False Publicity Bars Turbodyne From Trade

Turbodyne Technologies Inc. was one of the hottest small companies on Wall Street last summer, roaring up to more than $17 a share--from mere pennies a few years before--on the promise of its pioneering turbochargers.

But today, Turbodyne is no longer traded on Wall Street, barred by regulators who ruled that the company issued misleading press releases. De-listed in the United States, the stock now trades erratically on a fledgling European exchange, selling at about $2 a share.

The company appeared to have vast potential: It said it had found a way to commercially produce turbochargers that could reduce emissions and boost the power of internal combustion engines. As Turbodyne pumped out press releases, announcing deal after deal with auto and bus companies around the globe, investors pumped up the stock in Internet chat rooms.

At its peak, the company reached a market capitalization--shares outstanding times share price--exceeding $700 million. By comparison, food retailer Smart & Final Inc. currently has a market value of about $250 million.

But with the stock’s collapse, the hounds of the bar--class-action lawyers--are in hot pursuit of Turbodyne. At least four law firms are soliciting clients on the Web for possible shareholder suits.

“It isn’t Kosovo; my clients are still alive. But they have been badly hurt in this,” said Lionel D. Glancy, a Century City lawyer who says he represents several hundred investors in the Turbodyne collapse.

Many of the investors apparently learned of Turbodyne over the Internet. One of them was Bruce Bales, a Rancho Mirage resident who bought 4,000 shares in late 1997 and early 1998.

“My friend bought a lot, $300,000 worth of stock. I looked [Turbodyne] up over the Internet, and it all sounded absolutely wonderful. . . . It wasn’t like I went into it blind on a wild rumor,” Bales said.

Officials at Turbodyne acknowledge they are at a low ebb, but contend that prospects for their turbochargers remain bright. The company last week reported a net loss for 1998 of $30 million, on revenues that barely topped $40 million.

“We have a very tough period ahead. We have to increase sales, to get the economies of scale--lower costs per unit--we need,” said Walter Ware, 56, who took over as chief executive officer at Turbodyne a year ago. “But it’s hard to do that in an atmosphere of negative publicity.”

What happened? How could a company be so highly valued on Wall Street one moment, then dismissed by regulators and investors the next?

Playing a pivotal role in the downfall of Turbodyne was the well-known New York short trader Manuel Asensio, who released a bluntly worded report last August on the turbocharger maker’s prospects, partially posted on the Asensio & Co. Web site.

Asensio noted that a flurry of Turbodyne releases had reported turbocharger deals in the works with 14 companies in multiple nations--but that no business arrangement had borne much fruit. He concluded with a prediction that Turbodyne stock would fall below $1 a share.

Investors quickly scattered. Turbodyne chairman Edward Halimi returned in August from a two-week visit to Russia and put out a press release affirming that Turbodyne holds many patents on its technology.

Halimi also put out a release stating that a deal was being hatched, this time with Russia, that one day might rev up sales.

Turbodyne will seek to “capitalize on the Russian market of over 300,000 heavy-duty vehicles, representing more than $1 billion in potential sales to the company,” Halimi stated in a company release dated Aug. 17, shortly after the Asensio report. But to date, no sales to Russia have materialized.

Ware said the deal fizzled along with the Russian economy. “You’ve read about what is going on there,” he said. Ware said Turbodyne sued Asensio in December, and the case is pending.

In annual numbers released last week, Turbodyne reported a net loss of $30 million, of 88 cents a share, on revenues of $40.9 million, compared with a net loss of $13.2 million, or 58 cents a share, on revenues of $39.2 million in the year-earlier period.

Turbodyne is headquartered in a suite of offices in a Warner Center office tower. Behind plain wooden doors, there is a modest lobby and a receptionist. It is only an administrative center--Turbodyne’s design and production facilities are in Ensenada and Carpinteria, according to Ware and corporate literature.

Turbocharger sales accounted for only $723,000 of Turbodyne revenues in 1998. Most of Turbodyne’s sales are not newfangled turbochargers, but prosaic aluminum machined castings, manufactured to specifications for the motor vehicle industry. Turbodyne’s primary plant is in Ensenada, said Ware, where nearly 800 people are employed.

At the heart of the Turbodyne promise are its two turbocharger products, the Turbopac and the Dynacharger. Since the invention of the internal combustion engine, manufacturers have been bedeviled by inefficient mixes of air and fuel during acceleration and stop-and-go driving.

Ware said that Turbodyne devices, by utilizing microelectronics and better design, more precisely mix air and fuel, thus reducing pollution and boosting power. Even better, the new turbochargers are readily retrofitted on existing engines--a worldwide market or more than 1 billion units.

In addition, the federal Environmental Protection Agency has mandated that diesel buses emit less particulate matter into the air--and Turbodyne has the product to do that, Ware said.

Standing outside his Woodland Hills offices at the back of a Turbodyne bus parked on Oxnard Street, Ware recently demonstrated the reduction in visible smoke when the Turbopac is employed in combination with a Detroit diesel motor.

Also, depending on use, fuel savings can range between 3% and 22%, Ware said. But sales of this particular unit won’t be in the millions of units, or even hundreds of thousands, Ware said.

“We are looking at a market of 6,000 to 10,000 buses,” Ware said. Several cities, such as Baltimore and Paris, are testing the devices, with good results, he said.

The company recently announced an immediate cash infusion of $3 million, from the sale of convertible bonds to a private investor group. If the company’s stock appreciates, up to $17 million more might be raised through this unidentified group, Ware said.

But whether that stock will appreciate is an open question. On April 8, Turbodyne disclosed that the National Assn. of Securities Dealers had taken it off the Nasdaq after finding that the “Company engaged in a pattern of issuing misleading and incomplete press releases, which often were unsupported by an adequate basis in fact.”

No specific press releases were identified. Turbodyne also said it was establishing procedures to prevent such releases in the future. The association would not comment on Turbodyne, except to say the de-listing was “in the public interest.” Ware said that “now every release we put out is checked by three law firms.”

The company is applying to be re-listed, but no hearing has yet been scheduled.

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Mounting Losses

For fiscal years ending Dec. 31:

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Net losses Revenues Year (in millions of dollars) 1996 $1.9 $13.9 1997 $13.2 $39.2 1998 $30.0 $40.9

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Source: Turbodyne