments which may be for amounts greater than
our ability to pay.
BECAUSE WE PLAN TO RELY ON INDEPENDENT THIRD-PARTY MANUFACTURERS TO FABRICATE
THE WWT 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.
WE HAVE BROAD DISCRETION IN THE APPLICATION OF PROCEEDS WHICH WE RECEIVE IN
CONNECTION WITH THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND THE EXERCISE OF
THE WARRANTS, WHICH MAY INCREASE THE RISK THAT THE PROCEEDS WILL NOT BE APPLIED
EFFECTIVELY. Because of the uncertainty of the timing of our receipt and the
amount, if any, of the proceeds, we have not definitively determined specific
uses for them. Accordingly, investors will be relying on our management's
judgment with only limited information about our specific intentions regarding
the use of proceeds. Our failure to apply the funds effectively could have a
material adverse effect on our business, results of operations and financial
condition.
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN FUTURE EQUITY OFFERINGS. SALES OF OUR COMMON STOCK IN
THE PUBLIC MARKET DURING AND FOLLOWING THIS OFFERING, INCLUDING SALES MADE BY
THE SELLING STOCKHOLDERS, CAN BE EXPECTED TO LOWER THE MARKET PRICE OF OUR
COMMON STOCK. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable or at all. Of the 17,521,924 shares held by
persons who are not our affiliates on June 30, 2005, approximately 13,813,617
shares were freely tradable without restriction or further registration under
the Securities Act of 1933. In addition, approximately 3,550,562 additional
shares were then eligible to be sold in accordance with Rule 144 under that Act
and approximately 127,245 more shares will be able to be sold within the ensuing
twelve month period. All of the shares to be sold by the selling stockholders in
this offering will be freely tradable without restriction or further
registration under the Securities Act of 1933.
<page>17
ANTI TAKEOVER PROVISIONS COULD MAKE A THIRD PARTY ACQUISITION OF US DIFFICULT
WHICH MAY ADVERSELY AFFECT THE MARKET PRICE AND THE VOTING AND OTHER RIGHTS OF
THE HOLDERS OF OUR COMMON STOCK. Certain provisions of the Delaware General
Corporation Law may delay, discourage or prevent a change in control. The
provisions may discourage bids for our common stock at a premium over the market
price. Furthermore, the authorized but unissued shares of our common stock are
available for future issuance by us without our stockholders' approval. These
additional shares may be utilized for a variety of corporate purposes including
but not limited to future public or direct offerings to raise additional
capital, corporate acquisitions and employee incentive plans. The issuance of
such shares may also be used to deter a potential takeover of us that may
otherwise be beneficial to our stockholders. A takeover may be beneficial to
stockholders because, among other reasons, a potential suitor may offer
stockholders a premium for their shares above the then market price.
The existence of authorized but unissued and unreserved shares may enable the
Board of Directors to issue shares to persons friendly to current management
which would render more difficult or discourage an attempt to obtain control of
us by means of a proxy contest, tender offer, merger or otherwise, and thereby
protect the continuity of our management.
FORWARD LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
Forward-looking statements in this prospectus include statements regarding,
among other things, (a) our projected sales and profitability, (b) our growth
strategies, (c) anticipated trends in our industry, (d) our future financing
plans, (e) outcome of regulatory matters and (f) our anticipated needs for
funds. The statements may be found under "Management's Plan of Operation" and
"Proposed Business," as well as elsewhere in this prospectus. Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the risks
outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the events expressed or implied by the forward-looking statements will in
fact occur.
<page>18
The forward looking statements in this prospectus reflect what we currently
anticipate will happen. What actually happens could differ materially from what
we currently anticipate will happen. We are not promising to make any public
announcement when we think forward looking statements in this prospectus are no
longer accurate whether as a result of new information, what actually happens in
the future or for any other reason.
USE OF PROCEEDS
We are not selling any securities in this offering and therefore will not
receive any proceeds from this offering. As more fully described in this
prospectus however, we expect to receive proceeds from the sale of common stock
under the Standby Equity Distribution Agreement and upon exercise of warrants.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
common stock for a total purchase price of $15 million. Reference is made to the
table below for the approximate amount of net proceeds. The maximum amount of
each sale is $625,000, and we may not notify Cornell Capital Partners of any
sale to be made by us to Cornell Capital Partners within seven trading days of a
prior such notice.
For illustrative purposes only, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below which we may receive
subsequent to the date of this prospectus under the Standby Equity Distribution
Agreement and upon exercise of warrants in the order of priority. Although the
exercise price of all warrants which may be issued to Spencer Clarke has not yet
been determined, it will not be less than the weighted average price computed
under the Standby Equity Distribution Agreement, which for this example has been
set at $1.00 per share. The amounts in table below are based upon the
assumption that the exercise price will be the price so computed.
The amounts in the tables are based upon estimated offering expenses of
$160,000. These amounts are estimates only, and may be changed due to various
factors, including the timing of the receipt of the proceeds. For purposes of
the table, we have assumed that the exercise price of the warrants is the
weighted average price computed as described above.
Gross proceeds $4,771,494 $9,542,989 $18,553,478
- -------------------------------------------------------------
Net proceeds $4,048,994 $8,257,989 $16,143,478
<page>19
USE OF PROCEEDS
USE AMOUNT AMOUNT AMOUNT
- ------------------- ------------- ------------ ------------
Repayment of
convertible
promissory notes,
including interest $ 97,000 $ 97,000 $ 97,000
Repayment of
loan from Gary L.
Westerholm $ 22,700 $ 22,700 $ 22,700
WindStor Commercial
Installations $1,000,000 $4,000,000 $10,000,000
Repayment of loans
from Cornell Capital
Partners $1,950,000 $1,950,000 $ 1,950,000
Working capital and
other corporate
purposes $ 979,294 $12,188,289 $ 4,073,778
------------- ------------- ------------
Total $4,048,994 $8,257,989 $16,143,478
============= ============= ============
As more fully described under "Certain Transactions," we have borrowed $22,600
from Gary L. Westerholm and may borrow an additional $227,400 from him. The
proceeds of the loan have and will be used for working capital and other
corporate purposes. To the extent that we borrow more than $22,700 from Mr.
Westerholm, the amount allocated to working capital and other corporate purposes
will be reduced.
As more fully discussed under the caption "The Standby Equity Distribution
Agreement and Related Transactions," we have borrowed an aggregate of $3,500,000
from Cornell Capital Partners and issued our promissory notes to Cornell Capital
Partners in such aggregate amount. As of the date of this prospectus,
approximately $1,875,900 inclusive of $75,000 of accrued interest, remained
unpaid. The proceeds of those loans were used as follows:
<table>
<s> <c> <c>
Funding Fees/Repayment - Technology Development Kelsey Lake Accounts payable,
(Spencer Clarke, Cornell, (WindStor Wind Turbine Reclamation marketing and
Convertible repayments, and supporting tech) supporting costs
loan payments)
- -------------------- ----------------------- ------------ -----------------
$964,070 $894,000 $376,700 $1,265,230
==================== ======================= ============ =================
</table>
To the extent that the $93,000, plus approximately $4,000 in interest, in
promissory notes held by selling stockholders are converted into shares of our
common stock or warrants to be issued to Spencer Clarke are exercised, the
amount allocated to working capital and other corporate purposes will be
increased.
Because we have broad discretion in the application of proceeds, the risk that
the proceeds will not be applied effectively is increased. Pending use, we may
invest the net proceeds in short term, investment grade debt instruments,
certificates of deposit or direct or guaranteed obligations of the United
States.
<page>20
MANAGEMENT'S PLAN OF OPERATION
The following should be read in conjunction with our financial statements and
the related notes that appear elsewhere in this prospectus. The discussion
contains forward looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this prospectus, particularly under the caption "Risk Factors."
WindStor
With adequate funding, we intend to build, install and operate WindStor(sm), a
"Green Energy" electricity management system that is intended to provide
customers with electricity at fixed, long-term, rates by generating electricity
at the customer's location with a WindStor Wind Turbine "WWT", designed by
Dermond, Inc., and distributed via our proprietary "System Integrator"
("WindStor"). We believe the planned markets for WindStor exist in adequate size
to provide the opportunity for penetration of our products leading to profitable
operations. Because WindStor components and systems are in the design stage and
only a working prototype has 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.
In special cases, we may elect to sell WindStor rather than retain ownership.
Since October 30, 2004, we have been testing a 100 kilowatt (kW) WindStor Wind
Turbine (WWT) prototype at the Universite du Quebec en Abitibi-Temiscamingue, in
Rouyn-Noranda, Quebec Canada, our long term research and development site.
Rouyn-Noranda is the home of, or near, several of our key engineering and
specialty component manufacturing companies. The WindStor system will be
donated to the Universitie at the earliest of the end of our testing or May 31,
2015.
We have completed engineering of a 200 kW WWT that is the planned configuration
for our commercial device.
We intend to configure WindStor systems as "Projects." WindStor system(s)
within a Project will be built according to the electricity power needs of the
user. A wide variety of Project configurations are expected. For example, one
Project installation may require a 200 kW WWT and 200 kWs of energy storage, a
System Integrator and other components and costs to install the system; while
another WindStor Project may require multiple WWTs, a larger battery and a
System Integrator. Consequently, WindStor Projects will have different
installed costs and performance matrices.
We plan to retain ownership of the majority of commercial WindStor systems which
may be installed in customers' locations. Our plan is that a McKenzie Bay
company will own at least a majority of each Project. We intend to retain
control of the technology and benefit from the long term revenue generation
anticipated by each WindStor Project. WindStor Project majority ownership will
require additional capital beyond any proceeds we may receive under the Standby
Equity Distribution Agreement and exercise of warrants. We intend to arrange
for debt to be borrowed to fund a portion of each Project. There can be no
assurance that we will be successful in obtaining debt financing on terms not
unfavorable to us, if at all.
<page>21
We have formed WindStor Power Co. (WPC) as a wholly owned subsidiary of McKenzie
Bay International Ltd., to conduct the marketing, WindStor system assembly and
installation coordination, and system operation and administration of each
WindStor Project. To the extent that funding becomes available, WPC will be
funded by McKenzie Bay International Ltd. initially, with expectations that
revenues from WindStor Projects will exceed the costs of Project operations and
allow WPC to fund ongoing Project development.
We have entered into non-binding letters of intent with twenty entities for
commercial installations of WindStor, dependent upon satisfactory testing of
wind power at the respective location to provide sufficient electricity
production from a WWT 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
systems.
If we are successful in obtaining equity funds to be utilized in connection with
WindStor, we intend to allocate them as follows (based on the maximum amount of
proceeds received):
Installation of WindStor $10,000,000
Repayment of promissory
notes and other
corporate purposes $ 6,143,478
- ---------------------------------------------
TOTAL $16,143,478
=============
Lac Dore Mining Inc.
We have decided to seek a buyer or strategic partner to take over the Lac Dore
project. We believe our managerial and financial focus will be better directed
at commercializing WindStor. We have hired an investment banking firm to assist
us with a divestiture of Lac Dore.
If we are unsuccessful in identifying a buyer or strategic partner for Lac Dore,
we intend to maintain the claims and will reevaluate our options.
Cash Requirements for 2005 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 business.
<page>22
Our cash requirements for administrative costs for the balance of fiscal year
ending September 30, 2005 (including direct support of subsidiary operations)
follows:
Use Amount
------------ ------------
Employee salaries $ 383,000
Professional costs
(includes consultants,
outside accountants,
independent auditors
and legal counsel) $ 147,000
General and administrative
(includes lease obligations,
travel and other
administrative costs,
plus costs in arrears) $2,000,000
Neither we nor our subsidiaries will be able to continue commercial or
administrative functions for more than a few months unless substantial
additional funding from Cornell Capital Partners or otherwise becomes available.
As stated in the notes to our consolidated financial statements, because we have
suffered recurring losses and a have a deficiency in assets and working capital,
there is substantial doubt about our ability to continue as a going concern.
Our auditors have included a statement to that effect in their report dated
January 12, 2005
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 WWT and WindStor prototype testing. Additions include, project
managers, mechanical, aeronautic and electrical engineers and administrative
personnel. We recently hired a president and project manager, to direct the
business and oversee vendor relationships and WindStor Power Co. installations,
respectively. WPC and McKenzie Bay International, Ltd. intend to add
administrative personnel, including a controller. WindStor Power Co. is a wholly
owned subsidiary of McKenzie Bay International, Ltd.
<page>23
Revenues
For the fiscal year ended September 30, 2004, and nine-month period ending June
30, 2005, we did not generate any revenues.
Expenses
Expenses, for comparative periods, before depreciation, amortization,
gain/(loss) on assets sales and interest expenses decreased $142,390
($3,283,748 vs. $3,426,138) for the year ended September 30, 2004 as compared
to the year ended September 30, 2003. This decrease resulted primarily from
decreases in exploration expenses (reduced $418,398) and professional fees
(reduced $184,023). Offsetting these reductions were increases in management
wages and benefits (increased $485,647) although almost $480,000 of the increase
was a non-cash award of stock-based compensation.
For the nine months ended June 30, 2005, compared to the same nine month period
ended June 30, 2004, expenses before depreciation, amortization, gain/(loss) on
asset sales and interest expense increased $2,360,958. This increase in
operating expenses occurred primarily from: increases in research, development
and exploration expenses (increased $1,398,525), wages and benefits (increased
$396,856 - after adjusting 2004 for $794,467 in stock-based compensation costs),
professional fees (increased $362,767) and travel and promotion (increased
$93,808).
Net Loss
For the year ended September 30, 2004, net loss was ($3,456,228), compared to a
net loss of ($3,692,392) for the year ended September 30, 2003. For the nine
months ended June 30, 2005, net loss was ($5,098,517) compared to a net loss of
($2,337,497) for the nine months ended June 30, 2004. During the nine months
ended June 30, 2005, we recognized approximately $1,230,000 in amortization
expense related primarily to valuation adjustments of debentures converted to
equity and related deferred finance charges.
Liquidity and Capital Resources
Our ability to satisfy current obligations depends in substantial part upon our
ability to raise additional capital and, ultimately, the entry of WindStor into
the market and reaching a profitable level of operations. There is no assurance
that capital can be obtained to fulfill our capital needs. Without the sale of
additional common stock, we will be unlikely to continue operations.
The shortfall of working capital increased from ($2,235,388) as of September 30,
2004, to ($4,381,815) as of June 30 2005. This shortfall increase for the
period resulted from operating expenses in excess of capital raised to satisfy
these expenditures and the addition of approximately $2,125,000 in promissory
notes due to Cornell Capital Partners which we anticipate will be repaid by the
sale of our stock to Cornell Capital Partners.
<page>24
Off-balance sheet arrangements
We have no off-balance sheet financial arrangements and do not foresee any
during the next 12 months.
PROPOSED BUSINESS
Background
Prior to July 2003, we intended to primarily engage in the exploration of our
Lac Dore vanadium deposit in Chibougamau, Quebec. Based upon a market study,
undertaken as part of a preliminary 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. In order to retain full rights to the 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.
Because of our belief in the growing interest in alternative energy generation
devices, we altered our business plan in July 2003 to concentrate on wind
powered alternative energy systems. As more fully described below, we have
decided to seek a buyer or strategic partner for the Lac Dore deposit.
We do not have the capital to further fund or develop any of our proposed
business activities related to wind powered alternative energy systems. 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 Standby Equity Distribution
Agreement with Cornell Capital Partners 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 the development stage with
respect to wind powered alternative energy systems.
We have never realized any meaningful revenues. As stated in the notes to our
consolidated financial statements, because we have suffered recurring losses and
a have a deficiency in assets and working capital, there is substantial doubt
about our ability to continue as a going concern. Our auditors have included a
statement to that effect in their report dated January 12, 2005.
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 WindStor 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:
<page>25
o The issuance to each of the sellers of 50,000 shares of our common stock;
o 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 $53,940 U.S. on June 30,
2005) which will increase to CDN $85,000 (approximately $70,540 U.S. on June 30,
2005) upon our first sale of a Dermond Wind Generator. On August 31, 2005, we
were approximately $9,240 U.S. in arrears in the payment of salaries to each of
Messrs. Dery and Mondou
Pursuant to the royalty agreements as subsequently amended, we will pay each of
the sellers a royalty of CDN $6,000 upon the installation of each Dermond Wind
Generator utilizing the technology developed by Dermond. The royalty will be
payable with respect to each such installation, whether upon sale or lease of
the turbine, or upon installation to allow WindStor Power Company to sell the
electric power generated by the turbine. The royalties will be payable with
respect to all such installations during the 10-year period commencing with the
first commercial installation 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 principle
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.
<page>26
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.
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 8,133 MW of new wind power capacity was installed worldwide in
2003, increasing generating capacity by approximately 26% and increasing total
wind power installation to over 39,000 MW, enough to power 9 million average
American homes. Global wind power capacity rose approximately 301% over the
five-year period ended in 2003, growing from 9,800 MW to almost 39,300 MW.
<page>27
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 90% of the additional wind power capacity installed in 2003 was in
Europe and the United States. India added 408MW (5%), the largest single
addition outside the European and United States markets. The countries with the
most wind power capacity are Germany - by far the largest market, in spite of a
slight decline in the rate of new installations - followed by the United States,
Spain, India and Austria. A number of countries, including the Netherlands,
Italy, Japan, and the UK, now have several hundred megawatts installed and are
nearing the 1,000 MW mark
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.
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.
<page>28
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;
o Thousands of island and remote mining, logging and other off-grid
locations;
o More than 200 Canadian communities;
o 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
WWT(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
WindStor Wind Turbine or WWT. The WWT has been designed to utilize the following
technology which we have included in our patent application which may result in
the following:
o Simplification of installation by reducing the number of onsite elevated
assembly steps;
o Improvement in quality of workmanship by allowing more "in factory"
assembly;
o Reduction in overall cost of installation; and
o Relative ease of installation where certain assembly equipment may be
unavailable.
<page>29
A prototype 100 kW test unit WWT was installed in October 2004 at the Universite
du Quebec en Abitibi-Temiscamingue, in Rouyn-Noranda, Quebec Canada, our planned
long term research and development location. The prototype has generated peak
power of 104 kW, at a significantly lower wind speed than its 100 kW rated
capacity which is more electricity, at lower wind speeds, than we originally
projected. Other testing has not been completed and is ongoing.
Until the prototype has been fully tested, there can be no assurance that the
technology will work as expected or that any WWT will perform to the extent that
we anticipate or will be commercially viable. If the prototype meets our
expectations and we obtain the requisite funding, we intend to have WWTs
manufactured for commercial introduction. We are in the process of engineering
a 200 kW WWT which is the planned commercial configuration.
The "wind cage," or blade rotating space, of a 100 kW WWT will be approximately
40 feet high and 56 feet wide and is expected to weigh approximately 6,000
pounds. The wind cage of a 200 kW WWT will be approximately 66 feet high and 66
feet wide and is expected to weigh approximately 25,000 pounds. We have selected
the 100 kW and 200 kW sizes for our commercial product because the configuration
best meets our initial market focus on the urban, remote, limited access and
extreme climatic environment markets. We now believe that a 200kW configuration
of the WWT will be a better match for the largest of our potential markets,
urban areas, and be a good electricity energy generation size for off-grid
markets as well. If we are successful in marketing 200 kW WWTs, we intend to
develop WWTs having increased electrical output.
Our plan to go directly to commercial installations for the 200 kW WWTs has
altered our funding requirements. The terms of potential commercial
installations (the number of WWTs and selling price of electricity) are in
discussion. We will require significant amounts of capital to install each WWT
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
during 2005 as follows:
USE AMOUNT
- ----------------------------- -----------------
Build & Install WindStor Systems $10,000,000
Repayment of promissory notes
and other corporate purposes $ 6,143,478
- -------------------------------------------------------
TOTAL $16,143,478
==============
<page>30
WindStor(sm)
We are completing development of an energy system which is intended to integrate
and manage WWTs and other electricity generating sources with an energy storage
device. We refer to the system as "WindStor." The WWT is an integral part of
WindStor and results of WWT testing will have a material affect on the potential
for WindStor. Because WindStor components and systems are 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.
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 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 to provide to the customer
the least costly source of electricity.
WindStor is 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 WWT financing described
above. If we do not obtain all of the requisite funds, we will not be able to
produce or sell any WindStors.
On August 19, 2005, we entered into a Power Purchase Agreement with the
Ishpeming Housing Commission for the sale/purchase of onsite generated
electricity for the Ishpeming, Michigan HUD sponsored senior citizen apartment
building "Pioneer Bluff." If all of the conditions to the agreement are
satisfied, Ishpeming will purchase electricity generated by one WWT to be
installed by us at Pioneer Bluff at a fixed rate for the first fifteen years of
the twenty-year Agreement. Rates would then increase slightly but always be
less than utility rates providing Ishpeming an immediate power cost reduction
and a hedge against future grid related rate increases. We will be required to
build, operate and maintain the WWTs at our expense.
We have agreed to undertake and fund studies and inquiries in order to develop a
proposal for the specific configuration and to prepare for submission a detailed
proposal for pricing of electric power which may be accepted or rejected by
Ishpeming in its sole discretion. Among the other conditions to the Agreement
are the receipt of governmental and electric utility authorizations and permits
needed or desirable for us to construct, install and operate the facility and to
sell electric power; the execution of a lease and amendment to the Power
Purchase Agreement by both parties and the procurement by us of property damage
and liability insurance coverage as Ishpeming may reasonably require
We believe that it will require approximately $20,000 to complete the studies
and inquiries and make application for the authorizations and permits. If the
results of the studies and inquiries are satisfactory, the permits and
authorizations are obtained and Ishpeming agrees to the price structure which we
will then propose, we will require substantial additional funding to procure the
insurance, if available, and build and install the WWT. Although the additional
funds are not presently available to us, we are pursuing potential sources of
the funds. There can be no assurance that we will be able to acquire the funds
on terms not unfavorable to us, if at all or that all of the conditions to the
agreement can or will be satisfied.
<page>31
Production
If we are able to reach the production stage, we intend to have all WWTs 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 WWTs and WindStors primarily through non-exclusive
independent marketing agents. 20 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 installed through their efforts. The payment will consist
of 5% of WindStor's installed cost payable within 60 days of installation of a
system, exclusive of taxes and transportation, or, in most cases, a lump sum
payment of $20,000. Certain of the agents will also receive a 2% "carried
equity interest" in each WindStor system they sell.
Each of the agents 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 has been designing and installing 10 kW and 50 kW wind-diesel systems for
more than 10 years. Atlantic Orient 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 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.
<page>32
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 do we. 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
On January 2003, we filed a patent application in Canada, Japan and with the
European Union, which includes, 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:
o A wind system of the type having a rotating shaft perpendicular to the
ground;
o A blade attachment structure for a windmill;
o A blade for a windmill;
o A generator assembly for a windmill to produce electricity;
o A self erecting structure for a windmill; and
o A method for erecting a self-contained windmill.
<page>33
We believe that 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:
o 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.
o 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.
o 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.
o 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.
In May 2004, we amended and resubmitted our patent application responding to the
comments from the Canadian Intellectual Property Office
<page>34
On December 17, 2004, the Canadian Patent Office further objected to a number of
the pending claims and also to indefinite terms used in the claims. On January
21, 2005 we filed a response to the office action including amended claims and
arguments addressing the objections raised by the patent examiner.
A Notice of Allowance and Fees Due was mailed to us on July 27, 2005 from the
United States Patent and Trademark Office. Thirty-five out of the thirty-eight
claims originally submitted have been allowed. The three claims that were not
allowed relate to materials to be used in the construction of the turbine and
methods of bracing the self-erecting tower during and after construction. Each
of these claims was deemed to be generic in nature. We expect that the patent
will be issued with respect to the claims that have been allowed.
A Notice of Acceptance of Complete Specification was mailed to us on June 1,
2005 from the New Zealand Commissioner of Patents, Trade Marks and Designs,
notifying us that our application for the granting of a Patent has been
accepted. Our application was published in Journal No. 1512 on June 24, 2005.
Unless a Notice of Opposition is filed on or before September 24, 2005, or an
extension is granted, the application will be sealed and Letters Patent granted.
There can be no assurance that any other country will allow our claim and that a
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.
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.
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.
<page>35
Research and Development
During the fiscal years ended September 30, 2004 and September 30, 2003 we
expended approximately $994,000 and $629,000, respectively, on research and
development and for the nine month periods ended June 30, 2005 and June 30, 2004
we expended approximately $1,520,000 and $339,000, respectively, on research and
development related to WWTs and WindStor. The expenditures consisted primarily
of material and assembly costs for the 100kW WWT prototype (June 30, 2005 nine-
month period), engineering for the WWT and the system integrator. The foregoing
amounts do not include amounts expended for vanadium refining technology.
Regulation of Power Projects
Overview - United States
We propose to own and operate wind powered electric generating facilities to be
located on the property of our prospective customers. Our principal prospective
customers would be end-users (retail consumers) of electricity, such as
commercial office buildings, schools, and government buildings, who would
purchase electricity from us. While we do not intend to sell power from our
facilities to utilities or other re-sellers or into the open market (wholesale
sales), we may do so in specific applications.
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 construction of electric generating and
transmission facilities and the sale of electricity at retail.
The federal government regulates the electric wholesale and transmission
business in interstate commerce 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. The 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 wholesale power and electric transmission industry is also
subject to operating standards established by regional reliability councils,
and, increasingly, to governance of the operation of interconnected utility and
non-utility operations and wholesale markets through Independent System
Operators and Regional Transmission Organizations, all of which are in turn
subject to the plenary jurisdiction of the FERC.
The States regulate the sale of electric power at retail in their state in
accordance with individual state laws which can vary widely in material
respects.
Holding companies owning electric utility companies are, unless exempted by law
or regulation, subject to comprehensive and burdensome regulation under the
Public Utility Holding Company Act of 1935 ("PUHCA"). Unless they qualify for an
exemption or fall under a statutory exception, these companies and their direct
and indirect subsidiaries are not permitted to engage in a variety of
transactions, including financing transactions, without the authorization of the
SEC. 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."
<page>36
Federal Regulation - United States
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 of 80 MW or less (including all
such facilities owned or operated by the same person or its affiliates within
one mile of the facility) ) is deemed to be a Qualifying Small Power Production
Facility ("QF"), so long as no more than 50% of the equity interest in such
facility is owned by electric utilities, electric utility holding companies, or
subsidiaries of either. QFs are required by FERC to make certain non-burdensome
filings to confirm the facts supporting their status with respect to each such
facility.
QF status is not available for facilities located outside the United States and
certain of its Protectorates. At this time we do not own or operate any
facilities in any other countries that are generating any electric power for
sale. If we were to do so in the future, we believe that we will be able to
take advantage of one or more exemptions or exceptions from PUHCA that will
allow us with respect to any such foreign operations: (1) to avoid SEC
regulation under PUHCA, and (2) to comply with the ownership restrictions under
PURPA and the regulations of the FERC there under with respect to any QFs we
may own and operate in the United States. There can be no certainty, however,
that such exceptions or exemptions will be applicable to the circumstances of
any particular project or business opportunity we may wish to pursue in such
other countries.
A QF with a generating capacity not greater than 30 MW 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. 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 has 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 amount of power from others.
State regulatory agencies are required by PURPA to implement FERC's regulations
under PURPA, and most have done so. Utilities and other interests have in the
past attempted to challenge or dilute the rights of QFs under PURPA, and in some
circumstances have succeeded in securing certain rulings of state regulatory
agencies that have had the result of making inside-the-fence generating business
models such as ours less attractive to customers or economically infeasible.
There have for many years been attempts in Congress to repeal PURPA, but in each
case, the only repeal that has received serious consideration has been the
possible repeal of the PURPA requirement that utilities must offer to purchase
QF power. This particular right under PURPA has become increasingly 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. We do not intend to sell power to utilities except in rare
circumstances, so that such a limited repeal, even if our contracts were not
"grandfathered" in repeal legislation, would not be of material consequence to
us as a whole. If repeal of PURPA were broader, however, exemption from PUHCA as
a QF might no longer be available to us.
<page>37
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 may include a
generating set fueled with diesel fuel or natural gas. In addition, the system
could in some applications be interconnected with a utility grid. 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, any sales of power from the
battery, and the owners and operators of the battery, 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 it is used to transmit non-
QF power.
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 there is FERC precedent for the use of such
structures in QF-eligible applications, we cannot be certain that any particular
structure would qualify. Moreover, in the event that any such facility owned by
us were to lose QF status, we could be deemed to be a utility holding company
under PUHCA and the QF status of our other projects could be jeopardized.
State Regulation
With few exceptions, state regulatory agencies generally have the jurisdiction,
among other things, to approve the construction 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 of retail customers including the facilities
needed for interconnection, rates and terms 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. Any or all of the regulations may have important, and possibly
materially adverse, implications for our business model and operations in
specific circumstances.
<page>38
In most of our anticipated commercial retail applications, the WindStor system
would supply part of a customer's power requirements, but not produce excess
power that would go on to the utility distribution or transmission system. We
expect to provide and sell a portion of the customer's power requirements to the
customer, rather than selling or leasing the WindStor system to the customer.
The remainder of the customer's power requirements would be supplied by a local
electric utility or other retail supplier, or by other customer-owned
generation.
The first issue in any state will be whether a Certificate of Public Convenience
and Necessity or similar authorization ("CPCN") is required to be obtained from
the state regulatory agency before construction of the WindStor system may
begin. In some 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 be larger than most WindStor systems we anticipate installing. Where
a CPCN is required, it may involve a lengthy and expensive application process,
possibly including an environmental impact evaluation and opposition by
interested parties or utilities. We intend to require the prospective customer
to obtain such an authorization where required by law, and there can be no
certainty that potential customers will agree to undertake this process, or if
they do, that they will be successful.
The next critical issue is whether and under what circumstances a sale of power
to an end user at retail will be permitted by the state 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 QF's rates for sales of
retail power, or its corporate governance or financial organization. The extent
to which a state honors such federal preemption, however, may be subject to
varying practice. Where a CPCN is required, for instance, the conditions of a
CPCN may impose certain obligations that 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, as
well as certain periodic reporting requirements.
At this time, the State of New York permits the construction of small scale wind
turbines without a CPCN, and permits the sale of power from such turbines to end
users with no regulatory interference or limitation. There can be no certainty
that these favorable conditions will continue in New York, or that other States
will have or will maintain laws and regulations that are as favorable to us in
this respect when we wish to do business there.
Finally, the state regulatory authority may determine or approve a utility's
determination as to the physical interconnection requirements a utility may
impose on a customer who wishes to install a WindStor system in parallel with
the utility's distribution and transmission, what charges a utility may impose
on a retail customer for interconnection with the utility's system when the
customer maintains a WindStor system, and what charges, penalties or other
restrictions the utility may impose on the customer for, among other things,
permanently reducing its purchased power requirement from the utility. Charges
imposed by a utility and authorized by a state regulatory authority may make
purchasing power from our WindStor system or our wind turbines uneconomical for
some customers or for all customers in some utility service territories or
states. New York State has 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 also 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.
<page>39
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. 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.
We have deferred engaging in any material exploratory or other 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.
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
$38,000 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 exploratory activities since we acquired
the mining claims for which we expended approximately $6,000,000.
<page>40
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.
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.
<page>41
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 Preliminary 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. Our preliminary 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 the
Notes to Consolidated Financial Statements included elsewhere in this prospectus
for a description of the terms of the Canadian funding.
The preliminary 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.
SNC Lavalin Inc. completed the preliminary feasibility study in April 2002.
Although the analysis of the data considered during such a 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 study. The preliminary
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 preliminary 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.
<page>42
The preliminary feasibility study estimated that the initial capital cost of the
Lac Dore project would be approximately $260 million. Since the 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 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.
We believe than the vanadium market is characterized by significant excess mine
capacity and above ground stocks of vanadium. We further believe that the
Windimurra and possibly other mines are fully developed and could return to
production if prices rise above existing levels for a sustained period. Any
owners or exploiters of sources of vanadium which are not part of the Lac Dore
deposit will be in competition with us if we are ever able to exploit the Lac
Dore deposit.
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.
If we begin exploration 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.
<page>43
Exploration and commercialization
If we begin exploration 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 prospective customers. We have committed
significant resources to preliminary exploratory activities. Our expenditures
have primarily related to completion of the preliminary feasibility study and
the development of proprietary processes in connection with our laboratory
tests. Our exploration expenses related to Lac Dore were approximately
$147,000, $452,000 and $2.1 million for the fiscal years ended September 30,
2004, 2003 and 2002, respectively. We did not make any such expenditures during
the six months ended March 31, 2005, nor do we intend to so in the future.
We have decided to seek a buyer or strategic partner for the Lac Dore deposit.
On July 8, 2005, we entered into an agreement with Brooks, Houghton & Company,
Inc. to assist us in seeking a buyer or strategic partner for the Lac Dore
deposit. We have agreed to pay Brooks, Houghton a retainer of $100,000 which
will become payable at the time that we raise at least $2 million of equity
capital. We have also agreed to pay Brooks, Houghton a maximum of 5% of the
value of any transaction. Upon the execution of a binding agreement for the
sale of the Lac Dore mining deposit, we will issue warrants to Brooks, Houghton
for the purchase of 200,000 shares of our common stock for each $10 million of
the transaction value. The warrants will have a five year term and will have an
exercise price of 105% of the price per share of our common stock on the date
the warrant is issued. We have also agreed to grant Brooks, Houghton
"piggyback" registration rights regarding the shares underlying the warrants.
The engagement is effective for a period of nine months, during which time
Brooks, Houghton will be our exclusive financial advisor for the sale of the Lac
Dore mining deposit.
We intend to continue the development of our vanadium refining technologies if
funding becomes available. Whether this technology is part of a potential sale
of Lac Dore will depend upon the value allocation. We may consider a license of
the technology rather than sale if the prospects of increased value is
determined. There can be no assurance that we will be successful in finding a
strategic partner or enter into a license agreement on terms not unfavorable to
us, if at all.
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.
<page>44
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.
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:
o Mining rights for all mining facilities, with mandatory land surveys;
o Rights of the surface estate; and
o Rights for facilities other than those required for mining purposes
(for example, lease for storage of explosives, buildings not related
to mining).
<page>45
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.
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 preliminary feasibility study estimated that if Lac Dore becomes
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. These
amounts represent preliminary cost estimates and the actual costs may be
substantially greater.
Properties
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.
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.
<page>46
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
preliminary 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 preliminary 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.
Topography and 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.
<page>47
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.
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
$38,000 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 approximately $17 up to
$250, per claim, if more than 100 hectares and depending upon renewal date
payment. Work values must be at least $380 to $2,750, 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.
<page>48
Employees
On August 31, 2005, we had 12 employees. Subject to obtaining sufficient
capital, we intend to hire a controller, an administrative assistant, project
managers, two engineers and clerical staff. We believe that such personnel will
be readily available at reasonable rates of compensation.
Offices
Our principal executive office which consists of approximately four thousand
square feet is located at 37899 Twelve Mile Road, Suite 300, Farmington Hills,
MI 48331. The office is leased at a monthly rental of $8,722.00 (with
accelerator clauses in years two and three) under a lease expiring in 2008 .
Dermond has an office at 31 rue du Terminus ouest, Rouyn-Noranda Quebec J9X 2P3
Canada. This office, which consists of approximately 400 square feet, is leased
on a month-to-month basis for approximately $480 per month. We also maintain an
office consisting of approximately 150 square feed in Ada, MI for which we pay a
monthly rental of $225. 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.
MANAGEMENT
Executive Officers, Directors and Significant Employees
Set forth below are the name, age, position, and a brief account of the business
experience of each of our executive officers, directors and significant
employees. Each of our directors 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.
NAME AGE POSITIONS
- -------------------------------------------------------------------------------
Gary L. Westerholm 60 President, Chief Executive Officer and director
Gregory N. Bakeman 49 Treasurer, Chief Financial Officer and director
Donald C. Harms 64 Secretary and General Counsel and director,
William H. Damon III 52 Director
Anand Gangadharan 41 Director
Rocco J. Martino 50 Director
Stephen D. McCormick 60 Director
John Popp 68 Director
John W. Sawarin 71 Vice President - Marketing and Director
Doris F. Galvin 50 President of WindStor Power Co.
Jonathan C. Hintz 45 Senior Project Manager of WindStor Power Co.
Jacquelin Dery 64 President and director of Dermond, Inc.
Michel Garon 53 General Manager of Lac Dore Mining Inc.
Laurent B. Mondou 65 Vice President and director of Dermond, Inc.
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 each of our other
subsidiaries. Mr. Westerholm's term as an executive officer expires in March
2006.
<page>49
Gregory N. Bakeman has been a director since 2001 and has served as Chief
Financial Officer since February 2001 and Treasurer since December 2001. Mr.
Bakeman is also Chief Financial Officer of and a director of each 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 (now part of Oppenheimer &
Co.). Mr. Bakeman's term as an executive officer expires in March 2006.
Donald C. Harms has been a director since November 12, 2002, Secretary since
June 2004 and our full time General Counsel since April 2005. Prior to April
2005 and since 1973, Mr. Harms was 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 from April 1999 until April 2005.
William H. Damon III, P.E., has been a director since May 2005. Mr. Damon has
been the CEO of Cummins + Bernard, Inc. (electrical, mechanical and structural
engineering consultants) since 2002, and COO/President since 1995, responsible
for strategic development and consulting to corporate clients. Prior to joining
Cummins + Barnard in 1990, his experience included positions with an independent
energy development company, a large international consulting engineering firm,
as well as a major Midwestern investor-owned utility. Mr. Damon has served in a
senior consulting position on major power plant renovations and unit additions,
and has participated in cogeneration projects ranging from 2400 kW landfill gas
facilities utilizing reciprocating engine designs to 650+ MW merchant plant
designs incorporating both frame and aero-derivative gas turbine technologies.
Mr. Damon holds a degree in Mechanical Engineering from Michigan State
University.
Anand Gangadharan, has been a director since May 2005. Mr. Gangadharan has been
the President of NOVI Energy, a company focused on serving industrial and large
commercial customers with energy management and energy infrastructure
development and implementation services, since 2002. Mr. Gangadharan has broad
management experience in the US regulated and competitive energy industry, with
particular emphasis on the utilization of advanced energy technologies for end-
user benefit. Prior to his employment by NOVI Energy, Mr. Gangadharan has held
executive and senior management positions with CMS Energy and PacifiCorp. Mr.
Gangadharan has graduate degrees in Nuclear Engineering and Physics from Texas
A&M University and the University of Madras, India, respectively. He has
authored and presented several papers at international forums.
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, L.P.
or its predecessor, a private equity group.
<page>50
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.
John A. Popp has been a director since May 2004. In 1977, Mr. Popp established
MAP Mechanical Contractors, Inc. and was its president and chairman of the board
until 1999. He remains its board chairman.
John W. Sawarin has been a director since 1999 and has served as Secretary from
1999 until 2004, Treasurer from 1999 to March 2002 and Vice President-Marketing
since January 2003.
Doris F. Galvin has been President of WindStor Power Co. since April 2005 and
was a director of McKenzie Bay International, Ltd. from February 2004 to May
2005. From July 2004 until April 2005, Ms. Galvin was Senior Vice President-
Corporate Development of Semco Energy, Inc., a gas distribution company. For
approximately 2 1/2 years prior to that time, Ms. Galvin was self employed as a
consultant. From 1979 to 2002, Ms. Galvin was employed by CMS Energy, holding
numerous positions with that company, including Vice President & Treasurer, and
leaving the company as Senior Vice President-Global Development. CMS Energy is a
utility holding company. On August 31, WindStor Power Co. was approximately
$56,700 in arrears in the payment of Ms. Galvin's salary.
Jonathan C. Hintz has been the Vice President of Operations for WindStor Power
Co. since January 2005. Prior thereto and since August 2004, Mr. Hintz was a
Senior Project Manager of WindStor Power Co. Mr. Hintz brings more than 15 years
of general and project management, engineering and quality control expertise
from highly technical environments to WindStor Power Co. From 2003, until
joining WindStor Power Co., Mr. Hintz was Senior Systems Engineer with The
Benman Companies. From 1999 until 2003, Mr. Hintz was a Vice President of
Technical Operations with Capricorn Diversified Systems and from 1993 until 1999
he was an Engineering Manager and Area Office Manager with Clover Technologies
(a wholly owned company of Ameritech). On August 31, 2005 WindStor Power Co. was
approximately $10,600 in arrears in the payment of Mr. Hintz's salary.
Jacquelin Dery 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
<page>51
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 August 31, 2005 Dermond was
approximately $9,400 in arrears in the payment of Mr. Dery's salary.
Michel Garon has been Project Manager of Dermond, Inc. since November 2004. Mr.
Garon is also President of Lac Dore Mining Inc. (January 2005) and has been
General Manager of Lac Dore Mining Inc. since November 2002. Because Lac Dore
Mining Inc. has not begun development, Mr. Garon's time was available to assist
Dermond Inc. Approximately 57% of Mr. Garon's salary is paid by Dermond Inc.,
the remainder is paid by Lac Dore Mining Inc. 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. as General Manager in November 2002, Mr.
Garon was General Manager for Noranda's Matagami Mine, in charge of two
underground mining operations (annual operating budget - $35,000,000), including
a concentrator and all the ancillary services. He was also responsible for the
construction and development of a new underground operation (investment -
$85,000,000). 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 and Bachelor in Applied Sciences, Mining Engineering, Ecole
Polytechnique of Montreal, 1975. On August 31, 2005, Dermond Inc. and Lac Dore
Mining Inc. were approximately $50,500 in arrears in the payment of Mr. Garon's
salary.
Laurent B. Mondou 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 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 led 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 August 31, 2005 Dermond was approximately $9,400 in arrears in
the payment of Mr. Mondou's salary.
<page>52
Mr. Martino is an audit committee financial expert serving on the audit
committee of our Board of Directors. Mr. Martino is "independent" as that term
is used in Schedule 14A under the Securities Exchange Act of 1934.
There are no family relationships among our directors, executive officers, or
persons nominated or chosen by us to become directors or executive officers.
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:
o 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;
o Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
o 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
o 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. 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, 2004, 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, 2004 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, 2004 and whose total annual salary and bonus, as
so determined, was in excess of $100,000 (the "Named Executive Officers"):
<page>53
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 2004 $121,000 100,000 shares
2003 $115,500 200,000 shares
2002 $102,262 200,000 shares
Gregory N. Bakeman,
Treasurer and CFO 2004 $115,500 100,000 shares
2003 $110,250 200,000 shares
2002 $ 89,282 50,000 shares
The aggregate amount of any perquisites and other personal benefits, securities
or property paid or given by us to any of the Named Executive Officers in any of
the fiscal years was less than 10% of the total of annual salary of the
respective Named Executive Officer.
During the fiscal year ended September 30, 2004, we did not adjust or amend the
exercise price of stock options previously awarded to any of the Named Executive
Officers, whether through amendment, cancellation or replacement grants, or any
other means.
Option Grants Table
The following table provides certain information concerning individual grants of
stock options made during the fiscal year ended September 30, 2004 to each of
the Named Executive Officers:
<page>54
Option Grants in Fiscal Year Ended September 30, 2004
- ----------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------
Name Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or
Granted (shares of Fiscal Base Price Expiration
common stock) Year ($/Sh) Date
- ------------------ -------------- --------------- ---------- ------------
Gary L. Westerholm 100,000 30.77% $1.88 9/30/2013
Gregory N. Bakeman 100,000 30.77% $1.88 9/30/2013
In December 2004 we granted an option for the purchase of 150,000 shares to each
of Messrs. Bakeman and Westerholm under our 2001 Employee Incentive Stock Option
Plan exercisable at $1.22 and $1.35 per share, respectively. One-third of the
option amount of shares became immediately exercisable when the options were
granted. An additional one-third may be acquired on or after December 6, 2005
and the remaining shares may be acquired on and after December 6, 2006. Mr.
Bakeman's option expires on December 5, 2014 and Mr. Westerholm's option expires
on December 5, 2009.
In April 2005, we issued options to Donald C. Harms and Doris F. Galvin for the
purchase of 150,000 shares, each, similar to the options issued to Messers.
Bakeman and Westerholm in December 2004 except that the exercise price was $1.00
per share for Mr. Harms and $0.97 per share for Ms. Galvin which represented the
respective market prices per share on the dates of grant. Mr. Harms is employed
by us as our General Counsel and Ms. Galvin as President of WindStor Power Co.
We have never granted any stock appreciation rights to the Named Executive
Officers.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table provides certain information concerning each exercise of
stock options during the fiscal year ended September 30, 2004 by each of the
Named Executive Officers and the fiscal year-end value of unexercised options:
<table>
<s> <c> <c> <c>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
- --------------------------------------------------------------------------------------
Name Shares Value Number of Shares of
Acquired Realized Common Stock
on ($) Underlying Unexercised Value of Unexercised
Exercise Options at FY-End In-the Money
(shares of common stock) Options
at FY-End
Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------
Gary L. Westerholm -0- -0- 1,030,000 / 0 $204,000 / 0
Gregory N. Bakeman -0- -0- 555,000 / 0 $106,500 / 0
</table>
<page>55
An option is considered "in the money" for purposes of the table if its exercise
price was lower than $1.30, the market value of a share of our common stock on
September 30, 2004.
Long-Term Incentive Plans - Awards in Last Fiscal Year
We made no awards to a Named Executive Officer in the fiscal year ended
September 30, 2004 under any Long-Term Incentive Plans other than as set forth
in the Option 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, 2004 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 450,000 shares of our
common stock previously granted to Gary L. Westerholm, Gregory N. Bakeman, John
W. Sawarin, Rocco J. Martino, Robert Bryce, Gilles Allard and Alfred Hamel. The
options are exercisable at $1.00 per share.
In November 2004, we granted options to our directors for the purchase of shares
of our common stock as follows:
NAME NUMBER OF SHARES
UNDERLYING OPTIONS
- ------------------------------------------
Gregory N. Bakeman 100,000
John DiMora 25,000
Doris F. Galvin 39,167
Donald C. Harms 50,000
Rocco J. Martino 60,000
Stephen D. McCormick 50,000
John Popp 25,000
John W. Sawarin 75,000
Gary L. Westerholm 100,000
<page>56
The options are exercisable at $1.35 a share and expire on September 30, 2014.
Beginning in December 2004, each of the independent members of our Board of
Directors receives compensation at the annual rate of $10,000 to accrue and to
be paid when the Board of Directors determines that there are sufficient funds.
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. In
December 2004, we increased the annual base compensation of Messrs. Westerholm
and Bakeman to $225,000 and $200,000, respectively. 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. Each
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, and 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
<page>57
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. On August 31, 2005, we were in arrears in salary
payments under the employment agreements to Messrs. Westerholm, Bakeman and
Sawarin in the amounts of approximately $109,700, $687,800 and $79,900
respectively. We have not received written notice of the breaches from any of
our executive officers.
In April 2005 Donald C. Harms and Doris F. Galvin became our General counsel and
President of WindStor Power Co., respectively. Pursuant to three-year contracts
under which Mr. Harms will receive an annual base salary of $175,000 and Ms.
Galvin an annual base salary of $225,000, the other terms of the contract will
be substantially the same as those of the contracts with our other executive
officers. On August 31, 2005, we were in arrears in salary payments under the
employment agreements with Mr. Harms in the amount of approximately $51,000, and
Ms. Galvin in the amount of approximately $56,700.
Equity Securities Authorized for Issuance With Respect to Compensation Plans
The following table provides certain information as of September 30, 2004 with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance:
<table>
<s> <c> <c> <c>
Plan Category Number of shares Weighted average Number of shares
of common stock exercise price of common stock
to be issued upon of outstanding remaining available
exercise of options, warrants for future issuance
outstanding options, and rights other than securities
warrants and rights to be issued upon
exercise of the
outstanding options,
warrants and rights
disclosed elsewhere
in this table. (1)
- --------------------- -------------------- --------------- --------------------
Equity compensation
plans approved by
security holders 3,590,417 $1.24 3,909,583
Equity compensation
plans not approved
by security holders(2) 400,000 $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 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.
<page>58
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.
</table>
THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND RELATED TRANSACTIONS
Summary
In April 2004 we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners under which, subject to the conditions described below,
we may, at our discretion, periodically sell to Cornell Capital Partners shares
of our common stock for a total purchase price of up to $15 million. For each
share stock purchased under the Standby Equity Distribution Agreement, Cornell
Capital Partners will pay us 99% of, or a 1% discount from, the lowest volume
weighted average price of our common stock as quoted by Bloomberg, LP during the
five consecutive trading day period immediately following the respective dates
we give notice to Cornell Capital Partners of our intention to sell shares under
the Standby Equity Distribution Agreement. Because we have also agreed to allow
Cornell Capital Partners to retain 5% of the proceeds from our sale of shares to
Cornell Capital Partners, the net cash price to be paid by Cornell Capital
Partners to us will be 94% of the computed lowest volume weighted average price
with respect to each purchase. We also agreed to issue to Cornell Capital
Partners shares of our common stock as a commitment fee under the Standby Equity
Distribution Agreement having a market value similarly determined of $540,000
which we satisfied by the issuance of 239,968 shares. The issuance of the
shares effectively reduces the per share price we receive from Cornell Capital
Partners.
We were introduced to Cornell Capital Partners by Spencer Clarke LLC. We entered
into a Placement Agent Agreement with Spencer Clarke 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 have also paid and will continue to also pay Spencer Clarke
for its services as a placement agent in introducing us to Cornell Capital
Partners an amount equal to 10% of the gross proceeds of each purchase of our
shares by Cornell Capital Partners under the Standby Equity Distribution
Agreement. We have paid Spencer Clarke $355,000, which includes 10% of the
amounts we have borrowed from Cornell Capital Partners, in fees as of the date
of this Prospectus. Any additional fees to Spencer Clarke will be paid at the
time or times that Cornell Capital Partners purchases additional shares from us.
We have agreed to issue warrants to Spencer Clarke to purchase shares of our
common stock in an amount equal to 10% of the number of shares sold to Cornell
Capital Partners. We will also issue to Spencer Clarke warrants to purchase
shares of our common stock in an amount equal to 10% of the number of any
additional shares sold to Cornell Capital Partners. Although the exercise price
of the warrants have not yet been determined, it will not be less than the
weighted average price computed as described above. As of the date of this
prospectus, such weighted average price for warrants issued was $0.85.
The warrants will be exercisable for a period of seven years.
<page>59
After giving effect to the 10% fee payable to Spencer Clarke, the net cash price
we will retain on purchases by Cornell Capital Partners, without regard to the
additional issuances of shares and warrants to Cornell Capital Partners and
Spencer Clarke, escrow fees of $500 per purchase and fees and interest paid and
payable to Stone Street Advisors, LLC, will be 84.15% of the computed lowest
volume weighted average price with respect to each purchase. As set forth below,
based upon the number of shares actually purchased by Cornell Capital Partners,
under the described assumptions the effective discount from such computed price
could be as high as 15.85%. If fewer shares are purchased, the effective
discount could be substantially higher. For example, although unlikely, if we
sell only 5,000,000 million shares to Cornell Capital Partners, the effective
discount would be approximately 22.76%.
Cornell Capital Partners is not obligated to purchase any of our shares unless
our shares shall have been authorized for quotation on 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 shares.
Pursuant to our agreement with both Cornell Capital Partners and Spencer Clarke,
we have registered with the SEC all of the shares that they have and may acquire
under the Standby Equity Distribution Agreement and warrants, respectively, and
to maintain the registration statement's effectiveness until Cornell has sold
all of its shares included in the registration statement. We have also agreed
to register the shares in various states to the extent that exemptions from
registration are available. We further agreed to bear the entire cost of and
incident to such registration which we have estimated to be approximately
$160,000. The expenses we will pay do not include commissions, fees and
discounts of underwriters, brokers, dealers and agents. We have further agreed
to indemnify Cornell Capital Partners and Spencer Clarke and their controlling
persons against certain liabilities, including liabilities under the Securities
Act of 1933.
Unless we give Cornell Capital Partners 15 day's notice, we may not issue any
common or preferred stock for less than the bid price on the date of issuance or
issue or sell any security or instrument granting the holder the right to
acquire our common stock at a price per share less than the bid price on the
date of issuance.
Each of our executive officers, directors and SOQUEM Inc., an owner of
approximately 5.1% of our outstanding shares at the time the Standby Equity
Distribution Agreement was executed, have agreed with Cornell Capital Partners
that until the termination of the Standby Equity Distribution Agreement, he or
she will not, without the prior written consent of Cornell Capital Partners,
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 any of our securities except pursuant to Rule 144 under the
Securities Act of 1933.
<page>60
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners has
advised us that it does not intend to make a market in our shares or to
otherwise engage in stabilizing or other transactions intended to help support
our share price. Prospective investors should take these factors into
consideration before purchasing our common stock. Cornell Capital Partner's
business operations are conducted through its general partner, Yorkville
Advisors, LLC.
Certain Terms of the Standby Equity Distribution Agreement Explained
Pursuant to the Standby Equity Distribution Agreement, we may periodically sell
shares of our common stock to Cornell Capital Partners. The periodic sale of
shares is referred to as an advance. We may request an advance every seven
trading days. A closing will be held six trading days after such written notice
at which time we will deliver shares of common stock and Cornell Capital
Partners is required to pay the advance amount. In addition to written notice
and associated correspondence, each advance is subject to conditions which must
be satisfied after the date of this prospectus. Although we expect that each of
the conditions will be satisfied, we cannot assure you of that. The conditions
are set forth in the Standby Equity Distribution Agreement which is an exhibit
to our registration statement filed with the SEC of which this prospectus is a
part.
We are limited in our ability to request advances under the Standby Equity
Distribution Agreement by both the number of shares we have registered in our
registration statement and the number of shares we have authorized. For example,
at an assumed offering price of $1.00 per share, the gross proceeds would amount
to $15,000,000 through the sale of 15,000,000 shares of the 20,500,000 shares we
have registered for sale. However, if the actual weighted average price at which
we sell shares under the Standby Equity Distribution Agreement is less than
$0.73, we would have to register additional shares to receive all the funds
which would be available to us under the Standby Equity Distribution Agreement.
On the date of this prospectus, we had 75 million shares authorized for issuance
under our Certificate of Incorporation, of which approximately 45,400,000 were
either outstanding or reserved for issuance upon exercise or conversion of
outstanding derivative securities or compensation plans.
We may not request any advance from Cornell Capital Partners after the earliest
to occur of the following:
o Cornell Capital Partners has paid us gross proceeds of $15 million;
o The expiration of 24 months from the effective date of our registration
statement;
o A stop order is issued or there is a suspension in the effectiveness of our
registration statement for an aggregate of fifty trading days, other than due
to the acts of Cornell Capital Partners; or
<page>61
o We fail materially to comply the Standby Equity Distribution Agreement and
our failure is not cured within thirty days after receipt of written notice
from Cornell Capital Partners, provided, however, that this termination
provision does not apply to any period commencing upon our filing of a post-
effective amendment to our registration statement and ending upon the date on
which the post effective amendment is declared effective by the SEC.
In addition, Cornell Capital Partners is not obligated to purchase our shares
unless the following additional conditions are satisfied:
o We must have deposited the shares of common stock being sold with Cornell's
counsel under an Escrow Agreement;
o 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;
o We must obtain any permits required for the offer and sale of the shares from
any state where securities will be sold or have available an exemption
therefrom and the sale and issuance of the shares shall be legally permitted
by all laws and regulations to which we are subject;
o 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; and
o Our transfer agent must meet certain eligibility requirements.
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.
The amount of any advance may not exceed $625,000 and we may not request an
advance within seven trading days of a prior advance. In addition, we may not
request advances if the shares to be issued in connection with such advances
would result in Cornell Capital Partners owning more than 9.9% of our then
outstanding common stock. Other than described above, the amount available under
the Standby Equity Distribution Agreement is not dependent upon the price or
volume of our common stock.
We do not have any agreements with Cornell Capital Partners regarding the
distribution of the shares it purchases from us. Cornell Capital Partners has
advised us that it intends to promptly sell any shares it purchases from us
under the Standby Equity Distribution Agreement.
We cannot predict the actual number of shares that we will require Cornell
Capital Partners to purchase under the Standby Equity Distribution Agreement
primarily because the purchase price of the shares will fluctuate based on
prevailing market conditions. Nonetheless, we can estimate the number of shares
using certain assumptions. Assuming we issued the number of shares registered in
our registration statement at a recent price of $.75 per share, we would issue
approximately 18,283,000 shares of common stock to Cornell Capital Partners for
the remaining available gross proceeds to total $15,000,000. If these shares had
been issued on the date of this prospectus, they would represent approximately
38.4% of our outstanding common stock. In addition, we cannot predict the number
of shares, if any, that Spencer Clarke may purchase from us upon exercise of
warrants.
<page>62
There is no cap on the number of shares that can be issued under the Standby
Equity Distribution Agreement. Based upon our current capital needs and the
market price of our common stock, we presently have no intention of drawing
down the entire $15 million amount. Accordingly, our estimate of the number of
shares that we will issue pursuant to the equity line is 5 million shares in
addition to the shares required to repay our indebtedness to Cornell Capital
Partners. If our circumstances change and we have no other source of financing,
we may ultimately have to draw down the entire $15 million assuming that we will
then be in a position to satisfy all of the relevant conditions.
There is a large number of shares of common stock underlying the Standby Equity
Distribution Agreement that will be available for future sale and the sale of
these shares will cause dilution to our existing shareholders. The resale of
such shares can be expected to depress the market price of our shares.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. If the
market price of our stock declines, we would be required to issue a greater
number of shares under the Standby Equity Distribution Agreement and warrants
for a given advance. This inverse relationship is demonstrated by the following
table, which shows the maximum number of shares to be issued to Cornell Capital
Partners under the Standby Equity Distribution Agreement at various assumed
prices per share.
<table>
<s> <c> <c>
Assumed Purchase Price: $2.00 $1.50 $1.00 $0.50
- -------------------------------------------------------------------------------------
Number of Shares (2) 7,575,758 10,101,010 15,151,515 30,303,030 (1)
Total Outstanding (3) 35,282,555 37,807,807 42,858,312 58,009,827
Percent Outstanding (4) 21.5% 26.7% 35.4% 52.2%
Net cash proceeds (5) $12,590,000 $12,590,000 $12,590,000 $12,590,000
____________________
</table>
(1) In order for us to sell more than an aggregate of 21,626,604 shares pursuant
to the Standby Equity Distribution Agreement and exercise of the warrants
which may be issued to Spencer Clarke, we will be required to register the
additional shares with the SEC.
(2) Represents the number of shares of common stock issued and which may be
issued to Cornell Capital Partners at the assumed prices set forth in the
table, assuming sufficient authorized shares are then available.
(3) Represents the total number of shares outstanding after the issuance of the
maximum number of shares to Cornell Capital Partners under the Standby
Equity Distribution Agreement and repayment of debt owed to Cornell Capital
Partners if the shares had been issued on the date of this prospectus. Does
not include any shares which may be acquired by Spencer Clarke or others
upon exercise of the warrants or conversion of promissory notes.
<page>63
(4) Represents the shares of common stock to be issued to Cornell Capital
Partners as a percentage of the total number of shares outstanding based
upon the assumptions described in Note (2) above. Cornell Capital Partners
is not obligated to purchase any shares from us to the extent that its
holdings would exceed 9.9% of our then outstanding common stock.
(5) Represents net cash proceeds from shares sold to Cornell Capital Partners.
This amount assumes that all of our indebtedness to Cornell Capital Partners
will be paid prior to any other uses.
The following table sets forth the effective price per share we will receive
from purchases made by Cornell Capital Partners under the Standby Equity
Distribution Agreement at various assumed prices per share. To the extent
necessary, any net cash which we would otherwise receive from Cornell Capital
Partners will be used to repay our present and any future indebtedness to
Cornell Capital Partners.
Market Price (1) $2.00 $1.50 $1.00 $0.50
Number of Shares (2) 7,575,758 10,101,010 15,151,515 30,303,030
Net cash to be received
from Cornell Capital
Partners (3) $14,250,000 $14,250,000 $14,250,000 $14,250,000
Placement Agent fee (4) $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000
Net cash to be received
from Cornell Capital
Partners $12,590,000 $12,590,000 $12,590,000 $12,590,000
Net cash to be received
from Cornell Capital
Partners after
deduction of Placement
Agent Fee as a
percentage of Market
Price 80.5% 81.13% 81.77% 82.43%
Effective discount
from Market Price $ $0.39 $0.28 $0.18 $0.09
Effective discount
from Market Price % 19.5% 18.87% 18.23% 17.57%
(1) The term "Market Price" as used in the table refers to the lowest volume
weighted average price of our common stock as quoted by Bloomberg, LP during the
five consecutive trading day period immediately following the date we give
notice of our intention to sell shares.
<page>64
(2) Represents the number of shares of common stock to be issued to Cornell
Capital Partners under the Standby Equity Distribution Agreement at the assumed
prices set forth in the table, assuming sufficient authorized shares are then
available. Cornell Capital Partners is not obligated to purchase any shares
from us to the extent that its holdings would exceed 9.9% of our then
outstanding common stock.
(3) Represents 94% of the Market Price.
(4) Represents 10% of gross proceeds.
The percentage amounts in this prospectus relating to the effective discount in
connection with purchases of our shares by Cornell Capital Partners do not
reflect escrow fees of $500 per purchase, consulting fees payable to Stone
Street Advisors, LLC or interest under the promissory notes.
The table does not give effect to the warrants that have been and may be issued
to Spencer Clarke, or those received by other selling shareholders.
Reference is made to the "Use of Proceeds" section of this prospectus.
Loans from Cornell Capital Partners
On January 10, 2005, we borrowed $1,000,000 from Cornell Capital Partners and
issued our 12% promissory note to Cornell Capital Partners in that amount. At
the same time, we placed 1,000,000 shares of common stock in escrow with an
escrow agent designated by Cornell Capital Partners and we deposited with the
escrow agent 19 requests for advances under the Standby Equity Distribution
Agreement, each in the amount of $50,000 and one such advance in the amount of
$75,479.45. The escrow agent agreed to release a request for advances to
Cornell Capital Partners every seven days beginning January 17, 2005. The
promissory note issued to Cornell Capital Partners was payable on or before June
4, 2005. Upon the release of each request for an advance, the appropriate
number of our shares held in escrow was issued to Cornell Capital Partners. The
method of determination of the number of shares is described above. Proceeds
from the sale of the shares issued to Cornell Capital Partners were utilized in
payment of outstanding amounts under the promissory note. The promissory note
provided that in the event that during the life of the promissory note, the
proceeds from the sales of the escrowed shares were insufficient to repay all
amounts due, we would immediately place in escrow such number of additional
shares of our common stock of which the proceeds of the sale of such shares
shall be sufficient to repay all amounts due under the promissory note. There
was no limit on the number of shares we may have been required to issue to
Cornell Capital Partners to satisfy our obligation under the promissory note.
Any decline in the market price of our shares would increase the number of
shares we would otherwise have been required to issue to Cornell.
On each of February 14, 2005 and March 14, 2005 we borrowed an additional
$1,000,000 from Cornell Capital Partners under the same terms and conditions,
except that the weekly advances began on June 6, 2005 and the promissory notes
are payable on or before October 17, 2005 and October 21, 2005, respectively.
The share escrow with respect to the loans consists of 2,000,000 shares and
1,000,000 shares, respectively. On May 12, 2005 we borrowed an additional
$500,000 from Cornell Capital Partners under the same terms and conditions.
Weekly advances began June 6, 2005 and the promissory note is payable on or
before October 21, 2005. The share escrow with respect to that loan consists of
1,000,000 shares.
The promissory note of January 10, 2005 has been fully repaid, including
$74,098.63 in interest, from the proceeds of sales of 1,228,956 of our shares
made by Cornell Capital Partners. As of August 31, 2005, $625,000 of the
promissory note of February 14, 2005 had been repaid from additional sales of
905,237 of our shares made by Cornell Capital Partners. As of that date, the
outstanding principal and interest on the unpaid promissory notes was
approximately $1,875,000 and 2,873,312 of our shares were held in escrow to
secure the payments.
<page>65
Agreement with Stone Street Advisors, LLC.
On January 10, 2005, we entered into a consulting agreement with Stone Street
Advisors, LLC. under which Stone Street has and will provide advisory services
to us with regard to various types of financial arrangements, including, equity
line of credit financing, debt financing, other forms of direct investment in us
and general corporate matters. The agreement with Stone Street provides that we
will pay an amount as agreed upon in the future. We have paid Stone Street an
aggregate of $87,500 from the proceeds we have received from Cornell Capital
Partners in connection with the four promissory notes. If we engage in any more
funding transactions with Cornell Capital Partners outside of the scope of the
Standby Equity Distribution Agreement, we anticipate that we will compensate
Stone Street at a similar rate. The initial term of the agreement is for a
period of one year. Thereafter, unless previously terminated, and neither party
has given notice of termination, the agreement will be automatically renewed for
successive one year periods. Either party may terminate the agreement without
cause by giving written notice of termination to the other party. Stone Street
is an affiliate of and is under common control with Cornell Capital Partners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 2005 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:
<page>66
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 5,404,200 shares (3) 17.1 %
John W. Sawarin
143 Windsor Ave.
London, Ontario, Canada
N6C 2A1 2,465,600 shares (4) 7.9 %
Stephen D. and Karen A.
McCormick
PO Box 1254
Bismarck, ND 58502 9,953,382 shares (5) 27.1 %
Gregory N. Bakeman
975 Spaulding Avenue SE
Grand Rapids, Michigan 49546 714,700 shares (6) 2.6 %
Rocco J. Martino
1468 Gary Wood Drive
Bass Ridge, Illinois 60527 1,144,699 shares (7) 3.7 %
Donald C. Harms
37899 Twelve Mile Road
Farmington Hills, Michigan 48331 248,918 shares (8) 1.1% (9)
John A. Popp
PO Box 2917
Midland, MI 48640 1,285,930 shares (10) 4.24 %
William H. Damon III
2529 Thornapple Drive
Ann Arbor, MI 48103 0 shares (9)
Anand Gangadharam
23390 Winnsborough Drive
Novi, MI 48337 0 shares (9)
Officers and directors
as a group (9 persons) 21,517,429 shares (11) 52.8 %
(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.
<page>67
(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)
3,932,200 shares held by the Westerholm Family Living Trust as to which Mr.
Westerholm and his spouse are co-trustees and (d) 1,180,000 shares that can
be acquired by Mr. Westerholm upon exercise of options and warrants. Does
not include 100,000 shares that can be acquired by Mr. Westerholm upon
exercise of options that are not exercisable within 60 days of the date
hereof.
(4) Includes (a) 750,600 shares owned by Mr. Sawarin's spouse, (b) 855,000
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) 6,480,301 shares that can be acquired by Mr. McCormick upon exercise
of warrants and options.
(6) Includes (a) 500 shares owned by Mr. Bakeman's spouse, (b) 700 shares owned
by Mr. Bakeman's minor children, and (c) 705,000 shares that can be acquired
by Mr. Bakeman upon exercise of options. Does not include 100,000 shares
that can be acquired by Mr. Bakeman upon exercise of options and warrants
that are not exercisable within 60 days of the date hereof.
(7) Represents (a) 560,055 shares owned by Martino Investment Partners, the
general partners of which are Mr. Martino and his spouse, (b) 290,000 shares
that can be acquired by Mr. Martino 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)
193,750 shares that can be acquired by Mr. Harms upon exercise of options.
Does not include 100,000 shares that can be acquired by Mr. Harms upon
exercise of options and warrants that are not exercisable within 60 days of
the date hereof.
(9) Less than 1%.
(10) Represents (a) an aggregate of 726,722 shares held by Mr. Popp and his
Individual Retirement Accounts. (b) 19,990 shares owned by Mr. Popp's
spouse, (c) 127,977 shares owned by MAP Mechanical Contractors, Inc. of
which Mr. Popp is an affiliate, (d) 289,900 shares owned by MAP Mechanical
Contractors, Inc. Profit Sharing Plan, (e) 206,700 shares owned by MAP
Mechanical Contractors, Inc. Pension Plan and (f) 57,000 shares that can be
acquired by Mr. Popp upon exercise of options.
<page>68
(11) See notes above.
MARKET FOR COMMON EQUITY AND CERTAIN 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. Our shares have been authorized for quotation on the OTC Bulletin
Board. The following quotations were obtained from Barchart.
All quotes reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
2004 2003
------ ------
Quarter Ended Low High Low High
- -------------- ---- ---- ---- ----
March 31 $2.00 $3.40 $0.93 $ 1.70
June 30 $1.15 $2.45 $0.71 $ 1.10
September 30 $0.70 $1.60 $0.75 $ 2.25
December 31 $0.98 $1.56 $0.57 $ 1.65
Quarter Ended Low High
March 31, 2005 $0.75 $1.45
June 30, 2005 $0.63 $1.01
On August 29, 2005 our common stock was held of record by approximately 314
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. Commitments we may make in the future may, however, contractually
limit or prohibit the payment of dividends.
DESCRIPTION OF COMMON STOCK
Our authorized capital consists of 75,000,000 shares of common stock, par value
$.001 per share. All of the authorized common shares are of the same class and,
once issued, rank equally as to dividends, voting powers, and participation in
assets. Holders of the shares are entitled to one vote for each share held of
record on all matters to be acted upon by the stockholders. Holders of the
shares are entitled to receive such dividends as may be declared from time to
time by the Board of Directors, in its discretion, out of funds legally
available for that purpose. No shares have been issued subject to call or
assessment. There are no preemptive or conversion rights and no provisions for
redemption or, other than as set forth above, purchase for cancellation,
surrender, or sinking or purchase funds, nor any cumulative voting rights. Our
Board of Directors may from time to time declare and authorize payment of
dividends, as it deems advisable. The outstanding shares are fully-paid and non-
assessable.
Our authorized but unissued shares of common stock are available for future
issuance without stockholder approval and may be utilized for a variety of
corporate purposes, including future offerings to raise capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock could render more difficult or discourage
an attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
<page>69
We may become subject to provisions of the Delaware General Corporation Law
which, in general, prohibits certain Delaware corporations from engaging in a
business combination with an interested stockholder for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A business combination includes mergers, asset sales or other transactions
resulting in a financial benefit to the stockholder. The provisions could have
the effect of delaying, deferring or preventing a change in control of us.
CERTAIN TRANSACTIONS
Other than as set forth under this caption and under the caption "Management,"
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
o Any of our directors or executive officers;
o Any nominee for election as a director;
o Any security holder named in this prospectus as beneficially
owning more than 5% of our outstanding common stock; and
o Any member of the immediate family (including spouse, parents,
children, siblings, and in-laws) of any of the above persons.
Prior to April 2005, we had retained the law firm of Larson, Harms & Bibeau,
P.C. to perform certain legal services for us. From June 1, 2003 until March 31,
2005, we incurred legal fees and expenses with such firm of approximately
$246,000. Donald C. Harms was a principal of Larson, Harms & Bibeau, P.C. until
April 1, 2005.
On April 29, 2004, companies which are affiliates of John Popp exercised
previously issued options for the purchase of 158,100 shares of our common stock
at $2.00 per share.
In April 2005, Doris Galvin became the President of WindStor Power Co., pursuant
to a three-year contract under which she will receive an annual base salary of
$225,000. The other terms of the contract are substantially the same as those
of the contracts with our executive officers. Ms. Galvin also received an
option for the purchase of 150,000 shares similar to the option granted to
Messrs. Bakeman and Harms as described above. The per share exercise price of
Ms. Galvan's option is $0.97 per share, the market value of our shares on the
day that Ms. Galvin's employment began and she was issued the option. At the
time that Ms. Galvin became the President of WindStor Power Co., she was a
member of our Board of Directors.
In August 2005, Rocco J. Martino and Stephen D. McCormick each purchased from us
166,667 shares of our common stock and warrants for the purchase of 83,334
shares of common stock at an exercise price of $1.25 per share. The warrants
expire in August 2008. Each of them paid us a total purchase price of
$100,000.
<page>70
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been a limited public market for our common
stock, and we cannot assure you that a significant public market for our common
stock will develop or be sustained after this offering. Future sales of
significant amounts of our common stock, including shares of our outstanding
common stock and shares of our common stock issued upon exercise of outstanding
options and warrants, in the public market after this offering could adversely
affect the prevailing market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.
All of the shares sold in this offering by the selling stockholders will be
freely tradable without restriction under the Securities Act of 1933, unless
acquired by an affiliate of us, as that term is defined in Rule 144 under that
Act.
On June 30, 2005, we had outstanding 29,466,457 shares of common stock, which
included 1,999,628 shares issued to Cornell Capital Partners for fees and
funding activities but does not include those shares held in escrow to secure
our indebtedness to Cornell Capital Partners. Of the 17,521,924 shares held by
persons who are not our affiliates on that date, approximately 13,813,617 shares
were freely tradable without restriction or further registration under the
Securities Act of 1933. In addition, approximately 3,550,562 additional shares
were then eligible to be sold in accordance with Rule 144 under that Act and
approximately at least 127,245 more shares will be eligible to be sold within
the ensuing twelve month period.
In general, Rule 144 allows a stockholder (or stockholders where shares are
aggregated) who has owned shares which have been acquired from us or an
affiliate of us at least one year prior to resale and who files a requisite
notice with the SEC to sell within any three month period a number of those
shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding; or
o the average weekly trading volume of the common stock on a national
securities exchange and/or reported through the automated quotation system of
a registered securities association during the four calendar weeks preceding
the filing of the notice with respect to such sale.
Sales under Rule 144, however, generally are subject to specific manner of sale
provisions, notice requirements, and the availability of current public
information about our company. If, however, a stockholder (or stockholders where
shares are aggregated) has owned shares which have been acquired from us or an
affiliate of us at least two years prior to resale and who is not then and has
not been an affiliate of us at any time during the immediately preceding three
months, the stockholder(s) may sell the shares without complying with the manner
of sale provisions, notice requirements, public information requirements, or
volume limitations of Rule 144.
<page>71
We intend to file a registration statement with the SEC for shares of our common
stock issued or reserved for issuance under our present or future compensatory
plans. Any shares registered under that registration statement will be available
for sale in the open market.
THE SELLING STOCKHOLDERS
The following table sets forth information as of June 30, 2005 with respect to
our common stock held by each selling stockholder:
Name of Selling Stockholder Number Number of Number Percentage of
of Shares Shares of Shares Outstanding
Owned Being Offered to be Shares to be
Before Owned Owned After
The After the the Offering
Offering Offering (assuming the
sale of all
shares being
offered by
the selling
stockholders)
- -------------------------- ---------- ---------- ------------ --------------
Cornell Capital Partners, LP -0- 17,823,326 (1) -0- -0-
Spencer Clarke LLC 4,444 2,004,444 (2) -0- -0-
Joseph Trauth Jr. 37,500 37,500 (3) -0- -0-
Ropaco Realty
General Partnership 75,000 75,000 (3) -0- -0-
John & Karen DiMora 549,468 37,500 (3) 511,968 1.0%
Jim DiMora 103,833 70,834 (3) 33,000 <1%
Henry & Nancy Arnebold
Family Trust 37,500 37,500 (3) -0- -0-
Milton H Dresner
Revocable Living Trust 150,000 150,000 (3) -0- -0-
Thomas L. Griffin 75,000 75,000 (3) -0- -0-
Jan Fredriksson 37,500 37,500 (3) -0- -0-
J.W. Mason &
Millicent Mason 37,500 37,500 (3) -0- -0-
Philip Palmedo 75,000 75,000 (3) -0- -0-
Joseph Fung 75,000 75,000 (3) -0- -0-
Edward Wex 37,500 37,500 (3) -0- -0-
Roland Heitmann &
Julie Nucci 37,500 37,500 (3) -0- -0-
<page>72
Societe d'aide au
developpement des
collectivites 120,300 200,500 (3) -0- -0-
Larry Swift 37,500 37,500 (3) -0- -0-
Robert Neff 141,667 141,667 (3) -0- -0-
James Barrons 75,000 75,000 (3) -0- -0-
Andre Dawson 75,000 75,000 (3) -0- -0-
Timothy Kaehr 75,000 75,000 (3) -0- -0-
Feather & Gay Family Trust 225,000 225,000 (3) -0- -0-
John & Kyoko Robinson 37,500 37,500 (3) -0- -0-
Barton Katz 75,000 75,000 (3) -0- -0-
William Klingenstein 75,000 75,000 (3) -0- -0-
The Stephen Lindsay Group 65,000 65,000 -0- -0-
___________________
(1) Represents the maximum number of shares which we have registered under the
Securities Act of 1933 which may be acquired by Cornell Capital Partners under
the Standby Equity Distribution Agreement less the number of shares so acquired
and publicly resold .
(2) Includes the maximum number of shares which may be acquired by Spencer
Clarke upon exercise of the warrants which may be issued in connection with the
Standby Equity Distribution Agreement.
(3) Represents the maximum number of registered shares owned which may be sold,
number of shares which may be sold upon conversion of promissory notes and
shares which may be acquired upon exercise of warrants less the number of shares
so acquired and publicly resold.
<page>73
We have been advised that the respective persons identified below have voting
and investment control of the following entities:
ENTITY NAME OF PERSON
- ----------------------------------------------------------
Cornell Capital Partners, LP Mark Angelo
Spencer Clarke LLC Reid H. Drescher
Ropaco Realty General Partnership Nathan Robfogel
Henry & Nancy Arnebold Family Trust Henry Arnebold
Milton H Dresner Revocable Living Trust Milton Dresner
Societe d'aide au developpement
des collectivites Marcel Perreault, president
and Denis Jodouin, general manager
Feather & Gay Family Trust Art Feather
The Stephen Lindsay Group Stephen B. Lindsay
In 2004 we borrowed an aggregate of $1,093,750 and issued our 12% convertible
promissory notes in that aggregate amount. We have issued 1,100,009 shares of
our common stock upon conversion of the promissory notes of which 33,334 shares
remain unsold by the lenders as of the date of this prospectus and have been
registered with the SEC for resale in the registration statement of which this
prospectus is a part. An additional 80,200 shares we may issue upon conversion
of the 12% convertible promissory notes which remained outstanding as of the
date of this prospectus have been similarly registered. In connection with the
issuance of the convertible promissory notes, we issued warrants to the lenders
for the purchase of an aggregate of 1,623,300 shares of our common stock. The
warrants as to 750,000 shares are exercisable on or before August 13, 2006 at
$1.07 per share. The remaining warrants are exercisable on or before September
7, 2006 at $1.42 per share. The shares which may be acquired upon exercise of
the warrants have also been registered with the SEC for resale in the
registration statement of which this prospectus is a part.
Other than Cornell Capital Partners, Spencer Clarke and The Stephen Lindsay
Group, all of the selling stockholders participated in the loans to us.
Spencer Clarke acted as our placement agent in connection with loans for we paid
a commission to Spencer Clarke of $109,375.
We issued 65,000 shares of our common stock to The Stephen Lindsay Group in
satisfaction of indebtedness in the amount of approximately $83,200.
<page>74
John DiMora was a member of our Board of Directors from May 10, 2004 to May 20,
2005.
Except for the relationships and transactions described under the captions "The
Selling Stockholders" and "Standby Equity Distribution Agreement," none of the
selling stockholders has had any position, office or other material relationship
with us or any of our affiliates or any of our predecessors within the past
three years.
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of our
common stock which may be effected by them or by pledgees, transferees or other
successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions, will
take place either (a) on the over-the-counter market or in any other market on
which the price of our shares is quoted or (b) in transactions otherwise than on
the over-the-counter market or in any other market on which the price of our
shares is quoted. Such transactions may be effected at or about prevailing
market prices at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved). The selling stockholders are
underwriters and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
Under the securities laws of certain states, the shares may be sold in such
states only through registered or licensed brokers or dealers. We have advised
the selling stockholders to ensure that any underwriters, brokers, dealers or
agents effecting transactions on behalf of the selling stockholders are
registered to sell securities in all fifty states. In addition, in certain
states the shares may not be sold unless the shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
<page>75
We have advised the selling stockholders that the anti-manipulation provisions
of Regulation M under the Securities Exchange Act of 1933 will apply to
purchases and sales of shares of our common stock by them and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while the selling stockholders are
distributing shares which are the subject of this prospectus. Accordingly, the
selling stockholders are not permitted to cover short sales by purchasing shares
while the distribution is taking place. We have also advised the selling
stockholders that if a particular offer of common stock is to be made on terms
constituting a material change from the information set forth above with respect
to the Plan of Distribution, then, to the extent required, a post-effective
amendment to the registration statement of which this prospectus is a part must
be filed by us with the SEC.
We have agreed to indemnify Spencer Clarke and each of its officers, directors,
shareholders, employees or representatives and each person controlling,
controlled by or under common control with it from and against certain
liabilities to which Spencer Clarke or such other indemnified persons may become
subject under any federal or state securities law or regulation or otherwise
arising out the offer and sale of our common stock. We have similarly agreed to
indemnify Cornell Capital Partners.
INDEMNIFICATION
We have agreed to indemnify our executive officers and directors to the fullest
extent permitted by the Delaware General Corporation Law. That law generally
permits us to indemnify any person who is, or is threatened to be made, a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the fact that the
person is or was an officer or director or is or was serving at our request as
an officer or director. The indemnity may include expenses (which we may pay in
advance of a final disposition), including attorney's fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding, provided that the person acted
in good faith and in a manner the person reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
will not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to our best interests and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful approval if the officer or director is adjudged to be liable to us. The
indemnification provisions of the Delaware General Corporation Law are not
exclusive of any other rights to which an officer or director may be entitled
under our bylaws, by agreement, vote, or otherwise.
<page>76
Insofar as indemnification arising under the Securities Act may be permitted to
our directors, officers and controlling persons pursuant to the foregoing
provisions or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
LEGALITY OF SHARES
The legality of the shares of common stock offered by this prospectus has been
passed upon for us by Larson, Harms & Bibeau, P.C. to the extent set forth in
that firm's opinion filed as an exhibit to the registration statement of which
this prospectus is a part.
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.
EXPERTS
The financial statements included in the Prospectus have been audited by BDO
Seidman, LLP, an independent registered public accounting firm, to the extent
and for the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
We have electronically filed a registration statement on Form SB 2 and
amendments thereto with the SEC with respect to the shares of common stock to
be sold in this offering. This prospectus, which forms a part of that
registration statement, does not contain all of the information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits for complete information. With
respect to references made in this prospectus to any contract or other document,
the references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. You may read and copy the registration statement and other materials
we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1 800 SEC 0330. The SEC
maintains an Internet site that contains reports, proxy statements and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of that site is http://www.sec.gov.
We are subject to the information and reporting requirements of the Securities
Exchange Act of 1934 and file periodic reports, proxy soliciting material and
other information with the SEC.
We intend to furnish our stockholders with annual reports containing audited
financial statements.
<page>78
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A Development Stage Company)
PAGE NO.
CONDENSED CONSOLIDATED BALANCE SHEETS AS
OF JUNE 30, 2005 (UNAUDITED) AND SEPTEMBER 30,2004..................F-1
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE
LOSS THREE AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004.............F-2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2005 AND 2004............................F-3-4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................F-5-16
===========================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.............F-17
CONSOLIDATED BALANCE SHEETS-SEPTEMBER 30, 2004 and 2003.............F-18
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM INCEPTION TO SEPTEMBER 30, 2004............... ................F-19-21
CONSOLIDATED STATEMENT OF LOSS YEARS ENDED
SEPTEMBER 30, 2004 and 2003.........................................F-21
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003.............................F-22-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........................F-24-37
============================================================================
============================================================================
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts stated in U.S. dollars)
ASSETS
June 30 September 30
2005 2004
(Unaudited)
--------- ---------
Current:
Cash and cash equivalents $ 151,435 $ 562,250
Refundable taxes and other receivables 110,398 86,696
Prepaid expenses and deposits 94,460 200,896
Reclamation cash bond 41,000 338,685
Deferred issue and finance costs (notes 4 and 6) 922,800 359,724
---------- ----------
Total current assets 1,320,093 1,548,251
Property and equipment 28,214 31,580
Other assets 36,792 35,590
---------- ---------
Total assets $1,385,099 $1,615,421
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current:
Bank indebtedness (note 10) $ 93,144 $ 102,264
Accounts payable and accrued liabilities 3,054,820 2,380,916
Convertible promissory notes, net of discount (note 4) 101,775 643,944
Promissory note (note 5) 2,125,000 -
Current portion of long-term debt 287,169 219,740
Reclamation and closure liabilities 40,000 350,000
Redeemable capital stock - 86,775
---------- ---------
Total current liabilities 5,701,908 3,783,639
Long-term debt (note 6) 1,057,135 1,084,763
---------- ---------
Total liabilities 6,759,043 4,868,402
---------- ---------
Commitments and Contingencies
Stockholders' equity (deficit):
Common stock - $0.001 par value (note 3):
75,000,000 shares authorized,
29,485,595 and 26,407,393 shares
issued and outstanding 27,896 24,818
Additional paid in capital 23,258,049 20,133,739
Deficit accumulated during the development stage (28,119,503) (23,020,986)
Accumulated other comprehensive income (loss) (540,386) (390,552)
------------ -----------
Total stockholders' deficit (5,373,944) (3,252,981)
------------ -----------
Total liabilities and stockholders' deficit $ 1,385,099 $ 1,615,421
============ ===========
(See accompanying notes to condensed consolidated financial statements)
<page>F-1
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c> <c> <c>
Cumulative
Three months ended Nine months ended from inception
June 30, June 30, on August 23,
2005 2004 2005 2004 1996 to June 30, 2005
----------- ----------- ---------- ----------- ---------------------
Revenue $ - $ - $ - $ - $ 12,825
----------- ----------- ---------- ------------ ------------
Expenses (Other income):
Mineral resources 81,375 (66,719) 258,920 (41,688) 7,536,291
Research and development, net 253,810 174,789 1,520,440 339,147 2,826,291
General administration 134,596 99,642 321,137 295,511 1,810,999
Wages and benefits 118,878 16,818 146,999 85,246 1,327,811
Managements wages and benefits 199,032 166,717 572,001 1,031,365 4,070,877
Professional fees 371,262 166,984 817,830 455,063 3,101,114
Promotion and travel 87,292 46,704 206,666 112,858 1,207,921
Depreciation 1,802 4,382 5,466 12,472 409,728
Interest and finance charges (note 8) 142,317 15,953 1,477,997 50,626 1,911,942
Write-down of assets - - - - 1,626,821
Write off on incorporation and reorganization cost - - - - 152,051
Loss on marketable securities - - - - 1,242,242
Gain on sale of property and equipment - - - - (26,806)
Gain on settlement of debt (97) - (176,667) - (176,667)
Interest income (52,184) - (52,272) (3,103) (80,272)
----------- ----------- ----------- ------------ --------------
Loss before income and mining taxes and
cumulative effect of changes in accounting
principle (1,338,083) (625,270) (5,098,517) (2,337,497) (26,927,518)
Income tax and mining taxes recovery - - - - 141,000
----------- ----------- ----------- ------------ --------------
Loss before cumulative effect of change in
accounting principle (1,338,083) (625,270) (5,098,517) (2,337,497) (26,786,518)
Cumulative effect of change in accounting
principle for SFAS 142 - - - - (146,972)
----------- ----------- ----------- ------------ --------------
Net Loss (1,338,083) (625,270) (5,098,517) (2,337,497) (26,933,490)
----------- ----------- ----------- ------------ --------------
Foreign currency translation adjustment 3,158 55,042 (149,834) (24,252) (540,386)
----------- ----------- ----------- ------------ --------------
Comprehensive loss $(1,334,925) $ (570,228) $(5,248,351) $(2,361,749) $(27,473,876)
=========== =========== =========== ============ ==============
Basic and diluted loss per share $ (0.05) $ (0.02) $ (0.18) $ (0.09)
=========== =========== =========== ============
(See accompanying notes to condensed consolidated financial statements)
</table>
<page>F-2
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Cumulative
Nine months ended from inception
June 30, on August 23, 1996
2005 2004 to June 30, 2005
---------- ---------- ---------------
Operating activities:
Net loss $(5,098,517) $ (2,337,497) $ (26,933,490)
Adjustments to reconcile net loss to net cash used
in operating activities:
Cumulative effect of change in accounting principle - - 146,972
Depreciation 5,466 12,472 409,728
Amortization of debt discount and deferred finance
cost 1,222,285 - 1,317,844
Expenses settled through issuance of common stock 24,099 - 1,954,941
Write-down of assets - - 1,626,821
Loss on sale of marketable securities - - 1,242,242
Gain on sale of property and equipment - - (26,806)
Gain on settlement of debt (176,667) - (176,667)
Stock-based payment 6,075 794,467 2,511,165
Other - - (30,061)
Net change in working capital related to operations:
Refundable taxes and other receivables (20,800) 172,329 (97,248)
Deferred finance charges and issue costs (563,076) - (587,340)
Prepaid expenses and deposits 106,436 90,568 (19,712)
Accounts payable and accrued liabilities 582,667 (139,319) 2,830,346
Reclamation and closure costs (310,000) - 40,000
---------- ---------- -------------
Net cash used in operating activities (4,222,032) (1,406,980) (15,791,265)
---------- ---------- -------------
Investing activities:
Purchase of marketable securities - - (1,767,835)
Proceeds on sale of property and equipment - - 100,000
Proceeds on sale of marketable securities - - 525,593
Proceeds from (purchase of) reclamation cash bond 297,685 - (41,000)
Purchase of property and equipment (2,265) (13,974) (2,085,440)
Acquisition of business, net of cash acquired - - (31,286)
---------- ---------- -------------
Net cash provided by (used in) investing activities 295,420 (13,974) (3,299,968)
---------- ---------- -------------
<page>F-3
Financing activities:
Issuance of notes payable - - 350,000
Increase in bank indebtedness (12,163) 19,775 79,663
Proceeds from issuance of convertible debt
and warrants - - 1,121,505
Increase in convertible notes payable 3,500,000 - 3,500,000
Repayment of convertible note (1,375,000) - (1,375,000)
Payment of financing fees and issue costs - - (100,000)
Issuance of long-term debt - - 137,435
Repayment of long-term debt - (29,529) (137,435)
Repayment of government assistance (128,289) - (128,289)
Receipt of repayable government assistance 118,307 4,795 1,203,937
Proceeds from sale of common stock 1,420,000 1,424,401 14,735,558
Proceeds on sale of options - - 33,160
Redemption of redeemable capital stock - - (37,500)
Purchase of common stock for treasury - - (149,622)
---------- ---------- --------------
Net cash provided by financing activities 3,522,855 1,419,442 19,233,412
---------- ---------- --------------
Effect of foreign currency
exchange rate changes on cash and equivalents (7,058) (125) 9,256
---------- ---------- --------------
Net increase (decrease) in cash and cash
equivalents (410,815) (1,637) 151,435
---------- ---------- --------------
Cash and cash equivalents, beginning of period 562,250 49,208 -
---------- ---------- --------------
Cash and cash equivalents, end of period $ 151,435 $ 47,571 $ 151,435
========== ========== ==============
Supplemental non-cash financing activities:
Cash paid for interest $ 23,545 $ 11,943 $ 226,980
Issuance of common stock in lieu of settlement
of debt 74,750 - 74,750
Issuance of common stock in lieu of payment
of issue costs 270,000 280,000 550,000
Issuance of common stock in lieu of repurchasing
redeemable common stock 32,500 60,000 202,500
Issuance of options in lieu of repurchasing
redeemable common stock - - 605,210
Issuance of common stock in lieu of repayment of
convertible promissory note 825,000 - 850,626
Issuance of common stock in lieu of payment of notes
payable - - 356,424
Repurchase of capital stock in settlement of
accounts receivable - - 11,300
---------- ---------- -------------
(See accompanying notes to condensed consolidated financial statements)
</table>
<page>F-4
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2005
(Amounts stated in US dollars unless indicated otherwise)
1. Nature of operations
McKenzie Bay International, Ltd. and subsidiaries (Company) is a development
stage company with no operations. The Company's primary business activity is
the development of wind powered alternative energy systems. In addition, the
Company holds mining claims to a vanadium deposit in Northern Quebec.
2. Accounting policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring entries)
considered necessary for a fair presentation have been included. The
accompanying financial statements should be read with Notes to Consolidated
Financial Statements included in the Company's Annual Report of Form 10-KSB for
the fiscal year ended September 30, 2004. The balance sheet at September 30,
2004 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Operating
results for the three-months and nine-months periods ended June 30, 2005 are not
necessarily indicative of the results of operations that may be expected for the
fiscal year ending September 30, 2005.
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 has suffered recurring losses and has a deficiency in net assets
that raise substantial doubt about its ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to raise
additional capital and generate profits. However, management believes that it
will be successful at raising additional capital in the short-term and will have
profitable operations in the long-term.
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 is unable to continue as
a going concern.
<page>F-5
(b) Consolidation
These financial statements include the activities of the Company and its wholly-
owned subsidiaries, Lac Dore Mining Inc., Great Western Diamond Company, Dermond
Inc., WindStor Power Company and a 62.5% interest in Ptarmigan Energie Inc. All
intercompany balances and transactions have been eliminated in consolidation.
(c) New accounting pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment. The new statement replaces existing requirements under SFAS No. 123,
Accounting for Stock-Based Compensation, and eliminates the ability to account
for share-based compensation transactions using APB Opinion No. 25, Accounting
for Stock Issued to Employees. As a result, compensation cost relating to
share-based payment transactions will be measured based on the fair value of the
equity or liability instruments issued. This statement does not change the
accounting for similar transactions involving parties other than employees.
Publicly traded companies must apply this statement as of the beginning of the
first annual period that begins after June 15, 2005, while those that file as
small business issuers must comply as of the beginning of the first annual
reporting period that begins after December 15, 2005. This statement applies to
all awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. The cumulative effect of initially
applying this statement, if any, is recognized as of the required effective
date. The Company has not completed its evaluation of the impact of adopting
the new statement on its consolidated financial statements, but anticipates that
additional compensation costs will be recorded if the use of options for
employee and director compensation continues.
(d) Share-Based Payment
The Company has stock-based compensation plans which are described in note 3.
The Company uses the fair value method of accounting for all stock options and
common shares issued to non-employees for services in accordance with the
provisions of SFAS No. 123 and the intrinsic value method for stock options
granted to employees, officers and directors in conformity with APB Opinion No.
25 and its related interpretations, as allowed by SFAS No. 123. Under the fair
value method, compensation cost is measured at the date of the grant and
recognized over the vesting period, as is the case under the intrinsic value
method when the exercise price is lower than the current market price at the
date of the grant.
Had the compensation cost for stock options issued to employees, officers and
directors been determined based on the fair value method consistent with SFAS
No. 123, the Company's net loss and loss per share would have been as follows
for the periods ended June 30, 2005 and 2004:
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss, as reported $(1,338,083) $(625,270) $(5,098,517) $(2,337,497)
Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects 2,025 6,443 6,075 739,326
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects (149,156) (21,539) (1,021,318) (1,952,634)
----------- ----------- ----------- -----------
Pro forma net loss $(1,485,214) $ (640,366) $(6,113,760) $(3,550,805)
=========== =========== =========== ===========
<page>F-6
Basic and diluted
earning per share:
As reported $ (0.05) $ (0.02) $ (0.18) $ (0.09)
Pro forma $ (0.05) $ (0.02) $ (0.22) $ (0.14)
The fair value of options was estimated as of the date of grant using the Black-
Scholes option-pricing method with the following weighted average assumptions
for the periods ended June 30, 2005 and 2004:
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Risk Free interest rate 4.04% 4.32% 4.06% 4.32%
Expected average life (years) 9.86 10.00 9.36 10.00
Dividend yield 0% 0% 0% 0%
Volatility 121% 105% 126% 105%
Fair values of option grants
per share $ 0.93 $ 1.72 $ 1.09 $ 1.72
(e) Reclassifications
Certain amounts from the prior year have been reclassified to conform to the
current year presentation.
<page>F-7
3. Common stock
The following table summarizes the activity related to common stock for the nine
months ended June 30, 2005:
<table>
<caption>
<s> <c> <c>
Additional
Shares Common stock paid in capital Total
----------------------------------------------------------
Balance, September 30, 2004 26,407,393 $ 24,818 $20,133,739 $20,158,557
Common shares issued
for cash ($1.18 Wt.
Avg./share) 42,481 42 40,066 40,108
Common shares issued
for services ($2.25 Wt.
Avg./share) 119,984 120 269,880 270,000
Stock options issued
for compensation - - 2,025 2,025
Value of beneficial
conversion feature of
convertible promissory note - - 568,661 568,661
(Note 4)
Fair value of warrants
issued to private placement
agent for convertible
promissory note - - 115,822 115,822
- --------------------------------------------------------------------------------------
Balance, December 31, 2004 26,569,858 $ 24,980 $21,130,193 $21,155,173
- --------------------------------------------------------------------------------------
Common shares issued for
settlement of debt ($1.15 Wt.
Avg./share) 65,000 65 74,685 74,750
Common shares issued for cash
and other ($0.68 Wt, Avg/
share) 569,931 570 387,005 387,575
Common shares issued on
conversion of promissory
notes ($0.75 wt. Avg/share) 1,100,009 1,100 823,900 825,000
Common shares issued for
exercise of options ($1.00
Wt. Avg./share 3,000 3 2,997 3,000
Stock option compensation - - 2,025 2,025
Fair value of warrant issued
to private placement agent - - 35,665 35,665
Expiration of redeemable capital
stock rights - - 8,450 8,450
- ---------------------------------------------------------------------------------------
Balance, March 31, 2005 28,307,798 $ 26,718 $22,464,920 $22,491,638
- ---------------------------------------------------------------------------------------
Common shares issued for
cash and other ($0.58
Wt. Avg./share) 1,142,790 1,143 667,160 668,303
Common shares issued for
settlement of expenses
and accounts payable
($0.62 Wt. Avg./share 35,007 35 21,653 21,688
Stock options, compensation - - 2,025 2,025
Fair value of warrants
issued to private placement
agent - - 56,466 56,466
Expiration of redeemable
capital stock - - 45,825 45,825
- ---------------------------------------------------------------------------------------
Balance, June 30, 2005 29,485,595 $ 27,896 $23,258,049 $23,285,945
======================================================================================
</table>
<page>F-8
(a) Share-based incentive plans
The Company has three share-based incentive plans, each being limited so that
options to acquire no more than 2,500,000 common shares per plan 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 common stock of the Company, the purchase price of
each share shall be 110% of the market price on the date of grant and the
expiration date of the option shall be no more than five years from the
date of grant of such option. As of June 30, 2005, options to purchase an
aggregate of 1,040,000 common shares have been issued under this plan.
(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. The
options expire ten years from the date of grant. As of June 30, 2005,
options to purchase an aggregate of 2,080,000 common shares have been
issued under this plan.
(iii) Under the 2001 Directors Non-Qualified Stock Option Plan, options may be
granted to directors of the Company or certain non-employees for terms of
up to ten years at an exercise price as determined by the administrator on
the date of the grant. The options vest over three years. As of June 30,
2005, options to purchase an aggregate of 1,709,584 common shares have
been issued under this plan.
The following tables contain information with respect to all options granted by
the Company, in addition to those granted under the preceding incentive plans:
<page>F-9
Weighted
average
exercise
price
per
Shares share
-------------- -------------
Options outstanding,
September 30, 2004 13,632,817 $ 1.08
Granted 924,167 $ 1.33
-------------- -------------
Options outstanding,
December 31, 2004 14,556,984 $ 1.10
Exercised (3,000) $ 1.00
Expired (55,500) $ 2.00
-------------- -------------
Options outstanding,
March 31, 2005 14,498,484 $ 1.10
Granted 315,000 $ 0.99
-------------- -------------
Options outstanding
June 30, 2005 14,813,484 $ 1.09
============== =============
<page>F-9
Outstanding options Exercisable options
--------------------- ------------------------
Weighted Weighted Weighted
Average average average
life price price
Price Shares (years) US$/share Shares US$/share
------ -------- ------- ---------- --------- ----------
0.74 300,000 2.70 $0.74 - $ -
0.97-1.07 11,236,917 4.44 1.00 10,501,917 1.00
1.22-1.25 617,400 2.88 1.24 467,400 1.25
1.30-1.50 2,059,167 6.84 1.37 1,434,167 1.39
1.88 525,000 8.75 1.88 525,000 1.88
2.00-3.00 75,000 3.98 2.70 75,000 2.70
---------- -----------
14,813,484 13,003,484
========== ==========
<page>F-10
(b) Stock warrants
As of June 30, 2005, the following warrants for the purchase of common stock
were outstanding:
Number
of warrants
--------------
Outstanding, September 30, 2004 2,153,980
Issued 150,000
Expired (190,625)
---------------------------------------------
Outstanding, December 31, 2004 2,113,355
Issued 59,513
Expired (7,937)
---------------------------------------------
Outstanding, March 31, 2005 2,164,931
Issued 116,457
---------------------------------------------
Outstanding, June 30, 2005 2,281,388
=============================================
The warrants outstanding at June 30, 2005, can be exercised at prices ranging
from $0.65 to $3.00. The expiration dates of the warrants range from August 19,
2005 to June 27, 2007.
4. Convertible promissory notes
On August 13, 2004, the Company borrowed $500,000 from 13 lenders and issued its
12% convertible promissory notes in that aggregate amount. The notes and
interest were initially due and payable on November 14, 2004 although the date
was subsequently extended to February 18, 2005. The lenders were entitled to
convert the notes into a total of 666,667 shares of common stock. The Company
also issued warrants to the lenders for the purchase of an aggregate of 750,000
shares of the Company's common stock on or before August 13, 2006 at $1.07 per
share. Interest was due upon the conversion of the promissory notes to shares
of common stock or when the promissory notes became due.
On September 7, 2004, the Company borrowed $598,450 from ten lenders and issued
its 12% convertible promissory notes in that aggregate amount. The terms of the
notes and the issuance of warrants in connection with the notes were
substantially the same as those of the loans of August 13, 2004, except that the
notes were convertible into 746,867 shares of common stock and lenders received
warrants for the purchase of an aggregate amount of 873,300 shares of common
stock on or before September 7, 2006, at $1.42 per share.
On November 15, 2004, a registration statement filed by the Company with the
Securities and Exchange Commission (SEC) which included the shares obtainable by
the lenders upon conversion of the promissory notes was declared effective by
the SEC.
<page>F-11
The 12% promissory notes and warrants were recorded at their relative fair
values. The fair value assigned to the warrants of $529,789 was estimated using
the Black Scholes option-pricing model. The intrinsic value of the conversion
feature at the date the promissory notes were issued was $568,661, after taking
into account the fair value of the warrants. These amounts have been recorded
as debt discount, with an offsetting increase to additional paid-in capital. As
of June 30, 2005, all of the debt discount has been amortized as additional non-
cash interest expense over the life of the debt using the effective interest
method.
The Company also incurred $100,000 of costs in connection with the issuance of
the convertible promissory notes. These costs have been amortized on a basis
that approximates the interest method over the expected term of the related
debt.
During the quarter ended March 31, 2005, $825,000 of the promissory notes were
converted into 1,100,009 common shares. A further $175,000 of promissory notes
was repaid to lenders who chose not to convert into common shares. The maturity
date for the remaining promissory note of $102,750 has been extended until
September 30, 2005 with all other terms of the promissory note remaining the
same.
5. Promissory notes
On January 10, 2005, the Company borrowed $1,000,000 from Cornell Capital
Partners, L.P (Cornell Capital Partners) and issued its promissory note to
Cornell Capital Partners in that amount. At the same time, the Company placed
1,000,000 shares of common stock in escrow with an escrow agent designated by
Cornell Capital Partners and also deposited with the same escrow agent 19
requests for advances under the Standby Equity Distribution Agreement, each in
the amount of $50,000 and one such advance in the amount of $75,479.45. The
escrow agent agreed to release the requests to Cornell Capital Partners every
seven days beginning January 17, 2005. Upon the release of each request, the
appropriate number of our shares held in escrow were issued to Cornell Capital
Partners.
The promissory note issued to Cornell Capital Partners bears interest at the
annual rate of 12% and was payable on or before June 4, 2005. Proceeds from the
sale of the shares issued to Cornell Capital Partners were utilized in payment
of outstanding amounts under the promissory note. In the event that during the
life of the promissory note, the proceeds from the sales of the escrowed shares
had been insufficient to repay all amounts due, the Company had agreed to
immediately place in escrow such number of additional shares of its common stock
of which the proceeds of the sale of such shares would be sufficient to repay
all amounts due under the promissory note. There was no limit on the number of
shares the Company may have been required to issue to Cornell Capital Partners
to satisfy its obligation under the promissory note. Any decline in the market
price of the Company's shares increased the number of shares the Company would
otherwise be required to issue to Cornell.
<page>F-12
On each of February 14, 2005 and March 14, 2005 the Company borrowed an
additional $1,000,000 from Cornell Capital Partners under the same terms and
conditions, except that the weekly advances began June 6, 2005 and the
promissory notes are payable on or before October 17, 2005 and October 21, 2005,
respectively. The share escrow with respect to the loans consists of 2,000,000
shares and 1,000,000 shares, respectively.
On May 13, 2005, the Company borrowed $500,000 from Cornell Capital Partners and
issued its promissory note to Cornell Capital Partners in that amount. At the
same time, the Company placed 1,000,000 shares of common stock in escrow with an
escrow agent designated by Cornell Capital Partners and the Company deposited
with the escrow agent 19 requests for advances under the Standby Equity
Distribution Agreement, each in the amount of $25,000 and one such advance in
the amount of $40,534.25. The escrow agent has agreed to release the requests
to Cornell Capital Partners every seven days beginning June 6, 2005. Upon the
release of each request, the appropriate number of the Company's shares held in
escrow was and will continue to be issued to Cornell Capital Partners.
The Company's proceeds from the promissory notes were reduced by the prepayment
of fees due to Cornell Capital, the placement agent, investment advisors and the
escrow agent for the advances of shares under the terms of the Standby Equity
Distribution Agreement. These prepaid fees have been recorded as deferred issue
costs and will be amortized as shares are issued to Cornell Capital as repayment
of the promissory notes.
6. Standby equity distribution agreement
On April 6, 2004, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the Agreement and subject
to its terms and conditions, the Company may require Cornell Capital Partners to
purchase newly issued common shares from the Company, for a maximum total
purchase price of $15 million over a 24-month period, less certain fees and
expenses. The amount of any advance (periodic sale of stock) may not exceed
$625,000 and the Company may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners owning
more than 9.9% of the Company's then outstanding common stock. The Company
incurred $550,000 in issue costs related to the signing of the Agreement. These
costs were settled through the issuance of 224,412 of common shares at $2.25 per
share, which represented the volume weighted average trading price of the
Company's shares on the signing date of the agreement. These costs have been
deferred and will be treated as a reduction to the proceeds from the shares
issued under the Agreement.
<page>F-13
Under the terms of the SEDA, the Company will pay 5% of the proceeds to Cornell
Capital Partners as a fee and $500 each sale to the escrow agent for services.
Additionally, the Company will pay 10% of the proceeds to the placement agent
as a fee and issue warrants to the agent to purchase the Company's common stock
equal to 10% of the number of the Company's common stock issued in each advance.
Effective January 10, 2005 the company will pay an advisory fee of 2-2.5% to a
company related to Cornell Capital Partners LLP.
7. Basic and diluted loss per common share
<table>
<s> <c> <c>
Three Months ended June 30, Nine Months ended June 30,
2005 2004 2005 2004
------------ -------------- ------------ -----------
Net Loss $ (1,338,083) $ (625,270) $ (5,098,517) $(2,337,497)
------------ -------------- ------------ -----------
Total Weighted Average
Number of Common Shares
and Equivalents 28,821,709 26,082,842 27,783,450 25,691,524
------------ -------------- ------------ ------------
Net Loss per
Common Share $ (0.05) $ (0.02) $ (0.18) $ (0.09)
============ ============== ============ ===========
</table>
The following outstanding common stock equivalents were excluded from the
computation of diluted net loss per share attributable to common stockholders as
they had an anti-dilutive effect:
<page>F-14
Shares at end of period
June 30,
2005 2004
----- ------
Shares issuable upon exercise of stock options 14,813,484 13,522,817
Shares issuable upon exercise of warrants 2,281,388 834,485
8. Interest and finance charges
Interest and finance charges consist of the following:
<table>
<s> <c> <c>
Three Months ended Nine Months ended
June 30, June 30,
2005 2004 2005 2004
------------ -------------- ------------ -----------
Amortization of the fair value of $ - $ - $ 119,394 $ -
warrants issued for placement fees
Amortization of debt discount
related to the intrinsic value of
the beneficial conversion feature
of the convertible promissory notes - - 568,661 -
Amortization of deferred finance
charges and issue costs paid
in connection with the convertible
promissory note - - 79,724 -
Amortization of debt discount related
to warrants issued in connection with
the convertible promissory notes - - 454,506 -
Interest paid on convertible promissory
notes 56,844 - 96,005 -
Interest on promissory note 33,328 - 72,090 -
Other interest 52,145 15,953 87,617 50,626
-------------------------------------------------------------
$ 142,317 $ 15,953 $ 1,477,997 $ 50,626
=============================================================
</table>
<page>F-15
9. Related party transactions
The Company has retained a law firm to perform legal services for which Company
has incurred total expenditure of $1,009 for services for the three months and
$111,273 for the nine months ended June 30, 2005 ($33,984 for three months and
$92,145 for nine months ended June 30, 2004). A director of the Company was a
partner in that law firm during the time those services were rendered. The
transactions were valued at the exchange amount, which is the amount of
consideration agreed to by the related parties. As of June 30, 2005 an amount of
$134,041 ($102,440 as of June 30, 2004) resulting from these transactions is
included in accounts payable and accrued liabilities.
10. Commitments and Contingencies
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.
Royalty Agreements
The Company has entered into a royalty agreement that will pay 2.5% of Dermond
wind turbine sales to the former owners.
Bank indebtedness and other loans
The bank indebtedness of Dermond Inc. in the amount of $ 93,144 as of
June 30, 2005 ($90,101 as of September 30, 2004), carries interest at 4.25% per
annum and is secured by an assignment of Dermond Inc.'s refundable research and
development tax credit.
Legal
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.
Rental of Premises
On March 2, 2005, the Company entered into a three-year operating lease for
office facilities with an unrelated third party. In addition to the minimum
rents due under the lease terms, the Company is responsible for its
proportionate share of common area costs. Future minimum lease payments under
the terms of the operating lease are $101,528 for 2006, $106,232 for 2007 and
$45,080 for 2008.
11. Subsequent events
On July 15, 2005 Dermond Inc. issued its 12% unsecured convertible debenture due
March 31, 2006 to borrow $103,135. The debenture is convertible into 103,135
common shares of McKenzie Bay International Ltd (MKBY) on or before the due
date. Upon any conversion, MKBY will issue a warrant to purchase one common
share for each two shares issued upon the conversion for $1.25 per share. The
warrants will expire on July 15, 2007.
On August 1, 2005, Gary L. Westerholm, the president of the Company, agreed to
loan up to $250,000 to the Company pursuant to a 3.58% promissory note issued to
him by the Company. The principal amount along with interest accrued is payable
no later than September 15, 2005. As of August 15, 2005, Mr. Westerholm had
loaned $22,600 to the Company.
On August 1, 2005 the board of directors extended the expiration of 604,900
options to August 15, 2006.
Options
<page>F-16
- ----------------------------------------------------------------------------
MCKENZIE BAY INTERNATIONAL, LTD.
(A development-stage company)
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
McKenzie Bay International, Ltd.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of McKenzie Bay
International, Ltd. and subsidiaries (a development stage company) as of
September 30, 2004 and 2003, and the related consolidated statements of changes
in stockholders' equity (deficit), loss and cash flows for the years then ended,
and for the period from inception on August 23, 1996 through September 30, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McKenzie Bay
International, Ltd. and subsidiaries as of September 30, 2004 and 2003, and the
results of its operations and its cash flows for the years then ended, and for
the period from inception on August 23, 1996 through September 30, 2004, 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 the development of wind powered alternative energy
systems. As discussed in Note 2 to the financial statements, the Company has
incurred significant losses since inception, and has a working capital and
stockholders' deficit 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/ BDO Seidman, LLP
- ---------------------
Grand Rapids, Michigan
January 12, 2005
<page>F-17
- -----------------------------------------------------------------------
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 and 2003
(Amounts stated in U.S. dollars)
ASSETS
2004 2003
--------- --------
Current:
Cash and cash equivalents $ 562,250 $ 49,208
Refundable taxes and other receivables 122,286 262,979
Deferred charges 24,264 -
Prepaid expenses and deposits 176,632 145,441
Deferred issue and finance costs (notes 5 & 8) 359,724 -
-------- --------
Total current assets 1,245,156 457,628
Reclamation cash bond (note 3) 338,685 338,685
Property and equipment (note 4) 31,580 76,263
-------- -------
Total assets $1,615,421 $ 872,576
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current:
Bank indebtedness (note 15) $ 102,264 83,463
Accounts payable and accrued liabilities (note 14) 2,380,916 2,162,934
Convertible promissory notes, net of discount (note 5) 643,944 -
Current portion of long-term debt (note 6) 219,740 32,945
---------- ----------
Total current liabilities 3,346,864 2,279,342
Long-term liabilities:
Long-term debt (note 6) 1,084,763 1,074,651
Reclamation and closure liabilities (note 3) 350,000 250,000
Redeemable common stock (note 7) 86,775 252,175
---------- ----------
Total long-term liabilities 1,521,538 1,576,826
---------- ----------
Total liabilities 4,868,402 3,856,168
---------- ----------
Commitments and Contingencies (note 15)
Stockholders' equity (deficit):
Common stock - $0.001 par value (note 7):
75,000,000 shares authorized,
26,407,393 and 25,137,958 shares
issued and outstanding 24,818 23,649
Additional paid in capital 20,133,739 16,781,788
Deficit accumulated during the development stage (23,020,986) (19,564,758)
Accumulated other comprehensive income (loss) (390,552) (224,271)
------------ ------------
Total stockholders' deficit (3,252,981) (2,983,592)
------------ ------------
Total liabilities and stockholders' deficit $ 1,615,421 $ 872,576
============ ============
(See accompanying notes)
<page>F-18
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Deficit)
FROM INCEPTION ON AUGUST 23, 1996 TO SEPTEMBER 30, 2004
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Accumulated
other Total
Common Common Additional comprehensive stockholders'
stock stock paid in Accumulated income equity
shares amount capital deficit (loss) (deficit)
--------- ---------- --------- ----------- -------------- -------------
Common shares issued for cash
($0.04 Wt. Avg./share) 200,000 $ 200 $ 7,097 $ - $ - $ 7,297
Common shares issued in exchange of
exploration claims and services
($0.04 Wt. Avg./share) 50,000 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 250,000 250 8,871 (7,116) 12 2,017
Common shares issued for cash
($0.15 Wt.Avg./share) 5,149,560 5,150 748,534 - - 753,684
Common shares issued in exchange of
exploration claims and services
($0.04 Wt. Avg./share) 2,804,540 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 8,204,100 8,204 871,564 (824,060) (461) 55,247
Common shares issued for cash
($0.85 Wt.Avg/share) 517,000 517 440,277 - - 440,794
Common shares issued in exchange of
exploration claims and services
($0.04 Wt. Avg./share) 1,105,000 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 9,826,100 9,826 1,355,560 (1,343,183) (4,018) 18,185
Common shares issued for cash
($0.22 Wt.Avg./share) 1,755,744 1,756 381,685 - - 383,441
Common shares issued in exchange of
exploration claims and services
($1.08 Wt. Avg./share) 1,245,000 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
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
<page>F-19
Balance, September 30, 1999 12,826,844 12,827 3,075,170 (2,951,923) (3,761) 132,313
Issuance of redeemable common stock - - - (640,075) - (640,075)
Common shares issued for cash
($0.61 Wt. Avg./share) 1,734,202 1,734 1,054,409 - - 1,056,143
Common shares issued for services
($0.50 Wt. Avg./share) 42,000 42 20,958 - - 21,000
Net loss for the year - - - (830,612) - (830,612)
Change in foreign currency
translation adjustment - - - - (938) (938)
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
Balance, September 30, 2000 14,603,046 14,603 4,150,537 (4,422,610) (4,699) (262,169)
Issuance of redeemable common stock - - - (545,938) - (545,938)
Common shares issued for cash
($0.84 Wt. Avg/share) 5,734,801 4,241 4,809,951 - - 4,814,192
Common shares issed for services
($0.88 Wt. Avg./share) 148,928 149 130,207 - - 130,356
Purchase of common stock for treasury (79,000) (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)
Expiration of redemption rights - - 12,000 - - 12,000
Stock options issued for services - - 73,085 - - 73,085
Stock options issued for compensation - - 829,500 - - 829,500
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
Balance as at September 30, 2001 20,407,775 18,914 9,860,106 (9,901,792) (389,267) (412,039)
Common shares issued for cash
($0.00 Wt. Avg./share) - 5 56,920 - - 56,925
Common shares issued for services
($0.92 Wt. Avg./share) 1,572,053 1,572 1,441,098 - - 1,442,670
Common shares issued for business
acquisition-DERMOND INC.
($1.25 Wt. Avg./share) 100,000 100 124,900 - - 125,000
Common shares issued for conversion
of note payable ($1.07 Wt.Avg/share) 23,877 24 25,602 - - 25,626
Common shares issued for exercise of
warrants ($0.64 Wt. Avg./share) 25,000 25 16,092 - - 16,177
Common shares issued for exercise of
warrants ($1.23 Wt. Avg./share) 969,935 970 1,191,390 - - 1,192,360
Purchase of common stock for treasury (3,000) (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
Expiration of redemption rights - - 439,659 - - 439,659
Stock options issued for services - - 341,696 - - 341,696
Stock options issued for compensation - - 125,270 - - 125,270
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
Balance as at September 30, 2002 23,095,640 21,607 13,618,367 (15,872,366) 22,899 (2,209,493)
Common shares issued for cash
($0.65 Wt. Avg./share) 453,337 453 295,414 - - 295,867
Common shares issued for exercise of
warrants ($0.83 Wt. Avg./share) 661,038 661 551,125 - - 551,786
Common shares issued for services
($0.83 Wt. Avg./share) 937,943 938 822,053 - - 822,991
Purchase of common stock for treasury (10,000) (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)
Expiration of redemption rights - - 514,471 - - 514,471
Stock options issued for services - - 63,187 - - 63,187
Stock options issued for compensation - - 290,091 - - 290,091
Stock options issued for cash - - 33,160 - - 33,160
Stock options issued in lieu of
redemption rights - - 605,210 - - 605,120
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
Balance as at September 30, 2003 25,137,958 23,649 16,781,788 (19,564,758) (224,271) (2,983,592)
Common shares issued for cash
($1.35 Wt. Avg./share) 561,457 561 757,940 - - 758,501
Common shares issued for exercise of
stock options ($1.04 Wt. Avg./share) 58,800 59 60,941 - - 61,000
Common shares issued for exercise of
warrant ($1.08 Wt. Avg./share) 343,700 344 618,056 - - 618,400
Common shares issued for services
($1.97 Wt. Avg./share) 205,478 205 404,975 - - 405,180
Unpaid captial stock 100,000 - - - - -
Net loss for the year - - - (3,456,228) - (3,456,228)
Change in foreign currency
translation adjustment - - - - (166,281) (166,281)
Expiration of redemption rights - - 147,301 - - 147,301
Stock options issued for services - - 87,180 - - 87,180
Stock options issued for compensation - - 745,769 - - 745,769
Value of warrants issued in connection
with convertible debenture - - 529,789 - - 529,789
- ------------------------------------ ----------- ---------- --------- ------------ ------------ -------------
Balance, September 30, 2004 26,407,393 $ 24,818 $20,133,739 $(23,020,986) $ (390,552) $(3,252,981)
==================================== =========== ========== =========== =========== ============= =============
(See accompanying notes)
<page>F-20
</table>
<table>
<caption>
<c> <s> <s>
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED SEPTEMBER 30, 2004 and 2003
(Amounts stated in U.S. dollars)
Cumulative
from
inception
on August 23,
1996
to September
2004 2003 30, 2004
Revenue -------- - -------- --------------
$ - $ - $ 12,825
Expenses:
Exploration (note 9) 147,586 565,984 7,277,371
Research and development, net 649,017 656,834 1,305,851
General administration 336,927 295,642 1,489,862
Reorganization costs - - 102,914
Wages and benefits 79,363 160,589 1,180,812
Management wages and benefits 1,214,608 728,961 3,498,876
Professional fees 678,593 862,616 2,283,284
Promotion and travel 177,654 155,512 1,001,255
Depreciation 15,420 18,360 404,262
Interest and finance charges 183,969 72,088 433.945
Write-down of assets - - (1,626,821)
Write-off of incorporation and
reorganization costs - - (49,137)
Write-down of marketable securities - (32,731) (1,104,214)
Gain (loss) on sale of marketable securities - 140 (138,028)
Gain on sale property and equipment 26,806 - 26,806
Interest income 103 3,757 28,000
----------- ----------- ------------
Loss before income and mining taxes and
cumulative effect of change in
accounting principle for SFAS 142 (3,456,228) (3,545,420) (21,829,001)
Income and mining taxes recovery (note 10) - - 141,000
------------ ----------- -------------
Net loss before cumulative effect of
change in accounting principle
for SFAS 142 $(3,456,228) $(3,545,420) $(21,688,001)
------------ ------------ --------------
Cumulative effect of change in accounting
principle for SFAS 142 (note 2) - (146,972) (146,972)
------------ ------------ --------------
Net loss $(3,456,228) $(3,692,392) $(21,834,973)
------------ ------------ --------------
Comprehensive loss (note 12) $(3,622,509) $(3,939,562) $(22,225,525)
============ ============ ==============
Basic and diluted loss per share (note 13):
Net loss before cumulative effect of change
in accounting principle for SFAS 142 $ (0.13) $ (0.14)
Cumulative effect of change in
accounting principle - (0.01)
------------- ------------
Net loss $ (0.13) $ (0.15)
============= ============
(See accompanying notes)
<page>F-21
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 and 2003
(Amounts stated in U.S. dollars)
Cumulative
from
inception
on August 23,
1996
to September
2004 2003 30, 2004
----------- --------- ---------------
Operating activities:
Net loss $ (3,456,228) $(3,692,392) $(21,834,973)
Items not affecting cash:
Cumulative effect of change in accounting principle - 146,972 146,972
Depreciation 15,420 18,360 404,262
Amortization of financing and warrants 95,559 - 95,559
Expenses settled through issuance of common stock 125,180 362,992 1,930,842
Capitalized interest on convertible notes payable - - 2,571
Reclamation and closure costs (note 3) 100,000 - 350,000
Write-down of assets - - 1,626,821
Write-down of marketable securities - 32,731 1,104,214
Write-off of incorporation and reorganization costs - - 49,137
(Gain) Loss on sale of marketable securities - (140) 138,028
Gain on sale of property and equipment (26,806) - (26,806)
Stock-based payment 832,949 353,278 2,505,090
Net change in non-cash working capital related to
operations:
Refundable taxes and other receivables 129,168 (51,452) (76,448)
Deferred charges (24,264) 19,562 (24,264)
Prepaid expenses and deposits (31,191) 26,616 (126,148)
Accounts payable and accrued liabilities 111,478 1,446,532 2,247,680
------------ ------------ ------------
Net cash used in operating activities (2,128,736) (1,336,941) (11,487,464)
------------ ------------ ------------
Investing activities:
Purchase of marketable securities - - (1,767,835)
Proceeds on sale of property and equipment 100,000 - 100,000
Proceeds on sale of marketable securities - 50,910 525,593
Purchase of reclamation cash bond (note 3) - - (338,685)
Purchase of property and equipment (25,169) (9,273) (2,083,175)
Incorporation and reorganization costs - - (81,769)
Acquisition of business, net of cash acquired - - (31,286)
------------ ------------ ------------
Net cash provided by (used by) investing activities 74,831 41,637 (3,677,157)
------------ ------------ ------------
<page>F-22
Financing activities:
Issuance of notes payable $ - $ 350,000 $ 350,000
Increase of bank indebtedness 14,630 29,755 91,826
Proceeds from issuance of convertible promissory
notes payable 1,098,450 - 1,121,505
Payment of financing fees (100,000) - (100,000)
Issuance of long-term debt - - 137,435
Repayment of capital lease obligation (32,945) (36,156) (137,435)
Receipt of repayable government assistance (note 6) 158,999 71,272 1,085,630
Proceeds from sale of common stock 1,437,901 847,653 13,315,558
Proceeds from sale of stock options - 33,160 33,160
Redemption of redeemable common stock - - (37,500)
Purchase of common stock for treasury - - (149,622)
------------ ------------ ------------
Net cash provided by (used by) financing activities 2,577,035 1,295,684 (15,710,557)
------------ ------------ ------------
Effect of foreign currency exchange rate
changes on cash and equivalents (10,088) 3,503 16,314
------------ ------------ ------------
Net increase in cash and cash equivalents 513,042 3,883 562,250
Cash and cash equivalents, beginning of period 49,208 45,325 -
------------ ------------ ------------
Cash and cash equivalents, end of period $ 562,250 $ 49,208 $ 562,250
============ =========== =============
Supplemental information:
Cash paid for interest $ 147,438 $ 32,972 $ 192,268
Issuance of common stock in lieu of payment of issue
costs 280,000 - 280,000
Issuance of common stock in lieu of repurchasing
redeemable common stock 60,000 110,000 170,000
Issuance of stock options in lieu of repurchasing
redeemable common stock - 605,210 605,210
Issuance of common stock in lieu of payment
of notes payable - 356,424 356,424
Conversion of notes payable into common stock - - 25,626
Repurchase of common stock in settlement of
accounts receivable - 11,300 11,300
------------ ------------ ------------
$ 487,438 $ 1,115,906 $ 1,640,828
============ =========== =============
(See accompanying notes)
</table>
<page>F-23
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Amounts stated in U.S. dollars unless indicated otherwise)
1. Nature of operations
McKenzie Bay International, Ltd. and subsidiaries (Company) is a
development stage company with no operations. The Company's primary
business activity is the development of wind powered alternative energy
systems.
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 has 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. However, management believes that it will be
successful at raising additional capital in the short-term and
will have profitable operations in the long-term (see note 8).
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 financial statements include the activities of the Company
and its wholly-owned subsidiaries, Lac Dore Mining Inc.
(formerly McKenzie Bay Resources Ltd.), Great Western Diamond
Company, DERMOND INC. (formerly Experts Conseils Dermond Inc.),
WindStor Power Company and a 62.5% interest in Ptarmigan Energie
Inc. All intercompany balances and transactions have been
eliminated in consolidation.
<page>F-24
[c] Foreign currency translation
For statutory and other reporting purposes, the Company's wholly
and partially owned subsidiaries, Lac Dore Mining Inc., DERMOND
INC. and Ptarmigan Energie Inc. prepare financial statements in
Canadian dollars. The translation to U.S. 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 (accumulated other
comprehensive income).
[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 has invested 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 stockholders' equity (accumulated other
comprehensive income). There were no marketable securities
investments at September 30, 2004 and 2003.
[f] Use of estimates
The preparation of financial statements in conformity with US
GAAP 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 statement items
that require significant estimates from management include the
useful life of long-lived assets for depreciation purposes,
carrying value of goodwill and sufficiency of reclamation and
closure liabilities. Actual results could differ from such
estimates.
<page>F-25
[g] Exploration expenditures
Costs related to the exploration of resource properties are
expensed as incurred. Such amounts are reduced by grants and
other related revenues.
[h] Research and development
During fiscal 2004 and 2003, the Company expended $994,432 and
$742,936 ($649,017 and $656,834 net of non-refundable grants),
respectively, on research and development related to Lac Dore
Mining Inc. and DERMOND INC.
[i] Property and equipment
Property and equipment are recorded at cost and depreciated 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 equipment 30%
Office equipment 20%
[j] Impairment of 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.
[k] 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 realized 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 realized.
<page>F-26
[l] Loss per common share
Basic earnings (loss) per common 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).
[m] Share based payment
i) The Company has stock-based compensation plans which are
described in note 7. The Company uses the fair value method of
accounting for all stock options and common shares issued to
non-employees for services in accordance with the provisions of
SFAS 123, and the intrinsic value method for stock options
granted to employees, officers and directors in conformity with
Accounting Principles Board Opinion No. 25 and its related
interpretations, as allowed by SFAS 123. Under the fair value
method, compensation cost is measured at the date of the grant
and recognized over the vesting period, as is the case under the
intrinsic value method when the exercise price is lower than the
current market price at the date of the grant.
ii) Fair value disclosure
Had the compensation cost for stock options issued to employees, officers and
directors been determined based on the fair value method consistent with SFAS
123, the Company's net loss and loss per share would have been as follows for
fiscal 2004 and 2003:
2004 2003
---------------- -----------------
Net loss, as reported $(3,456,228) $(3,692,392)
---------------- -----------------
Add: Stock-based employee
compensation expense included
in reported net loss $ 745,769 $ 290,091
Deduct: Total stock-based
employee compensation expense
determined under the fair value
method for all awards, net of
related tax effects (1,974,173) (1,201,673)
--------------- ------------------
Pro forma net loss $(4,684,632) $(4,603,974)
=============== ==================
Basic and diluted loss per share:
As reported $ (0.13) $ (0.15)
Pro forma (0.18) (0.19)
<page>F-27
The fair value of options was estimated as of the date of grant using the
Black-Scholes option-pricing method with the following weighted average
assumptions for fiscal 2004 and 2003:
2004 2003
----- ------
Risk-free interest rate 4.21% 3.41%
Expected average life 9.28 7.98
Dividend yield - -
Volatility 105% 118%
Fair values of option grants per share $1.63 $1.07
[n] Goodwill and other intangible assets
SFAS 142 requires that goodwill is no longer amortized, but instead is tested
for impairment at least annually. Upon adoption of SFAS 142 in fiscal 2003,
the Company completed its transitional impairment review and determined that
the goodwill ("excess cost of investment over net assets acquired") of $146,972
associated with the fiscal 2002 acquisition 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.
2. Accounting policies (continued)
[o] New accounting pronouncements
On December 16, 2004, the Financial Accounting Standards Board
released FASB Statement No. 123 (revised 2004), Share-Based
Payment. These changes in accounting replace existing
requirements under FASB Statement No. 123, Accounting for Stock-
Based Compensation, and eliminate the ability to account for
share-based compensation transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. The compensation cost
relating to share-based payment transactions will be measured
based on the fair value of the equity or liability instruments
issued. This Statement does not change the accounting for
similar transactions involving parties other than employees.
Publicly traded companies must apply this Standard as of the
beginning of the first interim or annual period that begins
after June 15, 2005, while those that file as small business
issuers must comply as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005.
This Statement applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled
after that date. The cumulative effect of initially applying
this Statement, if any, is recognized as of the required
effective date. The Company has not completed its evaluation of
the impact of adopting FASB 123 (revised 2004) on its
consolidated financial statements, but anticipates that more
compensation costs will be recorded in the future if the use of
options for employee and director compensation continues as in
the past.
<page>F-28
[p] Reclassification
Certain amounts from the prior year have been reclassified to
conform to the current year presentation.
3. Reclamation cash bond
The Company has posted a cash bond with the State of Colorado,
Department of Natural Resources in the amount of $338,685 to cover
future site reclamation and closure liabilities associated Great West
Diamond Company's Kelsey Lake mine. A liability for the estimated
restoration costs of $350,000 ($250,000 in 2003) has been accrued in the
accompanying financial statements. During the fiscal year ended
September 30, 2004, the Company began reclamation activities at the
Kelsey Lake mine.
4. Property and equipment
Property and equipment consists of the following:
<table>
<caption>
<s> <c> <c>
2004 2003
Accumulated Net Book Net Book
Cost Depreciation Value Value
---------- ------------- ---------- -------------
Equipment undercapital lease $ - $ - $ - $ 64,000
Furniture and fixtures 8,380 5,397 2,983 3,499
Computer equipment 11,955 5,673 6,282 8,522
Office equipment 25,245 2,930 22,315 242
---------- ------------- ---------- -------------
$ 45,580 $ 14,000 $ 31,580 $ 76,263
========= ============ ========== ============
</table>
5. Convertible promissory notes
On August 13, 2004, the Company borrowed $500,000 from 13 lenders and
issued its 12% promissory notes in that aggregate amount. The notes and
interest are due and payable on the 14th day of November 2004. If,
however, a registration statement filed by the Company under the
Securities Act of 1933 to register the shares which may be obtained by
the lenders upon conversion of the notes has been declared effective by
the Securities and Exchange Commission (SEC) by that date, the maturity
date of the notes would be extended for a period of 90 days from the
date the registration statement was declared effective and the lenders
can convert the notes into a total of 666,667 shares of common stock
during the 90 day period. The Company also issued warrants to the
lenders for the purchase of an aggregate of 750,000 shares of the
Company's common stock on or before August 13, 2006 at $1.07 per share.
Interest shall be paid upon the conversion of the promissory notes to
shares or when the promissory notes are due.
<page>F-29
On September 7, 2004, the Company borrowed $598,450 from ten lenders
which were convertible into 746,867 shares of common stock. The terms
of the loans and the issuance of warrants in connection with the loans
are substantially the same as those of the loans of August 13, 2004,
except that lenders received warrants for the purchase of an aggregate
amount of 873,300 shares of common stock on or before September 7, 2006,
at $1.42 per share.
The 12% promissory notes and warrants were recorded at their relative
fair values. The fair value of the debt was determined to be $568,661.
The fair value assigned to the warrants was determined using the Black
Scholes option pricing model and $529,789 was recorded as a discount of
the debt and as an increase in shareholders' equity. The debt discount
attributable to the warrants is being amortized as additional non-cash
interest expense over the life of the debt using the effective interest
method. Total amortization recorded as interest expense for the period
ended September 30, 2004 is $75,283 and the unamortized discount of the
debt is $454,506.
As of September 30, 2004, the Company had not filed a registration
statement under the Securities Act of 1933. In accordance with EITF
00-27, Application of Issue No. 98-5 to Certain Convertible Instruments,
and EITF 98-5 Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, the
Company has not recorded any amount to reflect the intrinsic value
(market price of the stock less the effective conversion price) of the
conversion feature. The Company has calculated the intrinsic value of
the conversion feature at the date the promissory notes were issued to
be $568,661, after taking into account the fair value of the warrants.
When the event takes place that would allow the 12% promissory notes to
be converted into common stock, the Company will record additional
interest expense and an increase to additional paid in capital, equal to
the intrinsic value calculated at the date the promissory notes were
issued.
The Company has incurred $100,000 of costs in connection with the
issuance of the convertible promissory notes. The Company has deferred
these costs and is amortizing these costs on a basis that approximates
the interest method over the expected term of the related debt.
Accumulated amortization related to the deferred finance costs at
September 30, 2004, was approximately $79,724.
<page>F-30
The Company has pledged 100,000 shares of its common stock to secure one
of the promissory notes in the face amount of $98,450.
6. 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.
2004 2003
--------- -----------
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 $ 708,840 $ 665,190
Government of Canada unsecured financial
assistance, non-interest bearing,
repayable in quarterly payments of
CDN$62,500 commencing October 1, 2004 395,778 369,550
Government of Canada unsecured financial
assistance, non-interest bearing, repayable
in two equal annual payments,
commencing January 1, 2005 45,681 39,911
Government of Canada unsecured financial
assistance, non-interest bearing,
repayable in five annual payments of
1.5% of gross revenues of DERMOND INC., to
a maximum of CDN$150,000, over five
years beginning on November 1, 2005. If
after five years the original amount is
not repaid, payments will continue for a
maximum of five additional years or until
the assistance is repaid if sooner.
No further payments will be required
after the second five years regardless of
the amount owing 110,478 -
<page>F-15
Government of Canada unsecured financial
assistance, non-interest bearing, repayable
in four annual installments beginning on
April 1, 2007 43,726 -
Obligation under capital lease - 32,945
------------- -----------
1,304,503 1,107,596
Less: current portion 219,740 32,945
------------- ----------
$1,084,763 $1,074,651
============= ===========
6. Long-term debt (continued)
Principal repayments on long term debt are as follows:
2005 $ 219,740
2006 276,958
2007 66,171
2008 10,932
2009 730,703
-----------
2010 and thereafter $1,304,503
===========
7.
Common stock
Share-based incentive plans
At September 30, 2004, the Company had three share-based incentive plans each
being limited so that options to acquire no more than 2,500,000 common shares
per plan may be outstanding at any one time.
(i) Under the 2001 Employee Incentive Stock Option Plan, options may be
granted at an exercise price equal to the market price on the date of the
grant. All options expire no later than ten years from the grant date. In the
event an option is granted to an employee who owns 10% or more of the voting
power of common stock of the Company, the purchase price of each share shall be
110% of the market price on the date of grant and the expiration date of the
option shall be no more than five years from the date of grant of such option.
As of September 30, 2004, options to purchase an aggregate of 425,000 common
shares have been issued under this plan.
<page>F-31
(ii) Under the 2001 Employee Non-Qualified Stock Option Plan, options may be
granted to employees or certain non-employees at an exercise price as
determined by the administrator of the plan on the date of the grant. The
options expire ten years from the date of grant. As of September 30, 2004,
options to purchase an aggregate of 1,835,000 common shares have been issued
under this plan.
(iii) Under the 2001 Directors Non-Qualified Stock Option Plan, options may be
granted to directors of the Company or certain non-employees for terms of up to
ten years at an exercise price as determined by the administrator on the date
of the grant. The options vest over three years. As of September 30, 2004,
options to purchase an aggregate of 1,330,417 common shares have been issued
under this plan.
The following table contains information with respect to all options, in
addition to those granted under the preceding incentive plans issued by the
Company:
Weighted average
exercise price
Shares US$/share
------------ ----------------
Options outstanding,
September 30, 2002 3,335,000 $1.09
Granted 9,896,617 1.03
Expired (100,000) 1.50
Options outstanding,
September 30, 2003 13,131,617 1.04
Granted 660,000 1.82
Exercised (58,800) 1.04
Expired (100,000) 1.00
------------ ----------------
Options outstanding,
September 30, 2004 13,632,817 1.08
=========== ================
<page>F-32
The following table contains information with respect to all options granted by
the Company at September 31, 2004:
Outstanding options Exercisable options
--------------------- ------------------------
Weighted Weighted Weighted
Average average average
life price price
Price Shares (years) US$/share Shares US$/share
------ -------- ------- ---------- --------- ----------
$0.74 300,000 2.95 $ 0.74 - $ -
1.00 10,971,917 4.51 1.00 10,391,917 1.00
1.25 467,400 0.87 1.25 467,400 1.25
1.30-$1.50 1,285,000 5.90 1.39 810,000 1.42
1.88 525,000 9.01 1.88 525,000 1.88
2.00-3.00 83,500 3.84 2.63 83,500 2.63
----------- ------------ -------- ------ ------------- --------
13,632,817 12,277,817
=========== ==========
At September 30, 2004, the following are outstanding:
[a] Warrants for the purchase of common stock
Number
of warrants
Outstanding, September 30, 2002 2,719,095
Issued 446,762
Exercised (661,038)
Expired (1,552,200)
--------------------------------------------------
Outstanding, September 30, 2003 952,619
Issued 1,900,918
Exercised (343,700)
Expired (355,857)
-------------------------------------------------
Outstanding, September 30, 2004 2,153,980
=================================================
The warrants outstanding at September 30, 2004, can be exercised
at prices ranging from $1.07 to $3.00. The expiration dates on
the warrants range from October 20, 2004 to September 8, 2006.
<page>F-33
[b] Treasury stock
During fiscal 2004, the Company canceled 92,000 of its treasury
stock acquired at different times at an accumulated cost of
$160,922.
[c] Redeemable common stock
The Company has granted to the holders of an aggregate of 26,700
outstanding common shares the right to require the Company to
repurchase the shares at a price of $3.25 per share. If the
holders exercise their rights, the Company will be obligated to
pay, as of September 30, 2004 or gradually over the next fiscal
year, a maximum amount of $86,775.
8. Standby Equity Distribution Agreement
On April 6, 2004, the Company entered into a Standby Equity
Distribution Agreement (Agreement) with Cornell Capital
Partners, L.P. Under the Agreement and subject to its terms and
conditions, the Company may require Cornell Capital Partners,
L.P. to purchase newly issued common shares from the Company,
for a maximum total purchase price of $15 million over a 24-
month period, less certain fees and expenses. The amount of any
advance (periodic sale of stock) may not exceed $625,000 and the
Company may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital
Partners owning more than 9.9% of the Company's then outstanding
common stock. The Company incurred $280,000 in issue costs
related to the signing of the Agreement. These costs were
settled through the issuance of 124,428 of common shares at
$2.25 per share, which represented the volume weighted average
trading price of the Company's shares on the signing date of the
agreement. These costs have been deferred and will be treated
as a reduction to the proceeds from the shares issued under the
Agreement.
In addition to the above issue costs, under the terms of the
Agreement a further payment of $270,000 will be due on the
fulfillment of the terms and conditions of the Agreement.
9. Mineral properties and exploration expenditures
The Company's expenditures for mineral properties and exploration
activities, net of grant revenues received on Lac Dore Mining Inc.'s
vanadium and Great West Diamond Company's diamond exploration, were
$147,586 and $565,984 for fiscal years 2004 and 2003, respectively
($7,277,371 from inception on August 23, 1996 to September 30, 2004).
<page>F-34
10. Income and mining taxes
U.S. and Canada components of loss before income and mining taxes and
cumulative effect of change in accounting principle for SFAS 142 for
fiscal 2004 and 2003 were:
2004 2003
------ ------
United States $(2,130,512) $ (1,929,742)
Canada (1,325,716) (1,615,678)
------------- -------------
Loss before income and mining taxes $(3,456,228) $ (3,545,420)
============= =============
As the Company operates 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 U.S. federal income tax rate of 34%
were as follows:
2004 2003
---------- -----------
Loss before taxes and cumulative
effect of change in accounting
principle for SFAS 142 $(3,465,228) $ (3,545,420)
---------- -----------
Computed "expected" tax recovery (1,175,118) (1,205,443)
Increase (reduction) in income taxes
resulting from:
Resource allowance deduction 8.088 39,246
Earnings in foreign jurisdiction
taxed at different rates (25,802) (50,318)
Tax benefits of losses not recognized 994,066 1,214,804
Non-deductible expenses (stock options and interest) 248,766 1,774
--------- ----------
Total income and mining tax $ - $ -
========== ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
2004 2003
----------- ----------
Net operating loss carry forwards $6,189,547 $5,429,216
Capital loss carry forward 423,379 423,379
Depreciation and amortization 223,396 263,130
Reclamation costs 119,000 85,000
Compensation - stock options 294,480 45,709
Accrued liabilities 8,500 8,500
---------- ------------
Total gross deferred tax assets 7,258,302 6,254,934
Less valuation allowance (7,258,302) (6,254,934)
----------- -------------
Net deferred tax assets $ - -
============ =============
<page>F-35
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
-------------------------------
Canadian net operating loss carry forwards $2,595,465 2005 to 2011
U.S. net operating loss carry forwards 8,627,062 2019 to 2024
U.S. capital loss carry forwards 1,245,231 2008
Canadian exploration expenditures 6,887,211 Unlimited
11. Financial instruments
Financial instruments include cash and cash equivalents, refundable taxes and
other receivables, accounts payable, accrued liabilities and convertible
promissory notes, all of which are carried at cost which approximates fair value
because of the near-term maturity of those instruments. As of September 30,
2004, the fair value of repayable government assistance could not be determined
because no equivalent market exists for such loans.
12. Comprehensive loss
<table>
<caption>
<s> <c> <c>
Cumulative
From inception
on August 23,
1996 to
2004 2003 September 30,2004
--------------- --------------- -----------------
Net loss $(3,456,228) $(3,692,392) $(21,834,973)
Foreign currency translation
adjustment (166,281) (247,170) (390,552)
---------------- ---------------- -----------------
Comprehensive loss $(3,622,509) $(3,939,562) $(22,225,525)
================ =============== =================
</table>
13. Basic and diluted loss per common share
2004 2003
------------ ------------
Net loss $ (3,456,228) $ (3,692,392)
------------- -------------
Total weighted average number of
common shares outstanding 25,872,662 24,186,803
--------------- --------------
Net loss per common share $ (0.13) $ (0.15)
The following outstanding common stock equivalents were excluded from the
computation of diluted net loss per share attributable to common stockholders as
they had an anti-dilutive effect:
<page>F-36
2004 2003
----------- --------
Shares issuable upon exercise of stock options 13,632,817 13,131,617
Shares issuable upon exercise of warrants 2,153,980 952,619
Shares issuable upon conversion of promissory notes 1,413,533 -
14. Related party transactions
The Company has retained a law firm to perform legal services for which
the Company has incurred total expenditures of $112,474 in fiscal 2004
($125,086 in fiscal 2003). A director of the Company is a partner in
that law firm. At September 30, 2004 and 2003, $122,768 and $60,294
resulting from these legal services are included in accounts payable and
accrued liabilities, respectively.
The Company has issued 30,000 shares of its common stock (valued at
$42,000) to a director as compensation for services rendered to the
Company as a consultant in addition to the services rendered as a member
of the Board of Directors.
15. Commitments and Contingencies
The Company has provided to a creditor a 50% lien on the reclamation
bond on deposit with the state of Colorado with payment being made in
the event that Great Western Diamond Company is sold and the deposit
returned (see note 3).
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 accompanying financial
statements.
Royalty Agreements
The Company has entered into a royalty agreement that will pay 2.5% of Dermond
wind turbine sales to the former owners (and current employees) of DERMOND INC.
Bank indebtedness and other loans
The bank indebtedness of a subsidiary company, Great Western Diamond Company in
the amount of $12,163 as of September 30, 2004 ($40,890 as of September 30,
2003), carries interest at 8% per annum and is secured by the assets of Great
Western Diamond Company.
The bank indebtedness of a subsidiary company, DERMOND INC. in the amount of
$90,101, as of September 30, 2004 ($42,572 as of September 30, 2003), carries
interest at 7.5% per annum and is secured by an assignment of the subsidiary's
refundable research and development tax credit.
In addition to the above, the assets of Great Western Diamond Company have been
pledged to secure certain accounts payable in the amount of $240,342 as of
September 30, 2004, 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.
<page>F-37
===========================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has agreed to indemnify its executive officers and directors to
the fullest extent permitted by Delaware law. That law permits the Registrant to
indemnify any person who is, or is threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the
Registrant or in its right) by reason of the fact that the person is or was an
officer or director or is or was serving at our request as an officer or
director. The indemnity may include expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with the action, suit or proceeding, provided that
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to our best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
registrant may indemnify officers and directors in an action by the registrant
or in its right under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the registrant. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
registrant must indemnify him against the expenses which he actually and
reasonably incurred. The foregoing indemnification provisions are not exclusive
of any other rights to which an officer or director may be entitled under our
bylaws, by agreement, vote, or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the offering were
estimated to be approximately as follows.
SEC registration fee $ 3,853
Printing and engraving $ 12,000
Legal fees and expenses $ 82,000
Accounting and auditing fees and expenses $ 40,000
Blue sky fees and expenses $ 5,000
Transfer agent fees $ 12,000
Escrow fee $ 2,500
Miscellaneous $ 2,647
-------------
Total............................................. $ 160,000
=============
<page>79
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
From July 25, 2002 to August 31, 2005, the registrant sold the following equity
securities that were not registered under the Securities Act of 1933.
From July 25, 2002 to July 25, 2005, the registrant sold 3,423,243 shares of its
common stock to 89 private investors for an aggregate of $3,356,296. In
connection with the sales, the registrant issued options and warrants expiring
from July 27, 2004 to August 14, 2008 for the purchase of an aggregate of
843,448 shares of its common stock for no additional consideration. The sales
of shares include 439,450 shares which the registrant issued upon exercise of
certain warrants and options.
On August 15, 2003, the registrant sold options expiring from August 15, 2005 to
August 15, 2008 for the purchase of an aggregate of 8,252,700 shares of its
common stock for cash and other consideration aggregating $551,100 to 34 private
investors. The options were exercisable at prices ranging from $1.00 to $1.25.
From January 7, 2003 to July 12, 2004, the registrant sold options expiring from
November 7, 2009 to October 12, 2013 for the purchase of an aggregate of 68,500
shares of its common stock for services rendered or to be rendered by three
persons. The options were exercisable at prices ranging from $1.40 to $2.10.
The registrant valued the services attributable to the purchase price of the
options at $87,179 by the Black Scholes method.
From December 9, 2002 to February 7, 2005, the registrant sold options expiring
from September 30, 2007 to May 12, 2014 for the purchase of an aggregate of
1,585,000 shares of its common stock for services rendered or to be rendered by
eight employees. The options were exercisable at prices ranging from $0.97 to
$1.50.
From July 31, 2002 to July 12, 2004, the registrant sold 256,050 shares of its
common stock to two persons for services rendered or to be rendered which the
registrant valued at $195,230.
From December 9, 2002 to October 1, 2004, the registrant sold options expiring
from September 30, 2007 to September 30, 2114 for the purchase of an aggregate
of 1,589,584 shares of its common stock for services rendered or to be rendered
by thirteen directors. The options were exercisable at prices ranging from
$1.00 to $1.88.
<page>80
From September 30, 2002 to May 14, 2003, the registrant sold 191,963 shares of
its common stock to four persons in consideration of the release of indebtedness
in the aggregate amount of approximately $225,000.
From February 18, 2003 to May 27, 2005, the registrant sold 126,016 shares of
its common stock to four persons in consideration of their release of the
registrant's obligation to repurchase an aggregate of 70,000 of their shares at
prices ranging from $2.75 to $3.25.
From on April 17, 2003, the registrant sold 250,000 shares of its common stock
to an entity in consideration for acquisitions of assets with an aggregate value
of $262,250.
On April 6, 2004, the registrant sold 124,428 shares of its common stock to
Cornell Capital Partners, LP and Spencer Clarke LLC in satisfaction of $280,000
of fees the registrant had agreed to pay to them in connection with a financing
arrangement.
On August 13, 2004 the registrant borrowed $500,000 from 13 lenders and issued
its 12% promissory notes in that aggregate amount. The promissory notes are
convertible into shares of the Company's common stock at $.75 per share and are
payable on November 14, 2004 if not sooner converted. The registrant also
issued warrants to the lenders for the purchase of an aggregate of 750,000
shares of the registrant's common stock on or before August 13, 2006 at $1.07
per share. The lenders' rights of conversion of the promissory notes commences
on the effective date of this registration statement and expires ninety days
thereafter.
On September 7, 2004, the registrant borrowed $593,750 from ten lenders. The
terms of the loans and the issuance of warrants in connection with the loans are
substantially the same as those of the loans of August 13, 2004 except that (a)
the conversion price of the promissory notes is approximately $.795 per share
and (b) the lenders received warrants for the purchase of aggregate of 873,300
shares of the Company's common stock on or before September 7, 2006 at $1.42 per
share.
<page>81
On January 4, 2005, the registrant sold 3,000 shares of common stock to an
investor at $1.00 per share, upon the exercise of an option.
On March 18, 2005, the registrant issued 17,291 shares of common stock to an
individual in exchange for the cancellation of his right to require us to
repurchase an aggregate of 5,000 shares of our common stock from him at $3.25
per share.
In July 2005, Dermond, Inc. borrowed CDN$125,000, approximately $100,000US from
Centre Local de developpement MRC Rouyn-Noranda and issued a debenture in that
amount. The debenture bears interest at the rate of 12% per annum and is payable
on or before March 31, 2006. The debenture is convertible into 100,000 shares
of the registrant's common stock. The registrant will issue a warrant for each
common share issued upon conversion of the debentures for the purchase of an
additional one half share at the rate of $1.25 per share. The warrants will
expire on July 14, 2007. The registrant has guaranteed the obligations of
Dermond, Inc. in connection with the debenture.
In August 2005, Rocco J. Martino and Stephen D. McCormick each purchased from
the registrant 166,667 shares of common stock and warrants for the purchase of
83,334 shares of common stock at an exercise price of $1.25 per share. The
warrants expire in August 2008. Each of them paid the registrant a total
purchase price of $100,000.
There were no principal underwriters in connection with any of the foregoing
transactions.
The registrant claimed exemption from registration provisions of the Securities
Act of 1933 pursuant to Section 4(2) thereof and/or Rule 506 thereunder.
Although the registrant believed that the transactions did not involve a public
offering and that each purchaser either received adequate information about the
registrant or had access, through employment or other relationships, to such
information, the exemptions may not have been available to us.
ITEM 27. 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.
<page>82
4.6 Promissory Note and Warrant issued on August 13, 2004, letter of August
16, 2004 amending certain terms and "Debenture" setting forth certain
terms. Previously filed as an exhibit to our Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2004 and hereby
incorporated by reference.
4.7 Promissory Note and Warrant issued on September 7, 2004 and "Debenture"
setting forth certain terms. Previously filed as an exhibit to our
Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2004 and hereby incorporated by reference.
4.8 Form of Debenture dated July 14, 2005 payable to Centre local de
developement MRC Rouyn-Noranda and related Loan Agreement, Suretyship
and form of warrant. Previously filed as an exhibit to Post-Effective
Amendment No. 2 to this registration statement and hereby incorporated
by reference.
4.9 Form of Promissory Note issued to Gary L. Westerholm.*
5 Opinion of Larson, Harms & Bibeau, P.C. re legality. Previously filed
as an exhibit to Amendment No. 1 to this registration statement 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.
<page>83
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.
10.9 Employment Agreement dated March 21, 2003 between Gary L. Westerholm and
McKenzie Bay International, Ltd. Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30,
2003, and incorporated herein by reference.
10.10 Employment Agreement dated March 21, 2003 between Gregory N. Bakeman and
McKenzie Bay International, Ltd. Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30,
2003, and incorporated herein by reference.
10.11 Employment Agreement dated March 21, 2003 between John W. Sawarin and
McKenzie Bay International, Ltd. Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30,
2003, and incorporated herein by reference.
10.12 Consulting Agreement as of February 15, 2003 between McKenzie Bay
Resources, Inc.(now known as Lac Dore Mining Inc.) and Savanco, (Pty)
Ltd, incorporated. Previously filed as an exhibit to our Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2003, and
incorporated herein by reference.
<page>84
10.13 Agreement of August 19, 2003 between McKenzie Bay International, Ltd.
Resources, Inc. and Yes International Inc. Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003, and incorporated herein by reference.
10.14 Standby Equity Distribution Agreement as of April 6, 2004 between
Cornell Capital Partners, LP and McKenzie Bay International, Ltd.
Previously filed as an exhibit to our Annual Report on Form 10-KSB for
the fiscal year ended September 30, 2003, and incorporated herein by
reference.
10.15 Registration Rights Agreement as of April 6, 2004 between Cornell
Capital Partners, LP and McKenzie Bay International, Ltd. Previously
filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal
year ended September 30, 2003, and incorporated herein by reference.
10.16 Placement Agent Agreement as of April 6, 2004 between McKenzie Bay
International, Ltd. and Spencer Clarke LLC. Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003, and incorporated herein by reference.
10.17 Escrow Agreement as of April 6, 2004 between McKenzie Bay International,
Ltd., and Butler Gonzalez LLP. Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30,
2003, and incorporated herein by reference.
10.18 Agreement of June 2004 between Dermond Inc. and Universite du Quebec en
Abitibi-Temiscamingue. Previously filed as an exhibit to Amendment No. 1
to this registration statement and hereby incorporated by reference.
10.19 Form of Promissory Notes issued to Cornell Capital Partners, LP.
Previously filed as an exhibit to our Annual Report on Form 10-KSB for
the fiscal year ended September 30, 2004, and incorporated herein by
reference.
10.20 Consulting Services Agreement of January 10, 2005 between McKenzie Bay
International, Ltd. And Stone Street Advisors, LLC. Previously filed as
an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2004, and incorporated herein by reference.
10.21 Employment Agreement dated as of June 28, 2005 between Doris F. Galvin
and WindStor Power Co. Previously filed as an exhibit to Post-Effective
Amendment No. 2 to this registration statement and hereby incorporated
by reference.
<page>85
10.22 Employment Agreement dated as of April 1, 2005 between Donald C. Harms
and McKenzie Bay International, Ltd. Previously filed as an exhibit to
Post-Effective Amendment No. 2 to this registration statement and hereby
incorporated by reference.
10.23 Agreement of July 7, 2005 between McKenzie Bay International, Ltd., and
Brooks, Houghton & Company, Inc. Previously filed as an exhibit to
Post-Effective Amendment No. 2 to this registration statement and hereby
incorporated by reference.
10.24 Power Purchase Agreement dated August 18, 2005, between WindStor
Power Co., and Ishpeming Housing Commission.*
14.1 Code of Ethics. Previously filed as an exhibit to our Annual Report on
Form 10-KSB for the fiscal year ended September 30, 2003, and
incorporated herein by reference.
21.1 Subsidiaries. Previously filed as an exhibit to our Annual Report on
Form 10-KSB for the fiscal year ended September 30, 2003, and
incorporated herein by reference.
23.1 Consent of Larson, Harms & Bibeau, P.C. The consent is contained in
Exhibit 5.
23.2 Consent of BDO Seidman, LLP*
99.1 Lac Dore Preliminary 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.
___________________
* Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned small business issuer hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement other than any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) or any deviation from the low or high end
of the estimated maximum offering range if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
<page>86
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB 2 and has authorized this post-
effective amendment to its registration statement to be signed on its behalf by
the undersigned, in the City of Farmington Hills, State of Michigan, on the
2nd day of September, 2005.
MCKENZIE BAY INTERNATIONAL, LTD.
By: /s/ Gary L. Westerholm
------------------------
Gary L. Westerholm,
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- ------------------------ -------------- -----------
/s/ Gary L. Westerholm
- ----------------------- September 2, 2005
Gary L. Westerholm
President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Gregory N. Bakeman September 2, 2005
- ----------------------
Gregory N. Bakeman Treasurer, Chief Financial Officer
and Director (Principal Financial
and Accounting Officer)
<page>87
- -------------------------
William H. Damon III Director September 2, 2005
- ----------------------
Anand Gangadharan Director September 2, 2005
/s/ Donald C. Harms
- ----------------------
Donald C. Harms Director September 2, 2005
- ---------------------
Rocco J. Martino Director September 2, 2005
- ------------------------
Stephen D. McCormick Director September 2, 2005
/s/ John Popp
- -----------------------
John Popp Director September 2, 2005
/s/ John W. Sawarin
- -----------------------
John W. Sawarin Director September 2, 2005
<page>88