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As Of Filer Filing For·On·As Docs:Size Issuer Agent 6/30/05 Iq Power AG 20-F 12/31/04 5:721K Dorsey & Whitney LLP/FA |
Document/Exhibit Description Pages Size 1: 20-F Annual Report of a Foreign Private Issuer HTML 438K 2: EX-1.1 Underwriting Agreement 10 29K 3: EX-12.1 Statement re: Computation of Ratios 2± 8K 4: EX-13.1 Annual or Quarterly Report to Security Holders 1 6K 5: EX-99.1 Miscellaneous Exhibit HTML 4K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________________ to
_______________________
Commission file number 000-26165
iQ POWER AG
(formerly, iQ Power Technology Inc.)
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
--------------------------------------------------------------------------------
(Translation of Registrant's name into English)
Switzerland
--------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
Baarer Str. 137, CH-6300 Zug, Switzerland
--------------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Registered shares, with a par value of CHF0.03
--------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
--------------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or registered shares as of the close of the period covered by the annual
report 34,923,150 Registered shares with a par value of CHF0.03
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
[X] Item 17 [ ] Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Identity of Directors, Senior Management and Advisers..............1
Item 2. Offer Statistics and Expected Timetable............................1
Item 3. Key Information....................................................1
Item 4. Information on the Company.........................................9
Item 5. Operating and Financial Review and Prospects......................27
Item 6. Directors, Senior Management and Employees........................42
Item 7. Major Shareholders and Related Party Transactions.................54
Item 8. Financial Information.............................................56
Item 9. The Offer and Listing.............................................57
Item 10. Additional Information............................................60
Item 11. Quantitative and Qualitative Disclosures About Market Risk........73
Item 12. Description of Securities Other than Equity Securities............74
PART II.......................................................................75
Item 13. Defaults, Dividend Arrearages and Delinquencies..................75
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds..............................................75
Item 15. Controls and Procedures..........................................76
Item 16....................................................................77
Item 16A. Audit Committee Financial Expert..............................77
Item 16B. Code of Ethics................................................77
Item 16C. Principal Accountant Fees and Services........................77
Item 16D. Exemptions from the Listing Standards for Audit Committees....77
Item 16E. Purchases of Equity Securities by the Issuer and
Affiliated Purchasers.........................................77
PART III......................................................................78
Item 17. Financial Statements...........................................78
Item 18. Financial Statements...........................................79
Item 19. Exhibits.......................................................79
ii
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 20-F constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of iQ Power AG and its subsidiaries, iQ Power Deutschland GmbH
("iQ Germany") and iQ Power Licensing AG ("iQ Licensing") (hereinafter
collectively, referred to as "we," "us," "our," iQ Power" and "the Company"), or
developments in the Company's industry, to differ materially from the
anticipated results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to: the
Company's limited operating history, lengthy development and sales cycles
related to the commercialization of battery technologies, the Company's
dependence upon a relative concentration of customers in the automotive and
battery manufacturing industries; competition in the battery industry and
competing battery technologies, risk related to the development of the Company's
battery technologies and acceptance by the automotive and battery manufacturing
industries; risks of technological change that may be inconsistent with the
Company's technologies or may render its technologies obsolete, dependence on
selected vertical markets within the automotive and battery manufacturing
industries, general economic risks that may affect the demand for automotive
batteries; the Company's reliance on third-party marketing relationships and
suppliers; the Company's ability to protect its intellectual property rights and
the other risks and uncertainties described under "Risk Factors" in this Annual
Report on Form 20-F.
Some of the important risks and uncertainties that could affect forward-looking
statements are described further in this document under headings "Risk Factors",
"Business Overview", "Property Plants and Equipment" and "Operating and
Financial Review and Prospects". Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, estimated
or expected. The Company does not intend to update these forward-looking
statements. Investors are cautioned against attributing undue certainty to
forward-looking statements.
iii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
A. Directors and Senior Management.
Not Applicable.
B. Advisers.
Not Applicable.
C. Auditors.
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not Applicable.
ITEM 3. KEY INFORMATION.
A. Selected Financial Data.
The following tables set forth and summarize selected consolidated financial
data for the Company (stated in thousands of U.S. dollars, except numbers of
shares and per share amounts), prepared in accordance with generally accepted
accounting principles in the United States. The information in the tables was
extracted from the more detailed financial statements of the Company for the
years presented, which have been audited by Deloitte & Touche GmbH, Munich.
The selected financial data should be read in conjunction with Item 5,
"Operating and Financial Review and Prospects" and in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto contained
elsewhere in this Annual Report. The Company's fiscal period ends on December 31
of each year.
The following is a summary of certain selected financial information for the
Company's most recently completed fiscal year and for the Company's four
preceding fiscal years.
1
----------------------------------------------------------------------------------------------------------------
All in $1,000's except number Audited
of shares and per share (Fiscal year ended December 31)
amounts
2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Working capital (deficiency): (434) 62 (148) 145 (135)
Revenues: 53 42 0 0 6
Net earnings (loss): (2,648) (2,294) (1,555) (3,754) (2,359)
Basic and diluted earnings (0.09) (0.10) (0.09) (0.29) (0.24)
(loss) per share:
Total current assets : 1,150 1,928 667 901 451
Total Non-Current Assets 461 445 448 459 374
Total Current Liabilities : 1,584 1,866 815 756 586
Non-controlling interest - - - - -
Share capital, incl. Agio 15,822 13,315 10,576 8,574 5,941
Contributed Surplus 2,000 2,108 1,571 1,850 406
Number of shares 34,923,150 27,563,071 20,348,227 15,952,124 9,746,620
Retained earnings (deficit): (16,343) (13,695) (11,401) (9,846) (6,092)
----------------------------------------------------------------------------------------------------------------
No dividends have been declared in any of the years presented above.
Exchange Rate Information
The Company's accounts are maintained in U.S. dollars. In this Annual Report,
all dollar amounts are expressed in U.S. dollars except where otherwise
indicated.
On June 27, 2005, the exchange rate of Euros and Swiss francs into United States
dollars, based upon the noon buying rate in New York City for cable transfers
payable in Euros and Swiss francs as certified for customs purposes by the
Federal Reserve Bank of New York, was U.S. $1.00 equals EUR 0.8276 and CHF
1.2755, respectively.
B. Capitalization and Indebtedness.
Not Applicable.
C. Reasons for the Offer and Use of Proceeds.
Not Applicable.
2
D. Risk Factors.
The Company, and thus the securities of the Company, should be considered a
highly speculative investment and investors should carefully consider all of the
information disclosed in this Annual Report prior to making an investment in the
Company. In addition to the other information presented in this Annual Report,
the following risk factors should be given special consideration when evaluating
an investment in any of the Company's securities.
WE ARE ALMOST EXCLUSIVELY RELIANT ON THE SALE OF TREASURY STOCK FOR FINANCIAL
LIQUIDITY. OUR INABILITY TO SECURE ADDITIONAL FINANCING ON ACCEPTABLE TERMS
COULD PREVENT OR DELAY US FROM DEVELOPING AND COMMERCIALIZING THE IQ TECHNOLOGY
WHICH COULD DECREASE THE VALUE OF THE SHARES OR ADVERSELY AFFECT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Our auditors have expressed substantial doubt as to our ability to continue as a
going concern.
As of December 31, 2004, we had a working capital deficit of $434,000. We will
require additional financing to continue as a going concern. We anticipate that
we will need to raise approximately $2,000,000 to $2,200,000 during 2005 to fund
our anticipated plan of operation and working capital requirements during the
year ending December 31, 2005.
We are currently seeking additional financing to meet our financial requirements
for 2005. As of June 30, 2005, we have received subscriptions related to a
private placement to purchase 2,000,000 registered shares for total proceeds of
approximately $836,200 (CHF 1,062,871.25). We have also received approximately
$880,000 pursuant to the exercise of warrants and options to acquire 2,034,153
registered shares since January 1, 2005. We have only nominal revenue and no
historical basis for estimating 2005 revenues. We may require more financing
than we anticipate, if we experience delays, cost overruns, additional funding
needs for joint ventures, acquisitions, or other unanticipated events.
If we fail to get the necessary financing on a timely basis, it might:
o delay and increase the costs of development and commercialization of
the iQ technology;
o cause us to default on some of our financial commitments;
o prevent us from being able to commercialize the iQ technology;
o force us to discontinue our operations or to look for a purchaser for
the iQ technology or our business, and/or
o result in the bankruptcy of one or more companies within our corporate
group,
all of which would negatively impact your investment in our shares. We cannot
assure you that additional financing will be available on a timely basis or on
terms acceptable to us or at all.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION AND WE ANTICIPATE THAT LOSSES
WILL CONTINUE.
We incurred net loses of $2,648,000 in 2004 and $2,294,000 in 2003. As of
December 31, 2004, we have incurred net losses since our inception in the
aggregate amount of $17,367,000, and we anticipate that we will continue to
incur losses due to a high level of operating and capital expenditures, sales
and marketing costs, additional personnel requirements and our general growth
objectives.
3
We anticipate that our net annual losses will decrease in the near future as we
implement our business strategy and attempt to commercialize our MagiQTM
battery; however, our ability to earn a profit will depend on the commercial
acceptance of our products, which has not yet been achieved, and our ability to
exploit our technology. We may never achieve profitability.
WE HAVE EXPERIENCED DELAYS IN THE DEVELOPMENT OF OUR TECHNOLOGIES AND THE
COMMERCIALIZATION OF OUR BATTERIES.
We have experienced various delays in the development of our technologies and
our batteries that have adversely affected the commercialization of our
batteries and our results of operations. We had anticipated that our MagiQTM
batteries would be in commercial production as early as 2003. However, we
experienced delays in our pilot program that will result in a delay of the
commercial launch of our MagiQTM battery. Our MagiQTM batteries are currently in
the pilot program stage and we may not be in position to launch commercial
production of our MagiQTM batteries until we raise sufficient capital to
undertake such production.
In addition, we may experience delays in the development and commercialization
of our other technologies similar to those we experienced in developing our
MagiQTM batteries. The timing of the development of battery technology is
dependent on a number of factors, including availability of capital, changing
specification of manufacturers, changing technologies and other factors. We
cannot assure you that we will be able to complete the development of our
technologies in a timely manner or that our technology will be commercially
accepted.
THE INTENSE COMPETITION IN THE LEAD-ACID BATTERY INDUSTRY MAY HINDER OUR ENTRY
INTO THE MARKETPLACE AND MAY NEGATIVELY IMPACT OUR ABILITY TO COMMERCIALIZE THE
IQ TECHNOLOGY.
Many of our competitors have:
o long operating histories;
o substantial resources that are devoted to research and development,
manufacturing, marketing and commercializing products;
o products and technologies that are widely accepted by retail consumers
and other buyers of batteries;
o products with long histories of reliable and effective use; and
o established reputations and long-standing relationships with original
equipment manufacturers,
all of which could hinder our entry into the marketplace and give them a large
competitive advantage over us. We expect competition in the battery industry to
intensify because many battery companies are consolidating or vertically
integrating which, because they own all stages of production, allows them to
make batteries at lower cost. In recent years, buyers of lead-acid batteries
have also consolidated, reducing the number of customers for lead-acid batteries
and increasing price competition.
4
OUR INABILITY TO COMMERCIALIZE THE IQ TECHNOLOGY WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
Our design requires us to integrate the iQ technology with existing lead-acid
battery technology. We believe that the iQ technology can be integrated into
lead-acid batteries on a commercial basis, and that a commercially feasible
manufacturing process can be developed. We currently have no agreements or
arrangements to integrate our technology in any commercial applications. There
can be no assurance that our iQ technology will be incorporated into batteries
in commercial production in quantities sufficient to be commercially profitable.
MARKET DEMAND FOR THE IQ TECHNOLOGY AND FOR BATTERIES THAT INCORPORATE THE IQ
TECHNOLOGY IS UNCERTAIN WHICH MAY AFFECT OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND MAY ADVERSELY AFFECT YOUR INVESTMENT.
There may not be enough demand for the iQ technology or for batteries that
incorporate the iQ technology to generate revenues yet alone enough revenues so
that we will make a profit. If so, this would adversely affect your investment.
There are currently no commercially produced lead-acid batteries that use the iQ
technology. As a result, the potential demand for batteries that use the iQ
technology and the degree to which the iQ technology can meet market demand is
difficult to estimate. Our success in gaining market acceptance for the iQ
technology will be affected by a number of factors that are beyond our control,
such as:
o the license fees for the iQ technology;
o the willingness of consumers to pay a premium price for batteries
incorporating the iQ technology;
o specifications of automobile manufacturers;
o the marketing and pricing strategies of competitors;
o the development of alternative technologies; and
o general economic conditions.
WE HAVE NO HISTORY OF MATERIAL REVENUES. ANY REVENUES WE DO RECEIVE WILL DEPEND
MOSTLY ON LICENSING THE IQ TECHNOLOGY OR SELLING BATTERIES OR OTHER PRODUCTS
THAT INCORPORATE IQ TECHNOLOGY WHICH WILL MAKE US VULNERABLE TO CHANGES IN
MARKET DEMAND. AS A RESULT, ANY DECLINE IN DEMAND COULD MATERIALLY, ADVERSELY
AFFECT OUR BUSINESS.
To date we have earned no material revenues from the sale of our products and
only initial revenues from the licensing of our technology. We anticipate that
all of our revenues will initially come from fees derived from licensing the iQ
technology or, possibly, from the sale of our own batteries that incorporate the
iQ technology. We currently have only one licensing arrangement for our iQ
technology and have only launched a limited pilot program to commercialize our
MagiQTM battery. We cannot guarantee that we will receive any future revenues
from the licensing of the iQ technology or from the sale of batteries or other
products incorporating the iQ technology, or that we can generate a profit.
If we receive any revenues, the revenues may decrease after an initial period of
market introduction due to factors such as:
5
o increased competition;
o changes in consumer preferences;
o changes in customer specifications, market saturation;
o government regulation of the battery industry;
o changes in demand from OEMs;
o changes in demand for automobiles;
o changes in economic conditions; or
o other factors, many of which are beyond our control.
WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW ELECTRIC POWER TECHNOLOGIES OR
PRODUCTS AND THIS COULD NEGATIVELY AFFECT OUR PROSPECTS FOR GROWTH AND OUR
BUSINESS.
We may not successfully complete the development or introduction of new electric
power technologies or products, or, if we do, such technologies or products may
not achieve market acceptance. In addition, we may experience delays in the
development process. We believe our growth will depend upon our ability to
develop and commercialize the iQ technology and to introduce new products and
technologies that are attractive to consumers, OEMs, automobile manufacturers,
automobile service providers and retailers of automotive batteries. We cannot
assure you that we will be successful in doing so.
WE EXPECT TO BE DEPENDENT ON A FEW KEY CUSTOMERS, AND THE LOSS OF ANY ONE OF
THEM COULD SIGNIFICANTLY REDUCE OUR ABILITY TO GENERATE REVENUES WHICH WILL HAVE
AN ADVERSE AFFECT ON OUR BUSINESS.
To the extent we depend upon key customers for a large percentage of our
revenues, the loss of one or more of them or a significant reduction in
licensing fees from one or more of them could have a material adverse effect on
our business. We anticipate that a large portion of our revenues will come from
license fees from a limited number of key customers including automobile
manufacturers, aftermarket resellers and OEMs.
WE WILL RELY ON THIRD PARTIES TO SUPPLY DEVELOPMENT, MANUFACTURING, MARKETING
AND DISTRIBUTION EXPERTISE WHICH WILL MAKE OUR SUCCESS DEPENDENT UPON THEIR
EFFORTS. IF THEY ARE NOT SUCCESSFUL, IT COULD NEGATIVELY IMPACT OUR ABILITY TO
COMMERCIALIZE THE IQ TECHNOLOGY AND OUR BUSINESS.
Our future success is dependent on the development and maintenance of strategic
relationships. If our strategic partners or third parties fail to perform
effectively, we may not generate any revenues or a profit. We may rely upon
strategic partners:
o to assist us in the research and development of the iQ technology and
future technologies;
o to participate in the later stage development and testing of
commercial prototypes;
o to manufacture products based on the iQ technology; and
o to market and distribute such products.
6
We have no experience in manufacturing battery technology or products. If we
decide to manufacture and market our own product line, we will likely contract
with a third-party manufacturer to manufacture, assemble, test and package our
products to our specifications. We cannot assure you that we will be able to
enter into such contracts on terms that are acceptable to us. In addition,
third-party manufacturers are required to meet governmental and regulatory
requirements including environmental and consumer safety requirements. If the
third-party manufacturer we select should fail to comply with the regulatory
requirements or be unable to meet our quantity and quality requirements, we will
have to select another manufacturer, which may result in delays in delivering
products to distributors or other purchasers.
We have no sales, marketing or distribution experience. To the extent that we
depend on our strategic partners or third parties for marketing and
distribution, any revenues received by us will depend upon their efforts. We
cannot guarantee that such efforts will lead to a successful and effective sales
force and distribution system. We may have to rely on experienced employees,
strategic partners, distributors and third-party manufacturer's representatives
to market our products. If we are unable to maintain or establish third-party
distribution relationships, we may have to develop our own marketing and sales
force with technical expertise and supporting distribution capabilities. We can
not guarantee you that we will be successful in doing so.
OUR TECHNOLOGIES MAY BECOME OBSOLETE AND WE MAY NOT BE ABLE TO MEET THE
INDUSTRY'S EVOLVING REQUIREMENTS. FAILURE TO KEEP UP WITH THE TECHNOLOGICAL
ADVANCES AND OBTAIN MARKET ACCEPTANCE FOR SOME OR ALL OF OUR PRODUCTS WOULD HAVE
A NEGATIVE IMPACT ON OUR REVENUE AND ABILITY TO OPERATE PROFITABLY.
The automotive industry is characterized by rapidly changing markets,
technology, emerging industry standards and frequent introduction of new
products. The introduction of new products embodying new technologies, including
new manufacturing processes, and the emergence of new industry standards may
render our products obsolete, less competitive or less marketable. The process
of developing our iQ Technology is extremely complex and requires significant
continuing development efforts and third party commitments. Our success will
depend, in part, on our ability to continue to enhance its existing
technologies, develop new technology that addresses the increasing
sophistication and varied needs of the market, and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. We may not be successful in commercializing our
technologies or exploiting its niche markets effectively or adapting our
businesses to evolving manufacturer requirements or preferences or emerging
industry standards.
VOLATILITY OF OUR REGISTERED SHARES PRICE COULD CAUSE YOU TO LOSE ALL OR PART OF
YOUR INVESTMENT.
The market price for our registered shares as reported by the OTCBB have
fluctuated from $0.32 to $0.78 during the twelve month period ended December 31,
2004, and $0.35 to $0.75 during the period from January 1, 2005 to June 27,
2005. Market prices for securities of microcap companies generally are highly
volatile. Factors such as announcements of technological innovations, new
commercial products, patents, the development of proprietary rights by us or
others, future sales of our registered shares or our shareholders and other
factors could have a significant effect on the market price of our registered
shares.
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR OPERATION.
Our reporting currency is the United States dollar, and we have obligations and
commitments in other currencies including Euros and Swiss Francs. Fluctuations
in foreign currency exchange rates may affect our results of operations which in
turn may adversely affect reported financial figures and the comparability of
period-to-period results of operations.
7
WE DO NOT INTEND TO PAY CASH DIVIDENDS AND THERE IS NO ASSURANCE THAT WE WILL
EVER DECLARE CASH DIVIDENDS.
We do not have any intention of paying cash dividends in the foreseeable future.
In particular, there can be no assurance that our Board of Director's will ever
declare cash dividends, which action is completely within their discretion.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN OUR SHARES
BECAUSE THEY ARE CONSIDERED A PENNY STOCK AND ARE SUBJECT TO THE PENNY STOCK
RULES.
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales
practice and disclosure requirements on certain brokers-dealers who engage in
certain transactions involving "a penny stock." Subject to certain exceptions, a
penny stock generally includes any non-NASDAQ equity security that has a market
price of less than $5.00 per share. The market price of our shares over the year
ended December 31, 2004 ranged between $0.32 and $0.78 and our shares are deemed
penny stock for the purposes of the Exchange Act. The additional sales practice
and disclosure requirements imposed upon brokers-dealers may discourage
broker-dealers from effecting transactions in our shares, which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to anyone
other than an established customer or "accredited investor," generally, an
individual with net worth in excess of US$1,000,000 or an annual income
exceeding $200,000, or $300,000 together with his or her spouse, must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the United States
Securities and Exchange Commission relating to the penny stock market, unless
the broker-dealer or the transaction is otherwise exempt. A broker-dealer is
also required to disclose commissions payable to the broker-dealer and the
registered representative and current quotations for the securities. Finally, a
broker-dealer is required to send monthly statements disclosing recent price
information with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks.
8
ITEM 4. INFORMATION ON THE COMPANY.
A. History and Development of the Company.
We were incorporated on December 20, 1994 under the Canada Business Corporations
Act as 3099458 Canada Inc. We changed our name to iQ Power Technology Inc. on
May 9, 1997. Effective November 10, 2004, we continued the Corporation to
Switzerland, changing our name to iQ POWER AG. We are now incorporated under the
law of Switzerland, registered in the commercial register of the Canton of Zug,
under the registration number CH-170.3.027.783-9. As of the filing date of this
report, our principal executive offices are located at Baarerstr. 137, 6300 Zug,
Switzerland and our telephone number at that location is +41-41-766 6999.
iQ Germany was formed in 1991 to research and evaluate methods of maximizing
lead-acid battery performance. We were formed to acquire iQ Germany and to
license the technology developed by iQ Germany to others or to market products
based on such technology. Throughout this Annual Report we refer to the
technology developed by iQ Germany as our "technology", the "iQ technology" or
our "iQ Battery technology."
On August 25, 1998, we acquired all the issued and outstanding common stock of
iQ Germany in exchange for 5,120,000 of our registered shares. The value of the
shares we issued to acquire of iQ Germany was $3,200,000 or $0.625 per share. As
a result of the share exchange, we acquired all of the assets and liabilities of
iQ Germany. We are currently engaged in the development and commercialization of
electrical power sources for the automotive industry and other industries based
on the iQ technology.
On June 18, 1999, we completed our initial public offering in the United States
pursuant to which we received net proceeds of $4,690,000.
Disposition of BarbiQ Power Limited
BarbiQ Power Limited was established in 2003 as an investment holding company
and was domiciled in Barbados. BarbiQ was sold in June 2004 with a cumulative
loss of $13,000. No further assets or liabilities exist as of December 31, 2004.
Creation of iQ Power Licensing AG
On October 7, 2004, iQ Power Licensing AG was established to become the
operating entity, holding all of our intellectual property and to market our
intellectual property both internally as well as to external licensing partners.
Continuation to Switzerland
In 2004, we continued from Canada to Zug, Switzerland. Under the terms of the
Continuance:
(i) iQ Power continued from Canada to Switzerland and became a Swiss
corporation.
(ii) the corporate name "iQ Power Technologies Inc." was changed to "iQ
Power AG".
(iii) each share of iQ Power was deemed to represent one registered share
of iQ Power AG, par CHF 0.03. No fractional shares were issued in
connection with the Continuance.
(iv) issued and outstanding options and warrants of iQ Power were deemed
to represent options and warrants of iQ Power AG.
(v) iQ Power AG became subject to the Swiss Code of Obligations with
domicile in Zug, Switzerland.
9
Shareholders of the iQ Power approved the Continuance of the corporation to
Switzerland at its 2004 Annual General Meeting as well as a change of its name
to iQ Power AG on July 30, 2004. iQ Power received a Letter of Satisfaction from
the Director under the Canada Business Corporations Act permitting it to apply
for Continuance in Switzerland. iQ Power held a meeting of shareholders in
Switzerland to approve new Articles of Incorporation prepared in accordance with
Swiss law on November 5, 2004. The Continuation was completed on November 10,
2004.
The Continuance was deemed to be an offer for the securities of iQ Power, a
foreign corporation, by iQ Power AG, as the continued corporation. In connection
with the Continuance, iQ Power AG was deemed to have issued new securities.
These securities were offered in the United States pursuant to an exemption from
the U.S. tender offer rules provided by Rule 14d-1(c) under the Securities
Exchange Act of 1934, as amended, and pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), provided by Rule 802 thereunder. The securities issued
pursuant to the Continuance were unregistered restricted securities within the
meaning of Rule 144 under the Securities Act to the same extent and proportion
that the securities tendered or exchanged by the holder in that transaction were
restricted securities.
We have not been subject to any bankruptcy, receivership or similar proceeding.
A. Business Overview.
We are engaged in the development and commercialization of electrical power
sources and energy management technologies for the automotive industry and other
industries, including the aerospace and defense industry. Our primary expertise
lies in the synthesis of patented microelectronic software and communications
components with conventional battery technologies and the development of
proprietary energy management systems.
The initial market we targeted was the starting, lighting and ignition ("SLI")
battery market. We believe that this market is a mature and stable market
composed of a limited number of aftermarket resellers and original equipment
manufacturers (so-called "OEMs"). Over the last ten years, new competition and
changes in the automotive industry have increased pressure on SLI battery
manufacturers to reduce costs and to improve the power and efficiency of the
batteries they produce. In response to these conditions and to the increased
market demand for smaller and lighter SLI batteries that produce adequate
amounts of electrical power, we developed our iQ technology, a battery
technology that lowers the weight and increases the electrical output of SLI
batteries. The iQ technology has in turn given rise to other applications.
Employing the iQ Technology, we have developed, are developing, or are involved
in the development of the following products and product applications:
o "Smart" lead/acid automotive starter battery (known as the Generation
1 MagiQTM Battery);
o Generation 2 "Smart" lead/acid automotive starter battery with State
of Health (SOH)/State of Charge (SOC) External Monitor Capabilities;
o PowerLyzer(R);
o Conceptual Integration of the iQ Technology Platform in 42 volt
automotive electrical systems;
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o DC-BUS Automotive Communication System;
o Battery Energy Management (BEM)(R);
o Smart Energy Management (SEM)(R);
o Load Separation Module (LTM) for ACTROS and SMART passenger car
o Software for Diagnosis and Data-Analysis
Our portfolio is targeted at different market segments as shown in the graph
below:
Fig. 1 Relevant market segments for iQ Power product range
Specific information on our product line and on-going projects can be found
under the subheading, "Products and Technology" below.
Our primary commercial value today rests in our iQ Technology, the products we
have developed out of it, and our highly-qualified engineering and scientific
research and development personnel team. iQ Germany currently employs 10
engineers and scientists in its Unterhaching and Chemnitz, Germany offices on a
full-time basis, whose primary focus is research and development. These
personnel have considerable experience with the development of starting,
lighting and ignition ("SLI") battery systems and applications. We believe that
this combination of expertise has allowed, and will continue to allow, iQ
Germany to design and develop battery technologies and energy management
solutions that can be implemented in a timely and cost-effective manner.
In addition to our own expertise, we have developed numerous supplier,
co-development, and original equipment manufacturer relationships within the
automotive and electronics industry with such parties as BASF, Texas
Instruments, E. Schnapp & Co., YAMAR Electronics, Gigatronics, ESG,
DaimlerChrysler, BMW, and Audi.
While our iQ Battery technology platform can be applied across a diversified
spectrum of industries and applications, ranging from automotive (including
electric, hybrid and fuel cell powered vehicles) to stationary applications in
telecommunications and standby power sources, we have chosen in light of our own
expertise and financial limitations to initially focus on the automotive market
and specifically cars and trucks.
We have reached the stage where we must commercially market our products. We
have targeted two products for market penetration: the first is our
PowerLyzer(R) for which we shipped initial products in 2003 and delivered
engineering services in 2004. The second is our core Generation 1 MagiQTM
Battery. Management has spent a substantial amount of time over the past 2 years
finalizing our supply chain, sourcing contract manufacturers, and marketing our
Battery to potential Original Equipment Manufacturer (OEM) users.
The greatest challenge we face is raising sufficient capital on a timely basis
to implement commercial production while maintaining our existing research and
development operations and the overhead associated with those operations. To
date, we have been unable to manufacture, market or sell our products in
commercial quantities and we may not be in a position to do so in the near
future.
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Korean Joint Venture
In the Spring of 2004, we began negotiations with a group of Korean businessmen
led by Mr. Tae Soo Lee to develop a joint venture to develop and market
batteries feature iQ Power technology in Korea. We entered into a series of
agreements in connection with this project, including a consulting services
agreement under which iQ Germany has agreed to provide consulting services to
the joint venture related to developing a facility in Korea to manufacture iQ
products. We anticipate that fees paid to iQ Germany for consulting services
will not exceed $150,000.
In addition to the consulting services agreement, we entered into an exclusive
licensing agreement and option agreement under which we granted the joint
venture partner an option to secure a license to manufacture, market and sell
specified iQ products in a territory, including Korea, for consideration of
$1,350,000. As of June 27, 2005, we received approximately $1,100,000 from the
joint venture partner and expect to receive the balance of the upfront licensing
fee prior to the end of 2005.
Under the terms of the Korean joint venture arrangement, we are obligated to
supply the joint venture with the technology and key components, including iQ
chip sets, to manufacture iQ products. We expect to begin delivery of components
at specified prices near the end of 2005.
We agreed to take a 40% interest in the Korean joint venture, which cannot be
diluted. In addition to the licensing fees and consulting fees, the Korean joint
venture is obligated to pay iQ Power an initial distribution of $2,000,000 from
future income of the joint venture.
SLI Industry Background
We believe that the industry for starting, lighting and ignition (SLI) lead/acid
batteries is a stable, mature industry composed of a limited number of
aftermarket resellers and OEMs. The SLI market covers consumer-automotive,
marine and other automotive applications. In 2003 the world SLI lead/acid
battery market generated revenues of approximately $14.6 billion and, according
to recent research by Frost & Sullivan, is anticipated to grow almost 4.5
percent annually from 2003 to 2010. Such growth is expected to occur as a result
of marginal increases in unit deliveries combined with a moderate to high
fluctuation in unit prices. Moreover, emerging economies in the Asia-Pacific
region and parts of Europe are likely to fuel this growth over the next years.
Over 70% of the lead processed worldwide is used in the manufacture of lead/acid
batteries. The rapidly rising price of lead on the international commodities
markets since mid-2003 is putting tremendous pressure on battery makers'
margins. After all, the cost of lead accounts for 85% of the price of an SLI
battery. Still, increased raw-materials costs cannot be automatically passed on
to the customer - in this case the carmakers. In terms of dollars, lead prices
have more than doubled from some $400 per ton in June 2003 to about $1,000 per
ton in June 2005. One cause is the strong demand shown by the Chinese economy
and automobile industry for raw materials and lead, including for use in
batteries. On the other hand, this price increase is mitigated somewhat by the
lead/acid battery's 95% recycling rate and the heavy use of secondary lead
recovered from lead scrap.
It is the use of lead/acid batteries in the automotive industry, the largest
single market, which determines the size of the overall lead/acid battery
market. Some 180 million units were sold within this dominating market in 2000.
About 120 million went to the aftermarket and another 60 million were used as
original equipment or OE (a 2:1 ratio). Little change was observed within the
market segment of Europe, the United States and Japan, the three comprising the
most-important automobile sales market, due to their high level of market
saturation. Today growth stems primarily from emerging markets such as China,
India, Iran, Russia and Brazil.
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According to the OICA international association of motor vehicle manufacturers,
58.3 million starter batteries were used worldwide in the OE car and truck
manufacturing industry in the year 2000 (The most important markets were Europe,
the United States and Japan with 19.2 million such batteries in use in Europe,
20.1 million in the United States and 10 million in Japan). Another some 120
million units were used in the OE-supplier replacement-parts market worldwide.
According to industry organizations such as EUROBAT, in the year 2000 the size
of the market for replacement starter batteries was approximately 47 million
units in Europe and some 50 million in the United States. For Europe (including
countries such as Poland and Turkey) in 2003, EUROBAT showed a total market for
car batteries of 70.6 million units, of which 19 million units were for factory
equipment and 51.6 million for the aftermarket. For 2007 EUROBAT predicts a
total European market volume of 77 million units with 21.4 million as original
equipment and 55.7 as replacement parts.
The SLI battery market is a commodity market. New competition within the SLI
battery industry and sweeping changes in the automotive manufacturing industry
have placed increased pressure on SLI battery makers to reduce costs and
increase the power and efficiency of the batteries they produce. As a result,
the SLI lead/acid battery market has experienced a series of major
consolidations across the industry over the past years, a trend we believe will
continue. Strains on profitability due to increased volatility in lead prices
will be one of the challenges that the industry is likely to face in the future.
In light of increasing market competition and the commoditization of the
battery, some of the key issues for sustaining a profitable venture include
factors that set the sellers apart in terms of its product (innovation),
marketing activities and support functions.
Differentiation through Innovation and New Customer Demands
The industry for starter, lighting and ignition (SLI) batteries has been
notorious over the past 30 years for its rather minimal level of product
innovation.
Conventional lead/acid batteries are extremely sensitive to changes in
temperature and stoichiometric ratio of the electrolyte. They are constantly
losing output capacity due to temperature fluctuations, acid stratification,
vibration damage, corrosion and sulfation inside the battery. The impact of
stratification alone can reduce a car battery's nominal capacity by 40%.
Breakdown statistics published by Germany's ADAC, one of the largest and most
influential automobile associations, repeatedly highlights the inadequacy of
today's battery technology. In order to compensate for the tendency of
conventional lead/acid batteries to lose much of their output capacity over
time, conventional battery manufacturers simply build larger and heavier
batteries with an increased initial output rating. At the same time, modern
engine designs and the demand for better mileage has created demand for smaller,
lighter batteries to ensure maximum fuel efficiency and economy.
We believe that the performance capabilities of today's 12-volt technology are
far from exhausted and that the benefits of the innovative technology developed
by iQ Power will help give today's lead/acid battery a new and exciting life
cycle.
We are also convinced that the significance of electrical energy in the
automobile will soon shift from its earlier role of being a mere auxiliary
function to become an extremely important key function. The reasons for this can
be found not only in the increased use of electronics and electrical features in
motor vehicles, but also in the recent growing importance of electrically
operated active and passive safety features within the automobile.
As the power requirements of automotive electronics continue to increase,
automakers are designing new vehicles that require higher-voltage electrical
systems and in turn larger or multiple batteries. These new systems will
generally require a 12-volt battery for lighting systems and other low-power
consumers and
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a 36-volt battery, which is needed for the next generation of combined starter
motor/alternators and for high-power-consumption accessories such as air
conditioning and electrical heating. Additionally, European OEMs are expected to
include high-voltage electrical systems (42 volts) in selected luxury models
over the next 10 years.
In addition to higher-voltage electrical systems, European manufacturers
recently began experimenting with what are called "smart batteries". A smart
battery is a battery equipped with specialized hardware that provides
software-managed information on the calculated present state and predicted
future state to its host. A smart battery charger is a battery charger that
regularly communicates with a smart battery and adjusts its charging
characteristics according to the information the smart battery provides it. A
May 2002 study by Mercer Management Consulting estimates a unit demand of about
30 million smart batteries for the OEM car market in 2010. However, these
estimates are not limited to just smart batteries (such as our MagiQTM battery)
with integrated monitoring technology, but also include batteries with
intelligent devices (external battery monitors) incorporated in automobile
on-board networks. Our iQ technologies are engineered to be integrated into a
wide variety of smart-battery applications.
We have identified the following 10 macro-trends within the transportation
industry to help us successfully position our company and its product lines:
o OEMs are concentrating more on downstream activities resulting in the
subsequent outsourcing of manufacturing and systems development
o OEMs are focused on reducing weight and fuel consumption
o The growing importance of vehicle electrical/electronics systems
replacing mechanical systems
o An unrelenting increase in vehicle electric loads and the paradigm
shift of electrical energy in the automobile becoming a key function
o Realization of the need for vehicle-component integration and
networking
o Converting the SLI battery into an electronic systems component
o A move toward x-by-wire and drive-by-wire systems based on a no-fail
and uninterrupted energy supply
o 42-volt electrical systems to meet the needs of an ever-increasing
number of vehicle electric loads and consumers
o New battery technologies such as NaS (sodium/sulfur), NiMh
(nickel/metal hydride), Li-Ion (lithium ion) and LiPo
(lithium-polymer)
o Alternative power concepts associated with hybrid and natural-gas
vehicles
We believe that, with our technology and product portfolio, we are ideally
positioned to respond to the growing customer needs and well suited to quickly
react to the changing demands of the market.
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Products and Technology
The iQ technology platform and battery design changes are not simply
rearrangements of existing components. We believe that our proprietary designs
and technology can be incorporated into alternative energy systems or as product
bundles that encompass the following battery and battery-control products:
o Smart Battery Systems and Components;
o Automotive Power Control Products;
o Electric Vehicles Power Control Products;
o Battery Charger/Power Converter and Components;
o Traction, Marine and Aviation Power Control Products; and
o UPS, Stationary and Remote Power Control Products.
We intend to vigorously pursue the market for our products for use in these
applications within the structure, timing and financial resources of our
business plan.
"Smart"lead/acid automotive starter battery (known as the Generation 1
MagiQTMBattery)
How Our iQ Technology Works
Over time, lead-acid batteries lose output capacity due to, among other things,
temperature fluctuations and corrosion of internal lead plates. The iQ MagiQ(TM)
battery uses an insulated case, an internal microprocessor and a battery acid
anti-stratification device to minimize the loss of output capacity. As a result,
the iQ battery requires fewer lead plates than a conventional lead acid battery
to deliver the required output capacity for a specific application.
Double-Walled Casing
Conventional lead-acid batteries are vulnerable to damage caused by temperatures
above 50 degrees Centigrade (122 degrees Fahrenheit) and to loss of starting
performance when temperatures fall below freezing (0 degrees Celsius or 32
degrees Fahrenheit). Some auto manufacturers have attempted to protect batteries
from the high temperatures found in the car's engine compartment by installing
the batteries in the rear of the vehicle. Although this placement protects
batteries from heat, it requires the use of long, thick cables to connect the
battery to the engine. The cables not only increase the weight of the car, they
also produce electrical losses in cold starting conditions. To offset these
losses, manufacturers must use batteries with larger amounts of lead and acid,
thus further increasing the total weight of the automobile.
To minimize the loss of performance caused by temperature extremes, we, in
cooperation with BASF, Germany's largest chemical company, developed a
double-walled battery case made from a polypropylene foam material called
Neopolen(R), a thermoplastic particle foam. When a battery is placed inside the
Neopolen case, it is protected against the extreme temperature fluctuations by
the thermal insulation properties of the material.
In addition, Neopolen has mechanical properties which lends itself to
integrating with battery technology. The cells of this ductile material remain
intact under mechanical pressure and, after protracted compression, the material
returns to its original shape. We believe that the structural stability of the
Neopolen case will provide additional protection to the internal battery
components.
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Energy Control System
Although the insulated case of the iQ battery provides protection against
extreme high temperatures, the insulated case cannot protect the battery from
extended low temperatures. Temperatures below freezing dramatically reduce the
ability of a battery to start an automobile engine and to be recharged by a
running car's generator. To prevent the loss of performance caused by low
temperatures, the iQ battery incorporates an energy control system to maintain
or re-establish optimal internal battery temperatures.
The energy control system consists of a sensor and control system and an
internal heating component. The sensor and control unit is designed to measure
and record a variety of internal and external factors, including:
o outside temperature;
o changes in outside temperature;
o inside temperatures;
o changes in inside temperature;
o the revolutions per minute at which the engine was cranked;
o the time of travel and the RPMs during travel;
o Battery voltage; Battery zero voltage and powernet voltage; and
o changes in voltage.
Using this information, the energy control system determines when the heating
component must be activated and the amount of power that may be used to maintain
optimum internal battery temperature without draining the battery to the point
that damage occurs. We anticipate that in the future, automobiles will have real
time electronic information displays linked to the vehicle's on-board computer
system to provide the driver information relating to battery charge levels,
electrical outputs, temperature and other information.
We have completed the production design of the integrated circuits necessary for
the internal sensor and control unit.
The Anti-Stratification Component
Acid stratification is a less well-known, but significant problem associated
with lead-acid batteries. Lead-acid batteries utilize a mixture of sulphuric
acid and distilled water as electrolyte. Because the density of water is less
than that of sulphuric acid, over time gravity causes the acid and the water to
separate. When this separation occurs, the battery is not able to produce or
store electric power in the upper parts of the internal lead plates that are
surrounded by acid of lower (or: too low) concentration. In addition, if pure
sulphuric acid becomes concentrated in the lower parts of the battery, the
highly corrosive effects of the acid tend to override the electrochemical
process in the lower parts of the internal lead plates.
The problems caused by acid stratification can be alleviated by continuously
mixing the acid and water. In the past, manufacturers have sought to address
this problem with acid pumps and other methods, but their efforts have not been
successfully adapted for commercial application in the automotive starter
battery market.
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Instead of using moving parts or pumps, the iQ technology uses hydrodynamic principles to facilitate continuous mixing of the sulphuric acid and the distilled water inside the battery without using moving parts. A simple plastic baffle is integrated into each cell of the battery (see Fig. 2). When the vehicle is moving, e.g., accelerating or braking, the inertial energy acts with the baffle to produce internal fluid pressure that causes the sulphuric acid at the bottom of the battery to travel through a corridor to the top of the battery. Specially designed "gating" mechanisms inhibit the reversal of the fluid flow. In addition, when the vehicle is not moving, the internal baffle system acts as a hydrodynamic pump that moves fluid to the top of the battery in response to the battery's internal heating element.
Fig. 2
A: Car at standstill. Electrolyte shows stratification within standard lead acid battery
B: Car braking. Due
to negative acceleration, the electrolyte forms a wave on top. The water is still
dominating within that wave, the acid remains at the bottom.
C: same situation as in B,
but the iQ component forces the surface on top to the bottom and presses the
electrolyte from the bottom to the surface. No stratification remaining.
The Communication Device
Until recently, data transmission in automobile electrical systems used separate
data cable and connector systems. YAMAR Electronics has patented technology that
permits information and data to be accumulated in the microprocessor and
transmitted over DC lines. This technology has successfully been tested and
evaluated by BMW, other OEMs, and Tier 1 suppliers. We have entered into a
collaborative agreement with YAMAR to develop solutions using their patented
technologies in our iQ Battery exclusively for battery applications. In 2000,
our company was asked to form a consortium consisting of automobile
manufacturers and suppliers in order to standardize this technology. From 2000
to 2003, we actively led a consortium with the participation of, among other
manufacturers, BMW, AUDI, RENAULT, PSA and Infineon. A final cooperation
agreement between the parties was never reached. We are now concentrating on
developing a technology platform in a bilateral approach with individual
carmakers and suppliers.
17
We believe that the YAMAR technology can be developed into a solution that will
permit information such as the state of charge ("SOC") and the state of health
("SOH") of a battery and other electrical systems to be transferred to the
on-board computer or separate status indicators. We believe that an integrated
solution can be designed to avoid potential wiring and connector problems and
reduce the costs related to wiring and connector installations.
We are collaborating with YAMAR to develop an ASIC solution using this patented
technology. As of the filing date of this Annual Report, we have managed to
built functioning printed circuit boards for this system. Samples have been sold
in small quantities for tests to various customers, such as DaimlerChrysler,
Airbus Industries, and the German Rail (Project LEILA). All products have passed
the tests and could meet or exceed customers expectations. As a result of the
tests, we and YAMAR have been invited to participate in the SPARC project under
the lead of DaimlerChrysler and are collaborating in this project since 2004.
In the scope of this project, up to eight (8) MagiQ(TM) batteries communicate
via powerline with their SEM-controllers. Up to four of these SEM-controllers
will be used in the truck/trailer configuration. For small passenger cars
application, two MagiQ(TM) batteries and two SEM-controllers will be linked.
Performance Specifications and Test Results - iQ Smart Battery - Our First
Generation "MagiQTM" battery
The outer dimensions of the current iQ battery, the "MagiQ(TM)" battery, are
identical to a conventional 12 Volt lead acid battery in order to facilitate
ease of replacement in existing vehicles. In addition, the dimensions and shape
of the MagiQ(TM) battery's terminals are identical to those of conventional
batteries. Our battery, however, accepts charges at a much higher rate than
conventional batteries. As a result, the MagiQ(TM) battery, as currently
developed, requires less amp output to deliver the same performance over time,
requires fewer lead plates and weighs approximately 40% less than conventional
batteries.
Quality Management and Control
All developments were carried out in accordance with the ISO 9000 standards. The
certificates on ISO 9001 and VDA 6.2, the German automotive standard for
suppliers, were awarded to iQ Battery in November, 2000. In March 2002, iQ
Battery was awarded certificates on ISO 9001:2000 and VDA 6.2 and VDA 6.1. These
certificates permit iQ Battery to qualify as a supplier to certain manufacturers
in the automotive industry.
In 1996, we successfully completed independent, third party safety testing of
the iQ battery in Germany (TUV Rheinland Product Safety GmbH, test report no.
E-9613191E-01). We are not aware of any safety issues related to the iQ battery
that are not also applicable to standard automotive batteries.
iQ Smart Battery -- Second Generation Development
The second generation of our MagiQ(TM) Battery builds upon the technologies
developed for our MagiQTM battery. Subsequent to December 31, 2004, we built
first production samples of the second-generation iQ Smart Battery, capable of
transmitting the internally computed data on the battery's state of charge (SOC)
and state of health (SOH) to any on-board car computer using powerline
communication and DC-BUS technology or any other standard communication. We have
also completed this design to display the actual state of charge and state of
health information on a separate display. We anticipate that this type of
communication technology will be incorporated into production automobiles over
the next decade. In addition, we intend to develop the second generation iQ
Smart Battery so that a simple plug-in-display would be able to display a
battery's state of charge and state of health to the driver or host system.
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Working demonstrators of this technology are already being installed in test
vehicles operated by both the Company and third parties.
PowerLyzer(R)
Based on our core technology, we have developed and produced a measurement and
diagnostic device capable of analyzing the quiescent current in the automobile's
electrical system, to reveal any variances and precisely identify the cause of
any anomalies. In fiscal 2003, we commenced marketing the PowerLyzer(R). In
order to implement additional functionality, we responded to our customer wishes
and increased the functionality of the product. Subsequent to this report, the
generation II is under development. The new product will have increased memory,
using standard chip cards. This will increase the time for measurements up to
several weeks. Secondly, the PowerLyzer II gets an additional trigger-input to
have specific CAN-messages monitored that were recorded during standstill of the
car. We expect first shipments to take place in the second half of 2005.
36-Volt Smart Battery
The automotive industry had initiated plans to move from a 14-Volt to a 42-Volt
standard. The 14-Volt generator and powernet Voltage is the current standard,
i.e., the amount of Voltage from the alternator needed to keep a 12-Volt battery
charged (while 42-Volts would charge a 36-Volt battery). It was anticipated that
a 42-Volt system will enable engineers to provide higher power with less current
and consequently shrink wires to save cost and weight.
Initial OEM production of 42-Volt vehicles has been delayed and it is not
anticipated that 42-Volt solutions will be integrated in new models in the
foreseeable future. In the past, we had dedicated significant research
activities to developing products to meet this demand, but reduced our research
in light of this development.
We designed a second generation 36-Volt Smart Battery and battery-control system
that we believe will enable automakers to easily transition to the more complex
14/42-Volt vehicle architectures. We believe that our innovative approach
integrates components to improve efficiency, fuel economy and reduce emissions
while supporting increased vehicle content and features. Based on the results of
our development in this field, we believe we are prepared to quickly respond to
possible renewed customer demand for the 42-Volt technology once it should
manifest.
Intelligent Automotive Power Train: X-by-Wire
DaimlerChrysler's Business Unit, "Truck Product Creation" (TPC/MMA) and, among
other participants, our Company filed a joint research project application with
the European Union--5th Framework Programxiv to develop energy management
solutions for an intelligent power train. The Powertrain Equipped with
Intelligent Technology project (PEIT) was launched during the third quarter of
2001. We were responsible for the complete electrical energy management system,
including work on the system architecture. Other participants in this project
include Knorr Bremse, Diehl Avionic Systeme and Continental AG. The goal of this
program has been to utilize a complete X-by-wire concept in which a vehicle can
be safely controlled by digital signals. The concept requires an uninterrupted
power supply and intelligent energy management between redundant battery
systems. A key pre-requisite for X-by-wire is redundancy in safety-critical
areas such as energy supply and data communication, for which we could
demonstrate the iQ technology platform was ideally suited. One vehicle has been
integrated into a fixed test, with full functionality to emulate drives and
another vehicle for street tests was built. We delivered our smart batteries
equipped with the iQ modules and an additional load separation module for data
recording and storage for this research project. In 2003, we finalized design
specifications for an energy managing unit
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(SEM-Controller) for the project and delivered the unit for successful installation in 2004. In September 2004, the project PEIT was successfully completed with a public demonstration to the European Community officers, functioning as the customer, partners and invited guests from the automotive industry.
Fig. 3 PEIT Truck in Action, Boxberg Testing Facility September 27, 2004
The braking, steering and all other functions of this Actros truck are operated
exclusively with electrically generated power, controlled and distributed by
iQ's SEM (TM)Smart Energy Manager (left part).
We participate in a second program called Secure Propulsion using Advanced
Redundant Control (SPARC) with an objective to develop scalable architecture and
solutions for passenger cars and heavy trucks. Our role is to provide the system
architecture and components for safe electrical energy supply. The SPARC program
was officially launched in January 2004 and is funded by the European Community
with 6.5 million EURO under the FP6 framework. About twenty-five (25) project
partners are participating in the project, including Continental, FIAT,
Magna-Steyr, Siemens VDO, Freescale, Motorola, Haldex, SKF and others.
We believe that the X-by-wire steering system offers the advantages of greater
driving safety, since supporting systems (such as steering, braking and
transmission functions) are optimally networked to improve handling in critical
situations. The introduction of the intelligent powertrain is expected to
decrease the number of traffic accidents attributable to driver error.
iQ Systems Integration
Our smart energy management (SEM) technology is designed to combine the
necessary supporting components for a turnkey solution that supports
next-generation onboard networks in tomorrow's cars, create new opportunities
for alternative systems such as hybrid or zero-emission vehicles and industrial
applications. SEM is designed to provide failsafe energy and will - where
necessary - be designed redundantly for safety. Among other features, SEM will
provide reliable warning levels to onboard-systems, maintenance crew and the
driver. We have developed two capstone products, namely the SEM-
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Smart Energy Manager(R) and the BEM-Battery Energy Manager(R) that we believe
will play an important role bridging the complex technology of next generation
power systems.
BEM -- Battery Energy Manager(R)
The BEM-Battery Energy Manager(R) is capable of managing intelligence and power
between iQ batteries. Specifically, the BEM-Battery Energy Manager(R) optimizes
and allocates battery power reserves based on their individual status. As part
of an energy management system, the BEM-Battery Energy Manager(R) has the
following functions:
o Adjust for differing energy potentials between iQ batteries.
o Transfer the SOC and SOH of each battery to the SEM-Smart Energy
Manager(R) or directly to an onboard computer or driver information
system. This data transfer takes place over the DC-Bus or CAN-Bus
interface.
o Intra-battery charging and balance control.
o Protects the power needed to start the car, even if the lights or any
other accessories are left on.
The BEM-Battery Energy Manager(R) can also be used as an immobilizing system to
help prevent a vehicle from being stolen. Certain functionalities of the
BEM-Battery Energy Manager(R) have been implemented in the deliveries made to
DaimlerChrysler under the PEIT and SPARC-projects (see above).
SEM -- Smart Energy Manager(R)
The SEM-Smart Energy Manager(R) acts as the "traffic police" within the power
system. While the BEM-Battery Energy Manager(R) is capable of only intra-battery
management, the SEM-Smart Energy Manager(R) can distribute different energy
sources and energy loads. With the advent of fuel cells, recuperative braking
and other emerging energy sources it will be necessary to introduce automated
power management into these systems. The SEM-Smart Energy Manager(R) decides
which source should be used for charging and to which load energy is
distributed. It can cut-off loads and prioritize the supply of loads following
the safety over comfort-principle. These and additional functionalities have
been
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implemented in the designs realized and delivered under the PEIT-project. Further improvements are taking place under the SPARC -project.
Fig. 4 Save Energy Systems Architecture of iQ Power for the Projects PEIT and SPARC.
iQ Power's Contributions. We have contributed the following to the project:
o Systems architecture
o FMEA
o Intelligent Batteries with iQ Technology
o LTM box including the functions of the Battery Energy Manager
(BEM(TM)) and Smart Energy Manager (SEM(TM))
o Off-line SEM(TM) Diagnostics
o Software routines in the Powertrain controllers
Energy Management Software
The software that has been developed by iQ includes embedded software for the
controllers used in the SEM, BEM and MagiQ products. This software can also be
programmed to run in PC environments, e.g. data analysis and graphic plotting
for the data collected by the PowerLyzer and MagiQ products. Specific Software
routines have been programmed to run in the Electrical Control Units (ECU's) of
the partner firms responsible for the overall truck and the passenger car
management (e.g. DaimlerChrysler in the projects PEIT and SPARC).
22
Industry Relationships
We developed the following relationships in 2004:
DaimlerChrysler
In 2003 we began participating in another joint filing of a research project
under the European 6th Framework program, again under the lead of
DaimlerChrysler. The project is called Secure Propulsion using Advanced
Redundant Control (SPARC). In 2004, the SPARC-project was successfully launched
and we have been developing, testing and implementing all Hardware, Software and
documentation in time and fulfilling or exceeding project requirements and
management expectations. During the Year 2004 we received subsidies amounting to
$140,000, of which $70,000 are still an advance for future efforts. Subsequent
to this report, our project cost claims have been audited by our auditors, and
our project cost reporting has been confirmed as being in compliance with EU
reporting regulations.
BMW
In 2004 we received additional orders for the PowerLyzer(R), to be installed in
the E-65 (7 series) model and other models, and related services to adjust the
product to the customer's needs.
To date, neither DaimlerChrysler nor BMW have committed to incorporate iQ
technology into any of their commercially available automobiles or other
products.
ESG
During September 2004, ESG Elektroniksysteme- und Logistik GmbH, one of
Germany's biggest service providers and iQ Germany signed an agreement to
cooperate in the field of energy management in automobiles and system solutions
for the no-fail supply of electrical energy in vehicle power systems.
Competition
Competition in the battery and electronics industry is, and is expected to
remain, intense. Our competitors range from early stage companies to major
domestic and international companies. Many of these companies have financial,
technical, marketing, sales, manufacturing, distribution, and other resources
significantly greater than ours. In addition, many of these companies have name
recognition, established positions in the market, and long-standing
relationships with OEMs and other customers. Our competitors are doing
significant development work on various battery systems (including
electrochemistries such as NiCd, NiMH and lithium), with significant effort
focused on achieving higher energy densities, lower maintenance, lighter weight,
longer energy retention and lower cost batteries. We cannot assure you that one
or more new, higher power battery technologies will not be introduced which
could be directly compete with or be superior to the iQ technology.
We believe that our primary competitors are existing suppliers of automotive and
lead-acid batteries. Exide Corporation, Johnson Controls Inc., and Delphi are
the primary suppliers of car batteries in North America, followed by East Penn
Battery and Douglas Battery. Exide Corporation, VB Autobatterie GmbH (a
subsidiary of Johnson Controls Group), Hawker Batteries, Fiamm, Hoppecke (a
subsidiary of Johnson Controls Group), Yuasa, Autosil and Delco Remy (as
recently announced a subsidiary of Johnson Controls Group) are the primary
suppliers of car batteries in Europe. All of these companies are very large and
have substantial resources and market presence. Many are vertically integrated
and produce the core components for their batteries from raw or recycled
materials, reducing the unit cost of manufacturing. These companies have pursued
and implemented aggressive production and
23
manufacturing strategies that have led to substantial competitive advantages in
the areas of production efficiencies and integrated distribution and inventory
management systems. We expect that we will compete in targeted market segments
on the basis of performance, reliability, ease of recycling, and increased
battery life. We cannot assure you that we will be able to compete successfully
against these companies in any of the targeted market segments.
We may also develop products to compete in market segments including standby
power, small batteries for engine starting, and medical and electronics
applications. We expect that our primary competition in the market for small
lead acid batteries used in non-automotive applications include: Yuasa, Exide
Corporation, Matsushita, Hawker, CSB Battery of America Corp. and GS Battery.
These companies are large and have substantial resources and market presence. We
cannot assure you that we will be able to compete successfully against
traditional lead acid batteries in any of the targeted applications.
The market for batteries, and the evolution of battery technology, is very
dynamic. Other companies are devoting significant resources to improving
existing battery technologies and developing new battery technologies. We cannot
assure you that we will be able to compete effectively in any of their targeted
market segments.
Intellectual Property Rights
Our success is dependent on our ability to protect our intellectual property
rights. We rely principally on a combination of copyright, trademark, trade
secret and patent laws, non-disclosure agreements and other contractual
provisions to establish and maintain our proprietary rights.
In December, 2004, we have transferred all of our intellectual property rights
that were held by iQ Germany, to our newly founded Swiss subsidiary, iQ POWER
Licensing AG.
In this entity we actually hold the following:
12 patents and 7 patent applications for 9 strategic countries like USA,
Germany, Brazil, Japan, Canada, France, Great Britain, Italy, Spain.
3 patents have been awarded to us during 2004, 2 in Germany, 1 in USA.
Of the 3 patents we hold in the USA, the first is to expire in 2012 and of the 4
patents we hold in Germany, the first is to expire in 2018.
Of the 7 applications 3 are based on patents already awarded to us, therefore
our management believes that we will get these approved as well, however we
cannot predict the time it will take. The time between filing a patent and a
patent being approved varies substantially and could last several years. It is
beyond our influence to have that process accelerated or predetermined.
The patents cover specific iQ components, energy management technologies,
battery diagnostics and applications for intelligent batteries. All patents and
applications are related to each other. They are stacked in time and distributed
to several countries.
Currently, we have an additional 14 applications being prepared.
iQ Germany acquired patents and know-how improving the current output of a
chargeable battery at low outside temperatures and the registered design "iQ"
based on a contract dated March 15, 1995 from two shareholders, one of which is
a director and CEO of iQ Power and the other is a family member and a
24
former officer of the company. The intangibles purchased relate to a German
patent, an international patent application as well as the registered design
"iQ". iQ Power and the shareholders agreed that the shareholders would receive
approximately $257,000 (DM 400,000; approximately EUR 205,000) from future
income. We satisfied these payment obligations in the third quarter of 2004 by
issuing 200,000 shares and making a cash payment totaling $30,900 (EUR 25,330).
Our CEO received $10,300 (EUR 8,333) in cash and 50,000 shares valued at $0.40.
As part of our confidentiality procedures, we generally enter into nondisclosure
and confidentiality agreements with each of our key employees, consultants,
distributors and corporate partners and limit access to and distribution of our
technology, documentation and other proprietary information. In particular, we
have entered into non-disclosure agreements with each of our key employees and
strategic partners. The terms of the employee non-disclosure agreements include
provisions requiring assignment to iQ Germany of employee inventions. There can
be no assurance that our efforts to protect our intellectual property rights
will be successful. Despite our efforts to protect our intellectual property
rights, unauthorized third parties, including competitors, may from time to time
copy or reverse engineer portions of the iQ technology and use such information
to create competitive products.
Policing the unauthorized use of the iQ technology is difficult, and, while we
are unable to determine the extent to which piracy of the iQ technology exists,
such piracy can be expected to be a persistent problem. In addition, the laws of
some countries in which the iQ technology is or may be licensed do not protect
our products and intellectual property rights to the same extent as do the laws
of the United States. As a result, sales of products based on the iQ technology
in such countries may increase the likelihood that iQ technology might be
infringed upon by unauthorized third parties.
It is possible that the scope, validity, and enforceability of our intellectual
property rights could be challenged by competitors or other parties. We are
currently in the process of recording our interests in the iQ technology with
relevant authorities in applicable jurisdictions. The results of such challenges
before administrative bodies or courts depend on many factors which cannot be
accurately assessed at this time. Unfavorable decisions by such administrative
bodies or courts could have a negative impact on our intellectual property
rights. Any such challenges, whether with or without merit, could be time
consuming, result in costly litigation and diversion of resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. In the event of a claim of product infringement
against us and our failure or inability to license the infringed or similar
technology, our business, operating results and financial condition could be
materially adversely affected.
Our subsidiary, iQ Power Deutschland GmbH, has registered the trademark "iQ" in
Germany (No. 2061981) in 1994.
Our mark (red circle logo) has been registered in Germany since 1998. The same
figurative trademark has been registered as a CTM (European Trademark) No.
001195759 by iQ Power Germany in 2000. The trademark is also registered in Japan
(2002), Canada (1999) and USA (2003). Subsequent to December 31, 2004, our
subsidiary applied for international registration of this trademark in China and
The Republic of Korea.
The trademark "MagiQ" was filed by iQ Power Germany in 2001 in Germany. It has
been registered in 2002. iQ Power Germany filed two international registrations
based on this trademark for China and The Republic of Korea. Both applications
are pending.
25
The CTM application No. 002594893 "MagiQ" was transferred to us. An opposition
filed by Leodata S.L. based on the trademark "MEDIA MAGIC" was rejected in its
entirety, effective February 28, 2005.
An application of the trademark "MagiQ" has been filed in the USA in 2002, and
registered in 2004.
The trademarks: "BEM Battery Energy Management" and "SEM Smart Energy
Management" were filed in several classes in Germany, in 2000, with the BEM
trademark being registered in 2001, and SEM in 2000, respectively.
We have filed the "PowerLyzer" trademark in several countries. In Germany the
trademark was registered in 2004. In 2004, iQ Power Germany applied for
international registrations in France, United Kingdom, Italy and Sweden.
In 2004, we assigned all our trademarks to iQ Power Licensing AG. All trademarks
will be available for use by our subsidiaries.
Subsequent to this report, we - through iQ Germany - have applied for
registration of a European community trademark ("CTM"), "iQ Power" (new logo).
We expect this application No. 004193181 to be registered soon.
Environmental Matters
We currently contract with third-parties for the manufacture of our iQ battery
prototypes. We currently do not incur any significant direct cost related to
environmental compliance matters.
A. Organizational Structure.
The following table sets forth the name of each significant subsidiary of the
Company, the jurisdiction of its incorporation and the direct or indirect
percentage ownership by the Company of such subsidiary.
----------------------------------------------------------------------------------------
Name of Date of Jurisdiction of Percentage
Subsidiary Incorporation Incorporation Ownership(1)
----------------------------------------------------------------------------------------
iQ Power Deutschland GmbH October 10, 1991 Germany 100%
iQ Power Licensing AG October 07, 2004 Switzerland 100%
B. Property, Plants and Equipment.
iQ Germany occupies approximately 528 square meters of leased office space at
its headquarters in Unterhaching, Germany for its product development,
marketing, support and administration operations. iQ Germany also occupies
approximately 509 square meters of leased office space in Chemnitz, Germany. The
Unterhaching lease terminates on February 28, 2007 and the Chemnitz lease may be
terminated on the giving of six months' notice. We retained a management company
to maintain a Canadian office presence for us in Vancouver, British Columbia,
Canada, on a month-to-month basis. This contract was terminated as of November
9, 2004.
The Company entered into a lease agreement on June 01, 2005, for office space in
Zug, Switzerland; occupying approximately 243 square meters. The monthly rental
expense is approximately $5,200 (CHF 6,600), and it will terminate on May 31,
2010.
26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
Management's Discussion and Analysis
Certain statements and information contained in this Report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the Company, or developments in the Company's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: the Company's limited operating history
and history of losses, the Company's relative concentration of customers, the
risks related to the Company's ability to commercialize its technology, risks
associated with changes in market demand for the Company's technology, risks
involving the management of growth and integration of acquisitions, competition,
product development risks and risks of technological change, dependence on
third-party marketing relationships and suppliers, the Company's ability to
protect its intellectual property rights and the other risks and uncertainties
detailed in the Company's Securities and Exchange Commission filings.
Overview
The Company was organized in 1991 to develop and commercialize batteries and
electric power technology for the automotive industry and other industries.
Since that date, it has been engaged primarily in research and product
development efforts. Its primary product is a "smart" automotive starter
battery, which combines several proprietary features designed to optimize
automotive starter battery efficiency.
The Company is an early stage company and its principal activity to date has
been research and development. The Company has derived only small revenues from
operations at balance sheet date. The Company initially planned to begin
commercial production of its MagiQTM battery as early as 2003. See "Risk
Factors." The Company experienced delays due to quality fluctuations in certain
outsourced parts. In 2003, the Company successfully produced several hundred
products that met the specified quality. Nonetheless, the Company decided to
restructure its supplier base and is currently evaluating and assessing
potential future suppliers. This has also encouraged management to pursue the
task to build or acquire own production facilities. The Company will be required
to raise additional capital for working capital purposes and to fund their
independent production capacities until sufficient revenues can be generated
from the sales of the MagiQTM battery or licensing of the technology. The
Company has targeted revenues from the sale of licenses of its technology, its
MagiQTM batteries, its PowerLyzer(R) product and related services beginning in
2004. Assuming adequate financing is available to commercialize the Company's
products, the Company will engage in setting up production facilities, expand
their marketing force and ultimately accept orders, once delivery can be
assured. See "Need for Additional Capital," below.
The Company has entered into service and cooperation agreements with automotive
suppliers. The Company has entered into a licensing agreements with a licensee
in Korea and is in negotiations with potential licensees for additional licensed
territories. The Company expects to generate additional revenues from such
agreements. The Company entered into a cooperation and framework agreement with
Gigatronik, a German automotive supplier, as well as a cooperation agreement
with ESG, a German system supplier for the defense and automotive industry, for
the joint development and marketing of the Company's products, technology and
know-how. The Company also entered into a memorandum of understanding with the
Dutch TNO group regarding joint development and marketing, as well as
homologation of iQ's technology for the automotive industry and other
industries.
27
The Company has incurred substantial losses to date, and there can be no
assurance that the Company will attain any particular level of revenues or that
the Company will achieve profitability.
Further to above, the Company entered into an agreement regarding the
development of X-by-wire vehicles under a European program lead by
DaimlerChrysler Group. Under this project the Company is solely responsible for
design and development of save electrical power supplies. The Company received
advances from the European Community, through the program lead, in the amount of
$130,000 of which approximately $65,000 were already earned during the fiscal
year 2004.
The Company believes that its historic spending levels are not indicative of
future spending levels because it is in a period in which it will increase
spending on product research and development, marketing, staffing and other
general operating expenses. For these reasons, the Company believes its
expenses, losses, and deficit accumulated during the development stage will
increase significantly before it generates material revenues.
The Company's accounting for stock options is significant because the effect the
compensation expense has on the Company's results. As the Company begins mass
production of its product in the future and begins to earn revenue on sales of
products and services, the compensation expense associated with the Company's
stock options will have a significant effect on its ability to incur positive
net results.
Prior to June 18, 1999, our financial statements and those of iQ Germany were
presented as separate and distinct, as the former shareholders of iQ Germany had
a put option to enable them to reverse the August 25, 1998 transaction. That
option terminated on June 18, 1999, when we raised in excess of $3,000,000 by
equity financing. See "Liquidity and Capital Resources" below.
After June 17, 1999, all financial information is reported on a consolidated
basis. Any of our financial information used for comparative purposes prior to
June 18, 1999, is financial information of iQ Germany only. All amounts are set
forth in U.S. dollars unless provided otherwise.
Critical Accounting Policies
Financial Reporting Release (FRR) No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. The discussion and analysis of the
Company's financial condition and results of operations are based upon its
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. Actual results my differ from these estimates
under different assumptions or conditions. Note 3 of the Notes to the
Consolidated Financial Statements includes a summary of the significant
accounting policies and methods used in the preparation of the Company's
Consolidated Financial Statements.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The accounting
policy which the Company believes are the most critical to aid in fully
understanding and evaluating our reported financial results include stock based
compensation.
The Company's financial statements are presented on a going concern basis, which
assumes that the Company will continue to realize its assets and discharge its
liabilities in the normal course of operations.
28
If future financing is unavailable, the Company may not be able to meet its
ongoing obligations, in which case the realizable value of its assets may
decline materially from current estimates.
The Company made a valuation allowance of $315,000 related to certain advances
related to a proposed asset acquisition and the letter of intent related to the
acquisition of these assets has expired. The Company wrote off $540,000 in
connection with these advances (including $75,000 in 2003 and $150,000 in 2002).
In addition, the Company recorded $96,000 related to a balance originating from
deposit payments made in connection with the planned acquisition of assets from
a battery manufacturing facility. These assets will be used by a former
prospective venture partner, who will eventually acquire these assets and
reimburse these advances to the Company. Management still believes it will be
able to recover the $96,000 from one of the investment partners, either in cash
or in stock of that company. The company reclassified the $96,000 into
non-current deposits because of the probability to collect this deposit before
December 31, 2005.
The Company's current activities result in transactions denominated in US
Dollars, Euros, Swiss Francs and Canadian Dollars. The Company has determined
that the United States Dollar is the appropriate currency for reporting purposes
and is the functional currency for iQ Power till its continuation on to
Switzerland on November 10, 2004. From that day onwards the Euro is the
functional currency of iQ Power AG and its subsidiary iQ Power Licensing AG.
Transaction amounts denominated in foreign currencies are translated into US
dollars at exchange rates prevailing at the transaction dates. Carrying values
of non-US dollar assets and liabilities are adjusted at each balance sheet date
to reflect the exchange rate prevailing at that date. Gains and losses arising
from adjustment of foreign assets and liabilities are included in the
consolidated statement of loss and comprehensive loss. The functional currency
of iQ Germany is also the Euro. Assets and liabilities of iQ Germany are
translated into their US dollar equivalents at the rate of exchange in effect at
the balance sheet date. Revenues and expenses are translated at the average
exchange rate for the reporting period. The US dollar effect arising from
translation of the financial statements at changing rates is recorded as a
separate component of comprehensive income (loss).
SFAS No. 123, issued in October 1995, requires the use of the fair value based
method of accounting for stock options. Under this method, compensation cost is
measured at the vesting date at the fair value of the options vested and is
recognized over the exercise period. During the year ended December 31, 2002 and
2001, the Company issued options to individuals other than employees and
directors, which under SFAS No. 123 are recognized as share-based compensation
ratably over the vesting period. SFAS No. 123, however, allows the Company to
continue to measure the compensation cost of employee and director related stock
options in accordance with APB 25. The Company has adopted the disclosure-only
provision of SFAS No. 123 and SFAS No. 148, accounting for Stock-Based
Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No.
123.
The Company's accounting for stock options is significant because the effect the
compensation expense has on the Company's results. As the Company begins to
produce their product in the future and begins to earn revenue on sales of
products and services, the compensation expense associated with the Company's
stock options will have a significant effect on its ability to incur positive
net results.
Related Party Transactions
Financial Reporting Release (FRR) No. 61, "Effects of transactions with related
and certain other parties," requires all companies to include a discussion of
all material transactions with related and certain other parties to the Company.
See, Note 6 of our consolidated financial statements
29
The Company's Results of Operations for the Year Ended December 31, 2004
Compared to the Year Ended December 31, 2003
Revenues. We recorded revenues of $53,000 in the fiscal year ended December 31,
2004 versus revenues of $42,000 in the fiscal year ended December 31, 2003.
These revenues were generated through the sale of engineering services, sale of
management consulting services as well as product sales.
We have not been able to obtain the necessary financing at conditions acceptable
to us for the erection of our production plant, resulting in a delay of
production and consequently of generating turn over from the sales of our
products, in particular our MagiQTM battery. During 2004, we delivered a limited
number of our MagiQTM batteries for validation and verification in the real car
and truck environments of prospective customers as the first step in our plan to
commercialize our MagiQTM batteries. We have five potential revenue sources for
fiscal 2005: (1) management services charges related to our Korean venture, (2)
fees for securing the option for the exclusive license related to our Korean
venture, (3) the sale of PowerLyzer(R) products, (4) the sale of MagiQTM
batteries and (5) application engineering service fees. The majority of our
targeted revenue is contingent on a number of factors including raising
sufficient additional funding to commercialize our MagiQTM batteries, generating
additional sales of the PowerLyzer(R) product and initial sales of MagiQTM
batteries and concluding contract engineering agreements with parties from
existing negotiations. This revenue projections are not fully secured and are
not being relied upon by the Company in its financial projections. See
"Liquidity and Capital Resources," below.
Total operating expenses. Total operating expenses decreased by $46,000 to
$2,929,000 during the year ended December 31, 2004 from $2,975,000 during the
same period in 2003, a decrease of 1.5%. The main factor contributing to the
decrease, despite the increase in expenses of external services, such as
Consulting, Professional and Management fees of $369,000 and the additionally
taken bad debt reserve of $240,000, is the offset by the non-cash stock based
compensation contra-expense of $108,000 recorded by us in 2004, compared to a
stock based compensation expense of $537,000 in 2003.
Total operating expenses would have increased by $599,000 in 2004, compared to
2003, if non-cash stock based compensation expense were excluded. Non-cash stock
based compensation expense varies from quarter-to-quarter as a result of
fluctuating market prices for our equity securities. See "Significant Accounting
Policies" and Note 3 to the Financial Statements. Depending on the market price,
cost recognized in prior periods were reversed in current period. Total
operating expenses is anticipated to increase in 2005 as a result of planned
expenditures related to the production of our MagiQTM batteries. See "Plan of
Operation."
Research and development expenses. Research and development expenses in total
decreased to $1,244,000 in the year ended December 31, 2004 from $1,296,000 in
2003, a decrease of $52,000 or 4.0%. Research and development personnel costs
decreased from $877,000 in 2003 to $622,000 in 2004, a decrease of $255,000 or
29.1%.
The primary factor contributing to the decrease was a $207,000 decrease in
non-cash stock based compensation recorded as personnel related expense in 2004,
compared to 2003. The decrease in personnel cost was compensated by an increase
of consulting services and professional fees by $196,000 from $50,000 in 2003
versus $246,000 in 2004. These consulting cost in 2004 include a one-time
settlement cost for patent rights of $127,000 as described in Note 6 of the
financial statements and in Item 7 B, Related Party Transactions.
Laboratory expenses related to research and development decreased nominally for
the year ended December 31, 2004 to $324,000 from $330,000 during the year 2003
as we increased activities regarding
30
the pre-series production of the MagiQTM technology, completed first prototypes
of the SEM(TM) device and developed and produced a smaller amount of the
PowerLyzer(R) product.
Marketing and General and Administration Expenses. The expenses related to
marketing and general and administration increased to $1,685,000 for the year
ended December 31, 2004, compared to $1,679,000 for the comparable period in
2003, an increase of $6,000 or 0.4%. Personnel related expenses decreased by
$402,000 from $579,000 in the year ended December 31, 2003, to $177,000 in the
year ended December 31, 2004. This reduction was due primarily to non-cash stock
based compensation recorded as personnel related expense in 2004, compared to
2003. see comment in total operating expense. Professional fees increased to
$432,000, compared to $421,000 in the year ended December 31, 2003, which is
primarily due to legal expenses related to the cost associated with our the
continuation of iQ Power from Canada to Switzerland, creation of iQ Licensing AG
and the restructure of the IP-ownership within the corporation. Investor
relations expenses increased to $152,000 for the year ended December 31, 2004,
from $80,000 for the same period in 2003, an increase of $72,000. This increase
in investor relations expense resulted from the additional activities in
connection with the private placements in 2004, the extensive communications
required on the move of the exchange agent as well as the continuation of iQ to
Switzerland. Expenses for marketing activities remained roughly the same between
2004 and 2003 at just over $100,000. In 2004, an additional provision for
investment of $315,000 was taken, versus $75,000 in 2003, for a prepayment that
we made to Gel Electric Technologies, Inc. in the course of a now expired letter
of intent for the acquisition of that company. See Notes 3(f) to the financial
statement
Changes within our general and administrative expenditures from the year ended
December 31, 2003 compared to the year ended December 31, 2004, were nominal
consisting primarily in a $32,000 year on year increase in office and travel
expenses and $47,000 in consulting services.
Losses: As of December 31, 2004, we had an accumulated comprehensive deficit of
$17,367,000 compared to $14,719,000 at December 31, 2003. We incurred a net loss
of $2,648,000 for the year ended December 31, 2004, compared to a net loss of
$2,294,000 in 2003. The Company experienced a basic and diluted loss per share
of $0.09 for the year ended December 31, 2004, compared to a basic and diluted
loss per share of $0.10 for the year ended December 31, 2003.
We anticipate that losses will decrease in 2005 due to overall increased
activity and specifically increased revenues generated primarily through our
activities with our Korean partner partially offset by increase expense from
marketing of our PowerLyzer(R) and MagiQTM battery products. Our MagiQTM battery
is being manufactured by a third-party manufacturer for limited sales in Europe.
There can be no assurance that our efforts to commercialize our MagiQTM battery
will be successful or that we will not experience delays in introducing our
battery to the market.
The Company's Results of Operations for the Year Ended December 31, 2003
Compared to the Year Ended December 31, 2002
Revenues. We recorded revenues of $42,000 in the fiscal year ended December 31,
2003. In the fiscal year ended December 31, 2002 no revenues were recorded. We
had initially anticipated that our MagiQTM battery would be launched during the
second half of 2002, however, we experienced production and development delays.
During 2003, we delivered a limited number of our MagiQTM batteries for
validation
31
and verification in the real car environments of prospective customers as the
first step in our plan to commercialize our MagiQTM batteries.
Total operating expenses. Total operating expenses increased by $931,000 to
$2,975,000 during the year ended December 31, 2003 from $2,044,000 during the
same period in 2002, an increase of 46.0%. The main factor contributing to the
increase in expenses was the non-cash stock based compensation expense of
$537,000 recorded by us in 2003, compared to a stock based compensation income
of $279,000 in 2002. Total operating expenses would have increased by $144,000
in 2003, compared to 2002, if non-cash stock based compensation expense were
excluded. Non-cash compensation expense varies from quarter-to-quarter as a
result of fluctuating market prices for our equity securities. See "Significant
Accounting Policies" and Note 3 to the Financial Statements.
Research and development expenses. Research and development expenses in total
increased to $1,296,000 in the year ended December 31, 2003 from $804,000 in
2002, an increase of $492,000 or 61.0%. Research and development personnel costs
increased from $399,000 in 2002 to $877,000 in 2003, an increase of $478,000 or
120.0%. The primary factor contributing to the increase was a $370,000 increase
in non-cash stock based compensation recorded as personnel related expense in
2003, compared to 2002. Laboratory expenses related to research and development
increased nominally for the year ended December 31, 2003 to $330,000 from
$284,000 during the year 2002 as we increased activities regarding the
pre-series production of the MagiQTM technology, completed first prototypes of
the SEM(TM) device and developed and produced a smaller amount of the
PowerLyzer(R) product.
Marketing and General and Administration Expenses. The expenses related to
marketing and general and administration increased to $1,679,000 for the year
ended December 31, 2003, compared to $1,240,000 for the comparable period in
2002, an increase of $439,000 or 35.40%. Personnel related expenses increased by
$464,000 from $115,000 in the year ended December 31, 2002, to $579,000 in the
year ended December 31, 2003. This growth was due primarily to non-cash stock
based compensation recorded as personnel related expense in 2003, compared to
2002. Professional fees increased to $421,000, compared to $307,000 in the year
ended December 31, 2002, which is primarily due to auditing fees and legal
expenses related to our Securities and Exchange Commission filings, including
the filings that we prepare pursuant to the requirements of the Exchange Act of
1934, as amended. Investor relations expenses decreased to $80,000 for the year
ended December 31, 2003, from $229,000 for the same period in 2002, a decrease
of $149,000. This decrease in investor relations expense resulted from the
restructuring of investor relations agreements in 2002. Expenses for marketing
activities remained roughly the same between 2002 and 2003 at just over
$100,000. In 2003, a bad debt provision of $75,000 was reserved versus $150,000
in 2002 for a prepayment that we made to Gel Electric Technologies, Inc. in the
course of a now expired letter of intent for the acquisition of that company.
Changes within our general and administrative expenditures from the year ended
December 31, 2003 compared to the year ended December 31, 2002, were nominal
consisting primarily in a $60,000 year on year increase in office and travel
expenses.
Losses: As of December 31, 2003, we had an accumulated comprehensive deficit of
$14,719,000 compared to $12,425,000 at December 31, 2002. We incurred a net loss
of $2,294,000 for the year ended December 31, 2003, compared to a net loss of
$1,555,000 in 2002. The Company experienced a basic and diluted loss per share
of $0.10 for the year ended December 31, 2003, compared to a basic and diluted
loss per share of $0.09 for the year ended December 31, 2002.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through sales
of its equity securities. As of December 31, 2004, the Company had cash and cash
equivalents of $829,000, compared to
32
$1,135,000, at December 31, 2003. From inception to December 31, 2004, the
Company had raised approximately $16,408,000 (net of issuance costs) from the
sale of such securities.
In January 2004 the remaining 1,163,334 units for $523,344 were subscribed and
fully paid. The subscribers to the private placement were non-U.S. persons
outside the United States in reliance upon an exemption from registration under
Regulation S of the Securities Act of 1933, as amended.
In September 2004 the Company announced another private placement of 3,200,000
units for $800,000, each such unit consisting of one registered share of the
Company, valued at $0.25 and one non-transferable warrant exercisable for a
period of twelve months following closing and entitling the holder to purchase
one additional registered share of the Company for $0.35.
In 2004, 1,332,500 shares for proceeds of $571,450 were issued on the exercise
of warrants and 240,000 shares for proceeds of $104,000 were issued on the
exercise of options.
The Company made a bad debt provision of $315,000 related to certain advances
related to a proposed asset acquisition, and the letter of intent related to the
acquisition of these assets has expired. The Company wrote off $540,000 in
connection with these advances (including $75,000 in 2003 and $150,000 in 2002).
In addition, the Company recorded $96,000 related to a balance originating from
deposit payments made in connection with the planned acquisition of assets from
a battery manufacturing facility. These assets will be used by a former
prospective venture partner, who will eventually acquire these assets and
reimburse these advances to the Company. Management still believes it will be
able to recover the $96,000 from one of the investment partners, either in cash
or in stock of that company. The company reclassified the $96,000 into
non-current deposits because the probability to be able to collect this deposit
before December 31, 2005 is perceived to be low.
The Company currently has no further commitments for equity financing, credit
facilities, revolving credit agreements or lines of credit that could provide
additional working capital.
The Company anticipates that it will require an additional $2,000,000 to
$2,200,000 in financing to meet its on-going short term and long term
obligations during 2005 and to fund its plan of operation. See "Plan of
Operation." The Company plans to finance its capital needs principally from the
net proceeds of its securities offerings and interest thereon and, to the extent
available, lines of credit. In addition, the Company expects to generate some
revenues from the sales of its products.
The Company anticipates that the level of spending will increase significantly
in future periods as the Company undertakes marketing and sales activities
related to the commercialization of the iQ technology. In addition, we
anticipate that our general and administrative expenses will also significantly
increase as a result of the growth in our commercialization, research,
development, testing and business development programs. The Company expects its
spending on research and development to continue on the current levels. The
actual levels of research and development, administrative and general, and
marketing corporate expenditures are dependent on the cash resources available
to the Company.
Currently the Company is investigating investment opportunities such as an
investment in a production site in Germany. Should the Company proceed with such
investments, it anticipates that it will require substantially more funds. The
Company currently has commitments in the form of letters of intent for
government subsidies and credit financing for the building of a manufacturing
plant in Germany. Both are dependent on the availability of equity financing.
The successful completion of the financing cannot be guaranteed.
33
Options and Warrants
As of December 31, 2004, we have outstanding options granted under our stock
option plan and by individual agreement and warrants issued in connection with
private placements exercisable to acquire in the aggregate 8,202,352 registered
shares at an average exercise price of $0.43 per share.
On November 05, 2004 new employee stock option allotment of 4,605,750 units was
approved but none of these units were issued on or before December 31, 2004.
Foreign Currency Translation Risk
To date, exposure to foreign currency fluctuations has not had a material effect
on our operations. We believe our risk of foreign currency translation is
limited. We do not currently engage in hedging or other activities to control
the risk of foreign currency translation, but may do so in the future, if
conditions warrant.
Plan of Operation
In the fiscal year ended December 31, 2004, we have been actively undertaking
the following initiatives:
Research & Development
We completed the MagiQTM 100 battery design and optimized cost structure and
production related technology. We transferred the design to bigger battery
sizes, conducted tests to investigate the appropriate parameters for our battery
model, and adapted the software for these new battery types.
We successfully implemented our technology into Truck batteries, samples of
which had been delivered to one automaker as potential customer.
Validation and verification of our designs took place on a continued basis, as
well as benchmarking our products against other products e. g. standard
batteries.
We have analyzed the batteries used in the car designs of a major carmaker in
order to adjust our software parameters to the customers needs and to use these
in the PowerLyzer(R) product.
We have also developed the software algorithms and programs to read out and
analyze the data acquired by the PowerLyzer(R) device. Major efforts were made
in successfully developing the technologies aiming at our Generation II product,
providing for state-of-charge SOC and state-of-health SOH read-outs of the
batteries.
We are the first company to systematically acquire data from all our own
batteries in the field, as well as from conventional batteries monitored with
our PowerLyzer(R) devices. To cope with the ever-growing data amounts completed
the development of a software tool allowing the automated interpretation of the
raw data. In the future, our customers will be able to conduct online and
offline analysis of their data.
In the course of the PEIT project, we have delivered and integrated samples of
the SEM Smart Energy Manager(TM) to heavy truck vehicles. In September 2004, the
PEIT project was successfully completed with a presentation to the customer,
represented by a delegation of the European Union.
During 2004, the project SPARC - a successor to the PEIT program - has been
successfully launched
34
Production
The bottleneck to the successful commercialization of the iQ product range is
the lack of own production capabilities. Given this, we have concentrated our
effort in the planning a pilot production plant together with architects and
production planners. We have been assessing potential partners for the building
of the plant and received and discussed numerous offers. Proceeding with the
facilities is extremely dependent on raising additional funding. We have been
negotiating with various parties regarding the location for such a plant,
including benchmarking government aids and support from local and national
networks. The decision for a location will mainly depend on financial conditions
being offered and guaranteed to the Company.
We, in addition, have been evaluating various situations to acquire battery
manufacturing plants, and continue to do so.
We have altered technology to provide for more cost efficient and process
stabile technology. We refined contracts with all suppliers necessary to provide
the components for the ramp-up of the production according to quality
requirements and at fixed negotiated costs. In some cases, we decided not to
rely on a single source, but to expand the supplier base. We completed test run
programs to establish effective quality control programs with selected
suppliers. The Company is currently, together with these suppliers, examining
mass production options to expand its production capacities in the future.
We have entered into an agreement to establish a joint venture in Korea, and to
erect a production facility in Korea. The successful implementation will depend
to a large extend on our Korean venture partners. Management's assessment of the
Korean activities is - despite some delays that occurred due to regulations and
administrative reasons - generally positive, since the Korean venture partners
have to date complied with their contractual obligations.
We have selected and implemented a new ERP-Software called OXAION, based on an
IBM-platform, which allows to support and monitor production processes,
including material flows, purchase, etc.
Marketing & Sales
Our Marketing and Sales efforts focused on visiting and presenting our
technology and products to OEM and Tier 1 and Tier 2 suppliers. In some cases,
this has lead to immediate orders for validation and verification purposes. In
addition, we made some initial product deliveries to both OEM and After-Market
(AM) partners. We began to reposition our firm, seeking opportunities to enter
into development contracts and service agreements. This resulted in a new
website, that went life subsequent to this report, as well as a new logo, and
the claim "safe energy."
We have intensified our strategic alliances and cooperations and have been
introduced and exposed to numerous potential customers and buyers of our
technology.
In many cases we have installed our technology in the cars of such groups and
received detailed data for analysis and problem solving activities.
Trust-building, establishing our name brand and furnishing test products for
in-house approval by potential customers. Getting the name around and the
product approved are focal points for our marketing and sales efforts.
Financing
The majority of our funding in 2004 was obtained through the sale of securities.
We continued negotiations with European banks, funds, private equity firms,
venture capital firms and family offices.
35
With completion of our continuation to Switzerland, we have, subsequent to
December 31, 2004, negotiated the terms of a first subscription from a Swiss
first tier institutional investor in our securities, of 2,000,000 registered
shares for total proceeds of approximately $836,200 (CHF 1,062,871:25). We have
actively pursued a pre-education process involving presentations and discussions
with the Managing Directors of private and public companies in the automotive
industry and the supply industry, as well as related industry - valuating fuel
cells and other battery technologies. We anticipate this will act as a precursor
to eventual sales efforts within the industries.
Licensing
We have entered into an agreement with a Korean industrial consortium to acquire
licenses in our technology. In addition, we have started negotiations with other
parties to license our technology for other territories .
2005 Strategic Initiatives
As part of our strategic plan for fiscal 2005, assuming sufficient funding, we
intend to undertake the following activities:
Research and Development
We anticipate that we will spend approximately $1,000,000 on research and
development for the fiscal year ending December 31, 2005. We expect this will be
partially compensated by $100,000 in subsidies from European programs. Our
research and development initiatives for fiscal 2005 include:
o intensifying our research and development operations on the SEM and
BEM product family designs;
o complete and continuously improve refining and supplementing our
MagiQTM product family designs;
o finalizing our third party testing and validation program;
o continuing and expanding our joint research activities with car makers
in various x-by-wire programs;
o continuing our state of charge (SOC) and state of health (SOH)
software and implementation development;
o expediting our activities in the field of power line communication
with the DC-BUS technology; and
o expanding our activities in the field of powernet measurement and
diagnosis tools (similar to the PowerLyzer(R)).
Production
We anticipate that we will spend approximately $300,000 on production related
costs and planning activities in fiscal 2005. These activities are targeted to
include:
o commencing production of our MagiQ(TM)battery;
36
o continuing and expanding production of the PowerLyzer(R)device;
o continuing the assessment and the qualification of additional
manufacturing sites for the production of the MagiQ(TM)battery
designs;
o seeking and concluding joint ventures, partnership agreements,
cooperation agreements or similar agreements with battery
manufacturers and component suppliers;
o assessing options to operate own manufacturing sites;
o enforcing quality management and assurance programs of supplier's and
internal workflows;
o continuously improving production processes, optimizing cost
structure, and increasing product quality; and
o implementing adequate software tools for production planning and
scheduling (PPS) and enterprise resource planning (ERP).
Our production activities are expected to increase substantially once own
production facilities will be built or acquired. There can be no assurance that
this task will be financed, commenced, or completed.
Sales and Marketing
We anticipate that we will spend approximately $400,000 on marketing and sales
for the fiscal year ending December 31, 2005. These funds will be spent on
o expanding our marketing activities of our MagiQ(TM)battery system;
o expanding our licensing activities
o starting sales of our MagiQ(TM)battery system, either directly or
through licensees, to OEM customers and AM distributors;
o marketing the iQ technology and our software as part of our technology
for solutions regarding SOC and SOH status indications for batteries
to car manufacturers and their Tier 1 suppliers under license
agreements or similar agreements;
o entering into customization programs with customers of the automotive
industry and other industries to apply our technology for energy
storage (MagiQTM) to their individual demand;
o entering into development contracts with customers of the automotive
industry and other industries to apply our technology for energy
management solutions (BEM, SEM) to their individual demand with the
goal of producing and supplying the products to those customers; and
o increasing public awareness by enhanced public relations activities,
and by launching and operating a new website.
37
Financing activities
Our 2005 operations are extremely contingent upon our raising additional working
capital in 2005. We anticipate that we will spend approximately $250,000 for
capital raising efforts during fiscal 2005 with a view to
o seeking additional financing to expand our operations and to acquire
an interest in or form a strategic alliance with battery manufacturers
so that time-to-market of our first generation of products can be
reduced; and
o generating sales of our products.
Administrative and General Operating
We estimate that our general administrative and operating budget will be
approximately $1,200,000 during our fiscal year ending December 31, 2005. In
addition to existing general administrative functions, we anticipate
o intensifying our business development activities towards corporations
and alliances;
o implementing additional corporate governance structures in order to
respond to increased internal and external needs;
o continuously improving public awareness through investor and public
relations activities in accordance with the Company's development;
o adjusting the structure of the Company organization and work flows
along company growth and expansion;
o continuing the implementation of IT-support tools for smoother and
more efficient and transparent processes; and
o developing and implementing measures to increase internal controls.
We anticipate that our total operating budget for fiscal year ending December
31, 2005, will be approximately $3,250,000, and that we will require minimum
additional financing of approximately $2,000,000 to $2,200,000 to satisfy our
working capital requirements through December 31, 2005.
In the event that we acquire our own production facilities, our total budget for
the fiscal year ended 2005 is expected to increase significantly.
We will require financing in 2005 to fund our plan of operations and our
estimates may increase if we experience delays, cost overruns, additional
funding needs for joint ventures, acquisitions or other unanticipated events. As
of June 30, 2005, we have received subscriptions for 2,000,000 registered shares
for total proceeds of approximately $836,200 (CHF 1,062,871.25). In addition we
have received approximately $880,000 pursuant to the exercise of warrants and
options to acquire 2,034,153 registered shares since January 01, 2005. We cannot
assure you that we will be able to obtain more financing or that, if we do, it
will be on favorable terms or on a timely basis.
If we are unable to raise additional financing on acceptable terms, we may be
required to take some or all of the following:
38
o reduce expenditures on research and development;
o reduce sales and marketing expenditures;
o reduce general and administrative expenses through lay offs or
consolidation of our operations;
o suspend our participation in pilot programs that are not economically
profitable;
o sell assets, including licenses to our technologies;
o suspend our operations until sufficient financing is available; or
o sell or wind up and liquidate our business.
Any of these actions may affect our ability to offer competitive products or
compete in the market. Our inability to offer a competitive product or to
effectively compete will affect our ability to continue as a going concern.
Going Concern
We are still in the development stage and could fail before implementing our
business strategy. We may continue to incur net losses for the foreseeable
future and our auditors have prepared the accompanying financial statements
assuming that we will continue as a going concern. Our auditors have expressed
continued uncertainty as to our ability to continue as a going concern.
A. Research and Development, Patents and Licenses, etc.
We believe that our highly-qualified engineering and scientific personnel
provide us with a significant competitive advantage. iQ Germany currently
employs 10 engineers and scientists in its Chemnitz plant, whose primary focus
is research and development. iQ Germany's personnel have considerable experience
with the development of SLI battery systems and applications. We believe that
this combination of expertise has allowed, and will continue to allow, iQ
Germany to design and develop battery technologies that can be implemented in a
timely and cost-effective manner.
We continue to focus our research and development efforts on improving the iQ
technology and developing process technology required to manufacture the iQ
battery. A key element of our strategy is to complete development of a battery
that has completed all relevant testing programs by German auto manufacturers
and can be produced in commercial quantities. Since our inception, we have spent
a total of approximately $9.8 million on research and development including
$1,244,000 in 2004, $1,296,000 in 2003 and $804,000 in 2002.
B. Trend Information.
Global trends
Increased demand for commodities like steel, copper and other metal cause severe
price increases for these goods, i.e. lead increased by approximately 70% during
2004. This increased demand is primarily caused by the growth of the Chinese
industry. This will effect all industries and has already caused firms to go
into bankruptcy, because they had firm sales arrangements on a fixed price base.
We expect this trend to continue, though it will have a reduced negative impact
on us, since our products use less lead (by approx 30% in the average), and we
are not bound by any fixed pricing agreements as of the date of
39
this report. This fact may encourage customers also to purchase our products due
to lower lead content compared to competitive products.
Industry trends
Concentration processes in the industry have reached a point were purchase
departments of customers are developing increased concern regarding their
dependency on single or to few sources acting as a conglomerate. This effect, in
combination with an increasing number of battery failures in cars (about 10-15%
per year) has caused increased demand of customers to establish relations with
new players. We believe that, once iQ can deliver its products sourced from own
or controlled manufacturing facilities, this trend could be helpful in
establishing customer relationships and becoming a player.
Company trends
Auditor fees: up since years by approximately 50% per year. This is expected to
continue with increased requirements from the accounting boards and the SEC.
Professional Fees: up significantly, mainly due to the restructuring of the
Corporation (continuation to Switzerland) and immense consulting activities in
connection with the activities in Asia, namely the Korean cooperation
activities.
C. Off balance sheet arrangements
The Company has no off balance sheet arrangements.
D. Tabular disclosure of contractual obligations
Obligations and Commitments
In August 2002, the Company entered into a Financial Public Relations Adviser
Consulting Agreement with a non-U.S. person, outside the United States. The
Company agreed to pay this individual a consulting fee in the amount of
approximately $6,250 (EUR 5,000) per month for such services. Of the consulting
fee, approximately $2,500 (EUR 2,000) is due monthly, while the remaining
approximately $3,750 (EUR 3,000) is payable by issuing registered shares,
issuable on a quarterly basis. The agreement had an initial term of 12 months.
As of December 31, 2002, the Company had issued 16,900 registered shares under
the agreement. During the fiscal year 2003, the Company had issued 50,700
registered shares under the agreement, as well as another 22,500 registered
shares for additional compensation. As of December 31, 2003 the Company had
issued 90,100 shares in connection with this agreement. During the fiscal year
2004, the Company issued 91,593 registered shares under the agreement, as well
as another 213,000 registered shares for additional compensation, for services
rendered in 2003 and 2004. As of December 31, 2004 the Company had issued
181,693 shares in connection with this agreement. Effective January 01, 2005
this agreement was replaced by a new contract under which the Company agreed to
pay a monthly consulting fee in the amount of approximately $6,250 (EUR 5,000)
in cash per month.
Our capital requirements depend on several factors, including the success and
progress of our product development programs, the resources we devote to
developing our products, the extent to which our products achieve market
acceptance, and other factors. We expect to devote substantial cash for research
and development. We cannot adequately predict the amount and timing of our
future cash requirements. We will consider collaborative research and
development arrangements with strategic partners and additional public or
private financing (including the issuance of additional equity securities) to
fund all or a part of a particular program in the future. There can be no
assurance that additional funding will be
40
available or, if available, that it will be available on terms acceptable to the Company. If adequate funds are not available, we may have to reduce substantially or eliminate expenditures for research and development, testing, production and marketing of its proposed products, or obtain funds through arrangements with strategic partners that require it to relinquish rights to some of its technologies or products. There can be no assurance that we will be able to raise additional cash if our cash resources are exhausted. Our ability to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as our business performance. Contractual Obligations. The following table sets forth contractual obligations of the Company as of December 31, 2004.
|
Less Than 1 Year |
One to Three Years |
Three to Five Years |
More Than 5 Years | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Long-Term Debt(1) | nil | nil | nil | nil | |||||
| Capital Leases | nil | nil | nil | nil | |||||
| Operating Leases | $ 235,000 | $ 215,000 | nil | nil | |||||
| Purchase Obligations | nil | nil | nil | nil | |||||
A. Safe harbor
Certain statements contained in the foregoing Operating Results and elsewhere in
this Form 20-F constitute forward-looking statements. Such forward-looking
statements involve a number of known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statements were made and readers are advised
to consider such forward-looking statements in light of the risks set forth in
this annual report.
41
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. Directors and Senior Management.
The following table lists as of June 27, 2005 the names of the directors and
senior management of the Company. The directors and senior management have
served in their respective capacities since their election and/or appointment
and will serve until the next Annual General Meeting of Shareholders or until a
successor is duly elected, unless the office is vacated in accordance with the
Company's Articles.
Name Age Position
---- --- --------
DIRECTORS AND EXECUTIVE
OFFICERS:
Peter E. Braun 41 Director, President, Chief Executive
Officer and Acting Chief Financial
Officer
Dr. Guenther C. Bauer 55 Former Director, Chief Technical Officer
Hans Ambos 70 Director and member of Audit Committee
Rudolf Heinz 64 Former Director
Dr. Raymond Wicki 61 Director and member of Audit Committee
Gregory A. Sasges 44 Former Director, former Secretary(1)
Russell French 57 Former Director, former Vice-President
Business Development(2)
Dr. Herbert Weininger 59 Former Director, former Chief Financial
Officer(2)
KEY EMPLOYEES:
Rolf Koehler 59 Development Engineer
Eckehard Endler 61 Development Engineer
Steffen Tschirch 43 Head of Research and Development
(1) Mr. Sasges did not stand for election and his term as director expired on
June 30, 2004. Mr. Sasges resigned as Secretary effective November 9, 2004.
(2) Resigned effective November 9, 2004.
--------------------------------------------------------------------------------
Directors and Executive Officers
Peter E. Braun has served as a director and as our President and Chief Executive
Officer since September 1998. Mr. Braun has served as Acting Chief Financial
Officer since November 9, 2005. From 1994 to the present, Mr. Braun has also
served as Managing Director of iQ Germany. From 1992 to 1994, Mr. Braun worked
for Daimler Benz as an in-house consultant to Deutsche Aerospace. Mr. Braun
received a Masters of Science degree in Aeronautic Engineering and Space
Technology from the Technical University of Berlin in 1992.
Dr. Guenther C. Bauer has served as a director and as our Vice-President for
Research and Development and Chief Technical officer since September 1998 and
2003 respectively. While Dr. Bauer remains in his function as the Company's CTO,
he did not stand for reelection as a board member on June 30, 2004. From 1994 to
the present, Dr. Bauer has also served as Vice-President for Engineering of our
subsidiary iQ Germany. From 1993 to 1994, Dr. Bauer was responsible for creating
a Profit Center within the Daimler-Benz Group, an German automobile
manufacturer, and from 1992 to 1993, he was responsible
42
for business strategy with the TEMIC Group, a wholly-owned subsidiary of
Daimler-Benz Aerospace A.G. From 1987 to 1992, Dr. Bauer served in positions
with German Aerospace, including Head of Staff of Innovations Field Logic and
Director of Corporate Development for Business Aeronautics. Since 1980, Dr.
Bauer has been a Lecturer at the University of the Bundeswehr German Forces in
Munich, Germany. Dr. Bauer received his Master of Science in Electronics from
the Technical University of Munich and his doctorate in Mechanical Engineering
from the University of Dortmund in Dortmund, Germany.
Hans Ambos has served as a director since June 1999. Mr. Ambos has broad
experience in the high technology field generally and senior management
expertise in advanced technology development, including service with
Daimler-Benz Aerospace, the German Ministry of Defence, Dornier Aerospace, the
NATO MRCA Management Agency (NAMMA), and the NATO Industrial Advisory Group
(NIAG). Mr. Ambos first worked as an aeronautical engineer in Germany
progressing to higher levels of management in research and technology
development, and project management. Subsequently, he has held various high
senior management positions including executive board member for research and
development at Dornier (which included strategic co-operation with Canadair and
Bombardier), executive officer responsible for corporate strategy for
Daimler-Benz Aerospace reporting to Mr. Jurgen Schrempp, the current chairman of
the Daimler-Chrysler Group, and national and international advisor for
technology to Daimler-Benz Aerospace. In addition, he serves as a board member
with both the International Society for Innovation out of the University of
Bern, Switzerland and the Forum for Aerospace of Bonn/Berlin, a mirror body to
the Parliamentary Group for Aerospace in the German parliament.
Dr. Raymond Wicki has been a member of the iQ Power AG board of directors since
November 10, 2004 and is responsible for financial relations. Since October 7,
2004, he also serves as director on our subsidiary, iQ Power Licensing AG. Dr.
Wicki was an investment analyst for the Hoffmann-La Roche pharmaceuticals group
and served for many years as the CFO of the Aga Khan's global industrial
holdings. He established and led an independent institutional
portfolio-management company for one of Switzerland's most renowned banking
institutes. Dr. Wicki was also responsible for business operations at the
Privatbank von Graffenried, a private bank in Bern. Respected as one of the
pioneers of the European venture-capital scene, Dr. Wicki created one of the
first European venture-capital funds back in the late 1970's. He is one of the
founders of M2, an investment company in Zug, as well as of Bern Venture, a
venture-capital fund over which he serves as vice chairman. Besides being
president of the publicly traded Swiss investment company MachHitech, Dr. Wicki
is also active in a number of management and supervisory boards of German and
Swiss companies. Dr. Raymond Wicki studied business administration at the
University of Bern and earned his doctorate in both finance and tax law. He also
holds an MBA from Kent State University in Ohio.
Rudolf Heinz has served as Director since July 2003. Mr. Heinz was elected a
director on June 30, 2003. Mr. Heinz serves on several boards. He is a member
and speaker of the Association of minority shareholders. (Schutzgemeinschaft der
Kleinaktionaere e.V.) From 1990 till 1993 he served as regional manager for the
investment department of the BHF Bank in Frankfurt with additional
responsibility for its US, Japanese and English subsidiaries. Between 1982 and
1990 Mr. Heinz served as sole Managing Director for Deutsche Bank Capital
Management International GmbH, Frankfurt. Previously he acted as Head Analyst
and Financial Analyst at Deutsche Bank AG. Mr. Heinz holds a masters degree in
economics of the Saarland University. Mr. Heinz did not stand for reelection and
his term as director expired on June 30, 2004.
Gregory A. Sasges has served as our Secretary since December 1, 1998, and was
elected a director on June 30, 1999. Mr. Sasges practices law through his
personal corporation and has practiced law continually for the past 17 years
with a preferred area of practice in corporate and securities law. Mr.
43
Sasges is a past corporate secretary and director of various other public
companies. Mr. Sasges received his Bachelor of Commerce and Bachelor of Laws
degrees from the University of British Columbia, Canada, in 1984 and 1985
respectively. Mr. Sasges did not stand for re-election and his term as director
expired on June 30, 2004. Mr. Sasges resigned as Secretary effective November 9,
2004.
Russell French has served as a director since 1994. From December 1994 to August
1998, Mr. French served as our President. From August of 1998 to the present,
Mr. French has served as our Vice-President for Business Development. Mr. French
has been during the periods indicated a principal of the following private
companies organized to manage, organize and find new business ventures: Mayon
Management Corp. from 1993 to the present, and 509049 B.C. Ltd. from 1995 to the
present. Mr. French is a past director of various other public companies. Mr.
French resigned on November 9, 2004.
Herbert Weininger joined iQ Power in July 2004 as head of finance, was also
appointed our Chief Financial Officer in July 2004 and held that position
through November 2004. Prior to joining iQ Power, Mr. Herbert Weininger worked
with Bayerische Hypotheken Bank in senior positions and also worked as an
independent lawyer since 2000. He holds a Master of Science Degree in law from
the University of Munich. Mr. Weininger resigned on November 9, 2004.
All officers are appointed annually by the board of directors and serve at the
pleasure of the board. All directors are elected annually at the annual general
meeting of shareholders and serve until the next annual general meeting, or
until their successors are elected and qualified.
Key Employees:
Our key employees as of June 30, 2005 were:
Eckehard Endler has served as a Development Engineer since 1998. From 1994 to
the present, Mr. Endler has also served as manager, Measurement and Laboratories
of iQ Germany. From 1978 to 1994, Mr. Endler worked as a Development Engineer
for a textile company. He received a degree in Electrical Engineering from The
Senior Technical College in Dresden, Germany in 1973.
Rolf Koehler has served as a Development Engineer since 1998. From 1973 to 1997,
he served as a Development and Test Engineer at Foron, a white goods producer,
in Chemnitz, Germany. Mr. Koehler received a degree in Electronic Device
Construction from The Senior Technical College in Midweida / Chemnitz in 1973.
Steffen Tschirch has served as our Head of Research and Development since 1998.
From 1994 to the present, Mr. Tschirch held the same position at iQ Germany.
From 1989 to 1993, Mr. Tschirch worked as a Scientific Assistant at the
Technical University of Chemnitz, Germany. Prior to that period, Mr. Tschirch
studied at the Technical University of Chemnitz with a focus on Physics and
Electronic Components and received his Master of Science degree in 1989.
Appointment of Directors
Directors of the Company are elected by the shareholders at the Ordinary Annual
General Meeting and typically hold office for three years. The directors can be
re-elected. The articles of association also permit the general assembly to add
additional directors at general meetings as proposed by the Board of Directors.
Our present directors were elected at the general meeting held in Zug,
Switzerland on November 05, 2004. This elections became effective on the date of
continuation of the Company in Switzerland.
44
Audit Committee
The members of the Audit Committee as at June 21, 2005, were Hans Ambos and Dr.
Raymond Wicki. Each member of the Audit Committee is an independent director.
The Company does not currently have an audit committee charter. The Audit
Committee recommends independent accountants to the Company to audit the
Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews the Company's interim and year-end
operating results with the Company's executive officers and the Company's
independent accountants, considers the adequacy of the internal accounting
controls, considers the audit procedures of the Company and reviews the
non-audit services to be performed by the independent accountants.
There are no family relationships among the members of the board of directors or
the members of senior management of the Company.
A. Compensation.
Set out below are particulars of compensation paid to the following persons (the
"Named Executive Officers"):
(a) the Company's chief executive officer ("CEO");'
(b) the Company's chief financial officer ("CFO");
(c) each of the Company's executive officers, other than the CEO and CFO,
and members of its administrative, supervisory or management bodies
who were serving in such positions at the end of the most recently
completed financial year; and
(d) any additional individuals for whom disclosure would have been
provided under (c) but for the fact that the individual was not
serving as an executive officer of the Company at the end of the most
recently completed financial year.
As at December 31, 2004, the end of the most recently completed financial year
of the Company, the Company had 2 Named Executive Officers, whose names and
positions held within the Company are set out in the summary of compensation
table below:
45
Summary Compensation Table
(in United States Dollars)
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------
Awards Payouts
----------------------------------------
Restricted
Securities Shares or
Fiscal Other Annual under Restricted LTIP
Name and Principal Year Salary Bonus Compensation Options/SARs Share Units Payouts All Other
Position Ended (US$) (US$) (US$)(1) Granted (#) (US$) (US$) Compensation
-------------------------------------------------------------------------------------------------------------------------
Peter E. Braun, 2002 102,000 6,900
President,CEO and 2003 105,200 8,200 400,000
Acting CFO 2004 172,335 9,100 3,000 30,000(2)
Guenther C. Bauer, 2002 96,000 5,146
Chief Technical 2003 99,000 6,200 380,000
Officer 2004 148,000 6,900 3,000
-------------------------------------------------------------------------------------------------------------------------
(1) Represents pension fund contributions made on behalf of these named
executive officers.
(2) Represents payment of $10,000 and issuance of 50,000 shares at $0.40 each,
for compensation of patents and know-how per Note 6(b) of our consolidated
financial statements.
Compensation of the CEO
The process for the setting of the compensation of the CEO of the Company is the
same as for the other members of senior management of the Company. The CEO's
performance is evaluated by the Board of Directors relative to various
objectives set for him and the Company.
Aggregated Option/SAR Exercises During the Last Completed Fiscal Year and Fiscal
Year End Option/SAR Values
During our last completed fiscal year ended December 31, 2004, we did not grant
any incentive stock options to our directors and officers. No stock appreciation
rights ("SARs") were granted during this period.
The following table sets out incentive stock options exercised by the Named
Executive Officers during the last completed fiscal year as well as the fiscal
year end value of stock options held by the named executive officers. During
this period, no outstanding SARs were held by named executive officers.
46
----------------------------------------------------------------------------------------------------------------
Number of securities
Shares Value underlying unexercised Value of unexercised in-the-
acquired on Realized($) options/SARs at money options/SARs at
Name exercise(#) FY-end (#) FY-end ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable (1)
----------------------------------------------------------------------------------------------------------------
Peter E. Braun, 40,000 1,600 639,153/Nil 54,307/Nil
President, CEO and Acting
CFO
Guenther C. Bauer, Chief -- -- 755,199/Nil 67,872/Nil
Technical Officer
(1) Based on the closing price of the Company's registered shares as quoted on
the NASD OTCBB of $0.51 for December 31, 2004.
Stock Option Plan
In December 1998, our board of directors adopted the 1998 Stock Option Plan,
which was amended in 1999, 2000, 2001 and 2002 to increase the number of shares
authorized to be issued upon exercise of options granted under the plan
(collectively as amended, the "Stock Option Plan"). The Stock Option Plan will
continue in effect until all shares of Common Stock for issuance under the plan
have been issued and all restrictions on such shares have lapsed. The Stock
Option Plan is administered by the board of directors (or a committee thereof)
and provides that options may be granted to our officers, directors, employees
and other persons, including consultants, as determined by the Plan
Administrator in its sole discretion.
The options issued under the Stock Option Plan are exercisable at a price fixed
by the Plan Administrator, in its sole discretion; provided that options granted
in substitution for outstanding options of another corporation in connection
with a merger, consolidation, acquisition of property or stock or other
reorganization involving such corporation and us or any of our subsidiaries may
be granted with an exercise price equal to the exercise price for the
substituted option of the other corporation, subject to adjustment. Subject
exceptions in the Stock Option Plan relating to death, divorce and estate
planning techniques, options granted under the Stock Option Plan are
non-assignable and non-transferable.
The maximum number of the shares reserved for issuance under this Stock Option
Plan, as amended, was 4,714,000 shares. With the continuation to Switzerland,
all non issued options and shares were cancelled and new allotments were
approved. As of December 31, 2004, a total of 2,562,352 options were issued and
unexercised under the Stock Option Plan.
On November 10, 2004 a new employee stock option allotment of 4,605,750 units
was approved but none of these units were issued on or before December 31, 2004.
In May 2005, the Board of Directors approved the Stock Option Plan 2005, with a
maximum number of options for issuance of 2,500,000 shares at an option price of
$0.56 (EUR 0.45)
Set forth below is a table that reflects the history of the Company's option
grants and the repricing for options outstanding as of December 31, 2004:
47
Report on Repricing of Options
------------------------------------------------------------------------------------------------------------------
Original Grant Date # of Options Original Repriced Repriced Repriced Repriced
outstanding as Exercise Exercise Price Exercise Price Exercise Price Exercise Price
of Dec 31, 2004 Price June 12, 2000 Jan 16, 2001 Jan 18, 2002 Jun 06, 2003
------------------------------------------------------------------------------------------------------------------
Dec 17, 2003 1,400,000 $0.44 - - - -
Jan 18, 2002 30,000 $1.00 - - - $0.40
June 28, 2001 764,153 $1.37 - - $1.00 $0.40
Jan 16, 2001 85,000 $0.50 - - - $0.40
June 12, 2000 126,500 $1.50 - $0.50 - $0.40
Oct 15, 1999 20,000 $4.375 $1.50 $0.50 - $0.40
July 7, 1999 52,699 $3.75 $1.50 $0.50 - $0.40
June 28,1999 32,000 $2.50 $1.50 $0.50 - $0.40
Dec 1, 1998 52,000 $2.50 $1.50 $0.50 - $0.40
Total 2,562,352
Peter Braun, our President and Chief Executive Officer, held 280,000 of the
1,295,000 options granted in June 2001 and January 2002 and repriced in 2003 as
reflected in the above table. Mr. Braun also held 242,500 options of the 843,000
options granted on January 16, 2001 and prior and repriced in 2003 as reflected
in the above table. Guenther C. Bauer, our Chief Technical Officer, held 280,000
of the 1,295,000 options granted in June 2001 and January 2002 and repriced in
2003 as reflected in the above table. Mr. Bauer also held 242,500 options of the
843,000 options granted on January 16, 2001 and prior and repriced in 2003 as
reflected in the above table. On June 06, 2003, the Board of Directors
determined that it was in the best interest of the Company to reprice the
1,295,000 issued and still outstanding stock options originally granted by the
Company on January 18, 2002 and June 28, 2001. The Company's Board of Directors
approved a stock option repricing program. Under the program, all stock options
having an exercise price of $1.00 and granted under the Company's Stock Option
Plan, including directors and Named Executive Officers, were repriced at an
exercise price of $0.40 per share. At the same time, all options issued on June
20, 2000 and prior, and still outstanding, in total 843,00 options, were
repriced from $0.50 to $0.40. The new exercise price represented a 2.5% premium
over the then market price of $0.39 per share of common stock. Other than the
lower exercise price, each repriced stock option under the repricing program
retained the terms of the original grant, including the same vesting terms,
number of shares and expiration date.
The Board of Directors approved the stock option repricing program as a result
of the significant reduction in the price of our common stock subsequent to the
original grant of the options. The Board determined that the options having an
exercise price of $1.00 no longer provided meaningful incentive to the option
holders to remain in our employ and to maximize shareholder value. The Board
believed that the exchange of new stock options with a lower exercise price for
our existing stock options would once again provide incentive to our officers,
directors and employees to continue to provide services to us and to maximize
shareholder value.
48
Ten-Year Option/SAR Repricings
The following table reflects the participation of our Chief Executive Officer
and each Named Executive Officer in any option repricing by our Company over the
past 10 years:
---------------------------------------------------------------------------------------------------------------------
Name & Position Date Securities Market Price Exercise New Length of
Underlying of Stock at Price at Time Original Term
(of Repricing) Options/SAR Time of of Repricing Exercise Remaining at
Repriced or Repricing or or Amendment Price Date of
Amended (%) Amendment ($) Repricing or
($) ($) Amendment
---------------------------------------------------------------------------------------------------------------------
Peter E. Braun, Jan 16, 2001 320,000 $0.50 $1.50 $0.50 8.0 years
President, Jan 16, 2001 80,000 $0.50 $1.50 $0.50 8.5 years
Chief Executive Jan 18, 2002 280,000 $0.95 $1.37 $1.00 9.5 years
Officer and June 06, 2003 42,500 $0.39 $0.50 $0.40 7.0 years
Acting Chief June 06, 2003 120,000 $0.39 $0.50 $0.40 5.5 years
Financial Officer June 06, 2003 80,000 $0.39 $0.50 $0.40 6.0 years
June 06, 2003 280,000 $0.39 $1.00 $0.40 8.0 years
Guenther C. Bauer, Jan 16, 2001 320,000 $0.50 $1.50 $0.50 8.0 years
Chief Technology Jan 16, 2001 80,000 $0.50 $1.50 $0.50 8.5 years
Officer Jan 18, 2002 280,000 $0.95 $1.37 $1.00 9.5 years
June 06, 2003 42,500 $0.39 $0.50 $0.40 7.0 years
June 06, 2003 120,000 $0.39 $0.50 $0.40 5.5 years
June 06, 2003 80,000 $0.39 $0.50 $0.40 6.0 years
June 06, 2003 280,000 $0.39 $1.00 $0.40 8.0 years
Long-Term Incentive Plans
The Company has a long-term incentive plan although no cash or non-cash
compensation intended to serve as an incentive for performance (whereby
performance is measured by reference to financial performance or the price of
the Company's securities) was paid or distributed to the executive officer
listed or any other person, company, or entity during the most recently
completed financial year under that plan. The Incentive Plan was adopted by
shareholders in 2001 and amended in 2002 and provided for the issue of up to
2,500,000 registered shares to valued directors, key employees, and consultants
of the Company and similar such persons to encourage those persons to acquire a
greater proprietary interest in the Company, thereby strengthening their
incentive to achieve the objectives of the shareholders of the Company, and to
serve as an aid and inducement in the hiring of new employees and to provide an
equity incentive to consultants and other persons. The shares issued pursuant to
the Incentive Plan will be issued at a discount to market price on the basis of
resale restrictions prohibiting their being sold, assigned, pledged or otherwise
transferred, voluntarily or involuntarily, by a plan participant until the
Company meets certain performance requirements. Such restrictions on transfer
shall, to the extent that such shares of Registered shares have not previously
been forfeited to the Company, lapse on the last day of the fiscal period in
which the Company shall have generated cumulative net revenue from inception of
$2,500,000 or more, calculated in accordance with United States generally
accepted accounting principles. The shares awarded or sold under the Plan shall
be forfeited to the Company if the Company shall not have generated cumulative
net revenues from inception of $2,500,000 or more, calculated in accordance with
United States generally accepted accounting principles, prior to December 31,
2006. Certificates for the shares shall be issued in the plan participant's
respective names and shall be held in escrow by the Company until all
restrictions lapse or such shares are forfeited. On December 17, 2003, the Board
of Directors granted 1,350,000 incentive shares, which were issued to an escrow
account on January 7,
49
2004. With the continuation to Switzerland on November 10, 2004 all incentive
shares which were not granted at that time are no more available for
distribution.
Director Compensation
Other than compensation paid to Peter Braun and Guenther Bauer, as disclosed
above under the sub-heading "Compensation of Directors and Officers," our
directors have received cash compensation for their services rendered during our
most recently completed financial year in accordance with the shareholder
resolution as outlined below.
Our shareholders approved the payment to each of our directors of an annual
stipend of $2,500 together with an honorarium of $250 for each board meeting
that our directors attend in the annual meetings of our shareholders held in
each of 2002, 2003 and 2004. For the fiscal year ended December 31, 2002, the
directors deferred taking payment of the approved fees due to the financial
position of our Company in those years. In fiscal years ended 2003 and 2004, the
Company paid both the stipends and honorariums generally described above for
fiscal years 2002 through 2004 in total of $51,250. Since the continuation of iQ
Power to Switzerland on November 10, 2004 there will be no compensation for the
members of the Board of Directors of iQ Power AG. However Dr. Wicki did receive
$2,000 (CHF 2,500) for the year 2004 and will receive $12,000 (CHF 15,000) for
his duties as member of the Board of Directors of iQ Power Licensing AG.
We do not have any non-cash compensation plans for our directors and we do not
propose to pay or distribute any non-cash compensation during the current
financial year, other than by granting stock options.
Securities Authorized for Issuance Under Compensatory Plans
The following table includes information as of December 31, 2004, for all
compensatory plans previously approved by our security holders and all
compensatory plans not previously approved by our security holders.
EQUITY COMPENSATORY PLAN INFORMATION
-------------------------------------------------------------------------------------------------------------------
Plan Category Number of Securities to be Weighted Average Exercise Number of Securities
Issued Upon Exercise of Price of Outstanding Remaining Available for
Outstanding Options, Options, Warrants and Future Issuance Under
Warrants and Rights Rights Equity Compensation Plans
(excluding securities
reflected in column (a))
(a) (b) (c)
-------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans 2,562,352 $0.42 1,350,000(1)
Approved by Security Holders
-------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Not nil -- nil
Approved by Security Holders
-------------------------------------------------------------------------------------------------------------------
Total 2,562,352 1,350,000
-------------------------------------------------------------------------------------------------------------------
(1) Includes only the incentive shares of 1,350,000, which were issued into
escrow in February 2004).
Employment and Consulting Agreements
Effective September 1, 1998, Peter E. Braun and Dr. Guenther C. Bauer entered
into employment agreements with us providing for annual salaries of $102,000
($8,500 per month) and $96,000 ($8,000
50
per month), respectively. Mr. Braun's and Dr. Bauer's employment agreements are
for a term of five (5) years. Both agreements were extended through October 30,
2004, at increased rates effective September 01, 2003, of $10,100 (EUR 8087) and
$9,500 (EUR 7,609) per month, respectively. Each of our Named Executive
Officer's employment agreements mentioned above were governed by the laws of
Germany.
Both officers entered into new agreements effective November 01, 2004. Mr.
Braun's new employment agreement has a term of 5 years with a base salary of
$14,160 (CHF 18,000) and a bonus opportunity of up to $39,000 (CHF 50,000). This
contract is governed by the law of Switzerland. Dr. Bauer's new employment
agreement has a term of 5 years with a base salary of $13,700 (EUR 11,250) and a
bonus opportunity of up to $36,600 (EUR 30,000). This agreement is governed by
the law of Germany.
Other Compensation
Effective November 11, 2004 we agreed to pay Hans Ambos a quarterly retainer of
$3,000 (CHF 3,750) for his consulting services related to iQ Germany and iQ
Licensing.
Defined Benefit or Actuarial Plan Disclosure
The Company does not have a defined benefit/actuarial plan, under which benefits
are determined primarily by final compensation and years of service of the
Company's officers and key employees.
B. Board Practices.
Appointment of Directors
Directors of the Company are elected by the shareholders at the Ordinary Annual
General Meeting and typically hold office for three years. The directors can be
re-elected. The articles of association also permit the general assembly to add
additional directors at general meetings as proposed by the Board of Directors.
All officers serve at the pleasure of the board of directors.
The Company is scheduled to hold its next Ordinary Annual General Meeting in the
first half of 2006.
Audit Committee
The members of the Audit Committee as at June 21, 2005 were Hans Ambos and Dr.
Raymond Wicki. Each member of the Audit Committee was an independent director in
2004.
The Audit Committee meets with the President and Chief Executive Officer and the
Chief Financial Officer of the Company and the independent auditors to review
and inquire into matters affecting financial reporting, the system of internal
accounting and financial controls and procedures and the audit procedures and
audit plans. There is no formal charter for the Audit Committee. However, its
terms of reference include the quarterly review of financial statements,
reviewing the Company's budget, the Auditor's Report and terms of reference for
the auditor, pre-approval of non-audit services of the auditor, and oversight of
internal controls and compliance with regulatory requirements pertaining to
financial matters. The Audit Committee also recommends to the board of directors
the auditors to be appointed. In addition, this Committee reviews and recommends
to the Board for approval the annual financial statements, Management's
Discussion and Analysis, and certain other documents required by regulatory
authorities. The Audit Committee is mandated to meet, and also to consult the
auditors, in the absence of management.
51
During the year ending December 31, 2004, this Committee met 3 times.
C. Employees.
As of December 31, 2004, iQ Germany had 10 employees engaged in product research
and development on a full-time basis and 7 employees engaged in general and
administrative and marketing functions on a part- and full-time basis. Our
success will depend in large part on our ability to attract and retain skilled
and experienced employees. None of our or iQ Germany's employees are covered by
a collective bargaining agreement, and we believe iQ Germany's relations with
its employees are good. We currently maintain key man life insurance on two of
our directors and executive officers, Dr. Guenther C. Bauer and Peter E. Braun,
which carries a death benefit of 511,292 Euros, respectively, in the event of
the death of either Dr. Bauer or Mr. Braun.
The Company considers its employee relationships to be satisfactory. The
Company's employees are not represented by labor unions and the Company is not
aware of any attempts to organize our employees.
D. Share Ownership.
The following table sets forth as of June 27, 2005 information concerning the
beneficial ownership of our shares, by persons who are known by us to own
beneficially more than 5% of shares, by each of our directors, by each of our
Named Executive Officers and by all of our directors and executive officers as a
group. The calculations in the table are based on an aggregate of 38,857,303
shares outstanding as of June 27, 2005. Unless otherwise noted all addresses of
the beneficial owners are Erlenhof Park, Inselkammer Strasse 4, D-82008,
Unterhaching, Germany. The symbol "*" indicates that the amount shown is less
than 1% of outstanding shares.
Name and Address Number of Percentage of Class
of Beneficial Owner shares
--------------------------------------------------------------------------------
Guenther Bauer(1) 1,877,199 4.7%
Erlenhof Park
Inselkammer Strasse 4
D-82008 Unterhaching, Germany
Peter E. Braun(2) 1,630,000 4.1%
Erlenhof Park
Inselkammer Strasse 4
D-82008 Unterhaching, Germany
Hans Ambos(3) 470,741 1.2%
Erlenhof Park
Inselkammer Strasse 4
D-82008 Unterhaching, Germany
Raymond Wicki(4) 0 *
Erlenhof Park
Inselkammer Strasse 4
D-82008 Unterhaching, Germany
(1) Includes vested options exercisable to purchase 995,199 registered shares
within 60 days of June 27, 2005.
(2) Includes vested options exercisable to purchase 1,280,000 registered shares
within 60 days of June 27, 2005.
(3) Includes vested options exercisable to purchase 405,000 registered shares
within 60 days of June 27, 2005.
(4) Includes vested options exercisable to purchase 0 registered shares within
60 days of June 27, 2005.
* Less than 1%.
As at June 27, 2005, the directors and officers of the Company, as a group,
beneficially owned 1,297,741 Registered shares representing 3.3% of the
Registered shares issued and also held incentive stock options
52
(exercisable presently or within 60 days) pursuant to which up to 2,680,199
registered shares can be purchased.
53
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. Major Shareholders.
A major shareholder is a shareholder owning directly or indirectly more than 5%
of the issued shares of the Company.
The Company is a publicly owned corporation, the majority of the Registered
shares of which are owned by persons resident outside the United States. To the
best of the Company's knowledge, the Company is not directly owned or controlled
by another corporation or any foreign government.
According to information from Computershare Trust Company of Canada, our
Registrar and Transfer Agent, and the Depository Trust Company, as of December
31, 2004, we had 8 registered shareholders including the Depository Trust
Company who had addresses in the United States and who held, as of December 31,
2004, some 6,958,589 of our registered shares, representing approximately 19.9%
of our outstanding registered shares.
As at June 27, 2005, to the best of the Company's knowledge, no shareholder
beneficially owns more than 5% of the issued shares of the Company.
To the best knowledge of the Company, there are no voting arrangements among
shareholders of the Company. All shareholders have the same voting rights from
other shareholders.
B. Related Party Transactions.
iQ Germany acquired patents and know-how improving the current output of a
chargeable battery at low outside temperatures and the registered design "iQ"
based on a contract dated March 15, 1995 from two shareholders, one of which is
a director and CEO of iQ Power and the other is a family member and a former
officer of the company. The intangibles purchased relate to a German patent, an
international patent application as well as the registered design "iQ". iQ Power
and the shareholders agreed that the shareholders would receive approximately
$257,000 (DM 400,000; approximately EUR 205,000) from future income. We
satisfied these payment obligations in September, 2004 by issuing 200,000 shares
and making cash payments totaling $30,900 (EUR 25,330). We paid $10,300 (EUR
8,333) of cash and issued 50,000 shares valued at $0.40 to our CEO as part of
this payment. This settlement transfers all rights from these two individuals to
iQ without any future liabilities.
We entered into a consulting agreement dated August 25, 1998 with a corporation
controlled by Mr. French, our former Vice-President for Business Development
(resigned November 9, 2004). The agreement was for an initial term of three
years (with automatic one-year renewals in the absence of either party taking
affirmative action to terminate the agreement). The agreement provided for a
base annual fee of $72,000 ($6,000 per month) and for the reimbursement of
reasonable expenses incurred on our behalf. Effective April 1, 2003, the
contract was assigned to another company controlled by Mr. French. Effective
September 2003, the monthly fee increased to $7,200 per month. Total management
fees for the twelve months ended December 31, 2003, amounted to $78,600, and
$56,750 for the period from January 1, 2004 to November 9, 2004. As of November
9, 2004, Mr. French terminated this contract.
We paid legal fees in the amount of $66,965 in 2004 and $68,859 in 2003 to law
firms in which Gregory Sasges, a former Secretary and member of our board of
directors, is a partner. Mr. Sasges did not stand for election and his term as
director expired on June 30, 2004. Mr. Sasges resigned as Secretary effective
November 9, 2004.
54
Other than described above, none of our directors or senior officers or any of
our associates or affiliates, are or have been indebted to us at any time since
the beginning of the last completed financial year other than in the usual
course of their employment in connection with advances made on account of
expenses to be incurred on behalf of our Company. All these receivables have
been collected by December 31, 2004 and there are no new receivables outstanding
per December 31, 2004.
Other than as disclosed under "Executive Compensation - Employment and
Consulting Agreements," there were no other material transactions, series of
similar transactions, to which the Company or any of its subsidiaries was or is
to be a party, in which the amount involved exceeded $60,000 and in which any
director or executive officer, or any security holder who is known to the
Company to own of record or beneficially more than five percent of the Company's
common stock, or any member of the immediate family of any of the foregoing
persons, had a material interest.
C. Interests of Experts and Counsel.
Not Applicable.
55
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information.
Exhibited hereto are Consolidated Financial Statements audited by an independent
auditor and accompanied by an audit report, comprised of consolidated balance
sheets as at December 31, 2004 and 2003, consolidated statements of operations
and cash flows for each of the years in the three year period ended December 31,
2004 and related notes.
There are no legal proceedings currently pending.
The Company has not paid dividends in the past and does not expect to pay
dividends in the near future.
B. Significant Changes.
There have been no significant changes since the date of the Company's annual
financial statements, other than as disclosed in this Annual Report.
56
ITEM 9. THE OFFER AND LISTING.
A. Offer and Listing Details.
Price Range of Registered shares
Primary German Market -- The Frankfurter Wertpapier Boerse, Segment Freiverkehr
Our securities ("common shares") began trading over-the-counter on the Frankfurt
Stock Exchange (the Frankfurter Wertpapier Boerse) under the symbol IQP (WKN
924110) on July 28, 2000, which was after the effective date of the reverse
split which we accomplished April 10, 2000. With continuation of the company to
Switzerland, effective November 10, 2004, our common shares were exchanged on a
1 share for 1 share basis against registered shares, following Swiss law.
Effective April 4, 2005, all shares held in Europe are kept in collective safe
custody with CLEARSTREAM Banking Frankfurt, a subsidiary of Deutsche Boerse AG.
Since that date our shares are traded under the new symbol IQPB (WKN A0DQVL).The
following table sets forth, for the periods indicated, the high and low sale
prices, in Euros, for our registered shares as reported on the Frankfurter
Wertpapier Boerse.
Frankfurt
OTC
|
| | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| US$ | US$ | ||||||||||
| High | Low | ||||||||||
| 2003 | |||||||||||
| First Quarter | 0.49 | 0.33 | |||||||||
| Second Quarter | 0.80 | 0.34 | |||||||||
| Third Quarter | 0.72 | 0.50 | |||||||||
| Fourth Quarter | 0.58 | 0.37 | |||||||||
| 2004 | |||||||||||
| First Quarter | 0.56 | 0.42 | |||||||||
| Second Quarter | 0.44 | 0.31 | |||||||||
| Third Quarter | 0.36 | 0.22 | |||||||||
| Fourth Quarter | 0.48 | 0.25 | |||||||||
| 2005 | |||||||||||
| First Quarter | 0.43 | 0.35 | |||||||||
_________________
The closing price for our registered shares on the Frankfurt OTC was EURO 0.62
on June 27, 2005.
Exchange rates with respect to the Euro are based upon the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York. This exchange rate fluctuates
on a daily basis and were as follows on the following specified dates: $1.0800
on March 31, 2003; $1.1440 on June 30, 2003; $1.1597 on September 30, 2003 and
$1.2557 on December 31, 2003; $1.2173 on March 31, 2004; $1.2082 on June 30,
2004; $1.2324 on September 30, 2003 and $1.3641 on December 31, 2004 The noon
buying rate of exchange on March 31, 2005 as reported by the United States
Federal Reserve Bank of New York for the conversion of Euros into United States
dollars was $1.2469 ($1.00 = EURO 0.8020).
57
United States Market -- The NASD OTCBB
Our securities ("common shares") began trading on NASD Over The Counter Bulletin
Board (the "OTCBB") under the symbol "IQPT" on June 29, 1999. Prior to June 29,
1999, there was no public market for our commonshares. The following table sets
forth, for the periods indicated, the high and low sale prices for our shares as
reported on the OTCBB. On April 10, 2000, we completed a reverse-split of our
registered shares on a 2.5 share for 1 share basis, and our trading symbol on
the OTCBB was changed to "IQPR." With continuation of the company to
Switzerland, effective November 10, 2004, our common shares were exchanged on a
1 share for 1 share basis against registered shares, following Swiss law. On
April 4, 2005 our trading symbol was changed to "IQPOF". The information in this
annual report gives effect to the reverse-split.
|
NASD Over The Counter Bulletin Board
| | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| US$ | US$ | ||||||||||
| High | Low | ||||||||||
| 2003 | |||||||||||
| First Quarter | 0.50 | 0.36 | |||||||||
| Second Quarter | 0.90 | 0.36 | |||||||||
| Third Quarter | 1.00 | 0.35 | |||||||||
| Fourth Quarter | 0.70 | 0.44 | |||||||||
| 2004 | |||||||||||
| First Quarter | 0.78 | 0.51 | |||||||||
| Second Quarter | 0.51 | 0.37 | |||||||||
| Third Quarter | 0.42 | 0.29 | |||||||||
| Fourth Quarter | 0.55 | 0.32 | |||||||||
| 2005 | |||||||||||
| First Quarter | 0.53 | 0.35 | |||||||||
_________________
The closing price for our registered shares on the OTCBB was US$0.58 on June 20,
2005.
The over-the-counter market quotations set forth above reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
B. Plan of Distribution.
Not Applicable
C. Markets.
The primary market for our Registered shares is on Frankfurt Stock Exchange (the
Frankfurter Wertpapier Boerse). Our securities were traded under the symbol IQP
(WKN 924110) and since April 04, 2005 trading takes place under the symbol IQPB
(WKN A0DQVL). Our registered shares began trading over-the-counter on the
Frankfurt Stock Exchange on July 28, 2000.
58
Our registered shares have also been quoted on the NASD Over The Counter
Bulletin Board (the "OTCBB") since June 29, 1999. Our registered shares were
quoted under the trading symbol "IQPR" till April 04, 2005 and are now quoted
under the symbol "IQPOF". As of the filing date of this report, our securities
are now admitted on the DTC Link, an electronic system for rapid cross-border
securities clearing transactions between leading custodial banks in Europe and
the U.S.
D. Selling Shareholders.
Not Applicable.
E. Dilution.
Not Applicable
F. Expenses of the Issue.
Not Applicable
59
ITEM 10. ADDITIONAL INFORMATION.
A. Share Capital.
Not Applicable
B. Memorandum and Articles of Association.
iQ Power AG is registered in the Companies Register of the Canton of Zug,
Switzerland, under the number CH-170.3.027.783-9. Our corporate purposes are
according to the articles of association as attached. Set forth below is a
summary of certain material provisions of the Swiss corporate law. This
description does not purport to be complete.
-------------------------------------------------------------------------------------------------------------------------
The Corporation according to Art. 620 ff. of the Swiss Code of Obligations (CO)
-------------------------------------------------------------------------------------------------------------------------
1. Under Swiss corporation law the charter documents are its Articles of Incorporation.
These Articles have to set forth at least the name of the corporation, the Swiss Canton,
in which its registered office is located and the domicile, the purpose of the
Charter Documents. corporation, the issued capital and contributions made thereto, whether there are
restrictions on share transfers, the number and the par value and the type of shares,
the calling of a general meeting of shareholders and the voting rights of the
shareholders, the bodies for the administration and the audit, and finally the form
in which the corporation shall publish its notices.
-------------------------------------------------------------------------------------------------------------------------
2. Under Swiss corporation law a resolution of the General Meeting of Shareholders passed
by at least two thirds of the votes represented and the absolute majority of the par
value of shares represented, shall be required for the change of the corporation purpose,
Majority Required the creation of shares with privileged voting right, the restriction of the transferability
for Special of registered shares, an increase of capital either authorized or subject to a condition,
Resolution/ the limitation or withdrawal of pre-emptive rights, the change of the domicile of the
Extraordinary corporation, or the dissolution of the corporation without liquidation. Of course,
Action the Articles of Incorporation can declare other resolutions being subject to qualified
majorities.
-------------------------------------------------------------------------------------------------------------------------
3. The corporate records of a Swiss corporation are maintained at its registered office and
the cantonal commercial register. The commercial register maintains all corporate records
Access to Corporate and changes thereof. Furthermore, the commercial register is publicly available. Therefore,
Records every interested person has access to corporate information such as names of the members of
the Board of Directors and all information provided by the Articles of Incorporation.
-------------------------------------------------------------------------------------------------------------------------
In Switzerland the concept of authorized capital does not exist. The Swiss Code of
4. Obligations (CO) allows only an issued capital. A Swiss corporation may issue an unlimited
number of shares, whereas the minimum capital is CHF 100'000.00. The share capital can also
Share Capital be paid in by contributions in kind but this requires a report from a specially qualified
auditor.
-------------------------------------------------------------------------------------------------------------------------
5. Shares can be issued either in the name of a holder (registered shares) or to bearer. Both
types of shares may exist side by side in the proportion determined by the Articles of
Share Certificates Incorporation. Bearer shares and registered shares are basically transferable without
restriction, but the transferability of registered shares can be restricted by the Articles
of Incorporation. Bearer shares are transferred by hand over of the share certificate and
registered shares have to be duly endorsed for transferral. By amending the Articles of
Incorporation the General Meeting of Shareholders is authorized to split shares into shares
with lower par value or to consolidate shares into shares with higher par value, whereas the
consolidation of shares requires the approval of shareholders.
-------------------------------------------------------------------------------------------------------------------------
60
-------------------------------------------------------------------------------------------------------------------------
The Corporation according to Art. 620 ff. of the Swiss Code of Obligations (CO)
-------------------------------------------------------------------------------------------------------------------------
The members of the Board of Directors have to be elected by the General Meeting of
6. Shareholders. The Swiss corporate law requires the election of directors by the General
Meeting of Shareholders for a term not to exceed six years, whereas re-election is
Directors possible. Under Swiss law the majority of the members of the Board of Directors have to
be either Swiss or European Union Citizens and have to be domiciled in Switzerland.
The federal Council may grant exceptions to this rule for companies whose principal purpose
consists in holding participations in other enterprises, provided the majority of
these enterprises are abroad. Only shareholders are eligible to the Board of Directors,
whereas fiduciary shareholding is sufficient. The Board of Directors has certain
non-transferable and inalienable duties, such as the ultimate management of the
corporation and the giving of the necessary directives, the establishment of the
organization, the structuring of the accounting system and of the financial controls as
well as the financial planning insofar as this is necessary to manage the corporation,
the appointment and removal of the persons entrusted with the management and the
representation, the preparation of the business report as well as the preparation of the
General Meeting of the Shareholders and the implementing of its resolutions and the
notification of the judge in the case of over indebtedness. The members of the Board of
Directors and all persons engaged in the management are liable not only to the corporation,
but also to each shareholder and to the corporation's obligees for the damage caused by
intentional or negligent violation of their duties. There are specific insurances covering
those risks.
-------------------------------------------------------------------------------------------------------------------------
The General Meeting of Shareholders is the supreme corporate body of the corporation. It
7. has certain inalienable powers, such as the adoption and the amending of the Articles of
Incorporation, the election of the members of the Board of Directors and of the auditors,
Members/ the approval of the annual report and of the consolidated statements of account, the
Shareholders approval of the annual financial statement as well as the resolution on the use of the
balance sheet profit, in particular, the declaration of dividends and the release of the
members of the Board of Directors. The ordinary General Meeting of Shareholders takes
place annually within six months after the close of the business year, special meetings
are called according to need. The General Meeting of Shareholders is called by the Board
of Directors and if necessary by the auditors at the latest twenty days prior to the day of
the meeting. The calling of a general Meeting of Shareholders may also be requested by one
or more shareholders representing together at least ten percent of the share capital. The
calling has to state the agenda items as well as the motions of the Board of Directors and
of the shareholders who have requested the holding of a General Meeting of Shareholders or
the inclusion of an item in the agenda. No resolution may be passed on motions concerning
agenda items which have not been duly announced.
-------------------------------------------------------------------------------------------------------------------------
8. Under Swiss law the business report and the auditor's report of the particular business year
have to be made available for inspection at the corporation's domicile no later than
Financial Disclosure twenty days prior to the ordinary General Meeting of Shareholders. Any shareholder may
request that a copy of these documents be immediately sent to him. Any shareholder may
still request from the corporation the business report in the form approved by the General
Meeting of Shareholders, as well as the auditor's report, during the year following the
General Meeting of Shareholders. At the General Meeting of Shareholders any shareholder is
entitled to request information from the Board of Directors concerning the affairs of the
corporation and from the auditor concerning the execution and the results of their
examination. The corporation has to give information to the extent necessary for the
exercising of shareholders' rights. Information may be refused if business secrets or other
interests of the corporation worth being protected are jeopardized. Auditors must be
independent from the Board of Directors and from any shareholder who has a majority vote.
In particular, they shall not be employees of the corporation to be audited, and they shall
not perform work for it incompatible with the auditing mandate. If the shares of the
corporation are listed on the stock exchange, the auditors must meet special professional
qualifications. The auditor can be replaced based on the regulation in the Articles of
Incorporation.
-------------------------------------------------------------------------------------------------------------------------
61
-------------------------------------------------------------------------------------------------------------------------
The Corporation according to Art. 620 ff. of the Swiss Code of Obligations (CO)
-------------------------------------------------------------------------------------------------------------------------
9. The Board of Directors and any shareholder may take legal actions against the corporation to
challenge resolutions of the General Meeting of Shareholders, which violate the law or
Dissent the Articles of Incorporation. Decisions are particularly challengeable if they withdraw or
Proceedings/ limit shareholders' rights thereby violating the law or the Articles of Incorporation.
Appraisal Rights Decisions are also challengeable if they withdraw or limit shareholders' rights without
proper reason or if they withdraw the profit orientation of the corporation without the
consent of all shareholders. If the legal action by the shareholder is successful a
judgement will annul the resolution of the General Meeting. In Switzerland there are no
appraisal rights provided by law but in a merger the merging corporations can contractually
agree on a possibility for shareholders to opt for a cash-out.
-------------------------------------------------------------------------------------------------------------------------
10. In Switzerland on July 1, 2004, the new Swiss Merger Act became effective. The Swiss Merger
Act provides two forms of merger. In what is referred to as an absorption, a target
Amalgamation (Merger) corporation merges into an acquiring corporation. By operation of law, the acquirer not
only becomes the owner of the assets of the target corporation but also becomes subject to
the actual and contingent liabilities of the target. Upon finalizing the transaction, the
target corporation disappears, and its dissolution is registered in the commercial
register. Thus, it ceases to exist while the acquiring corporation continues to exist.
Characteristic of this form of merger is that, prior to the merger, the acquiring
corporation has previously existed as a legal entity. In what is referred to as a
combination, two (or more) companies merge on equal terms and form a newly established
entity. It is the characteristic of this merger that the acquiring corporation originates
from the transaction itself. The Merger Act stipulates specific guidelines regarding
mergers between companies that are in a control relationship (parent / subsidiary) to each
other as well as for mergers between small and medium enterprises. On the other hand,
additional legal constrains apply if one of the merging firms is in liquidation or if one
corporation is over indebted or reports that half of its equity is no longer covered.
-------------------------------------------------------------------------------------------------------------------------
11. The Swiss corporate law does not contain any regulations referring compulsory acquisitions.
Only if a corporation is registered with the Swiss Stock Exchange (SWX) the specific rules
Take-Over Bids and of the Stock Exchange Act apply. The Swiss Stock Exchange Act contains several regulations
Compulsory such as opting up, opting out, squeeze out, squeeze in, etc. The new Swiss Merger Act
Acquisitions contains the possibility for merging corporations to contractually opt for a squeeze-out of
minority shareholders if at least 90% of the shareholders of the transferring corporation
agree.
-------------------------------------------------------------------------------------------------------------------------
C. Material Contracts.
None, other than disclosed in this report.
D. Exchange Controls and other limitations affecting security holders
There are, except in limited embargo circumstances pursuant to resolutions
adopted by the United Nations or the European Union, no legal restrictions in
Germany on international capital movements and foreign exchange transactions.
For statistical purposes only, every individual or corporation residing in
Germany (a "Resident") must report to the German Central Bank (Deutsche
Bundesbank), subject only to certain immaterial exceptions, any payment received
from or made to or on account of an individual or corporation residing outside
Germany (a "Nonresident") if such payment exceeds (euro)12,500 or the equivalent
in a foreign currency. In addition, Residents must report any claims against or
any liabilities payable to Nonresidents if such claims or liabilities in the
aggregate exceed (euro)5,000,000 or the equivalent in a foreign currency during
any one month.
62
There are currently no Swiss foreign exchange controls or other Swiss laws
restricting the import or export of capital by iQ or its subsidiaries. In
addition, there are currently no restrictions under Swiss law affecting the
remittance of dividends, interest or other payments to non-resident holders of
iQ securities.
Neither Swiss Law nor the Articles of Association (Satzung) of iQ Power impose
any limitations on the rights of Nonresident or foreign owners to hold or vote
iQ Shares.
E. Taxation.
This section outlines the material Swiss tax and United States federal income
tax consequences of the ownership of IQ registered shares by a US holder (as
defined below) who holds IQ registered shares as capital assets. It is designed
to explain the major interactions between Swiss and US taxation for US persons
who hold IQ shares. The discussion does not address the tax consequences to
persons who hold IQ registered shares in particular circumstances, such as
tax-exempt entities, banks, financial institutions, insurance companies,
broker-dealers, traders in securities that elect to mark to market, holders
liable for alternative minimum tax, holders that actually or constructively own
10% or more of the voting stock of IQ, holders that hold IQ registered shares as
part of a straddle or a hedging or conversion transaction or US holders (as
defined below) whose functional currency for US tax purposes is not the US
dollar. This discussion also does not apply to holders who acquired their IQ
registered shares pursuant to the exercise of employee stock options or
otherwise as compensation or through a tax-qualified retirement plan. The
discussion is based on the tax laws of Switzerland and the United States,
including the US Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations under the Internal Revenue Code,
published rulings and court decisions, as in effect on the date of this
document, as well as the convention between the United States of America and
Switzerland, which we call the "Treaty," all of which may be subject to change
or change in interpretation, possibly with retroactive effect. For purposes of
this discussion, a "US holder" is any beneficial owner of IQ registered shares
that is for US federal income tax purposes:
o a citizen or resident of the United States,
o a domestic corporation or other entity taxable as a corporation,
o an estate, the income of which is subject to United States federal
income tax without regard to its source, or
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
The discussion does not generally address any aspects of Swiss taxation other
than income and capital taxation or of United States taxation other than federal
income taxation. Holders of IQ shares are urged to consult their tax advisors
regarding the United States federal, state and local and the Swiss and other tax
consequences of owning and disposing of these shares in their particular
circumstances.
63
Ownership of IQ Registered shares - Swiss Taxation
Dividends and Distributions
Dividends paid by IQ to a holder of IQ registered shares (including dividends on
liquidation proceeds and stock dividends) are subject to a Swiss federal
withholding tax at a rate of 35%. The withholding tax must be withheld from the
gross distribution, and be paid to the Swiss Federal Tax Administration. A US
holder that qualifies for Treaty benefits may apply for a refund of the
withholding tax withheld in excess of the 15% Treaty rate. The claim for refund
must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65,
CH-3003 Berne, Switzerland no later than December 31 of the third year following
the end of the calendar year in which the income subject to withholding was due.
The form used for obtaining a refund is Swiss Tax Form 82 (82C for companies;
82E for other entities; 821 for individuals), which may be obtained from any
Swiss Consulate General in the United States or from the Swiss Federal Tax
Administration at the address above. The form must be filled out in triplicate
with each copy duly completed and signed before a notary public in the United
States, a US Embassy or a US Consulate. The form must be accompanied by evidence
of the deduction of withholding tax withheld at the source. Repayment of capital
in the form of a par value reduction is not subject to Swiss withholding tax.
Transfers of IQ Registered shares
The sale of IQ registered shares, whether by Swiss resident or non-resident
holders (including US holders), may be subject to a Swiss securities transfer
stamp duty of up to 0.15% calculated on the sale proceeds if it occurs through
or with a bank or other securities dealer in Switzerland as defined in the Swiss
Federal Stamp Tax Act. In addition to the stamp duty, the sale of IQ registered
shares by or through a member of a recognized stock exchange may be subject to a
stock exchange levy. Capital gains realized by a US holder upon the sale of IQ
registered shares are not subject to Swiss income or gains taxes, unless such US
holder holds such shares as business assets of a Swiss business operation
qualifying as a permanent establishment for the purposes of the Treaty. In the
latter case, gains are taxed at ordinary Swiss individual or corporate income
tax rates, as the case may be, and losses are deductible for purposes of Swiss
income taxes.
Ownership of IQ Registered shares-United States Federal Income Taxation
Dividends and Distribution
Subject to the passive foreign investment company rules discussed below, US
holders will include in gross income the gross amount of any dividend paid,
before reduction for Swiss withholding taxes, by IQ out of its current or
accumulated earnings and profits, as determined for United States federal income
tax purposes, as ordinary income when the dividend is actually or constructively
received by the US holder. Dividends paid to a noncorporate US holder in taxable
years beginning before January 1, 2009 that constitute qualified dividend income
will be taxable to the holder at a maximum rate of 15%, provided that the holder
has a holding period in the shares of more than 61 days during the 120-day
period beginning 60 days before the ex-dividend date and meets other holding
period requirements. Dividends paid by IQ with respect to the shares will
generally be qualified dividend income. For United States federal income tax
purposes, a dividend will include a distribution characterized as a repayment of
capital in the form of a par value reduction, if the distribution is made out of
current or accumulated earnings and profits, as described above. Dividends will
be income from sources outside the United States for foreign tax credit
limitation purposes, but generally will be "passive income" or "financial
services income," which are treated separately from other types of income for
foreign tax credit limitation purposes. Special rules apply in
64
determining the foreign tax credit limitation with respect to dividends that are
subject to the maximum 15% rate. The dividend will not be eligible for the
dividends-received deduction generally allowed to United States corporations in
respect of dividends received from other United States corporations. The amount
of the dividend distribution included in income of a US holder will be the US
dollar value of the Swiss franc payments made, determined at the spot Swiss
franc/US dollar rate on the date such dividend distribution is included in the
income of the US holder, regardless of whether the payment is in fact converted
into US dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend distribution is
included in income to the date such dividend distribution is converted into US
dollars will be treated as ordinary income or loss. Such gain or loss will
generally be income or loss from sources within the United States for foreign
tax credit limitation purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal income
tax purposes, will be treated as a return of capital to the extent of the US
holder's basis in its IQ registered shares and thereafter as capital gain.
Subject to certain limitations, the Swiss tax withheld in accordance with the
Treaty and paid over to Switzerland will be creditable against the US holder's
United States federal income tax liability. To the extent a refund of the tax
withheld is available to a US holder under the laws of Switzerland or under the
Treaty, the amount of tax withheld that is refundable will not be eligible for
credit against the US holder's United States federal income tax liability,
whether or not the refund is actually obtained. Stock dividends to US holders
that are made as part of a pro rata distribution to all shareholders of IQ
generally will not be subject to United States federal income tax. US holders
that received a stock dividend that is subject to Swiss tax but not US tax may
not have enough foreign income for US tax purposes to receive the benefit of the
foreign tax credit associated with that tax, unless the holder has foreign
income from other sources.
Transfers of IQ Registered shares
Subject to the passive foreign investment company rules discussed below, a US
holder that sells or otherwise disposes of IQ registered shares generally will
recognize capital gain or loss for United States federal income tax purposes
equal to the difference between the US dollar value of the amount realized and
the tax basis, determined in US dollars, in the IQ registered shares. Capital
gain of a non-corporate US holder that is recognized before January 1, 2009 is
generally taxed at a maximum rate of 15% if the IQ registered shares were held
for more than one year. The gain or loss will generally be income or loss from
sources within the United States for foreign tax credit limitation purposes.
U.S. Federal Income Tax Consequences
The following is a summary of the anticipated material U.S. federal income tax
consequences to a U.S. Holder (as defined below) arising from and relating to
the acquisition, ownership, and disposition of Registered Shares.
This summary is for general information purposes only and does not purport to be
a complete analysis or listing of all potential U.S. federal income tax
consequences that may apply to a U.S. Holder as a result of the acquisition,
ownership, and disposition of Registered Shares. In addition, this summary does
not take into account the individual facts and circumstances of any particular
U.S. Holder that may affect the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Registered Shares. Accordingly, this
summary is not intended to be, and should not be construed as, legal or U.S.
federal income tax advice with respect to any U.S. Holder. Each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant regarding
the U.S. federal, U.S. state and local, and foreign tax consequences of the
acquisition, ownership, and disposition of Registered Shares.
65
Scope of this Disclosure
Authorities
-----------
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations (whether final, temporary, or proposed), published
rulings of the Internal Revenue Service ("IRS"), published administrative
positions of the IRS, the Convention Between The United States Of America And
The Swiss Confederation For The Avoidance Of Double Taxation With Respect To
Taxes On Income (the "Switzerland-U.S. Tax Convention"), and U.S. court
decisions that are applicable and, in each case, as in effect and available, as
of the date of this Annual Report. Any of the authorities on which this summary
is based could be changed in a material and adverse manner at any time, and any
such change could be applied on a retroactive basis. This summary does not
discuss the potential effects, whether adverse or beneficial, of any proposed
legislation that, if enacted, could be applied on a retroactive basis.
U.S. Holders
------------
For purposes of this summary, a "U.S. Holder" is a beneficial owner of
Registered Shares that, for U.S. federal income tax purposes, is (a) an
individual who is a citizen or resident of the U.S., (b) a corporation, or any
other entity classified as a corporation for U.S. federal income tax purposes,
that is created or organized in or under the laws of the U.S. or any state in
the U.S., including the District of Columbia, (c) an estate if the income of
such estate is subject to U.S. federal income tax regardless of the source of
such income, or (d) a trust if (i) such trust has validly elected to be treated
as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is
able to exercise primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all substantial decisions
of such trust.
Non-U.S. Holders
----------------
For purposes of this summary, a "non-U.S. Holder" is a beneficial owner of
Registered Shares other than a U.S. Holder. This summary does not address the
U.S. federal income tax consequences of the acquisition, ownership, and
disposition of Registered Shares to non-U.S. Holders. Accordingly, a non-U.S.
Holder should consult its own financial advisor, legal counsel, or accountant
regarding the U.S. federal, U.S. state and local, and foreign tax consequences
(including the potential application of and operation of any tax treaties) of
the acquisition, ownership, and disposition of Registered Shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
---------------------------------------------------------------------------
This summary does not address the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Registered Shares to U.S. Holders
that are subject to special provisions under the Code, including the following
U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified
retirement plans, individual retirement accounts, or other tax-deferred
accounts; (b) U.S. Holders that are financial institutions, insurance companies,
real estate investment trusts, or regulated investment companies; (c) U.S.
Holders that are broker-dealers, dealers, or traders in securities or currencies
that elect to apply a mark-to-market accounting method; (d) U.S. Holders that
have a "functional currency" other than the U.S. dollar; (e) U.S. Holders that
are liable for the alternative minimum tax under the Code; (f) U.S. Holders that
own Registered Shares as part of a straddle, hedging transaction, conversion
transaction, constructive sale, or other arrangement involving more than one
position; (g) U.S. Holders that acquired Registered Shares in connection with
the exercise of employee stock options or otherwise as compensation for
services; (h) U.S. Holders that hold Registered Shares other than as a capital
asset within the meaning of Section 1221 of the Code; or (i) U.S. Holders that
own,
66
directly or indirectly, 10% or more, by voting power or value, of the
outstanding shares of the Company. U.S. Holders that are subject to special
provisions under the Code, including U.S. Holders described immediately above,
should consult their own financial advisor, legal counsel or accountant
regarding the U.S. federal, U.S. state and local, and foreign tax consequences
of the acquisition, ownership, and disposition of Registered Shares.
If an entity that is classified as partnership (or "pass-through" entity) for
U.S. federal income tax purposes holds Registered Shares, the U.S. federal
income tax consequences to such partnership (or "pass-through" entity) and the
partners of such partnership (or owners of such "pass-through" entity) generally
will depend on the activities of the partnership (or "pass-through" entity) and
the status of such partners (or owners). Partners of entities that are
classified as partnerships (or owners of "pass-through" entities) for U.S.
federal income tax purposes should consult their own financial advisor, legal
counsel or accountant regarding the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Registered Shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed
------------------------------------------------------------------------------
This summary does not address the U.S. state and local, U.S. federal estate and
gift, or foreign tax consequences to U.S. Holders of the acquisition, ownership,
and disposition of Registered Shares. Each U.S. Holder should consult its own
financial advisor, legal counsel, or accountant regarding the U.S. state and
local, U.S. federal estate and gift, and foreign tax consequences of the
acquisition, ownership, and disposition of Registered Shares.
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and
Disposition of Registered Shares
Distributions on Registered Shares
----------------------------------
General Taxation of Distributions
A U.S. Holder that receives a distribution, including a constructive
distribution, with respect to the Registered Shares will be required to include
the amount of such distribution in gross income as a dividend (without reduction
for any foreign income tax withheld from such distribution) to the extent of the
current or accumulated "earnings and profits" of the Company. To the extent that
a distribution exceeds the current and accumulated "earnings and profits" of the
Company, such distribution will be treated (a) first, as a tax-free return of
capital to the extent of a U.S. Holder's tax basis in the Registered Shares and,
(b) thereafter, as gain from the sale or exchange of such Registered Shares.
(See more detailed discussion at "Disposition of Registered Shares" below).
Reduced Tax Rates for Certain Dividends
For taxable years beginning after December 31, 2002 and before January 1, 2009,
a dividend paid by the Company generally will be taxed at the preferential tax
rates applicable to long-term capital gains if (a) the Company is a "qualified
foreign corporation" (as defined below), (b) the U.S. Holder receiving such
dividend is an individual, estate, or trust, and (c) such dividend is paid on
Registered Shares that have been held by such U.S. Holder for at least 61 days
during the 121-day period beginning 60 days before the "ex-dividend date" (i.e.,
the first date that a purchaser of such Registered Shares will not be entitled
to receive such dividend).
The Company generally will be a "qualified foreign corporation" under Section
1(h)(11) of the Code (a "QFC") if (a) the Company is incorporated in a
possession of the U.S., (b) the Company is eligible for the benefits of the
Switzerland-U.S. Tax Convention, or (c) the Registered Shares are readily
67
tradable on an established securities market in the U.S. Under a notice
published by the IRS, stock will be considered as "readily tradable on an
established securities market in the U.S." if such stock is listed on a national
securities exchange that is registered under section 6 of the Securities
Exchange Act of 1934 or on the Nasdaq Stock Market. The IRS announced in that
notice that it is considering the treatment of dividends paid with respect to
stock listed only in a manner that does not satisfy this definition of "readily
tradable on an established securities market in the U.S.," such as stock that is
traded on the OTC Bulletin Board or on the electronic pink sheets.
However, even if the Company satisfies one or more of such requirements, the
Company will not be treated as a QFC if the Company is a "passive foreign
investment company" (as defined below) for the taxable year during which the
Company pays a dividend or for the preceding taxable year. In 2003, the U.S.
Department of the Treasury (the "Treasury") and the IRS announced that they
intended to issue Treasury Regulations providing procedures for a foreign
corporation to certify that it is a QFC. Although these Treasury Regulations
were not issued in 2004, the Treasury and the IRS have confirmed their intention
to issue these Treasury Regulations. It is expected that these Treasury
Regulations will obligate persons required to file information returns to report
a distribution with respect to a foreign security issued by a foreign
corporation as a dividend from a QFC if the foreign corporation has, among other
things, certified under penalties of perjury that the foreign corporation was
not a "passive foreign investment company" for the taxable year during which the
foreign corporation paid the dividend or for the preceding taxable year.
As discussed below, the Company does not believe that it was a "passive foreign
investment company" for the taxable year ended December 31, 2004, and does not
expect that it will be a "passive foreign investment company" for the taxable
year ending December 31, 2005. (See more detailed discussion at "Additional
Rules that May Apply to U.S. Holders" below). However, there can be no assurance
that the IRS will not challenge the determination made by the Company concerning
its "passive foreign investment company" status or that the Company will not be
a "passive foreign investment company" for the current or any future taxable
year. Accordingly, although the Company expects that it may be a QFC, there can
be no assurances that the IRS will not challenge the determination made by the
Company concerning its QFC status, that the Company will be a QFC for the
current or any future taxable year, or that the Company will be able to certify
that it is a QFC in accordance with the certification procedures issued by the
Treasury and the IRS.
If the Company is not a QFC, a dividend paid by the Company to a U.S. Holder,
including a U.S. Holder that is an individual, estate, or trust, generally will
be taxed at ordinary income tax rates (and not at the preferential tax rates
applicable to long-term capital gains). The dividend rules are complex, and each
U.S. Holder should consult its own financial advisor, legal counsel, or
accountant regarding the dividend rules.
Distributions Paid in Foreign Currency
The amount of a distribution paid to a U.S. Holder in foreign currency generally
will be equal to the U.S. dollar value of such distribution based on the
exchange rate applicable on the date of receipt. A U.S. Holder that does not
convert foreign currency received as a distribution into U.S. dollars on the
date of receipt generally will have a tax basis in such foreign currency equal
to the U.S. dollar value of such foreign currency on the date of receipt. Such a
U.S. Holder generally will recognize ordinary income or loss on the subsequent
sale or other taxable disposition of such foreign currency (including an
exchange for U.S. dollars).
68
Dividends Received Deduction
Dividends paid on the Registered Shares generally will not be eligible for the
"dividends received deduction." The availability of the dividends received
deduction is subject to complex limitations that are beyond the scope of this
discussion, and a U.S. Holder that is a corporation should consult its own
financial advisor, legal counsel, or accountant regarding the dividends received
deduction.
Disposition of Registered Shares
--------------------------------
A U.S. Holder will recognize gain or loss on the sale or other taxable
disposition of Registered Shares in an amount equal to the difference, if any,
between (a) the amount of cash plus the fair market value of any property
received and (b) such U.S. Holder's tax basis in the Registered Shares sold or
otherwise disposed of. Any such gain or loss generally will be capital gain or
loss, which will be long-term capital gain or loss if the Registered Shares are
held for more than one year. Gain or loss recognized by a U.S. Holder on the
sale or other taxable disposition of Registered Shares generally will be treated
as "U.S. source" for purposes of applying the U.S. foreign tax credit rules.
(See more detailed discussion at "Foreign Tax Credit" below).
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is
an individual, estate, or trust. There are currently no preferential tax rates
for long-term capital gains of a U.S. Holder that is a corporation. Deductions
for capital losses and net capital losses are subject to complex limitations.
For a U.S. Holder that is an individual, estate, or trust, capital losses may be
used to offset capital gains and up to U.S.$3,000 of ordinary income. An unused
capital loss of a U.S. Holder that is an individual, estate, or trust generally
may be carried forward to subsequent taxable years, until such net capital loss
is exhausted. For a U.S. Holder that is a corporation, capital losses may be
used to offset capital gains, and an unused capital loss generally may be
carried back three years and carried forward five years from the year in which
such net capital loss is recognized.
Foreign Tax Credit
------------------
A U.S. Holder who pays (whether directly or through withholding) foreign income
tax with respect to dividends paid on the Registered Shares generally will be
entitled, at the election of such U.S. Holder, to receive either a deduction or
a credit for such foreign income tax paid. Generally, a credit will reduce a
U.S. Holder's U.S. federal income tax liability on a dollar-for-dollar basis,
whereas a deduction will reduce a U.S. Holder's income subject to U.S. federal
income tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid (whether directly or through withholding) by a U.S. Holder
during a year.
Complex limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of a U.S.
Holder's U.S. federal income tax liability that such U.S. Holder's "foreign
source" taxable income bears to such U.S. Holder's worldwide taxable income. In
applying this limitation, a U.S. Holder's various items of income and deduction
must be classified, under complex rules, as either "foreign source" or "U.S.
source." In addition, this limitation is calculated separately with respect to
specific categories of income (including "passive income," "high withholding tax
interest," "financial services income," "general income," and certain other
categories of income). Dividends paid by the Company generally will constitute
"foreign source" income and generally will be categorized as "passive income"
or, in the case of certain U.S. Holders, "financial services income." However,
for taxable years beginning after December 31, 2006, the foreign tax credit
limitation categories are reduced to "passive income" and "general income" (and
the other categories of income, including "financial services income," are
eliminated). The foreign tax credit rules are complex, and each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant regarding
the foreign tax credit rules.
69
Information Reporting; Backup Withholding Tax
---------------------------------------------
Payments made within the U.S., or by a U.S. payor or U.S. middleman, of
dividends on, and proceeds arising from certain sales or other taxable
dispositions of, Registered Shares generally will be subject to information
reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a)
fails to furnish such U.S. Holder's correct U.S. taxpayer identification number
(generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification
number, (c) is notified by the IRS that such U.S. Holder has previously failed
to properly report items subject to backup withholding tax, or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has furnished its
correct U.S. taxpayer identification number and that the IRS has not notified
such U.S. Holder that it is subject to backup withholding tax. However, U.S.
Holders that are corporations generally are excluded from these information
reporting and backup withholding tax rules. Any amounts withheld under the U.S.
backup withholding tax rules will be allowed as a credit against a U.S. Holder's
U.S. federal income tax liability, if any, or will be refunded, if such U.S.
Holder furnishes required information to the IRS. Each U.S. Holder should
consult its own financial advisor, legal counsel, or accountant regarding the
information reporting and backup withholding tax rules.
Additional Rules that May Apply to U.S. Holders
If the Company is a "controlled foreign corporation" or a "passive foreign
investment company" (each as defined below), the preceding sections of this
summary may not describe the U.S. federal income tax consequences to U.S.
Holders of the acquisition, ownership, and disposition of Registered Shares.
Controlled Foreign Corporation
------------------------------
The Company generally will be a "controlled foreign corporation" under Section
957 of the Code (a "CFC") if more than 50% of the total voting power or the
total value of the outstanding shares of the Company is owned, directly or
indirectly, by citizens or residents of the U.S., domestic partnerships,
domestic corporations, domestic estates, or domestic trusts (each as defined in
Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10%
or more of the total voting power of the outstanding shares of the Company (a
"10% Shareholder").
If the Company is a CFC, a 10% Shareholder generally will be subject to current
U.S. federal income tax with respect to (a) such 10% Shareholder's pro rata
share of the "subpart F income" (as defined in Section 952 of the Code) of the
Company and (b) such 10% Shareholder's pro rata share of the earnings of the
Company invested in "United States property" (as defined in Section 956 of the
Code). In addition, under Section 1248 of the Code, any gain recognized on the
sale or other taxable disposition of Registered Shares by a U.S. Holder that was
a 10% Shareholder at any time during the five-year period ending with such sale
or other taxable disposition generally will be treated as a dividend to the
extent of the "earnings and profits" of the Company that are attributable to
such Registered Shares. If the Company is both a CFC and a "passive foreign
investment company" (as defined below), the Company generally will be treated as
a CFC (and not as a "passive foreign investment company") with respect to any
10% Shareholder.
70
The Company does not believe that it has previously been, or currently is, a
CFC. However, there can be no assurance that the Company will not be a CFC for
the current or any future taxable year.
Passive Foreign Investment Company
----------------------------------
The Company generally will be a "passive foreign investment company" under
Section 1297 of the Code (a "PFIC") if, for a taxable year, (a) 75% or more of
the gross income of the Company for such taxable year is passive income or (b)
50% or more of the assets held by the Company either produce passive income or
are held for the production of passive income, based on the fair market value of
such assets (or on the adjusted tax basis of such assets, if the Company is not
publicly traded and either is a "controlled foreign corporation" or makes an
election). "Passive income" includes, for example, dividends, interest, certain
rents and royalties, certain gains from the sale of stock and securities, and
certain gains from commodities transactions.
For purposes of the PFIC income test and asset test described above, if the
Company owns, directly or indirectly, 25% or more of the total value of the
outstanding shares of another foreign corporation, the Company will be treated
as if it (a) held a proportionate share of the assets of such other foreign
corporation and (b) received directly a proportionate share of the income of
such other foreign corporation. In addition, for purposes of the PFIC income
test and asset test described above, "passive income" does not include any
interest, dividends, rents, or royalties that are received or accrued by the
Company from a "related person" (as defined in Section 954(d)(3) of the Code),
to the extent such items are properly allocable to the income of such related
person that is not passive income.
If the Company is a PFIC, the U.S. federal income tax consequences to a U.S.
Holder of the acquisition, ownership, and disposition of Registered Shares will
depend on whether such U.S. Holder makes an election to treat the Company as a
"qualified electing fund" or "QEF" under Section 1295 of the Code (a "QEF
Election") or a mark-to-market election under Section 1296 of the Code (a
"Mark-to-Market Election"). A U.S. Holder that does not make either a QEF
Election or a Mark-to-Market Election will be referred to in this summary as a
"Non-Electing U.S. Holder."
Under Section 1291 of the Code, any gain recognized on the sale or other taxable
disposition of Registered Shares, and any "excess distribution" (as defined in
Section 1291(b) of the Code) paid on the Registered Shares, must be ratably
allocated to each day in a Non-Electing U.S. Holder's holding period for the
Registered Shares. The amount of any such gain or excess distribution allocated
to prior years of such Non-Electing U.S. Holder's holding period for the
Registered Shares generally will be subject to U.S. federal income tax at the
highest tax applicable to ordinary income in each such prior year. A
Non-Electing U.S. Holder will be required to pay interest on the resulting tax
liability for each such prior year, calculated as if such tax liability had been
due in each such prior year.
A U.S. Holder that makes a QEF Election generally will not be subject to the
rules of Section 1291 of the Code discussed above. However, a U.S. Holder that
makes a QEF Election generally will be subject to U.S. federal income tax on
such U.S. Holder's pro rata share of (a) the "net capital gain" of the Company,
which will be taxed as long-term capital gain to such U.S. Holder, and (b) and
the "ordinary earnings" of the Company, which will be taxed as ordinary income
to such U.S. Holder. A U.S. Holder that makes a QEF Election will be subject to
U.S. federal income tax on such amounts for each taxable year in which the
Company is a PFIC, regardless of whether such amounts are actually distributed
to such U.S. Holder by the Company.
A U.S. Holder that makes a Mark-to-Market Election generally will not be subject
to the rules of Section 1291 of the Code discussed above. A U.S. Holder may make
a Mark-to-Market Election only if
71
the Registered Shares are "marketable stock" (as defined in Section 1296(e) of
the Code). A U.S. Holder that makes a Mark-to-Market Election will include in
gross income, for each taxable year in which the Company is a PFIC, an amount
equal to the excess, if any, of (a) the fair market value of the Registered
Shares as of the close of such taxable year over (b) such U.S. Holder's tax
basis in such Registered Shares. A U.S. Holder that makes a Mark-to-Market
Election will, subject to certain limitations, be allowed a deduction in an
amount equal to the excess, if any, of (a) such U.S. Holder's adjusted tax basis
in the Registered Shares over (b) the fair market value of such Registered
Shares as of the close of such taxable year.
The Company does not believe that it was a PFIC for the taxable year ended
December 31, 2004, and does not expect that it will be a PFIC for the taxable
year ending December 31, 2005. There can be no assurance, however, that the IRS
will not challenge the determination made by the Company concerning its PFIC
status or that the Company will not be a PFIC for the current or any future
taxable year.
The PFIC rules are complex, and each U.S. Holder should consult its own
financial advisor, legal counsel, or accountant regarding the PFIC rules and how
the PFIC rules may affect the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Registered Shares.
F. Dividends and Paying Agents.
Not Applicable
G. Statement by Experts.
Not Applicable
H. Documents on Display.
Any statement in this Annual Report about any of the Company's contracts or
other documents is not necessarily complete. If the contract or document is
filed as an exhibit to this Annual Report, the contract or document is deemed to
modify the description contained in this Annual Report. Readers must review the
exhibits themselves for a complete description of the contract or document.
Readers may review a copy of the Company's filings with the U.S. Securities and
Exchange Commission ("the "SEC"), including exhibits and schedules filed with
it, at the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Readers may also obtain copies of
such materials from the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Readers may call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC maintains a Web site (http://www.sec.gov) that
contains reports, submissions and other information regarding registrants that
file electronically with the SEC. The Company has only recently become subject
to the requirement to file electronically through the EDGAR system most of its
securities documents, including registration statements under the Securities Act
of 1933, as amended and registration statements, reports and other documents
under the Securities Exchange Act of 1934, as amended.
Readers may read and copy any reports, statements or other information that the
Company files with the SEC at the address indicated above and may also access
them electronically at the Web site set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
72
Any of the documents referred to above can be viewed at the iQ Germany business
offices at Inselkammer Strasse 4, D-82008 Unterhaching, Germany. All of the
documents referred to above are available in English.
The Company is required to file reports and other information with the SEC under
the securities exchange act of 1934, as amended. Reports and other information
filed by the company with the SEC may be inspected and copied at the SEC's
public reference facilities described above. As a foreign private issuer, the
Company is exempt from the rules under the securities exchange act of 1934, as
amended prescribing the furnishing and content of proxy statements and the
Company's officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in section 16 of
the securities exchange act of 1934, as amended. under the securities exchange
act of 1934, as amended, as a foreign private issuer, the Company is not
required to publish financial statements as frequently or as promptly as United
States companies.
I. Subsidiary Information.
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flows of the Company due to adverse changes in
financial market prices, including interest rate risk, foreign currency exchange
rate risk, commodity price risk, and other relevant market or price risks. The
effect of the foreign exchange risk on the Company's cash balances is discussed
earlier in this Annual Report - see "Item 5 -Operating and Financial Review and
Prospects - Operating Results - Fiscal year ended December 31, 2004 as compared
to Fiscal year ended December 31, 2003".
As the Company is in the exploration stage, it presently has no activities
related to derivative financial instruments or derivative commodity instruments.
73
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
There are none.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not Applicable.
74
ITEM 15. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that the information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. After evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this
Annual Report, the Chief Executive Officer and Chief Financial Officer have
concluded that as of such date, the Company's disclosure controls and procedure
were adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these disclosure controls and procedures
during the period covered by this Annual Report, including any significant
deficiencies or material weaknesses of internal controls that would require
corrective action.
75
ITEM 16.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
All of the members of the Audit Committee are financially literate and the Board
has determined that Dr. Raymond Wicki meets the requirements of an "audit
committee financial expert" as defined in Item 16A of Form 20-F. Dr. Wicki is an
independent director, as independence is currently defined in the AMEX listing
standards for audit committee members.
ITEM 16B. CODE OF ETHICS
As of the date of this report, we are in the process of considering, but have
not adopted a Code of Conduct that applies to our principal executive officer,
principal financial officer, principal accounting officer, controller or persons
performing similar functions (including our Chief Executive Officer, Chief
Financial Officer and Corporate Controller). We are evaluating the requirements
of an appropriate Code of Conduct under Swiss, German and United States law,
which has resulted in a delay in its adoption. We anticipate that we will adopt
a Code of Conduct and intend to post the Code of Conduct on our Web site. We
also intend to satisfy the disclosure requirement under Form 20-F relating to
amendments to or waivers from any provision of our Code of Conduct applicable to
our Chief Executive Officer, Chief Financial Officer and Corporate Controller by
posting this information on our Web site.
The information on our Web site is not, and shall not be deemed to be, a part of
this report or incorporated into any other filings we make with the SEC.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal years ended December 31, 2004 and 2003 and
reviews of the consolidated financial statements included in the Company's Forms
20-F for Fiscal 2004 and Forms 10-KSB for fiscal 2003 were approximately
$150,000 and $98,000, respectively.
Audit Committee's pre-approval policies and procedures
The Company paid no fees to Deloitte & Touche GMBH for services related to
financial information systems design and implementation fees or other fees.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
None.
76
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not Applicable.
77
ITEM 18. FINANCIAL STATEMENTS.
See the Financial Statements attached hereto and filed as part of this Annual
Report.
The Company's Consolidated Financial Statements are stated in U.S. Dollars and
are prepared in accordance with United States GAAP.
See Item 19 below.
78
ITEM 19. EXHIBITS.
Financial Statements
The Consolidated Financial Statements of the Corporation and exhibits listed
below are filed with this Annual Report on Form 20-F in the United States.
The following financial statements are attached to and form part of this Annual
Report:
Consolidated Financial Statements of the Corporation
- Auditors' Report on Consolidated Financial Statements
- Consolidated Balance Sheets as of December 31, 2004 and December 31,
2003
- Consolidated Statements of Operations and Deficit for the years ended
December 31, 2004, December 31, 2003 and December 31, 2002
- Consolidated Statements of Cash Flows for the years ended December 31,
2004, December 31, 2003 and December 31, 2002
- Notes to the Consolidated Financial Statements of the Corporation
79
iQ POWER AG
(a development stage company)
Consolidated Balance Sheets
(Expressed in United States Dollars; all amounts in thousands,
except per share data)
================================================================================
--------------------------------------------------------------------------------------------------
December 31, December 31,
2004 2003
--------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents, (Note 3d) 829 1,135
Accounts receivable - 37
Receivable from related parties - 15
Tax receivables 64 45
Prepaids and deposits 51 41
Current deposits, (Note 3e) (0) 410
Inventory, (Note 3f) 206 245
----------------------------------------------------------------------------------------------
Total current assets 1,150 1,928
Non-current Assets
Non-current deposits, (Note 3e) 96 -
Equipment, net, (Note 3g) 365 445
----------------------------------------------------------------------------------------------
Total non-current assets 461 445
TOTAL ASSETS 1,611 2,373
-----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities
Bank overdraft 0 182
Short-term debt - 155
Accounts payable 587 818
Accrued payroll and employees benefits 76 226
Advances 79 292
Deferred revenues, (Note 3i) 650 -
Other/Accrued liabilities 192 193
--------------------------------------------------------------------------------------------
Total current liabilities 1,584 1,866
----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,584 1,866
SHAREHOLDERS' EQUITY
Authorized:
71,598,502 registered shares with a par value of CHF0.03
Issued and outstanding:
27,563,071 common shares at December 31, 2003
34,923,150 registered shares at December 31, 2004 15,822 13,315
Capital surplus/Additional paid-in 2,000 2,108
Other comprehensive (loss) income, (Note 3n) (1,452) (1,221)
Accumulated deficit, during development stage
(after loss allocation to silent partners of k$1,024) (16,343) (13,695)
----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 27 507
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,611 2,373
--------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
81
iQ POWER AG
(a development stage company)
Consolidated Statement of Operations and Comprehensive Income/(Loss)
(Expressed in United States Dollars; all amounts in thousands,
except per share data)
================================================================================
------------------------------------------------------------------------------------------------------------------
Cumulative from
date of inception Year ended Year ended Year ended
to December 31, December 31, December 31, December 31,
2004 2004 2003 2002
------------------------------------------------------------------------------------------------------------------
SALES AND OTHER REVENUE, (Note 3j) 277 53 42 -
Costs of goods sold 56 27 29 -
------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 221 26 13 -
EXPENSES
Research and development expenses
Personnel (incl. stock based compensation), (Note 3k) 5,183 622 877 399
Laboratory 2,176 324 330 284
Office & Travel 690 52 39 58
Consulting services 764 127 10 25
Professional fees 1,019 119 40 38
----------------------------------------------------------------------------------------------------------------
Total Research & Development expenses, (Note 3q) 9,832 1,244 1,296 804
Marketing and general & administrative expenses
Personnel (incl. stock based compensation), (Note 3k) 2,133 177 579 115
Financing 590 4 10 3
Office & Travel 1,056 234 202 142
Consulting services 855 149 102 106
Professional fees 1,726 432 421 307
Management fees 446 119 76 72
Marketing activities 530 106 98 108
Investor relations 1,080 152 80 229
Research memberships 100 - - -
Provision for investment, (Note 3e) 539 315 75 150
Other 223 (3) 36 8
----------------------------------------------------------------------------------------------------------------
Total Marketing and G&A expenses 9,278 1,685 1,679 1,240
TOTAL OPERATING EXPENSES 19,110 2,929 2,975 2,044
Interest expense 200 9 17 2
------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 19,310 2,938 2,992 2,046
Interest and other income (157) (3) (4) (8)
(Gain)/loss on foreign exchange (1,565) (261) (681) (483)
INCOME/(LOSS) BEFORE INCOME TAX (17,367) (2,648) (2,294) (1,555)
Income tax - - - -
NET INCOME/(LOSS) (17,367) (2,648) (2,294) (1,555)
------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), (Note 3n) (1,452) (231) (775) (472)
COMPREHENSIVE INCOME/(LOSS), (Note 3p) (18,819) (2,879) (3,069) (2,027)
------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share, on net loss, (Note 3m) (1.49) (0.09) (0.10) (0.09)
Basic and diluted weighted average
number of shares outstanding 11,640,132 31,039,170 23,242,183 18,114,452
------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
82
iQ POWER AG
(a development stage company)
Consolidated Statements of Cash Flows
(Expressed in United States Dollars; all amounts in thousands)
================================================================================
-------------------------------------------------------------------------------------------------------------------
Cumulative from Twelve months Twelve months Twelve months
date of inception ended ended ended
to December 31, Dec. 31, Dec. 31, Dec. 31,
2004 2004 2003 2002
------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss (17,367) (2,648) (2,294) (1,555)
Items not affecting cash
Depreciation and amortization 557 82 96 100
Settlement with related parties 80 80 - -
Stock based compensation 2,279 28 598 (168)
Changes in non-cash working capital
(Increase) decrease in receivables 19 20 109 41
(Increase) decrease in prepaids and deposits (36) (5) 4 125
Increase (decrease) in accounts payable 675 (142) 323 55
Increase (decrease) in accrued liabilities 295 (171) 140 (10)
Increase (decrease) in deferred revenues 650 650 - -
(Increase) decrease in inventory (171) 25 (92) (20)
Increase (decrease) in provisions 540 315 75 150
------------------------------------------------------------------------------------------------------------------
(12,479) (1,766) (1,041) (1,283)
INVESTING ACTIVITIES
(Additions) of current deposits (636) - (486) (150)
(Increase) decrease to property, plant and equipment (856) 29 (47) (43)
------------------------------------------------------------------------------------------------------------------
(1,492) 29 (533) (193)
FINANCING ACTIVITIES
Increase (decrease) in bank overdraft (19) (180) 147 14
Increase (decrease) in due to shareholder 138 - - -
Proceeds received from issuance of short term debt 167 - 167 -
Repayment of short term debt (187) - (187) -
Advances received from external parties 665 73 265 32
Cash acquired on business combination 4,718 - - -
Advances from subsidiary 581 - - -
Issue of capital stock 9,155 1,707 2,678 1,891
Issuance of atypical shares 1,025 - - -
------------------------------------------------------------------------------------------------------------------
16,243 1,600 3,070 1,937
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 2,272 (137) 1,496 462
EFFECT OF FOREIGN EXCHANGE MOVEMENT (1,443) (169) (692) (583)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - 1,135 331 451
------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD 829 829 1,135 331
Cash paid for income taxes - - - -
Cash paid for interest 200 9 17 2
------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
83
iQ POWER AG
(a development stage company)
Consolidated Statements of Shareholders' Equity (Deficit)
(Expressed in United States Dollars; all amounts in thousands,
except per share data)
================================================================================
-------------------------------------------------------------------------------------------------------------------------
Accumulated Accumulated Total
Additional Other Shareholders'
Registered shares Paid-In Comprehensive Accumulated Equity
Shares Amount Capital Income (Loss) Deficit (Deficit)
------------ ---------- ----------- ------------- ----------- -----------
Balance at December 31, 2001 15,952,124 $ 8,574 $ 1,850 $ 26 $ (9,846) $ 604
Net loss - - - - (1,555) (1,555)
Other comprehensive (loss) -
foreign currency translation
adjustments (472) - (472)
Issue of shares 4,376,103 1,992 - - - 1,992
Stock based compensation (279) (279)
Exercise of options 20,000 10 - - - 10
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 20,348,227 $10,576 $ 1,571 $ (446) $(11,401) $ 300
-------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (2,294) (2,294)
Other comprehensive (loss) -
foreign currency translation
adjustments (775) - (775)
Issue of shares 4,683,145 1,670 - - - 1,670
Stock based compensation 138,198 6370 431
Exercise of warrants 1,622,853 700 - - - 700
Exercise of options 770,648 308 167 - - 475
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 27,563,071 $13,315 $ 2,108 $(1,221) $(13,695) $ 507
-------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (2,648) (2,648)
Other comprehensive (loss) -
foreign currency translation
adjustments (231) - (231)
Issue of shares 4,577,634 1,323 - - - 1,323
Debt-Shares conversion 259,452 158 - - - 158
issue shares for services performed 645,900 214 214
Stock based compensation 304,593 136 (148) (12)
Exercise of warrants 1,332,500 572 - - - 572
Exercise of options 240,000 104 40 - - 144
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 34,923,150 $15,822 $ 2,000 $(1,452) $(16,343) $ 27
-------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
84
Part 1.
Notes to the accounts
1. NATURE OF OPERATIONS
iQ Power AG, former iQ Power Technology Inc. ("iQ Power") was incorporated
under the Canada Business Corporations Act on September 20, 1994. Effective
June 17, 1999, iQ Power completed a business combination with iQ Battery
Research & Development GmbH ("iQ Germany"). The business combination has
been accounted for as a reverse acquisition with iQ Battery being
identified as the acquirer. Although iQ Germany is deemed to be the
acquiring corporation for financial accounting and reporting purposes, the
legal status of iQ Power as the surviving corporation does not change.
Herein after iQ Power and its subsidiary are referred to as "the Company".
On November 9, 2004 iQ Power AG transferred its activity from Canada to
Zug, Switzerland.
iQ Power Deutschland GmbH (iQ Germany), former iQ Battery R&D GmbH,
established in 1991, is conducting research and product development in the
area of intelligent performance-improved battery systems. The Company's
first product is an intelligent car battery, in which electronics,
microprocessors and software manage the energy. Additional products,
related to energy management in automotive vehicles, have been developed.
Patents have been granted for Germany, thirteen other European countries,
and for the United States of America. International patents applications
have been filed in nine additional countries. iQ Germany legal domicile was
moved in 2004 from Chemnitz to Unterhaching Germany, a suburb of Munich,
where management has its offices. The R&D labs in Chemnitz are still
active. BarbiQ was established in 2003 as an investment holding company and
was domiciled in Barbados. BarbiQ was sold during 2004 with a cumulative
loss of $13,000. No further assets or liabilities exist as of the balance
sheet date. On October 5, 2004 iQ Power Licensing AG, (iQ Licensing) was
established, with domicile in Zug, Switzerland. Its primary role will be to
hold and market the companies IP and licenses both with external customers
and partners as well as within the corporation.
2. CONTINUING OPERATIONS
These financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
cumulative losses since inception and as of December 31, 2004, the Company
has a negative working capital position. The Company's ability to continue
as a going concern is dependent upon the ability of the Company to attain
future profitable operations and/or to obtain the necessary financing to
meet its obligations and repay its liabilities when they become due. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Since going public, the Company's financing has been primarily obtained
through a series of private placements.
The Company has used the proceeds to fund research and development of iQ
Battery's technology, expansion of the Company's marketing and sales
activities and general working capital. Additional funds are necessary to
allow the Company to complete its product development and marketing plan.
In order to increase outsourced production and to build in-house production
capabilities, additional financing will be required. There is no assurance
that the Company will be able to secure additional financing or that such
financing will be on terms beneficial to the existing shareholders.
The Company has signed agreements to jointly develop and market its
applications with large corporations. Such alliances involve the
utilization of certain aspects of the Company's technology and know how.
The ability of the Company to succeed in these alliances is dependent upon
the Company's ability to obtain
85
additional financing. The Company has been active in its search for such
financing. Management believes that the Company will be able to obtain the
necessary financing. As of December 31, 2004, the Company's current
financial condition requires the infusion of additional capital in order to
continue or expand its current operations. If the Company is unable to
obtain the additional financing, the Company will be unable to meet all of
its financial obligations. There is no assurance that the Company will be
able to secure additional financing or that such financing will be on terms
beneficial to the existing shareholders.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America and reflect the following significant accounting policies:
(a) Consolidation
These consolidated financial statements include accounts of the
Company and its wholly owned subsidiaries iQ Power Deutschland GmbH
(iQ Germany) and iQ Power Licensing AG (iQ Licensing). All
inter-company transactions and balances have been eliminated.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Foreign currency translation
The Company's current activities result in transactions denominated in
US Dollars, Euros, Swiss Francs and Canadian Dollars. The Company has
determined that the United States dollar is the appropriate currency
for reporting purposes. Transaction amounts denominated in foreign
currencies are translated into US dollars at exchange rates prevailing
at the transaction dates. Carrying values of non-US dollar assets and
liabilities are adjusted at each balance sheet date to reflect the
exchange rate prevailing at that date. Gains and losses arising from
adjustment of foreign assets and liabilities are included in the
consolidated statement of loss and comprehensive loss. The functional
currency of iQ Power, iQ Germany and iQ Licensing is the Euro. Assets
and liabilities of iQ Germany and iQ Licensing are translated into
their US dollar equivalents at the rate of exchange in effect at the
balance sheet date. Revenues and expenses are translated at the
average exchange rate for the reporting period. The US dollar effect
arising from translation of the financial statements at changing rates
is recorded as a separate component of comprehensive income (loss).
(d) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits at banks
and highly liquid money market instruments with an original maturity
of 90 days or less.
(e) Current/Non-current deposits
The balance originates from deposit payments made in connection with a
planned acquisition of assets from a battery manufacturing facility.
These assets are intended to be used by a former prospective venture
partner, who promised to acquire these assets and to reimburse these
advances to the Company. Management is concerned that two of the
promissory notes as well as the accrued interest may not be
collectable. Therefore the Company recorded a total valuation
allowance of $540,000, ($315,000 in 2004, $75,000 in 2003 and $150,000
in 2002) was taken against this deposit. Management still believes it
will be able to recover $96,000 from one of the investment partners,
either
86
in cash or in shares of that company. The Company reclassified the
$96,000 into non-current deposits because of the probability to
collect this deposit before December 31, 2005.
(f) Inventory
Inventory consists of raw materials, mainly electronic components, and
are valued at their corresponding acquisition cost. The values shown
do not exceed their estimated net realizable values.
(g) Equipment
Equipment is recorded at cost. Depreciation is recorded using the
straight-line method based upon the useful lives of the various
assets. When assets are sold or retired, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is
included in the consolidated statement of loss and comprehensive
loss. The Company has also acquired moulds in 2002 for purposes of
production. As of December 31, 2004 and 2003 these moulds had a book
value of $175,000. As no significant production has begun, no
depreciation has been taken on this equipment since their acquisition
in 2002. Depreciation expense, for the years 2004, 2003 and 2002 was
$82,000, $96,000 and 100,000, respectively.
-----------------------------------------------------------------------------
in $ 000's 2004 2003 Years of depreciation
-----------------------------------------------------------------------------
Intangible Assets
Software 70 60 3
Tangible Assets
Leasehold improvements 130 120 5-10
Tools and fixtures 212 220 2-6
Vehicles 0 40 5
Office equipment & Furniture 584 577 3-10
Total Fixed Assets at cost 995 1017
Cummulative depreciation 630 572
Net Fixed Assets 365 445
-----------------------------------------------------------------------------
(h) Impairment of long-lived assets
The carrying value of long-lived assets, principally equipment, is
reviewed for potential impairment, when events or changes in
circumstances indicate that the carrying amount of such assets may not
be recoverable. The determination of recoverability is made based upon
the estimated undiscounted future net cash flows of the related
assets.
(i) Deferred Revenues
In accordance with the SEC's Staff Accounting Bulletin ("SAB") Nos.
101 and 104, revenues generated for providing the exclusive use of
rights, licenses and trademarks will be recognized over the expected
life of such right, license or trademark.
(j) Revenue Recognition
Revenues are recognized once persuasive evidence of an arrangement
exists, the products are delivered or services are rendered, the sales
price is fixed and it is reasonably assured that the sales price is
collectable. Revenues, which are deferred as described in Note 3(i)
above, are recognized as the use of such right or license occurs.
87
(k) Stock based compensation
In accordance with the provisions of the Financial Accounting
Standards Board's ("FASB") Statement of Accounting Standard ("SFAS")
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
148 "Accounting for Stock-Based Compensation-Transition and
Disclosure", the Company has elected to follow the Accounting
Principles Board's Opinion No. 25, Accounting for Stock Issued to
Employees and the related interpretations ("APB 25") in accounting for
its employee stock based compensation plans. Due to changes in the
exercise price for certain Stock Options granted under the Stock
Option Plan, those options will be accounted for using variable plan
accounting under APB 25. Under variable plan accounting total
compensation cost is measured by the difference between the quoted
market price of the stock and the amount, if any, to be paid by an
employee and is recognized as an expense over the period the employee
performs related services. (see Note 5(a)). Stock options granted to
non-employees result in the recognition of expenses based upon the
fair value of such stock options.
The following amounts have been recognized in the financial statements
under Personnel Expense:
Cumulative ITD 2004 2003 2002
R&D Engineering $ 717,000 $ (43,000) $ 164,000 $ (207,000)
Marketing, Sales and G&A $ 1,283,000 $ (65,000) $ 373,000 $ (72,000)
(l) Financial instruments and risk concentration
The Company estimates that the carrying values of its cash and cash
equivalents, current receivables, and payables, approximate fair value
at December 31, 2004 and 2003 due to the short-term maturity of the
balances. Financial instruments, which potentially subject the Company
to concentration of credit risk, are primarily cash and cash
equivalents. It is the Company's practice to place its cash and cash
equivalents in time deposits at commercial banks with high credit
ratings. In foreign locations, local financial institutions are
generally utilized for local currency needs. The Company limits the
amount of exposure to any particular institution and does not believe
it is exposed to any significant credit risk.
(m) Earnings per Share
The Company presents earnings per share ("EPS") data in accordance
with the requirements of SFAS No. 128. Under SFAS No. 128, basic EPS
is computed by dividing net income by the weighted average number of
shares of registered share outstanding during the period. Diluted EPS
is calculated using the treasury stock method and reflects the
dilutive effect of outstanding options and warrants. At December 31,
2004, 2003 and 2002, all of the 8.2 million, 6.3 million and 6.4
million, respectively, of the exercisable stock options under the
Stock Option Plan and warrants outside the Stock Option Plan were
excluded from the computation of diluted EPS since their inclusion
would have resulted in an antidilutive effect.
(n) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from non-owner sources.
Amounts represent gains and losses on foreign currency translation
adjustments.
(o) Certain Significant Risks and Uncertainties
The Company operates in the automotive industry and can be affected by
a variety of factors. For example, management of the Company believes
that changes in any of the following areas could have a significant
negative effect on the Company in terms of its future financial
position, results of operations and cash flows: ability to obtain
additional financing; regulatory changes; fundamental changes in the
technology underlying their products; market acceptance of the
Company's products under development; development of sales channels;
litigation or other claims against the Company; the hiring,
88
training and retention of key employees; successful and timely
completion of product development efforts; and new product
introductions by competitors.
(p) Accumulated comprehensive deficit
The accumulated comprehensive deficit is based on the accumulated net
loss plus the impact of the cumulative foreign currency translation
adjustments. The accumulative deficit reported in the Company's
balance sheet is adjusted to exclude the loss that was allocated in
the years 1994 to 1998 to the holders of atypical shares of iQ
Germany. The accumulated deficit reported in the Company's income
statement does not include a similar adjustment.
(q) Research and development
Research and development costs are expensed as incurred.
(r) Atypical shareholders
Atypical (preferred) shares were issued by the Company's German
subsidiary, iQ Germany, in previous years in order to raise capital
for the Company before it was a public entity. The Atypical
shareholders had certain information rights, but no voting powers.
Furthermore, losses and profits were allocated to the Atypical
shareholders accounts as stipulated in the individual Atypical
shareholders agreements and the Atypical shares were redeemable. As
such, there was no equity recorded on the balance sheet.
When the Company received the proceeds from these Atypical
shareholders, it recorded a liability. A liability was recorded
because it was stated in the original Atypical shareholder agreements
that these proceeds would ultimately be returned to the shareholders.
As stipulated in the agreements, a respective portion of the Company's
losses were absorbed by the Atypical shareholders. As such, the
accumulated deficit was reduced by that respective amount, and there
was a corresponding reduction of the recorded liability. With the
completion of the Company's IPO and the share exchange agreement in
1999, 2.8 million registered shares of the company were exchanged for
all of the outstanding Atypical shares and the Atypical shares have
been cancelled.
(s) Recent pronouncements
FASB Pronouncements and Interpretations
SFAS 123(R), SHARE-BASED PAYMENT
In December 2004, the FASB issued Statement 123 (revised 2004) ("SFAS
No. 123R") that will require compensation costs related to share-based
payment transactions to be recognized in the financial statements. The
compensation costs, with limited exceptions, will be measured based on
the grant-date fair value of the equity instrument issued.
Compensation cost will be recognized over the period that an employee
provides service in exchange for the award. SFAS No. 123R replaces
SFAS No. 123 and supersedes APB 25. This statement is effective for
our company for periods beginning on January 01, 2006 and applies to
all awards granted after the effective date and requires the reporting
of the cumulative effective of applying this statement as of this
date. Management is in the process of reviewing this Statement and
assessing the impact it will have on the Company's financial
statements.
SFAS NO. 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS"
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154") which replaces Accounting Principles
Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements--An Amendment of
APB Opinion No. 28." SFAS 154 provides guidance on the accounting for
and reporting of accounting changes and error corrections. It
establishes retrospective application, or the latest practicable date,
as the required method for reporting a change in accounting principle
and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made
89
in fiscal years beginning after December 15, 2005. The Company is
currently evaluating the effect that the adoption of SFAS 154 will
have on its consolidated results of operations and financial condition
but does not expect it to have a material impact.
SEC Rules
---------
SEC DEFERS EFFECTIVE DATE OF STATEMENT 123(R) FOR CERTAIN COMPANIES
On April 14, 2005 the SEC adopted a rule that defers the required
effective date of FASB Statement 123 (revised 2004), Share-Based
Payment. The SEC rule provides that Statement 123(R) is now effective
for registrants as of the beginning of the first fiscal year beginning
after June 15, 2005, instead of at the beginning of the first quarter
after June 15, 2005 (as prescribed originally by the FASB Statement).
Therefore, the required effective date of Statement 123(R) for
calendar year-end public companies is January 1, 2006 instead of July
1, 2005. Early adoption is still permitted. This deferral does not
change the required effective date for public companies with June 30,
July 31, or August 31 year-ends. They will still have to adopt
Statement 123(R) as originally scheduled. Additionally the rule
provides for parallel changes to the effective date for small business
issuers.
FINAL RULE, MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING AND CERTIFICATION OF DISCLOSURE IN EXCHANGE ACT PERIODIC
REPORTS
The SEC deferred the implementation date for Section 404 of the
Sarbanes-Oxley Act. For foreign private issuers, compliance is
required beginning with the company's first fiscal year ending on or
after July 15, 2005 (compliance was originally required beginning with
fiscal years ending on or after April 15, 2005).
(t) Reclassifications
Certain amounts in the 2003 and 2002 financial statements have been
reclassified to conform to the presentation used in 2004. Such
reclassifications had no effect on the financial position or results
of operations.
4. EQUIPMENT
Equipment is as follows (in thousands):
|
December 31, 2004 |
December 31, 2004 | ||||
|---|---|---|---|---|---|
| Equipment, at cost | $995 | $1,017 | |||
| Less accumulated depreciation | $630 | $ 572 | |||
| Net book value | $365 | $ 445 | |||
5. SHARE CAPITAL
As of December 31, 2004 the Company was authorized to issue up to a total
of 71,598,502 registered shares with a par value of CHF0.03.
The following table presents those registered shares issued and outstanding
Number of
Registered shares Amount ($ 000)
----------------- --------------
Balance, December 31, 2001 15,952,124 8,574
Private placements, issued for cash (incl. Finder's Fees) 4,225,853 1,881
Shares issued for external stock based compensation 150,250 111
Options exercised during the year 20,000 10
Balance, December 31, 2002 20,348,227 10,576
90
Private placements, issued for cash (incl. Finder's Fees) 4,683,145 1,670
Shares issued for external stock based compensation 138,198 61
Options exercised during the year 770,648 308
Warrants exercised during the year 1,622,853 700
Balance, December 31, 2003 27,563,071 13,315
Private placements, issued for cash (incl. Finder's Fees) 4,577,634 1,323
Shares issued for conversion of debt 259,452 158
Issue shares for services performed 645,900 214
Shares issued for external stock based compensation 304,593 136
Options exercised during the year 240,000 104
Warrants exercised during the year 1,332,500 572
Balance, December 31, 2004 34,923,150 15,822
As described in 5(b), there are additional 1,350,000 shares issued and held
in escrow under the Incentive Share Plan.
On April 10, 2000, the company's board of directors declared a 2.5 to 1
reverse share split of the company's shares. In addition, the authorized
shares issued and outstanding were decreased from 24,366,550 to 9,746,620
shares. All references in the consolidated financial statements to shares
and related prices, weighted average number of shares, per share amounts,
and stock plan data have been adjusted to reflect the reverse split.
(a) Stock options
The Company has established a Stock Option Plan for employees,
officers, directors, consultants, and advisors. The Company has
reserved 4,714,000 registered shares for issuance under the Stock
Option Plan. Thereof 1,600,000 options were granted in the fourth
quarter 2003 of which 50,000 are not vested as of the balance sheet
date, with an exercise price of $0.44. Of the total 1,600,000 options,
1,500,000 options were vested immediately as of the grant date. Of the
remaining 100,000 options, 50,000 did vest in December 2004, and
50,000 are expected to vest in December 2005. Options granted for
issuance under the Stock Option Plan generally are not transferable,
and the exercise price of stock options must be at least equal to 100%
of the fair market value of the registered shares on the date of the
grant. The Stock Option Plan may be administered by the Board of
Directors or a committee of the Board (the "Committee"). The Board of
Directors or the Committee, as the case may be, has the power to
determine the terms of any options granted there under, including the
exercise price, the number of shares subject to the option, and the
exercisability thereof. The term of an option granted under the Plan
may not exceed ten years. The specific terms of each option grant
shall be approved by the Board of Directors or the Committee.
The Company grants stock options both under the Stock Option Plan and
by way of individual grants outside of the Stock Option Plan. Under
the Stock Option Plan the following options and warrants have been
granted and remain outstanding at December 31, 2004:
Weighted Average Weighted Average
Stock Options Exercise Price Warrants Exercise Price
Outstanding as of December 31, 2001 2,393,000 1.02 1,019,344 1.00
Options/Warrants exercisable at
December 31, 2001 2,304,000 1.02 1,019,344 1.00
Granted during fiscal year 2002 30,000 1.00 4,022,853 0.62
Exercised during fiscal year 2002 20,000 0.50 0
Forfeited during fiscal year 2002 30,000 0.50 1,019,344 1.00
----------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2002 2,373,000 0.80 4,022,853 0.62
Options/Warrants exercisable at
December 31, 2002 2,373,000 0.80 4,022,859 0.63
Granted during fiscal year 2003 1,600,000 0.44 4,400,103 0.45
Exercised during fiscal year 2003 770,648 0.40 1,622,853 0.43
Forfeited during fiscal year 2003 235,000 0.40 3,400,000 0.64
----------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2003 2,967,352 0.42 3,400,103 0.43
91
Options/Warrants exercisable at
December 31, 2003 2,867,352 0.42 3,400,103 0.43
Granted during fiscal year 2004 0 4,363,334 0,39
Exercised during fiscal year 2004 240,000 0.43 1,332,500 0,43
Forfeited during fiscal year 2004 165,000 0.40 790,937 0,42
----------------------------------------------------------------------------------------------------
Outstanding as of December 31, 2004 2,562,352 0.42 5,640,000 0.43
Options/Warrants exercisable at
December 31, 2004 2,512,352 0.42 5,640,000 0.43
The exercise price for the options exercisable at December 31,
2004 is $0.40 for 1,162,352 shares, with an average of 6.1 years
to expire and $0.44 for 1,350,00 shares, with an average of 9.0
years to expire.
The exercise price for the warrants exercisable at December 31,
2004 is $0.50 for 2,580,000 shares, with an average of 1 months
to expire and $0.35 for 3,060,000 shares, with an average of 9
months to expire.
SFAS No. 123, issued in October 1995, requires the use of the fair
value based method of accounting for stock options. Under this method,
compensation cost is measured at the grant date as the fair value of
the options granted and is recognized over the exercise period. During
the year ended December 31, 2002 and 2001, the Company issued options
to individuals other than employees and directors, which under SFAS
No. 123 are recognized as share-based compensation ratably over the
vesting period. SFAS No. 123, however, allows the Company to continue
to measure the compensation cost of employee and director related
stock options in accordance with APB 25. The Company has adopted the
disclosure-only provision of SFAS No. 123 and SFAS No. 148, accounting
for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123.
On June 12, 2000, the Board of Directors decreased the exercise price
for the Stock Option Plan; from $2.50 to $1.50 for all options granted
under and outside of the plan. On January 16, 2001, the Board of
Directors decreased again the exercise price for the Stock Option
Plans from $1.50 to $0.50 for all options granted under and outside of
the plan. On January 18, 2002, the Board of Directors decreased the
exercise price of the 1,415,000 options granted under the Plan on June
28, 2001, from $1.37 to $1.00. On June 6, 2003 all outstanding options
were repriced to $0.40. Due to the changes, all the options granted
under the plan will be accounted for using variable plan accounting
under APB 25. On December 31, 2004, the fair value of the Company's
stock was above the adjusted exercise price, though below the stock
price on December 31, 2003. Therefore, a stock-based compensation
contra-expense of $108,144 was recognized in 2004.
The following table illustrates the effect on net earnings (loss) and
net earnings (loss) per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation. All amounts below are in $000's except per share data.
Year ended December 31,
2004 2003 2002
------------ ------------ ------------
Net loss as reported $ (2,648) $ (2,294) $ (1,555)
Add: Stock-based employee compensation expense
included in the reported net income, net of related
tax effects $ (108) $ 537 $ (279)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects $ (18) $ (854) $ (13)
Pro forma net loss $ (2,774) $ (2,611) $ (1,847)
Loss per share (basic and diluted)
As reported $ (0.09) $ (0.10) $ (0.09)
SFAS No. 123 pro forma $ (0.00) $ (0.01) $ (0.02)
Pro forma net loss $ (0.09) $ (0.11) $ (0.11)
92
The weighted average fair value, calculated using the Black-Scholes
option pricing model value of options vested under the stock option
plan during the years ended December 31, 2004, 2003 and 2002 were
$0.37, $0.37 and $0.32 per share, respectively. The fair value of
these options was estimated at the date of grant, using a weighted
average volatility factor between 85% and 139% depending on grant
date, a dividend yield of 0%, a weighted average expected life of the
stock options of 2 - 4 years, and a risk free interest rate of 1.375%
to 3.43% depending on grant date.
(b) Incentive Share Plan
In July 2001, the Company instituted an Incentive Plan reserving
shares for issue to officers, directors, and employees of the Company
and its subsidiary as an incentive. The number of shares set aside for
issue under the incentive share plan was 2,500,000 registered shares.
The board of Directors decided on Dec 17, 2003 to grant 1,350,000 of
these incentive shares in 2004. These incentive shares were granted on
January 7, 2004. However these shares are issued to an escrow account,
in the name of the individuals. The individuals do not have voting and
trading rights, nor the right to receive dividends until distribution.
The distribution of these shares is contingent to achieving cumulative
Sales of $2,500,000 by December 31, 2006. These shares are not
accounted for in the Company's consolidated financial statements, nor
deemed to be issued as of December 31, 2004. With the continuation to
Switzerland on November 10, 2004 all incentive shares which were not
granted at that time are no more available for distribution.
(c) Loss per share
Losses per share calculations give effect to the reverse acquisition
described in Note 1.
(d) iQ share capital
The registered share capital of iQ Germany is $51,277 (EUR 51,150),
and is fully paid in. All equity securities were acquired by iQ Power
as part of the business combination. The registered share capital of
iQ Licensing is $79,776 (CHF 100,000), and is also fully paid in.
(e) Issuance of shares due to private placements
In January 2002, the Company completed a private placement of 950,000
units of the Company at $0.65 per unit for proceeds of $617,500, with
each unit consisting of one registered share of the Company and one
non-transferable warrant exercisable for a period of twelve months
following closing and entitling the holder to purchase one additional
registered share of the Company for $0.85. The subscribers to the
private placement were non-U.S. persons outside the United States in
reliance upon an exemption from registration under Regulation S of the
Securities Act of 1933, as amended. The Company paid finder's fees to
non-U.S. persons outside the United States, in connection with the
offering consisting of 95,000 registered shares. The cost of the
finder's fee was netted against the proceeds obtained from the
financing. The shares were issued pursuant to an exemption from
registration available under Regulation S of the Securities Act. The
combined fair value of the attached warrants as of the date of the
private placement was approximately $360,000. The fair value was
calculated using the Black-Scholes option-pricing model.
In May 2002, iQ Power agreed to extend the term of its $1 warrants
originally issued in October and November 2001, for an additional 6
months. The original term was 6 months.
In June 2002, the Company completed a private placement of 1,500,000
units of the Company at $0.50 per unit for proceeds of $750,000, with
each unit consisting of one registered share of the Company and one
non-transferable warrant exercisable for a period of twelve months
following closing and entitling the holder to purchase one additional
registered share of the Company for $0.65. The subscribers to the
private placement were non-U.S. persons outside the United States in
reliance upon an exemption from registration under Regulation S of the
Securities Act of 1933, as amended. The Company paid finder's fees to
non-U.S. persons outside the United States, in connection with the
offering consisting of
93
108,000 registered shares. The cost of the finder's fee was netted
against the proceeds obtained from the financing. The shares were
issued pursuant to an exemption from registration available under
Regulation S of the Securities Act. The combined fair value of the
attached warrants as of the date of the private placement was
approximately $766,000. The fair value was calculated using the
Black-Scholes option-pricing model.
In November 2002, the Company announced another private placement of
up to 1,715,000 units of the Company at $0.35 per unit for proceeds of
$600,000, with each unit consisting of one registered share of the
Company and one non-transferable warrant exercisable for a period of
twelve months following closing and entitling the holder to purchase
one additional registered share of the Company for $0.45. Thereof
1,572,853 units for proceeds of $550,500 were issued in November and
December 2002. Additional 150,000 units for proceeds of $52,500 were
issued in February 2003. The subscribers to the private placement were
non-U.S. persons outside the United States in reliance upon an
exemption from registration under Regulation S of the Securities Act
of 1933, as amended. The Company incurred finder's fees to non-U.S.
persons outside the United States, in connection with the offering
consisting of 107,142 registered shares. The cost of the finder's fee
was netted against the proceeds obtained from the financing. The
finder's fees were paid out subsequent to December 31, 2002. The
shares were issued pursuant to an exemption from registration
available under Regulation S of the Securities Act.
From February through June 2003, the Company raised $820,300 in
capital through the private placement of 2,563,437 units of the
Company at $0.32 per unit, each such unit consisting of one registered
share of the Company and one non-transferable warrant exercisable for
a period of twelve months following closing and entitling the holder
to purchase one additional registered share of the Company for $0.42.
The subscribers to the private placement were non-U.S. persons outside
the United States in reliance upon an exemption from registration
under Regulation S of the Securities Act of 1933, as amended. The
Company incurred finder's fees to non-U.S. persons outside the United
States, in connection with the offering consisting of 175,900
registered shares at a deemed price of $0.32 per share. The cost of
the finder's fee was netted against the proceeds obtained from the
financing. The finder's fees were paid out in June 2003. The shares
were issued pursuant to an exemption from registration available under
Regulation S of the Securities Act.
In October 2003, the Company's subsidiary iQ Battery Research &
Development GmbH issued a convertible loan instrument at 12% interest
per annum, due September 2004. The loan terms provide that the holders
have the right to convert their respective loans, together with
interest thereon, into registered shares of iQ Power at a conversion
price of $0.60 (EUR 0.48). The Company had the right to repay the loan
including interest at any time, prior to the due date. Under this
agreement, $150,000 (EUR 120,000) had been subscribed and the lender
opted to convert to 259,452 shares in January 2004.
In November 2003, the Company announced another private placement of
2,222,222 units of the Company at $0.45 per unit, each such unit
consisting of one registered share of the Company and one
non-transferable warrant exercisable for a period of twelve months
following closing and entitling the holder to purchase one additional
registered share of the Company for $0.50.
In December 2003 the Board of Directors decided to increase the
private placement allotment to 2,850,000 units. Until December 31,
2003 1,686,666 units for $759,000 were subscribed. Additional advances
of $292,000 were already paid in to the company's trust account for
further subscriptions, as of the balance sheet date. The subscribers
to the private placement were non-U.S. persons outside the United
States in reliance upon an exemption from registration under
Regulation S of the Securities Act of 1933, as amended.
In January 2004 the remaining 1,163,334 units for $523,344 were
subscribed and fully paid. The subscribers to the private placement
were non-U.S. persons outside the United States in reliance upon an
exemption from registration under Regulation S of the Securities Act
of 1933, as amended.
In September 2004 the Company announced another private placement of
3,200,000 units for $800,000, each such unit consisting of one
registered share of the Company, valued at $0.25 and one
94
non-transferable warrant exercisable for a period of twelve months
following closing and entitling the holder to purchase one additional
registered share of the Company for $0.35.
The combined fair value of the attached warrants issued in 2004, as of
the date of the private placement was approximately $598,000. The fair
value was calculated using the Black-Scholes option-pricing model.
In 2004, 1,332,500 shares for proceeds of $571,450 were issued on the
exercise of warrants out of private placements.
The subscribers to all private placements were non-U.S. persons
outside the United States of America.
(f) Issuance of shares due to consulting agreements
In August 2002, the Company entered into a Financial Public Relations
Adviser Consulting Agreement with a non-U.S. person outside the United
States. The Company agreed to pay this individual a consulting fee in
the amount of approximately $6,250 (EUR 5,000) per month for such
services. Of the consulting fee, approximately $2,500 (EUR 2,000) is
due monthly, while the remaining approximately $3,750 (EUR 3,000) is
payable by issuing registered shares, issuable on a quarterly basis.
The agreement had an initial term of 12 months. As of December 31,
2002, the Company had issued 16,900 registered shares under the
agreement. During the fiscal year 2003, the Company had issued 50,700
registered shares under the agreement, as well as another 22,500
registered shares for additional compensation. As of December 31, 2003
the Company had issued 90,100 shares in connection with this
agreement. During the fiscal year 2004, the Company issued 91,593
registered shares under the agreement. As of December 31, 2004 the
Company had issued 181,693 shares in connection with this agreement.
The Company issued another 213,000 registered shares for additional
compensation, not in connection with this agreement.
In November 2002, the Company entered into an Officer Engagement
Agreement with the Chief Financial Officer. The Company agreed to pay
a consulting fee in the amount of $3,000 per month for such services.
Of the consulting fee, one half was payable by issuing 3,333
registered shares. The agreement had an initial term ending March 31,
2003, renewable on a quarterly basis thereafter. The agreement was not
renewed as of June 30, 2003. As of December 31, 2003, the Company had
issued all 24,998 registered shares under the agreement.
6. RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in the financial
statements comprised:
(a) We entered into a consulting agreement dated August 25, 1998 with a
corporation controlled by Mr. French, our Vice-President for Business
Development. The agreement was for an initial term of three years
(with automatic one-year renewals in the absence of either party
taking affirmative action to terminate the agreement). The agreement
with that corporation provided for a base annual fee of $72,000 and
for the reimbursement of reasonable expenses incurred on our behalf.
The contract got prolonged by one year until June 30, 2004. The
contract has been further extended till October 2004. Effective
September 2003, the monthly fee increased to $7,200 per month.
Effective June 2004 the fee was reduced to $3,600 per month. Total
management fees for the twelve months ended December 31, 2004 amounted
to $54,000. The contract terminated with the continuation of iQ Power
AG in Switzerland per November 9, 2004.
(b) iQ Germany acquired patents and know-how improving the current output
of a chargeable battery at low outside temperatures and the registered
design "iQ" based on a contract dated March 15, 1995 from two
shareholders, one of which is a director and CEO of the Company and
the other is a family member and a former officer of the company. The
intangibles purchased relate to a German patent, an international
patent application as well as the registered design "iQ". The Company
and the
95
shareholders agreed that the shareholders would receive approximately
$257,000 (DM 400,000; approximately EUR 205,000) from future income.
Because this was a settlement of a contingent liability, any amounts
paid were charged to operations as a current expense. These
liabilities were settled in September, 2004 through issues of 200,000
shares (for a value of $80,000) and a cash payments in total of
$30,900 (EUR 25,330), of which $10,300 (EUR 8,333) of cash and 50,000
shares valued at $0.40 were granted to the CEO of the company. In
connection with these disbursements the Company recorded a totals
expense of $110,900 as consulting services within R&D expenses.
7. OPERATING LEASE
The Company has operating leases for certain equipment and facilities. For
the years 2004, 2003 and 2002 the operating lease payments were $178,000
$195,000 and $178,000 respectively. As at December 31, 2004 obligations to
make future minimum lease payments were as follows (to be made in the years
ending December 31, in $000):
Year Lease payment
---- -------------
2005 235
2006 160
2007 55
2008 0
2009 0
Thereafter 0
-----------------------------------------
Total 450
8. INCOME TAXES
The company accounts for its income taxes using the asset and liability
approach, as stipulated under SFAS No. 109. For all periods presented, the
provision for income taxes differs from the federal corporation income tax
rate of 35% for Germany (incl. trade tax and solidarity tax), 16% for
Switzerland and 40% for Canada. No benefit was realized for operating
losses incurred.
As at December 31, 2004 the Company had total deferred income tax assets
relating to loss carry forwards of $3,872,000 (2003 - $6,467,000 and 2002 -
$3,576,000) which have been reduced to zero by valuation allowances. The
valuation allowance represents the amount of deferred income tax assets
that may not be realized based upon expectations of taxable income that are
consistent with the Company's operating history. The tax loss carry
forwards related to the Company's operations in Canada can no longer be
utilized, due to the continuation of the corporation from Canada to
Switzerland on November 9, 2004.
As of December 31, 2004 the Company had net tax loss carry forwards of
approximately $10,862,000 for corporation income taxes. The tax loss carry
forwards relate to the Company's operations in Germany and Switzerland and
do not expire under enacted tax laws.
9. SEGMENT DISCLOSURES
The Company is currently marketing and developing its proprietary
technology. In accordance with SFAS No. 131 the Company considers its
business to consist of one reportable operating segment. The majority of
the Company's significant physical assets are located in Germany.
96
10. LITIGATION
The Company has been named as a defendant in lawsuits in the normal course
of its business. In the opinion of management, the liabilities, if any,
resulting from these matters will not have a material effect on the
financial statements of the Company.
11. SUBSEQUENT EVENTS
Subsequent events not disclosed elsewhere in the financial statements
include:
Due to the continuation of iQ Power in Switzerland, all employees of iQ,
holding stock options, were given the opportunity to convert the strike
price of their options from USD to EURO at a rate of 1.333 USD/EURO
(average rate of Q1 2005). All Employees subscribed to this opportunity in
April 2005.
As of June 30, 2005, we have received subscriptions for 2,000,000
registered shares for total proceeds of approximately $836,200 (CHF
1,062,871.25). In addition we have received approximately $880,000 pursuant
to the exercise of warrants and options to acquire 2,034,153 registered
shares since January 01, 2005. In May 2005, the Board of Directors approved
the Stock Option Plan 2005, with a maximum number of options for issuance
of 2,500,000 shares at a option price of $0.56 (EUR 0.45)
The Company entered into a lease agreement on June 01, 2005, for office
space in Zug, Switzerland; occupying approximately 243 square meters. The
monthly rental expense is approximately $5,200 (CHF 6,600), and it will
terminate on May 31, 2010.
97
EXHIBITS
EXHIBIT INDEX
Exhibit
1.1 Articles of Incorporation of iQ Power AG
4.1(1) Management Agreement dated January 1, 1997, between 3099458
Canada Inc. and Mayon Management Corp. (previously filed as
Exhibit 6.5)
4.2(1) Consulting Agreement dated August 25, 1998, between iQ Power
Technology Inc. and Mayon Management Corp. (previously filed as
Exhibit 6.6)
4.3(1) Employment Agreement dated August 31, 1998 with Dr. Guenther C.
Bauer (previously filed as Exhibit 6.7)
4.4(1) Employment Agreement dated August 31, 1998 with Peter E. Braun
(previously filed as Exhibit 6.8)
4.5(1) Form of Confidentiality Agreement between iQ Power Technology
Inc. and certain Officers of the Company (previously filed as
Exhibit 6.10)
4.6(1) Contract Concerning Industrial Property Rights and Know How by
and between Dieter Braun and Peter E. Braun and iQ Battery
Research and Development GmbH dated March 15, 1995 (Translated to
English)(previously filed as Exhibit 6.22)
4.7(1) Supplementary Contract to the Contract concerning Industrial
Property Rights and Know How by and between H. Dieter Braun and
Peter E. Braun and iQ Battery Research and Development GmbH dated
August 16, 1996 (Translated to English)(previously filed as
Exhibit 6.23)
4.8(1) Extension of Contract regarding Industrial Property Rights and
Know How by and between Dieter Braun and Peter Braun and iQ
Battery Research and Development GmbH dated September 20, 1996
(Translated to English)(previously filed as Exhibit 6.24)
4.9(1) Agreement by and between iQ Battery Research and Development GmbH
and Dieter Braun and Peter Braun dated October 9, 1998
(Translated to English)(previously filed as Exhibit 6.30)
4.10(1) 1998 Stock Option Plan (previously filed as Exhibit 6.31)
4.11(1) Form of Stock Option Agreement (previously filed as Exhibit 6.32)
4.12(1) Agreement Re Rights and Interests dated December 9, 1998 by and
among the Company, H. Dieter Braun and Peter E. Braun (previously
filed as Exhibit 6.34)
4.13(1) Trademark Assignment dated December 9, 1998 by and between the
Company and H. Dieter Braun (previously filed as Exhibit 6.35)
4.14(1) Patent Assignment dated December 9, 1998 by and between the
Company and H. Dieter Braun and Peter E. Braun (previously filed
as Exhibit 6.36)
4.15(2) Amendment No. 3 to iQ Power Technology 1998 Stock Option Plan
(previously filed as Exhibit 6.50)
4.16(3) iQ Power Technology 2001 Incentive Plan (previously filed as
Exhibit 6.51)
12.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
13.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1 Consent of Deloitte & Touche GMBH
------------------------
(1) Previously filed as an exhibit to the registrant's registration statement
on Form SB-1 on December 10, 1998 (File No. 333-68649).
(2) Previously filed as an exhibit to the registrant's annual report on Form
10-KSB for the year ended December 31, 2000. (3) Previously filed as an
exhibit to the registrant's registration statement on Form S-8 filed on
July 25, 2001.
98
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
iQ POWER AG
Date: June 28, 2005 /s/ Peter Braun
---------------------------------------
Peter Braun
Chief Executive Officer and acting
Chief Financial Officer
99
| This ‘20-F’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
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| 5/31/10 | ||||
| 1/1/09 | ||||
| 2/28/07 | ||||
| 12/31/06 | ||||
| 1/1/06 | ||||
| 12/31/05 | 20-F | |||
| 12/15/05 | ||||
| 11/9/05 | ||||
| 7/15/05 | ||||
| 7/1/05 | ||||
| Filed on: | 6/30/05 | 6-K | ||
| 6/28/05 | ||||
| 6/27/05 | 6-K | |||
| 6/21/05 | ||||
| 6/20/05 | ||||
| 6/15/05 | ||||
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| 4/15/05 | ||||
| 4/14/05 | ||||
| 4/4/05 | 6-K | |||
| 3/31/05 | ||||
| 2/28/05 | 6-K | |||
| 1/1/05 | ||||
| For Period End: | 12/31/04 | |||
| 11/11/04 | ||||
| 11/10/04 | ||||
| 11/9/04 | ||||
| 11/5/04 | ||||
| 11/1/04 | ||||
| 10/30/04 | ||||
| 10/7/04 | CB/A | |||
| 10/5/04 | ||||
| 9/27/04 | ||||
| 7/30/04 | ||||
| 7/1/04 | ||||
| 6/30/04 | ||||
| 3/31/04 | 10QSB, NT 10-K | |||
| 1/7/04 | ||||
| 1/1/04 | ||||
| 12/31/03 | 10KSB, 10KSB/A, NT 10-K | |||
| 12/17/03 | ||||
| 9/30/03 | 10QSB | |||
| 9/1/03 | ||||
| 6/30/03 | 10QSB | |||
| 6/6/03 | ||||
| 4/1/03 | NT 10-K | |||
| 3/31/03 | 10QSB | |||
| 12/31/02 | 10KSB, NT 10-K | |||
| 1/18/02 | ||||
| 12/31/01 | 10KSB | |||
| 7/25/01 | S-8 | |||
| 6/28/01 | ||||
| 1/16/01 | ||||
| 12/31/00 | 10KSB, NT 10-K | |||
| 7/28/00 | ||||
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| 4/10/00 | ||||
| 6/30/99 | 10QSB, NT 10-Q | |||
| 6/29/99 | ||||
| 6/18/99 | ||||
| 6/17/99 | ||||
| 12/10/98 | SB-1 | |||
| 12/9/98 | ||||
| 12/1/98 | ||||
| 10/9/98 | ||||
| 9/1/98 | ||||
| 8/31/98 | ||||
| 8/25/98 | ||||
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| 1/1/97 | ||||
| 9/20/96 | ||||
| 8/16/96 | ||||
| 3/15/95 | ||||
| 12/20/94 | ||||
| 9/20/94 | ||||
| List all Filings | ||||