Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

or

Commission File No.: 001-15143

IMPCO TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

16804 Gridley Place Cerritos, California 90703

(Address of principal executive offices, including zip code)

(562) 860-6666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

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. Yes  x  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No  ¨

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 30, 2004, the end of the registrant’s most recent second fiscal quarter, was approximately $104.1 million based upon the closing sale price of the Registrant’s Common Stock on such date, as reported on the Nasdaq National Market.

As of March 31, 2005, the Registrant had 28,519,621 shares of Common Stock, $0.001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be filed not later than 120 days after December 31, 2004 are incorporated by reference into Part III.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Statements about our plans, intentions and expectations are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions to help identify forward-looking statements. These statements are not guarantees of future performance or courses of actions and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” and elsewhere in this Annual Report. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of the filing of this Annual Report.

PART I

Overview

We design, manufacture and supply alternative fuel products and systems to the transportation, industrial and power generation industries on a global basis. Our components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas, for use in internal combustion engines. Our products improve efficiency, enhance power output and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. We also provide engineering and systems integration services to address our individual customer requirements for product performance, durability and physical configuration. For more than 46 years, we have developed alternative fuel products. We supply our products and systems to the market place through a global distribution network of over 400 distributors and dealers in 55 countries and 100 original equipment manufacturers, or OEMs.

Customers use our components and systems on engines ranging from one to 4,000 horsepower. We provide gaseous fuel components, systems and certified gaseous fueled engines to the industrial transportation and the power generation markets.

We offer our products to a number of OEMs in the industrial, transportation and power generation industries of power systems that use clean burning gaseous fuels, which we believe decreases fuel costs, lessens dependence on crude oil and reduces harmful emissions in internal combustion engines. We offer an array and combination of common components to assemble fuel conversion kits and systems to these customers.

2

Taxi companies, transit and shuttle bus companies, and delivery fleets of companies such as Coca-Cola, Frito-Lay, Pepsi Cola and United Parcel Service are among our most active customers. Small and large industrial engine users capitalize on the cost benefits of using alternative fuels and their low-pollutant capabilities. For example, forklift users often operate equipment indoors where toxic emissions are a concern. Because of the global price differential worldwide in favor of gaseous fuels compared to gasoline, their availability in third-world markets and their lower pollutants, the alternative fuel industry market potential is growing rapidly. As of December 31, 2004, approximately 45% of our revenue is derived from sales outside the United States.

We were incorporated in Delaware in 1985 after having provided automotive and alternative fuel solutions in a variety of organizational structures since 1959.

Our periodic and current reports, and any amendments to those reports, are available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC, on our website: www.impco.ws. The information on our website is not incorporated by reference into this report.

Net consolidated revenues for the fiscal year ended December 31, 2004 were approximately $118.3 million with a net loss of approximately $14.2 million. As described below in more detail, we completed several material capital transactions in which we paid off a $20.0M loan to Bison Capital Structured Equity Partners, LLC (“Bison”); entered into a loan agreement with MTM, S.r.l. (“MTM”), a wholly owned subsidiary of B.R.C. Societá a Responsabilitá Limitata (“BRC”), an Italian company; completed a public equity offering for the sale of 4,600,000 shares of our common stock pursuant to a $60.0 million shelf registration statement; and completed our acquisition of the remaining 50% of the outstanding equity interest of BRC not currently held by us on March 31, 2005.

Recent Developments

Business Acquisition

In a series of related transactions between October 2, 2003 and July 29, 2003, we acquired 50% of BRC’s equity from two of its founders, Mariano Costamagna and Pier Antonio Costamagna. The aggregate price for the purchase of the initial 50% equity interest was $23.8 million. On October 22, 2004, we entered into an agreement to purchase the remaining 50% equity interest from those same individuals using a combination of cash and stock. The terms of the transaction include a cash payment of approximately $10.0 million and an issuance of 5,098,284 shares of our common stock. As of October 22, 2004, the date of the BRC acquisition agreement, the value of that consideration was approximately $37.6 million based on a stock price of approximately $5.40. Based on the last reported sale of our common stock as of March 24, 2005 of the value of the consideration to be received by the founders was approximately $36.3 million. On March 10, 2005, our stockholders approved the issuance of 5,098,284 shares of our common stock to be used as part of the purchase price for the acquisition of the 50% remaining ownership of BRC. The BRC purchase transaction was completed and closed on March 31, 2005.

On December 23, 2004 we entered a loan agreement with MTM pursuant to which we borrowed $22.0 million. The loan proceeds were used to retire all debts and related obligations

3

we had incurred pursuant to a Securities Purchase Agreement dated July 18, 2003 with Bison. The MTM loan carries an interest rate equal to 3-month EURIBOR plus 1.5% per annum, which totaled approximately 3.7% as of December 31, 2004. The MTM loan matures on December 31, 2009 and will be repaid in quarterly installments beginning April 1, 2005, each payment in the amount of not less than $650,000 in the first two years, $800,000 in the third year, $1,000,000 in the fourth year and $1,150,000 in the final year, with a $5,000,000 “balloon payment” of the remaining unpaid principal and interest due on December 31, 2009. This loan may be accelerated in the event that any payment is not made within 15 days of the date when due, if the employment of Mariano Costamagna is terminated for any reason (with certain exceptions for termination upon Mr. Costamagna’s death), if we materially breach his employment agreement or upon written notice of any other default under the agreement. Using proceeds from the MTM loan, we repaid the Bison loan on December 30, 2004 in the amount of $20.0 million plus a prepayment penalty of $1.0 million. As a result of our prepayment, we are required under generally accepted accounting principles to take a charge to income representing the amount of the unamortized portion of the original issue discount and the unamortized issuance costs, which were approximately $2.0 million and $3.8 million, respectively. These charges, including the prepayment penalty of $1.0 million, were recognized as a loss on extinguishment of debt in the fourth quarter of 2004.

On February 4, 2005, we sold 4,000,000 shares of our common stock as part of a public offering to investors and realized net proceeds of approximately $20.6 million inclusive of approximately $1.0 million of issuance expenses. On February 11, 2005, the underwriters exercised their over-allotment option and we sold an additional 600,000 shares from which we received additional net proceeds of approximately $3.2 million. Approximately $10.0 million of the proceeds from the public offering were placed in an escrow account for use as partial consideration in the acquisition of the remaining 50% ownership of BRC.

Management Transition

Effective January 1, 2005, Mariano Costamagna, the principal executive officer of BRC became our new Chief Executive Officer, and on the same date, Mr. Robert Stemmler, the Chairman of the Board of Directors, resigned as our Chief Executive Officer. Robert Stemmler has been a director since May 1993 and the Chairman of the Board of Directors since June 1998. Mr. Stemmler also served as our President and Chief Financial Officer from May 1993 through December 31, 2004. Mr. Stemmler was a full time employee consultant to support the transition to a new CEO until March 17, 2005, when his consulting relationship was changed. A revision to the employee consulting agreement is now being prepared to re-define Mr. Stemmler’s consulting role.

Relocation of Research and Development Facility

On March 14, 2005, management announced its intention to relocate research and development activities to its Cerritos, California manufacturing facility and close the Seattle, Washington facility. Upon subsequent management review, the Company has revised its plans to include retaining certain research and development activities in the Seattle, Washington facility, reduce the allocation of space to support these activities and sublease a significant portion of the facility to offset operational costs. Retaining certain research and development activities enables the Company to continue to earn revenue for contracted services to customers, as well as potentially utilize this location for durability testing for new fuel systems to satisfy the scheduled 2007 EPA requirements. The Company intends to move a limited number of staff to its Cerritos facility, and may relocate certain equipment from the Seattle facility or purchase equipment to support their research and development activities. These two strategies

4

are an integral part of the board approved transition plan associated with the purchase of BRC and the need to improve the effectiveness and reduce the costs of the research and development activities at both IMPCO and BRC.

Alternative Fuel Industry

Overview

Our business is focused on the alternative fuel industry. We believe three independent market factors—economics, energy independence and environmental concerns—are driving the growth of the market for alternative fuel technology. We believe the historic price differential between propane or natural gas and gasoline results in economic benefit to end users of alternative fuel technology. The price of alternative fuels such as natural gas or propane is typically 40% to 60% less than the price of gasoline. By converting a liquid fueled internal combustion engine to run on propane or natural gas, customers can capitalize on this fuel price differential. End-users may recoup the cost of the conversion within six to eighteen months, depending on the fuel cost disparity prevailing at the time. Transportation companies in various countries, including Australia, Mexico, India and China, are also taking advantage of these economics.

In addition to economic benefits to alternative fuels to end-users, some governments have sought to create a demand for alternative fuels in order to reduce their dependence on imported oil and reduce their unfavorable balance of payments by relying on their natural gas reserves. For example, we believe that the Indian, Pakistani and Chinese governments, rather than relying solely on imported gasoline and diesel fuel for their transportation needs, each promotes the use of natural gas in vehicles to free some of its oil production for export. Alternative fuel vehicles that operate on natural gas or propane can lessen the demand for gasoline.

Governmental emission regulations, which support the use of clean burning alternative fuels, are also expanding industry growth. Internal combustion engines are a major source of air pollution, which has led to increased government regulation and oversight on vehicle and industrial engine emissions. Most major international cities are experiencing significant pollution from gasoline and diesel emissions. These cities also have the largest concentrations of fleet operators, and many of these cities, particularly those outside the United States, are taking steps to reduce emissions, typically by implementing natural gas or propane-fueled vehicles. For example, in Mexico City, Milan and Rome and in India, the respective governments have taken steps such as prohibiting the use of certain vehicles on designated days of the week.

In the United States, legislative and administrative policies such as the Comprehensive National Energy Strategy, the Clean Air Act Amendments of 1990, the Energy Policy Act of 1992, and the Organization for Economic Cooperation and Development (OECD) Environmental Committee’s Report on Environmentally Sustainable Transport provide goals for energy efficiency, and coupled with the Environmental Protection Agency and the California Air Resource Board’s Large Spark Ignited Off-Highway Emission regulation for industrial equipment, afford strict emission standards and promote the development and implementation of alternative fuels and related technologies.

Markets

We are directly involved in two market segments transportation and industrial, which includes power generation equipment, which have seen growth in the use of clean-burning

5

gaseous fuels due to the less harmful emissions effects of gaseous fuels and the cost advantage of gaseous fuels when compared to gasoline and diesel fuels.

Transportation.     According to the most recent statistics from the World LP Gas Association, the International Association for Natural Gas Vehicles (IANGV) and the European Natural Gas Association, there are over 5.7 million gaseous fuel vehicles in use worldwide: either for personal mobility, fleet conveyance or public transportation. As the world’s vehicle population increases from 800 million to over 1.3 billion by 2020, most growth will occur in developing countries within Asia, North Africa, and areas of the Middle East. These regions currently have the lowest ratio of vehicles per one thousand people, and are slated to grow rapidly over the next ten years as economic improvements stimulate personal vehicle ownership.

The Energy Information Administration of the U.S. Department of Energy, the World Bank, the Office of Economic and Community Development, the fifteen countries of the European Union (EU15) and the Asian Development Bank suggests that interest in expanding the use of alternative fuel vehicles is mounting in many parts of the developed and developing world. Growth projections, reported by the Energy Information Administration and the IANGV in comparison with current data available from the European Natural Gas Vehicle Association, indicate that over two million additional alternative fuel vehicles will be introduced worldwide by 2010. In Europe, alternative fuel vehicles have rapidly penetrated the transportation market. The European Union’s four largest natural gas-consuming members, the United Kingdom, Germany, France, and Italy, all have introduced incentives for gaseous-fueled vehicles. The European Union has established a target to replace 20% of their liquid fueled vehicles with gaseous fuels by 2020. The Mexican Regulatory Commission of Energy estimates that Mexico will be able to increase the use of natural gas vehicles from 2,000 in 2000 to 100,000 by 2008.

The Asia region is emerging as a significant growth market for alternative fuel vehicles. China, already the world’s second-largest energy consumer, will continue to grow in importance on world energy markets as many forecasts suggest that strong economic growth will drive up demand.

Industrial.     Equipment such as forklifts, aerial platforms, sweepers, turf equipment, light-duty construction equipment, mobile wood-processing equipment and other mobile industrial equipment have long been workhorses of developed countries, and are a significant portion of our global activities. With developed countries such as the United States and the EU15 seeking a broader consensus on regulation of emission sources in an attempt to further reduce air pollution, many countries have and, we believe will continue to, legislate emission standards for this type of equipment.

With new emission regulations being imposed, these OEMs will require advanced technologies that permit the use of gaseous fuels in order to satisfy not only the regulation, but also the customers’ requirements for durability, performance and reliability. We have developed and are currently supplying a series of advanced technology alternative fuel systems to the industrial OEM market under the brand name Spectrum. We and our industrial brands focus on serving the market with fuel systems, services and emission certified engine packages.

With respect to the power generation industry, the World Energy Outlook 2002 projects the global primary energy demand will increase by 1.7% per year from 2000 to 2030, reaching 15.3 billion tons of oil equivalent. Even though the earth’s energy resources are adequate to meet this demand, the amount of investment that will be needed for these

6

resources to be exploited is significantly higher than has occurred in the past. For example, investment needs in the power sector are expected to be almost three times larger over the coming three decades than over the last three. Investment in the oil industry will also have to rise sharply, as demand rises and the surplus capacity in crude oil production and refining that has characterized the industry since the 1970s is used up. Gaseous fuels such as propane and natural gas have significant reserves available worldwide which are less costly to refine compared to crude oil and have historically been less expensive than liquid fuels. Countries like China, for example, are actively developing their infrastructure to utilize their natural gas reserves rather than import liquid fuels.

Competitive Advantages

Industry participants compete on price, product performance and customer support.

We believe we have developed a technological leadership position in the alternative fuel industry based on our experience in designing, manufacturing and commercializing alternative fuel delivery products and components, our relationships with leading companies in transportation, power generation and industrial markets, our financial commitment to research and product development and our proven ability to develop and commercialize new products. We believe our competitive strengths include:

Strong Technological Base.    Over the past ten years, we have invested approximately $142.0 million in research and development. This investment, coupled with our history and experience in the alternative fuel industry, has provided us with a strong technology base for new product innovation for internal combustion engines, particularly in our industrial and power generation markets. Additionally, we believe our acquisition of BRC will expand our technology and product base in the transportation market. BRC has been developing, manufacturing and marketing alternative gaseous fuel products and systems for automobiles for more than 20 years and we believe is a leader in the transportation market for alternative fuel technology.

Strong Global Distribution and OEM Customer Relationships.    We have developed a distribution system of over 400 dealers and distributors in 55 countries around the world. In addition, we currently sell products to more than 100 OEM customers in domestic and international alternative fuel markets. To date, we have sold over four million fuel systems or sub-systems globally to our customers. We believe that the successful historic use of our products and our reputation as a leader in application development support for our customers provides a strong competitive position. In addition, BRC has developed a distribution system of over 100 distributors and dealers in over 20 countries. BRC also sells its products to over 30 automotive OEMs.

Extensive Manufacturing Experience.    We have more than four decades of experience in the manufacture, development and integration of alternative fuel technologies and products. We currently maintain manufacturing and production facilities in the United States, Europe, and Australia, which produce a broad range of components. The location of manufacturing plants in four continent enables the company to receive a low cost of good by global sourcing and to obtain low labor rates for realizing very competitive manufacturing costs. Additionally, supply of products to our global customers is superior to competition due to strategically located facilities. Our U.S., Australian and European facilities have achieved ISO-9001 or QS-9000 certification. QS-9000 is the common supplier quality standard for Chrysler Corporation, Ford Motor Company and General Motors. QS-9000 applies to suppliers of production materials, production and service parts, heat-treating, painting and plating and other finishing services. ISO-9000 is a set of three individual, but related, international standards on quality

7

management and quality assurance. These three standards were developed to document effectively the quality controls necessary to maintain quality production of products. BRC has three manufacturing facilities in Italy and one in Brazil. All of such facilities are ISO qualified.

Established Systems Integration Expertise.    As more OEMs seek to reduce costs by outsourcing key tasks and reducing the number of suppliers, we have focused increasingly on capturing additional revenue opportunities by expanding our systems integration capabilities. In 1998, we established our Industrial Engine Systems business in Sterling Heights, Michigan, which provides systems integration of our low-emission products on engines that are subsequently sold to industrial OEMs. We believe that our systems integration expertise, together with our proprietary and patented technologies, give us a significant customer support advantage in the alternative fuel markets. BRC also has system integration experience in the automotive aftermarket and with OEMs and provide products and systems to enable their customers to convert to gaseous fuel. In addition, BRC also converts new vehicles to gaseous fuels for subsequent sale by automotive OEMs.

Positioned for Global Growth.    With seven foreign offices and over 400 distributors and dealers to sell our products and service our customers in more than 55 countries outside the United States, management believes that we are positioned to capitalize on global growth opportunities. We believe that the alternative fuel markets will grow dramatically internationally, particularly in China, India, and Southeast Asia, because of the existing urban pollution problems and economics that favor alternative fuels versus gasoline. Our purchase of BRC strengthens IMPCO’s global position by adding an additional 100 distributors and dealers in all 15 European nations, as well as ten Eastern European countries, and a number of developing countries including Brazil, Argentina, Chile, Australia, India, China, Thailand and South Korea.

Business Strategy

We believe that the successful execution of the following strategic objectives will enable us to maintain and expand our leadership position in the advanced fuel technologies industry.

Capitalize on IMPCO’s Strong Technology Leadership Position.    We believe we have a technology advantage due to our investment in research and development. Our investment has permitted us to develop and supply new technology and products to our target markets, and our management believes that these trends will continue to grow as liquid fossil fuels become increasingly scarce and expensive to develop. Our management also plans to develop new technologies, including the technology of BRC, and expand our product and system integration capabilities to an increasingly larger and more diversified customer base.

Migrate Revenue Base from Component Products to Complete Fuel Systems.    Historically, our revenues were derived exclusively from component parts. As part of its strategic business review, management recognized the need to further differentiate its product offering, and as such we now also develop and engineer complete fuel systems. These systems not only generate higher dollar revenues, but also result in additional future revenue streams such as engine controls and maintenance contracts. As of December 31, 2004, revenues derived from fuel systems were approximately 50% of our total revenues and were primarily in the industrial market. We believe the BRC acquisition, if completed, will enable the same system strategy to be expanded into the transportation market.

Focus on Advanced Fuel Delivery Technologies and Related Products.    We intend to focus on advanced electronic and fuel metering technologies and products. We plan to continue our research and product development in fuel delivery and electronic control systems for alternative

8

fuels. We actively seek to establish joint development programs and strategic alliances with the major engine designers, manufacturers and industry leaders in these markets. After completion, the BRC acquisition will provide us with additional electronic and fuel metering technology.

Develop and Expand Key Industry Relationships.    We plan to utilize the successful technical and business relationships and reputation we have established worldwide with major industry leaders using alternative fuel products to enable us to establish and maintain strategic alliances, joint product development programs and joint ventures with these companies in our target markets. We will concentrate our efforts on broadening our OEM relationships in an effort to establish strong top-tier supplier positions based on our belief that OEMs will drive industry growth in the alternative fuel industry. After completion, the BRC acquisition will expand our industry relationships in the transportation market.

Expand and Broaden Systems Integration Expertise.    We expect to continue to broaden our capabilities to provide integration, testing, validation and manufacturing of our products and systems into the industrial transportation, and power generation markets. As more OEMs seek to reduce costs and shorten time to market by outsourcing key tasks and reducing numbers of suppliers, we are focused increasingly on capturing additional revenue opportunities by expanding into value-added services, such as systems integration. For example, we have established an industrial systems unit in Michigan to integrate our products into engines that will be sold to industrial OEMs, who in turn will install these engines into end products. After completion, the BRC acquisition will expand our product and system capabilities in the automotive transportation market.

Increase Bases of Business Operations and Distributor Network in High-Growth Global Regions.    We plan to expand our operating network in higher-growth regions, such as Asia, Europe and Latin America, to take advantage of significant growth opportunities that we believe exist in those areas. We intend to capitalize on these growth opportunities through acquisitions and joint ventures, strengthening of our distributor network and developing key local business and governmental support and recognition. Additionally, we believe that working with local governments and establishing joint ventures with local businesses is essential to expanding into international markets. Our purchase of BRC further expands our presence in the European transportation market and will expand key industry relationships in the automotive transportation market.

Expand Our Global Manufacturing Operations.    We plan to expand our manufacturing operations in the United States by establishing manufacturing sites in low-cost locations with a continued focus on quality, timely delivery and operating efficiency. In addition, our management anticipates that the manufacturing strengths of BRC, coupled with the additional product volume management hopes to derive from the relationship, will result in productivity improvements.

Customers and Strategic Relationships

Our customers include some of the world’s largest OEMs and engine manufacturers, including Boss Manufacturing, Caterpillar, Clark, Cummins, Daewoo, Detroit Diesel, Ford Australia, GM Holden, Kohler, Komatsu, Mazda, Mitsubishi, Onan, Still and Toyota.

We are working with a number of these customers to address their future product and application requirements as they integrate more advanced, certified gaseous fuel systems into

9

their business strategies. Additionally, we continually survey and evaluate the benefits of joint ventures, acquisitions and strategic alliances with our customers and other participants in the alternative fuel industry to strengthen our global business position.

We have focused our strategic alliances on our marketing strategy and/or on our development strategy. Our marketing strategy seeks to expand the distribution channels for our gaseous fuel system technologies. Our development strategy is to advance the state of technology and its application.

For the fiscal year ended December 31, 2004, the Company had sales to two customers that represent approximately 33% and 10.8%, respectively. During fiscal years 2003 and 2004, sales to key customers accounted for 40% and 56% of our revenue, respectively. If several of these key customers were to reduce their orders substantially, we would suffer a decline in revenue and profits, and those declines may be substantial.

Quantum Collaboration.    Our three-year agreement with Quantum provides that we will collaborate with Quantum to identify and conduct research and development programs of mutual interest. As part of those research and development activities, we may develop technology and products separately or jointly with Quantum. The agreement also allows us to acquire and sell into its alternative fuel markets Quantum’s advanced technology products, including compressed natural gas storage tanks, fuel injectors, in-tank regulators and other products, for use in automotive, bus and truck and industrial aftermarket applications and in the bus and truck and industrial OEM markets. For jointly developed products, Quantum and we will jointly own any patent or other intellectual property rights and will issue royalty-free cross licenses covering our respective markets. For separately developed products, each party will grant the other a right to sell the affected products in their respective markets. The developing party will retain sole intellectual property ownership. There was no significant transactions under this agreement during the year.

Products and Services

Our products include gaseous fuel regulators, fuel shut-off valves, fuel delivery systems, complete engine systems, and electronic controls for use in internal combustion engines for the transportation, industrial, and power generation markets. In addition to these core products, which we manufacture, we also design, assemble and market ancillary components required for complete systems operation on alternative fuels.

All of our products are designed, tested and validated in accordance with our own internal requirements, as well as tested and certified with major regulatory and safety agencies throughout the world, including Underwriters Laboratories in North America and TÜV in Europe. The following table describes the features of our products:

10

11

Sales and Distribution

We sell products through a worldwide network encompassing more than 400 distributors and dealers in over 55 countries and through a sales force that develops sales with OEMs and large end-users. Our operations focus on OEM and aftermarket customers in the transportation, industrial, and power generation markets. Of these markets, we believe that the greatest potential for immediate growth is in the Latin America and Asia Pacific regions in the transportation OEM and aftermarket and in North America in the industrial OEM and aftermarket.

For the fiscal year ended December 31, 2004, sales to distributors (including company-owned distributors) accounted for 32% of our net revenue and sales to OEM customers accounted for approximately 68% of our net revenue. During the fiscal year ending December 31, 2003, sales to distributors accounted for 45% of our net revenue and sales to OEM customers accounted for 55% of net revenues.

12

Distributors generally service the aftermarket business of the conversion of liquid fueled engines to gaseous fuels, and small-volume OEMs and are generally specialized and privately owned enterprises. Many domestic distributors have been our customers for more than 30 years, and many of our export distributors have been our customers for more than 20 years.

For fiscal years 2003 and 2004, sales of products used in vehicle conversion programs by OEMs accounted for 60% and 68% of our revenues, respectively.

Our International Operations segment, which consists of our subsidiaries located in Europe, Australia, Japan, and India, has sales, application and market development and technical service capabilities. Information regarding the revenues, income and assets of each of our two segments, U.S. Operations and International Operations, and regarding our revenues and assets by geographic area is included in Note 11 to the consolidated financial statements.

Manufacturing

We manufacture and assemble products at our facilities in Cerritos, California, Sterling Heights, Michigan and at our international facilities. Current manufacturing operations consist primarily of mechanical assembly and light machining. We rely on outside suppliers for parts and components and obtain components for products from a variety of domestic and foreign automotive and electronics suppliers, die casters, stamping operations, specialized diaphragm manufacturers and machine shops. For the fiscal year ended December 31, 2004, ten suppliers accounted for approximately 61% of our raw material purchases. During our fiscal years ended December 31, 2004 and 2003, the eight month transition period ended December 31, 2002, and the fiscal year ended April 30, 2002, General Motors Corporation, and affiliates of General Motors, accounted for approximately 41%, 33%, 12% and 9% respectively, of purchases. During our fiscal years ended December 31, 2004 and 2003, the eight month transition period ended December 31, 2002, and the fiscal year ended April 30, 2002, Rangers Die Casting Company, accounted for approximately 4%, 7%, 8% and 8% respectively, of purchases.

Material costs and machined die cast aluminum parts represent the major components of cost of sales. Coordination with suppliers for quality control and timely shipments is a high priority to maximize inventory management. We use a computerized material requirement planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. All of our U.S. manufacturing facilities are ISO-9001 certified.

Research and Development

Our research and development facility near Seattle, Washington will be used primarily for the research and development of systems and products that support the use of gaseous fuels in internal combustion engines. This facility has sophisticated, state-of-the-art research laboratories, emissions control equipment, and testing equipment. Our research and development is focused on fuel delivery and electronic control systems and products for motor vehicles, engines, forklifts, stationary engines and small industrial engines.

We have the following technical capabilities:

13

We believe this facility is a critical component in our ability to maintain our technological leadership position in alternative fuel enabling systems.

We conduct alternative fuel application development at the following facilities:

On March 14, 2005 management announced its intention to relocate research and development activities to its Cerritos, California manufacturing facility and close the Seattle, Washington facility. Upon subsequent management review, the Company has revised its plans to include retaining certain research and development activities in the Seattle, Washington facility, reduce the allocation of space to support these activities and sublease a significant portion of the facility to offset operational costs. Retaining certain research and development activities enables the Company to continue to earn revenue for contracted services to customers, as well as potentially utilize this location for durability testing for new fuel systems to satisfy the scheduled 2007 EPA requirements. The Company intends to move a limited number of staff to its Cerritos facility, and may relocate certain equipment from the Seattle facility or purchase equipment to support their research and development activities. These two strategies are an integral part of the board approved transition plan associated with the purchase of BRC and the need to improve the effectiveness and reduce the costs of the research and development activities at both IMPCO and BRC.

Competition

Our key competitors in gaseous fuel delivery products, accessory components and engine conversions markets include Landi Group, Lovato, OMVL and Tartarini located in Europe, Aisan and Nikki in Japan and GFI in the United States and Europe, which together with us account for a majority of the world market for alternative fuel products and services. In the future, we may face competition from traditional automotive component suppliers, such as Bosch, Delphi, Siemens and Visteon, and from motor vehicle OEMs that develop fuel systems internally. Industry participants compete on price, product performance and customer support. The Company believes we have approximately 50% market share in the overall alternative fuels market.

Product Certification

We must obtain emission compliance certification from the Environmental Protection Agency to sell certain of our products in the United States and from the California Air

14

Resources Board to sell certain products in California. Each car, truck or van sold in the U.S. market must be certified by the Environmental Protection Agency before it can be introduced into commerce, and its products must meet component, subsystem and system level durability, emission, refueling and various idle tests. In California, both on-road and off-road vehicles have emission compliance regulation. We have also obtained international emissions compliance certification in Argentina, Australia, Brazil, Canada, Chile, Europe and Mexico.

We strive to meet stringent industry standards set by various regulatory bodies, including the Federal Motor Vehicle Safety Standards of the United States, the National Highway and Transportation Safety Administration, the National Fire Protection Association, Underwriters Laboratories and American Gas. Approvals enhance the acceptability of our products in the domestic marketplace. Many foreign countries also accept these agency approvals as satisfying the “approval for sale” requirements in their markets.

Backlog

As of March 22, 2005, our backlog for our products was $19.6 million, as compared to $32.0 million on March 8, 2004 and $13.5 million on February 28, 2003. We measure backlog for our product sales from the time orders become irrevocable, which generally occurs 90 days prior to the planned delivery date. We expect to fill all of the backlog orders during fiscal year 2005.

Employees

As of March 24, 2005, we employed approximately 721 persons including those employed by our unconsolidated affiliates in India, Mexico and Italy. Of these employees, approximately 194 were employed in U.S. Operations and 527 were employed in International Operations. None of our employees (except those that are also BRC employees) are represented in a collective bargaining agreement. Management considers our relations with our employees to be good.

Intellectual Property

We currently rely primarily on patent and trade secret laws to protect our intellectual property. We currently have 13 U.S. patents and 26 foreign patents issued. Our U.S. patents began expiring in October 2002 and will expire on various dates until May 2020. We do not expect the expiration of our patents to have a material affect on our revenues.

We also rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. However, we cannot be sure that these intellectual property rights provide sufficient protection from competition. We believe that copyright, trademark and trade secret protection are less significant than our patents.

15

Facilities

Our executive offices and our Gaseous Fuel Products division are located in Cerritos, California. We currently lease additional manufacturing, research and development and general office facilities, under leases expiring between 2007 and 2011, in the following locations set forth below:

* The Cherasco, Italy and Manaus, Brazil facilities are leased and operated by our unconsolidated subsidiary, BRC

**The Gurgaon, India facility is used by our 50% owned and unconsolidated Minda IMPCO Limited joint venture.

We also lease nominal amounts of office space in Australia, France and the United Kingdom. We believe our facilities are presently adequate for our current core product manufacturing operations and OEM development programs and production.

From time to time, we may be involved in litigation relating to claims arising out of the ordinary course of our business. We are not a party to, and to our knowledge there are not threatened, any claims or actions against us, the ultimate disposition of which would have a material adverse effect on us. MTM is a defendant in a lawsuit brought by ICOM, S.r.l. (“ICOM”), filed in the local court at Milan, Italy. That lawsuit initially sought injunctive relief and damages for infringement of ICOM’s alleged exclusive rights to sell ring-style gaseous fuel tanks in Italy. The trial court initially denied the plaintiff’s motion for injunctive relief and subsequently denied the plaintiff’s damages claims. The case remains on appeal, and BRC’s management has indicated they believe the plaintiff’s claims are without merit.

16

No matters were submitted for the vote or approval of our security holders during the quarter ended December 31, 2004.

On March 10, 2005 at a special meeting, our stockholders approved the acquisition by IMPCO of the remaining 50% ownership in BRC pursuant to the Equity Purchase Agreement dated October 22, 2004, and the related transactions described in the proxy statement/prospectus. The BRC purchase transaction was completed and closed on March 31, 2005.

17

PART II

Our common stock is traded on the Nasdaq National Market under the symbol “IMCO.” The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported on the Nasdaq National Market. Bid quotations reflect inter-dealer prices, without adjustments for mark-ups, mark-downs, or commissions, and may not necessarily represent actual transactions.

As of March 24, 2005, there were approximately 550 holders of record of our common stock.

Dividend Policy

We have not recently declared or paid dividends on our common stock, including during the past two fiscal years, and we currently expect to retain any earnings for reinvestment in our business. Accordingly, we do not expect to pay dividends in the foreseeable future. The timing and amount of any future dividends is determined by our board of directors and will depend on our earnings, cash requirements and the financial condition and other factors deemed relevant by our board of directors. Our senior credit facility currently prohibits declaring or paying dividends.

The following table sets forth repurchases of the Company’s common stock during the fourth quarter 2004 on behalf of the Company’s Deferred Compensation Plan.

18

The following selected financial information for the fiscal years ended April 30, 2000, 2001 and 2002, the eight months ended December 31, 2002 and the fiscal years ended December 31, 2003 and 2004 is derived from our audited consolidated financial statements. The financial data below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. The financial results of Quantum Fuel Systems Worldwide, Inc. (“Quantum”) are shown below as a loss on discontinued operation, net of tax.

19

The following discussion includes forward-looking statements about our business, financial condition, and results of operations, including discussions about management’s expectations both for our own business and for the business of our unconsolidated affiliate, BRC. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A list of the known material factors that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is included in the section below entitled “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and notes included herein.

Overview

We design, manufacture and supply components, complete certified engine systems and fuel systems on a global basis that include fuel metering, electronic control and fuel storage products that enable internal combustion engines to run on clean burning alternative fuels such as propane and natural gas instead of gasoline. Alternative fuel technology is used to reduce fuel costs, to reduce harmful emissions from internal combustion engines, and to lessen dependence on crude oil. Based on more than 46 years of technology development and expertise in producing cost-effective, safe and durable alternative gaseous fuel technology systems for engines, we believe that we are positioned to provide enabling products and technologies in the rapidly expanding alternative fuel industry through our global network of over 400 distributors and dealers and 100 original equipment manufacturers in 55 countries.

We classify our business into two business segments: U.S. Operations and International Operations. Our U.S. Operations sell products, including complete certified engines, parts and conversion systems, for applications in the transportation, material handling, stationary and portable power generator and general industrial markets. Our International Operations in Australia, Europe, India, Japan, and Mexico provide distribution for our products, predominantly from U.S. Operations and some product assembly on engines. As of December 31, 2004, we will no longer consolidate our operations in Mexico and India as part of International Operations. These operations will be accounted for using the equity method of consolidation due to our 50% ownership in these entities and our lack of effective control.

We recognize revenue for product sales when title is transferred, ordinarily when products are shipped, and when management is reasonably assured of collectibility. We provide for returns and allowances as circumstances and facts require.

Net loss for the fiscal year ended December 31, 2004 was $14.2 million on revenues of approximately $118.3 million as compared to revenues and a net loss during fiscal 2003 of $74.7 million and $6.9 million, respectively.

The net loss for the year ended December 31, 2004 of $14.2 includes a loss on the extinguishment of debt of $6.8 million on the payoff of the Bison loan in December 2004; increase in the provision for the allowance for deferred tax assets of $2.3 million; write-off of goodwill totaling $1.3 million for reduction of business in Japan and Mexico; a change in accounting estimate for excess and obsolete inventories resulting in a charge of $1.3 million; additional costs incurred for preparation and auditing for Sarbanes-Oxley Act of 2002 of

20

approximately $0.6 million; and severance costs of personnel reductions of approximately $0.8 million in conjunction with the board approved transition plan for the integration of IMPCO and BRC.

The net loss for the year ended December 31, 2003 of $6.9 million was primarily due to the continuing negative impact on the US and international markets of the economic reductions resulting from the events of September 11, 2001. The industrial and transportation markets worldwide are beginning to approach the level of economic activity prior to that event.

For the fiscal year ended December 31, 2003, we recorded a net loss of $6.9 million on revenues of $74.7 million. The $6.9 million net loss represented an improvement of $29.7 million over the unaudited twelve-month period ended December 31, 2002, when we recorded a net loss of $36.6 million. Information for the period ended December 31, 2002 is presented solely for purposes of comparison owing to the change of our fiscal year; these data are derived from our unaudited financial statements for the four-month period ended April 30, 2002 and our audited financial statements for the eight-month transition period ended December 31, 2002.

Recent Developments

Business Acquisition

In a series of related transactions between October 2, 2003 and July 29, 2003, we acquired 50% of BRC’s equity from two of its founders, Mariano Costamagna and Pier Antonio Costamagna. The aggregate price for the purchase of the initial 50% equity interest was $23.8 million. On October 22, 2004, we entered into an agreement to purchase the remaining 50% equity interest from those same individuals using a combination of cash and stock. The terms of the transaction include a cash payment of approximately $10.0 million and an issuance of 5,098,284 shares of our common stock. As of October 22, 2004, the date of the BRC acquisition agreement, the value of that consideration was approximately $37.6 million based on a stock price of approximately $5.40. Based on the last reported sale of our common stock as of March 24, 2005 of $5.16, the value of the consideration to be received by the founders was approximately $36.3 million. On March 10, 2005, our stockholders approved the issuance of 5,098,284 shares of our common stock to be used as part of the purchase price for the acquisition of the 50% remaining ownership of BRC. The BRC purchase transaction was completed and closed on March 31, 2005.

On December 23, 2004 we entered a loan agreement with MTM pursuant to which we borrowed $22.0 million. The loan proceeds were used to retire all debts and related obligations we had incurred pursuant to a Securities Purchase Agreement dated July 18, 2003 with Bison. The MTM loan carries an interest rate equal to 3-month EURIBOR plus 1.5% per annum, which totaled approximately 3.7% as of December 31, 2004, provided that the rate will increase to 3.5% above 3-month EURIBOR after and during the continuance of a default under the Loan Agreement and to 6.5% above 3-month EURIBOR on any unpaid portion of the loan outstanding 30 days after the maturity date of December 31, 2009. The MTM loan matures on December 31, 2009 and will be repaid in quarterly installments beginning March 31, 2005, each payment in the amount of not less than $650,000 in the first two years, $800,000 in the third year, $1,000,000 in the fourth year and $1,150,000 in the final year, with a $5,000,000 “balloon payment” of the remaining unpaid principal and interest due on December 31, 2009.

This loan may be accelerated in the event that any payment is not made within 15 days of the date when due, if the employment of Mariano Costamagna as our CEO is terminated for any

21

reason (with certain exceptions for termination upon Mr. Costamagna’s death), if we materially breach his employment agreement or upon written notice from MTM in the case of any other default under the agreement. The MTM loan agreement contains restrictive covenants limiting our ability to: (a) incur additional indebtedness other than unsecured trade credit, capital leases and additional indebtedness pursuant to the senior credit facility with LaSalle; (b) merge, consolidate or sell our assets; (c) purchase, retire or redeem our capital stock; and (d) make capital expenditures in excess of $2.5 million in any fiscal year.

Using proceeds from the MTM loan, we repaid in full our senior subordinated promissory note issued to Bison on July 18, 2003. As a result, we paid a prepayment penalty of approximately $1.0 million. In addition, as a result of our prepayment, we are required under generally accepted accounting principles to take a charge to income representing the amount of the unamortized portion of the original issue discount and the unamortized issuance costs, which were approximately $2.0 million and $3.8 million, respectively. These charges, including the prepayment penalty of $1.0 million, were recognized in the fourth quarter of 2004 as a loss on extinguishment of debt.

We believe that the BRC acquisition and the retirement of the Bison debt and its replacement with the MTM loan will be highly beneficial to us in a number of ways, including increasing our product development, sales and marketing, and manufacturing capabilities, and because of the savings we expect to realize in interest expense. Such savings in interest expense are expected to be approximately $2.9 million per year on a consolidated basis when comparing the reduction in principal amount and interest rate from $20.0 million at 18.25% under the Bison debt to $10.0 million at 3-month EURIBOR plus 1.5% per annum under the MTM loan agreement.

On February 4, 2005, we sold 4,000,000 shares of our common stock as part of a public offering to investors and realized net proceeds of approximately $20.6 million inclusive of approximately $1.0 million of issuance expenses. On February 11, 2005, the underwriters exercised their over-allotment option and we sold an additional 600,000 shares from which we received additional net proceeds of approximately $3.2 million. Approximately $10.0 million of the proceeds from the public offering were placed in an escrow account for use as partial consideration in the acquisition of the remaining 50% ownership of BRC.

Management Transition

Effective January 1, 2005, Mariano Costamagna, the principle executive officer of BRC, became our new Chief Executive Officer, and on the same date, Mr. Robert M. Stemmler, the Chairman of the Board of Directors, resigned as our Chief Executive Officer. Robert Stemmler has been a director since May 1993 and the Chairman of the Board of Directors since June 1998. Mr. Stemmler also served as our President and Chief Executive Officer from May 1993 through December 31, 2004. Mr. Stemmler was a full time employee consultant to support the transition to a new CEO until March 17, 2005, when his consulting relationship was changed. A revision to the employee consulting agreement is now being prepared to re-define Mr. Stemmler’s consulting role.

Pursuant to the terms of Mr. Costamagna’s employment agreement, Mr. Costamagna’s initial base salary will be US$360,000 per year, and he will be entitled to participate in our standard executive bonus plan. Pursuant to the employment agreement, if Mr. Costamagna’s employment is terminated due to death, disability, by us other than for “cause,” or if he resigns for “good reason,” we are obligated to pay him severance equal to US$5.0 million (subject to certain limited reductions if he sells more than 20% of the aggregate amount of our stock he

22

received, and is to receive, as consideration in connection with our acquisition of BRC). In addition, termination of Mr. Costamagna’s employment is terminated for any reason (with limited exceptions for termination upon Mr. Costamagna’s death), Mr. Costamagna or his estate may accelerate the MTM loan.

Relocation of Research and Development Facility

On March 14, 2005 management announced its intention to relocate research and development activities to its Cerritos, California manufacturing facility and close the Seattle, Washington facility. Upon subsequent management review, the Company has revised its plans to include retaining certain research and development activities in the Seattle, Washington facility, reduce the allocation of space to support these activities and sublease a significant portion of the facility to offset operational costs. Retaining certain research and development activities enables the Company to continue to earn revenue for contracted services to customers, as well as potentially utilize this location for durability testing for new fuel systems to satisfy the scheduled 2007 EPA requirements. The Company intends to move a limited number of staff to its Cerritos facility, and may relocate certain equipment from the Seattle facility or purchase equipment to support their research and development activities. These two strategies are an integral part of the board approved transition plan associated with the purchase of BRC and the need to improve the effectiveness and reduce the costs of the research and development activities at both IMPCO and BRC.

Change of Fiscal Year

On November 14, 2002 we changed our fiscal year so that effective January 1, 2003 our fiscal year is the calendar year.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our 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 management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, taxes, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We recognize revenue for product sales when title is transferred, ordinarily when products are shipped and when management is reasonably assured of collectibility.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

23

Warranty

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required. In 2004, we increased the warranty reserve by approximately $0.7 million. Due to a change in accounting estimate, we increased the warranty reserves for the engine system product line by approximately $0.4 million in the fourth quarter to reflect the increased volume of business in engine system and the visibility of warranty experience. We believe our warranty experience is within industry norms. Our standard warranty period is 18 months from the date of manufacture. The warranty obligation on our certified engine products can vary from 3 to 5 years depending on the specific part and the actual hours of usage.

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. We revised our policy with respect to slow moving and obsolete inventory in response to market changes in several foreign markets that have historically placed significant orders with U.S. Operations. For the year 2004, we reduced the carrying value of inventory by $1.8 million by increasing inventory reserves which included approximately $1.3 million in the fourth quarter. We evaluated current and future market conditions in several of the markets for our older products, such as Mexico, Japan and Australia and determined that a portion of our existing inventory was unlikely to turn adequately and, accordingly, we recognized an increase in inventory reserves.

Goodwill

We operate wholly-owned and majority-owned subsidiaries. We record goodwill at the time of purchase for the amount of the purchase price over the fair values of the assets and liabilities acquired. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge in the future. We recognized an impairment charge for goodwill of approximately $1.3 million related to goodwill that had been allocated to our Japanese and Mexican subsidiaries. We determined that the fair value of these businesses was not adequate to sustain the amount of goodwill allocated to these business and, accordingly, recognized a permanent impairment loss as part of operating income for 2004. The principal factors that resulted in the impairment loss were the future uncertainties related to revenue growth and expected earnings in Mexico and Japan. At December 31, 2004, we established a joint venture with another partner, in which we have a 50% ownership, which will be the primary point of distribution for IMPCO and BRC products and solutions in Mexico. In Japan, we are in the process of evaluating alternative means of product distribution including the possibility of establishing a joint venture or distributorship agreements.

Net Deferred Tax Assets

During the transition period ended December 31, 2002, we recorded a $24.0 million valuation allowance for that portion of deferred tax assets that we believe is not likely to be realized. On a quarterly basis, we continue to analyze the deferred tax asset and the reserve required for the portion of the asset that is unlikely to be realized. During 2003, we increased

24

the valuation allowance to $26.5 million. For the 2004 fiscal year, we increased the valuation allowance by an additional $9.1 million representing a reduction in the recoverability of net deferred tax assets at December 31, 2004 to approximately $8.1 million. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect our assessment of the adequacy of the reserve. In the event that we determine that it is more likely than not that we would be unable to realize an additional portion of our net deferred tax asset, an additional valuation allowance would be recognized and charged to income in the period such a determination was made.

Results of Operations

Fiscal Years Ended December 31, 2004 and 2003

The following table sets forth our revenues and operating income in thousands of dollars:

The following table sets forth our product revenues by application across all reporting segments for fiscal years 2004 and 2003 in thousands of dollars:

During the fiscal years ended December 31, 2003 and 2004, our revenue was generated in the following geographic regions by percent proportions:

Revenues increased $43.6 million, or 58.3%, to $118.3 million in the fiscal year ended December 31, 2004 from $74.7 million for the fiscal year ended December 31, 2003. U.S. Operations revenue increased by $40.5 million, or 77.9%, from $52.0 million to $92.4 million

25

over the same period. International Operations increased by $1.6 million, or 4.3%, from $36.1 million to $37.7 million. The dramatic increase in revenue for U.S. Operations was in the industrial marketplace and was attributable to shipments of the Spectrum product line that was launched in the fourth quarter of 2003. The Spectrum product line is designed to address more stringent EPA emission standards impacting certain “off-road” vehicles such as industrial forklifts and other similar industrial equipment. Revenues declined in the transportation market segment by $2.6 million, or 8.7%, from $29.5 million in 2003 to $26.9 million in 2004. This decline was attributed primarily to the Mexican market where potential legislation existed during most of 2004 that would impose additional excise taxes on gaseous-fueled vehicles.

Operating income increased by $0.9 million, or 192.5% from $0.5 million loss in fiscal 2003 to $0.4 million income in 2004. Gross profit was adversely impacted by $1.8 million in additional inventory reserves for slow-moving inventory primarily related to reduced expectations in Mexico and Japan that we believe will cause a portion of our inventory to turn slower than our previous estimates. Gross profit was also negatively impacted by the recognition of additional credits for payment incentives in Mexico and product mix of approximately $0.6 million. Operating expenses were negatively impacted by new costs related to our compliance with the Sarbanes-Oxley Act of 2002, which required that we provide an assessment of our internal financial controls, subject to an audit by our independent auditors. Costs incurred to meet Section 404 portion of the Act were approximately $0.6 million primarily in outside professional fees and consultants. We recognized termination costs of $0.8 million anticipating the merger of IMPCO and BRC in 2005 and increased warranty reserves by $0.7 million to reflect more current information regarding customer returns on the new engine systems product line. We recognized an impairment loss for goodwill of approximately $1.3 million as part of operating income as a result of a change in corporate direction in Mexico and reduced expectations in Japan.

U.S. Operations.    Revenues increased $40.5 million, or 77.9%, to $92.4 million in the fiscal year ended December 31, 2004 from $52.0 million for the fiscal year ended December 31, 2003. The significant increase in revenue for is attributable to shipments of the Spectrum product line that was launched in the fourth quarter of 2003.

Operating income increased by $2.7 million, or 59.0% from a profit of $4.5 million in fiscal 2003 to $7.2 million profit in 2004. The increase in operating profit was affected by a gross profit increase of $3.6 million due primarily to increased revenues of $40.5 million partially offset by an increase of operating expenses of $0.9 million as compared to fiscal 2003. Gross profit was adversely impacted by $1.3 million in additional inventory reserves for slow-moving inventory related to reduced expectations in Mexico and Japan that we believe will cause a portion of our inventory to turn slower than our revised inventory policy. Gross profit was also negatively impacted by increases in the reserve allowance for bad debt of $0.4 million due to the settlement of domestic invoicing issues and approximately $0.4 million in additional warranty reserves.

International Operations.    Revenues increased $1.6 million, or 4.3%, to $37.7 million in the fiscal year ended December 31, 2004 from $36.1 million for the fiscal year ended December 31, 2003. Revenue increased primarily in our Holland and Indian subsidiaries by a total of $3.2 million and was partially offset by a decline of $2.8 million in Mexico.

Operating income increased by $0.1 million from a profit of $1.6 million in fiscal 2003 to $1.7 million profit in 2004. The increase in operating profit was affected by a gross profit increase of $0.9 million due primarily to increased revenues of $1.6 million partially offset by an increase of operating expenses of $0.8 million as compared to fiscal 2003. Gross profit was

26

negatively impacted by additional credits for payment incentives for accounts receivable of $0.4 million $0.2 million related to past due accounts receivables and product mix. Operating expenses in International Operations were adversely affected by the $1.3 million goodwill impairment charge recognized as part of International Operations’ financial results for 2004.

Corporate.    Corporate expenses consist of general and administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, information systems, legal services and investor relations. Corporate expenses increased by approximately $1.4 million from $7.0 million in 2003 to $8.4 million in 2004. Approximately $0.6 million was related to our compliance with Section 404 in the form of outside professional fees and consultants. We incurred termination costs totaling approximately $0.8 million in response to a November 2004 transition plan approved by the Board of Directors to reduce redundant costs in anticipation of the BRC acquisition.

Interest Expense.    We recognized interest expense of approximately $5.5 million in 2004 as compared to $4.0 million in 2003. On December 30, 2004, we prepaid the Bison note for a total of $22.0 million consisting of a principal payment of $20.0 million plus accrued interest of $1.0 million and a prepayment penalty of $1.0 million. Prior to the payoff of the note, we incurred during 2004, approximately $4.9 million in interest expense related to Bison, of which approximately $2.3 was cash interest expense. In December 2004, we were paying an effective interest rate of 18.75%.

We entered into an agreement with LaSalle Business Credit, LLC in July 2003 for a maximum amount of $12.0 million bearing interest at a rate of prime plus 1%. At December 31, 2003 and 2004, the amount outstanding under the line was $5.3 million and $7.7 million, respectively. Interest expense recognized in 2003 and 2004 was approximately $0.2 million and $0.6 million, respectively, of which $0.5 million was cash interest expense. In December 2004, we were paying an interest rate of 6.25%. Subsequent to December 31, 2004 on March 29, 2005 we consummated a third amendment to this agreement reducing the maximum commitment amount to $9.0 million, changing certain financial covenants, and extending the loan term until July 18, 2007. At December 31, 2004, and measured upon finalization of the Company’s financial results on March 31, 2005, the Company had not met the then effective covenants prior to the third amendment for EBITDA, Fixed Charge Ratio and Leverage Ratio for both the US and Consolidated Operations. Because of a cross default agreement with MTM (the successor creditor to Bison), the MTM loan was also then in default. Upon consummation of the third amendment, the EBITDA, Fixed Charge Ratio and Leverage Ratio were reserved and set aside, and the revised tangible net worth requirements were met by the Company. Consequently, the Company has subsequently satisfied terms of both lending arrangements and is no longer in default. The Company’s forecasts for 2005 project continued compliance with the LaSalle covenants. In any case, the Company currently has sufficient cash available to completely pay off the LaSalle loan.

Provision for Income Taxes.    In fiscal year 2004, the estimated effective annual tax rate was 19.7% compared to the previous year’s tax benefit rate of 14.7%. The effective tax rate represents the federal statutory income tax rate, state income taxes and foreign income taxes increased by the permanent differences adjustment and the valuation allowance. During 2004, we recognized a tax provision for approximately $2.3 million as compared to $0.7 million for fiscal 2003. During the fourth quarter of 2004, we performed an evaluation of the recoverability of the net deferred tax assets on the consolidated balance sheet and determined that we were more likely than not based on our expectations for future earnings that our future taxable income will more likely than not be sufficient to recover the current balance of $8.1 million over the next three years. Future adverse changes in market conditions, poor operating

27

results and a decline in our projections about future profitability may affect our assessment about the adequacy of the reserve. In the event that we determine that it is more likely than not that we would be unable to realize any portion of the current balance, we would provide additional reserves (allowances) and recognize a charge against income in the period that such a determination is made.

Pursuant to Internal Revenue Code Sec. 382 and 383, certain changes in ownership structure (common stock issuances in the case of IMPCO) may partially or fully limit future use of net operating losses and tax credits available to offset future taxable income and future tax liabilities, respectively. The Company has measured this factor for the year ended December 31, 2004 and believes that is less likely than not to limit the Company as described above. However, subsequent to the year ended December 31, 2004, the Company sold 4.6 million shares of its common stock in a public offering for the purposes of providing the cash portion of the BRC purchase price and for working capital. In addition, on March 31, 2005, the BRC purchase transaction was closed, resulting in the issuance of 5.1 million shares of the Company’s common stock. These common stock issuances, when measured against other historical common stock issuances and application to the IRS code, may result in a limitation on our realization of deferred tax assets in the first quarter of 2005 or future periods.

Equity Share in Income (Losses) of Unconsolidated Affiliates.    During fiscal 2004, we recognized a $0.9 million of income representing our share in the earnings of our unconsolidated affiliates as compared to an expense of $1.1 million during 2003. With respect to BRC, we recognized 50% of BRC’s 2004 earnings of approximately $3.1 million in the amount of approximately $1.6 million, offset by approximately $0.4 million in connection with the amortization of the cost differential related to the difference between the fair value and the carrying value of the net assets and liabilities on BRC’s balance sheet as of the acquisition date in July 2003. In fiscal 2004, the Company also recognized $46,000 expense in the 40% interest in Minda IMPCO Limited (“MIL”) as compared to $0.1 million in fiscal 2003. In addition, we wrote-off our investments in joint ventures in China and Egypt where we had 51% and 50% equity interest, respectively, for a total amount of approximately $0.2 million.

Fiscal Year Ended December 31, 2003 and Twelve-Month Period Ended December 31, 2002

In November 2002, we changed our fiscal year-end from April 30 to December 31. The basis of comparison for the discussion that follows for the fiscal year ended December 31, 2003 consists of the eight months ended December 31, 2002, the three months ended April 30, 2002 and the month ended January 31, 2002. We have provided summary of the consolidated statement of operations for 2002 (in thousands of dollars):

28

Unless otherwise noted, comparisons for fiscal 2003 are to the unaudited 12 month period ended December 31, 2002.

Net revenue increased $6.3 million, or 9.3%, to $74.7 million in the fiscal year ended December 31, 2003 from $68.4 million for the twelve months ended December 31, 2002. Revenue in the three months ended December 31, 2003 was $18.2 million or 21.3% higher than revenues of $15.0 million during the corresponding period of 2002. The annual revenue increase was due to a $7.6 million increase in net sales to the industrial market partially offset by a $1.3 million decline in net sales to the transportation market. The increase in the industrial market was due primarily to the continued economic recovery affecting the industrial markets in the United States and in Europe since the downturn that followed the events of September 11, 2001. The quarterly increase in revenues is attributable to the launch of our new Spectrum product line. During the fourth quarter of 2003, we began shipping the Spectrum product line including certified engine packages and fuel systems in response to the new federal regulations, effective January 1, 2004, requiring that certain “off-road” vehicles and industrial applications meet more stringent exhaust standards.

Revenue and operating income for our reporting segments for the fiscal year ended December 31, 2003 as compared to the 12 month period ended December 31, 2002 are as follows (in thousands of dollars):

The following table sets forth our product revenues (in thousands of dollars) by application across all reporting segments for the 12 month period ended December 31, 2003 and the corresponding period of 2002:

29

During the twelve month periods ended December 31, 2003 and 2002, our revenue was generated in the following geographic regions:

Operating loss improved by $2.2 million, or 82%, from a loss of $2.7 million in 2002 to a loss of $0.5 million in 2003. This decrease in operating loss is the result of increased revenues of approximately $6.3 million, which contributed $1.8 million in additional operating income; higher gross margin percentage of 2% (compared to 29% in 2002), which contributed $1.2 million; partially offset by increased operating expenses of approximately $0.8 million.

U.S. Operations.    Net revenues from U.S. Operations increased $2.6 million, or 5.3%, to $52.0 million in the twelve months ended December 31, 2003 from net revenues of $49.3 million in the same period in 2002. The increase in sales during 2003 is due primarily to a $5.5 million increase in gross revenue for the industrial market offset by a $2.9 million decline in revenues for the transportation market.

Gross profit in this segment increased by $0.1 million in 2003 due to $0.6 million in higher margin contribution from the $2.6 million in higher revenues offset by approximately $0.5 million due to reduced gross profit percentages resulting from unfavorable changes in product mix.

For 2003, operating income increased by $2.3 million, or 105.8%, as compared to the same period in 2002. The increase in operating income was due to an increase in gross profit of $0.1 million and a decrease in operating expenses of $2.2 million. Significant cost reductions occurred in sales and marketing and the research functions since the third quarter of 2002 following the Quantum spin-off.

International Operations.    For the fiscal year ended December 31, 2003, net revenue increased by approximately $0.2 million to $36.1 million, compared to $35.9 million reported for the same period in the prior calendar year. The growth in revenue was due primarily to a 30% increase in revenues from our European and Asian subsidiaries offset by a reduction of 32% in revenues from our Mexican subsidiary. By market segment, the increase in sales during 2003 as compared to 2002 was caused primarily by a $2.9 million increase in gross revenue from the industrial market offset by a $2.7 million decline in revenues from the transportation market. Foreign currency fluctuations had the effect of increasing revenue in U.S. dollars by approximately $2.2 million.

Gross profit for 2003 increased by approximately $2.6 million, or 32.8%, as compared to the same period in 2002. The increase in gross margin was attributed primarily to changes in product mix that contributed positively to gross margin.

During 2003, operating income from international operations increased by approximately $1.4 million, or 622%, as compared to 2002. The increase in operating profit was due to the increase in gross profit of $2.6 million offset by increases in operating expenses of $1.2 million. The increase in operating expenses was associated partly with amounts recognized as

30

bad debt expense in our Mexican subsidiary for $0.5 million and higher expenses in our European subsidiaries related to the weakening of the dollar against the euro throughout 2003. During 2003, we recognized $0.5 million in higher bad debt expense in Mexico primarily due to the write-off of another receivable of $0.4 million which we believe to be substantially uncollectible.

Corporate Expenses.    Corporate expenses consists of general and administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, management information systems, legal services and investor relations. Corporate expenses for 2003 were approximately $2.4 million more than the corresponding period of 2002 and are attributable to higher insurance premiums, higher depreciation expense for installation of new information systems, higher legal, investment banking and accounting expenses associated with LaSalle credit facility and the Bison notes to refinance the Bank of America debt, higher consulting fees and outside services, and reduced recoveries of corporate overhead in 2003 to Quantum and the foreign affiliates.

Interest Expense.    Net interest expense for 2003 was approximately $4.0 million compared to $1.0 million for 2002 due primarily to the carrying value of our debt increasing from $14.3 million at December 31, 2002 to $23.7 million at December 31, 2003. In July 2003, we entered into lending agreements with Bison and LaSalle for $20.0 million and $12.0 million, respectively, for the primary purposes of repaying the Bank of America debt and financing the deferred portion of the BRC 50% acquisition of $7.0 million. The interest rates for Bison and LaSalle were an effective interest rate of 15.9% and a variable interest rate equal to LaSalle Bank’s prime plus 1%, respectively. As of December 31, 2003, the amount borrowed under the LaSalle line was approximately $5.2 million and the interest expense recognized in the statement of operations for the year ended December 31, 2003 was $0.2 million, which included $77,000 in amortization expense related to debt issuance costs of approximately $0.3 million. Under the Bison loan agreement interest expense was approximately $1.8 million of which $0.8 million was attributed to the amortization of $2.2 million in deferred debt issuance costs, $2.6 million associated with the fair value of 500,000 warrants issued in connection with the notes, and the $2.7 million loan discount associated with the difference between the $20.0 million loan amount and the actual net proceeds of $17.3 million. During 2003, we also incurred interest expense in connection with several bridge loans totaling approximately $4.1 million that were repaid completely by December 2003. Interest expense for the bridge loans included cash payments of approximately $0.5 million and amortization expense of $0.7 million associated with warrants issued to the holders of the bridge loans. Interest expense in the amount of approximately $0.7 million was recognized during 2003 for the Bank of American terms loans and lines of credit, all of which were repaid in July 2003.

Provision For Income Taxes.    During 2002, we established a $24.0 million valuation allowance for deferred tax assets on the basis that we believed that it is more likely than not that a portion of our deferred tax asset will not be realized and established a valuation allowance for those assets that are not likely to be utilized in the next three years, notwithstanding that some of these may have longer lives under applicable tax laws. During 2003, we increased by approximately $2.5 million the valuation allowance to $26.5 million on the basis that the increase in deferred tax asset and related net operating losses from the domestic pre-tax loss in 2003 of $6.1 million would more likely than not be unrecoverable over the next three years. The effect of the increase in the valuation allowance was that no income tax benefit was recognized for domestic tax purposes during 2003. Federal net operating loss carryforwards of $72.0 million will begin to expire in 2021. We have federal and state research and development credit carryforwards aggregating approximately $9.7 million. Federal research and development credits totaling $5.1 million will begin to expire in 2009. State

31

research and development credits of $4.6 million have no expiration. As of December 31, 2003, the deferred tax asset, net of the $26.5 million reserve, was $9.8 million. The income tax expense of $0.7 million during 2003 was attributed to our international operations, which had a pre-tax income of approximately $1.6 million. We believe that, based on our history of prior operating earnings and our expectations for the future, our operating income will be sufficient to recover the net deferred tax assets within the next three years. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect our assessment of the adequacy of the reserve. In the event that we determine that it is more likely than not that we would be unable to realize an additional portion of our net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.

Equity Share of Income (Loss) of Unconsolidated Affiliates.    We recognized a $1.1 million expense before tax corresponding to our share in the losses of unconsolidated affiliates primarily due to our 50% ownership in BRC of Italy for the period of July 22, 2003 to December 31, 2003. Our share of the BRC loss was approximately $0.5 million. The BRC loss was attributed to reduced revenues of € 2.6 million ($3.0 million) and reduced operating income of € 2.1 million ($2.4 million) for the twelve months ended December 31, 2003 compared to the corresponding period of 2002. Foreign exchange transaction loss totaled € 0.3 million ($0.3 million) during the fourth quarter of 2003 due to the continued strengthening of the euro relative to other currencies in which BRC settled transactions. In accordance with the equity method of accounting for business combinations, we recognized amortization expense of $0.3 million for the difference between the book value and the fair value of our share of the net assets acquired. The BRC purchase transaction was subsequently completed and closed on March 31, 2005. Impco Accounting for BRC will then include consolidation into Impco’s Financial Statements.

Discontinued Operation.    We completed the spin-off of Quantum on July 23, 2002. We did not recognize any activity during 2003 related to the discontinued operation. The loss from discontinued operation during the twelve months ended December 31, 2002 was $10.3 million.

Liquidity and Capital Resources—Fiscal 2004

Our ongoing operations are funded by cash generated from operations, debt financings and sales of our equity securities. In addition, these sources of cash provide for capital expenditures and research and development, as well as to invest in and operate our existing operations and prospective new lines of business.

At December 31, 2004, our cash and cash equivalents totaled approximately $8.4 million, compared to cash and cash equivalents of approximately $9.5 million at December 31, 2003.

We currently are party to two significant credit agreements:

32

During June 2004, our Mexican subsidiary utilized an existing factoring agreement, with recourse, with Heller Financial in which we received proceeds of approximately $0.9 million. We accounted for this transaction as a secured financing agreement in which we were obligated to repay Heller Financial $0.9 million plus accrued interest by October 2004 in the event that the factored receivables are not settled. During October 2004, we settled all amounts outstanding in full.

33

Our ratio of current assets to current liabilities was 1.5:1.0 at December 31, 2004 and 2.0:1.0 at December 31, 2003. At December 31, 2004, our total working capital had decreased by $7.0 million to $15.1 million from $22.1 million at December 31, 2003. Changes in current assets consisted primarily of a $5.3 million decrease in inventory and a $1.1 million decrease in cash offset by an increase of $4.3 million accounts receivable associated with the $43.6 million increase in revenue for the 2004 fiscal year over the 2003 fiscal year and an increase of $2.7 million in receivables from related parties. Changes in current liabilities consist of increases in lines of credit and current maturities of long-term debt and capital leases of $2.4 million and $2.6 million, respectively.

Net cash used by operating activities for the year ended December 31, 2004 was $1.9 million, compared to $0.8 million provided by operations for the year ended December 31, 2003. The cash flow used by operating activities for the year ended December 31, 2004 of $1.9 million resulted primarily from a net loss of $14.2 million, adjusted for non-cash charges against income for depreciation and amortization of $3.8 million, goodwill impairment of $1.3 million and a reduction in the value of the net deferred tax assets of $2.3 million, including a change of $0.9 million for foreign deferred tax assets and $1.4 million of domestic deferred tax assets. The $1.4 million reduction in domestic deferred tax assets results from an increase of $4.8 million in deferred tax assets and a reduction of $2.9 million in deferred tax liability totalling $7.7 million offset by an increase in the provision for the deferred tax asset valuation allowance of 9.1 million. This was offset by our share in income of unconsolidated affiliates of $.9 million. The extinguishment of debt, $6.8 million, consists of unamortized portion of Bison and Bathgate warrants in the amounts of approximately $1.7 million and $0.5 million, respectively, the remaining loan accretion cost in the amount of $2.0 million, unamortized original debt issuance cost in the amount of approximately $1.6 million and the $1.0 million prepayment penalty. Changes in working capital that positively affected cash flows were an increase of accounts payable of $0.8 million, a decrease in inventories of $4.1 million and an increase in accrued expenses of $1.5 million, offset entirely by negative cash flows of $4.3 million, $3.6 million and $0.8 million associated with increases of accounts receivable, receivables from related party and other assets, respectively. For the year ended December 31, 2003, cash provided by operating activities was $0.9 million consisting of net loss of $6.9 million, adjusted favorably for non-cash charges for minority interest in consolidated subsidiaries of $0.6 million, depreciation expense of $3.6 million and share in equity of unconsolidated affiliate of $1.1 million. Working capital changes that negatively affected cash were increases in deferred income taxes, accounts receivable and inventory totaling $5.7 million offset largely by positive effects on cash flow totaling $6.2 million for increases in accounts payable, accrued expenses and other assets.

Net cash used in investing activities in the year ended December 31, 2004 was $2.3 million, a decrease of $13.0 million from the prior year. This included $1.3 million in the purchase of equipment and additional BRC acquisition costs of $1.0 million. During the 2003 fiscal year, we invested $13.6 million in the BRC acquisition and $1.7 million in the purchase of capital equipment.

Net cash provided by financing activities for the year ended December 31, 2004 was $2.5 million or a decrease of $18.2 million from $20.7 million provided by financing activities in the year ended December 31, 2003, consisting primarily of borrowings of $22.9 million under the MTM loan, which was partially offset by payments to Bison to retire the $21.9 million senior subordinated note, and the repayment of the HSBC line of credit for $0.6 million. During 2003, cash provided by financing activities totaling $20.7 million consisted primarily of the proceeds from the Bison loan made in July 2003 of $17.3 million and net proceeds from the issuance of common stock of $10.6 million partially offset by $6.9 million in payments made to Bank of America to settle outstanding amounts under a loan agreement that was settled in July 2003.

34

For the year ended December 31, 2004, net cash decreased by $1.1 million as compared to a $7.5 million increase in the prior year.

Our subsidiary in the Netherlands has a €2.3 million credit facility with Fortis Bank. At September 30, 2004, there was no outstanding balance under this credit facility.

Subsequent to December 31, 2004 on March 29, 2005 we consummated a third amendment to our loan agreement with LaSalle Business Credit reducing the maximum commitment amount from $12.0 to $9.0 million, changing certain financial covenants, and extending the loan term until July 18, 2007. At December 31, 2004, and measured upon finalization of the Company’s financial results on March 31, 2005, the Company had not met the then effective covenants prior to the third amendment for EBITDA, Fixed Charge Ratio and Leverage Ratio for both the US and Consolidated Operations. Because of a cross default agreement with MTM (the successor creditor to Bison), the MTM loan was also then in default. Upon consummation of the third amendment, the EBITDA, Fixed Charge Ratio and Leverage Ratio were reserved and set aside, and the revised tangible net worth requirements were met by the Company. Consequently, the Company has subsequently satisfied terms of both lending arrangements and is no longer in default. In addition, the proceeds we received from the sale of 4.6 million shares totaling approximately $23.9, less the $10.0 million use to satisfy the cash portion of the BRC purchase price, provides approximately $13.9 million in working capital support. We expect to reduce our amount drawn against the LaSalle loan using a portion of these proceeds.

We believe that our existing capital resources together with revenue from continuing operations should be sufficient to fund operations for at least the next 12 months. This assumes continued compliance with the provisions of our outstanding indebtedness. Because we will need to generate an amount of income from operations in the first quarter of 2005 that is significantly in excess of the amount we generated in the fourth quarter of 2004, we cannot assure you that we will be in compliance with the LaSalle covenants at that date. In addition, we sold 4.6 million shares of our common stock in February 2005 and realized net proceeds of approximately $23.9 million, and $10 million of those proceeds will be sufficient to fund our acquisition of the remaining 50% equity interest in BRC without depending on cash from continuing operations or from our other credit arrangements. In addition we have sufficient cash available to payoff the LaSalle loan.

For periods beyond 12 months, we may seek additional financing to fund future operations through future offerings of equity or debt securities or agreements with corporate partners and collaborators with respect to the development of our technologies and products, or to expand our business strategy to contemplate new technologies or products. We cannot assure you, however, that we will be able to obtain additional funds on acceptable terms, if at all.

Our cash requirements may vary materially from those now planned because of fluctuations in our sales volumes or margins or because of other factors identified in the section below entitled “Risk Factors.”

Fiscal 2003

As of December 31, 2003, our cash and cash equivalents totaled $9.5 million, compared to cash and cash equivalents of $2.0 million at December 31, 2002. On July 22, 2003 we refinanced our debt to retire our $11.3 million debt to Bank of America, to finance the $7.0 million deferred payment to complete the 50% acquisition of B.R.C. Societá Responsabilitá Limitata (“BRC”), and to provide working capital. The debt restructuring consisted of two new

35

loans. First, we entered into a senior subordinated secured promissory note and a related securities purchase agreement with Bison Capital Structured Equity Partners, LLC (“Bison”) for an aggregate borrowing of $20.0 million, with net proceeds of $17.3 million, and we issued to an affiliate of Bison warrants to purchase up to 500,000 shares of our common stock. The Bison loan has a nominal interest rate of 11.25%, subject to certain adjustments, and matures on July 22, 2007. Interest on the Bison loan is payable monthly in arrears. During periods in which an event of default exists under the Bison loan agreement, the interest rate increases at a rate of 0.50% per month up to a maximum of 6 months or 3%, and in certain circumstances, interest payments during an event of default can be capitalized, or added to the principal amount outstanding. At the same time, we entered into a revolving loan and security agreement and a related secured promissory note with LaSalle Business Credit, LLC (“LaSalle”). The LaSalle loan has a maximum borrowing limit of $12.0 million, with availability based upon a percentage of eligible inventory and eligible accounts receivable, and has an adjustable interest rate of 1% above LaSalle’s prime rate as announced from time to time and matures on July 22, 2006. Interest on the LaSalle loan is payable monthly in arrears. During periods in which an event of default exists under the LaSalle loan agreement, the interest rate increases to 2% above LaSalle’s prime rate. The Bison and LaSalle loans contain cross-default provisions such that an event of default existing under one loan generally constitutes an event of default under the other. As of December 31, 2003, our borrowing under the line of credit was approximately $5.2 million with approximately $1.6 million unused and available under the line. On March 12, 2004, we received an amendment to the LaSalle loan agreement to expand the eligible accounts receivable, resulting in an additional $2.6 million of available additional borrowing under this loan. On December 19, 2003 we sold 1,500,000 shares of common stock to certain institutional investors at $6.40 per share, yielding net proceeds of approximately $9.0 million after discounts and commissions. The offering was conducted as a private placement under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The proceeds of this offering were used to retire short-term debt and for working capital.

Our subsidiary in Japan has a ¥64 million (US$0.6 million at December 31, 2003) short-term loan facility with the Hong Kong and Shanghai Banking Corporation Ltd., Osaka Branch. At December 31, 2003, a balance of $0.6 million was outstanding. Our subsidiary in the Netherlands has a secured €2.3 million ($2.9 million) revocable credit facility with Fortis Bank. At December 31, 2003 there were no borrowings on this facility.

On October 3, 2002, we entered into an option agreement with the equity holders of BRC. Under the option agreement, we obtained the right to purchase from those equity holders 50% of the outstanding equity interest of BRC for approximately $23.8 million, which included the issuance of approximately 2.3 million shares of Company common stock (which the parties acknowledged and agreed were valued at $10.0 million). We announced on May 8, 2003 that we had exercised the option and that the purchase of 50% of BRC was completed pending a $7.0 million payment that represented a deferred portion of the purchase price due on September 30, 2003. On July 22, 2003, immediately after the refinancing of our debt as discussed above, we paid the deferred payment of $7.0 million to the equity holders of BRC completing the acquisition of the 50% equity interest in BRC. As of December 31, 2003, we had incurred acquisition costs of approximately $24.8 million, which are shown on the consolidated balance sheet as part of investment in affiliates. The corresponding costs incurred as of December 31, 2002 totaled $12.6 million. We use the equity method of accounting to recognize the investment in and the results of BRC in our consolidated financial results.

As a result of the refinancing of the Bank of America debt and the acquisition of our 50% equity interest in BRC, we have assumed additional long-term debt, which has increased our financial leverage. Interest costs and related charges since July 2003 have been higher than in

36

prior years and will continue to be a significant use of funds. The LaSalle and Bison notes have loan terms of three and four years, respectively. Under the Bison agreement, we are obligated to pay off the note in July 2007 in the amount of $20.0 million. Under the LaSalle agreement, which has a maturity date of July 2006, we are obligated to repay the balance owed at that time under the revolving line of credit, not to exceed $12.0 million. At December 31, 2003 the Company was in default under terms of the LaSalle agreement in failure to maintain minimum consolidated EBITDA of $4,000,000, to maintain a consolidated fixed charge coverage ratio of not less than 0.25:1.00, and to maintain a consolidated leverage ratio not to exceed 8.45:1.00. LaSalle has waived these financial covenant non-compliance conditions at December 31, 2003. The Company was also in default under terms of the Bison agreement in failure to maintain minimum consolidated EBITDA of $3,500,000 and minimum consolidated leverage ratio not to exceed 8.50:1.00. Bison has waived these covenant non-compliance conditions at December 31, 2003. The events of default under these loans will cause our applicable interest rates to increase as long as the circumstances continue unless we are successful in negotiating amendments to these covenants. The LaSalle loan increases the interest rate to prime plus 2%, which will increase our interest expense and our cash outflows by approximately $25,000 per quarter. Under the Bison loan, the applicable interest rate increases by 0.5% per month up to a maximum of 3% or six months. We expect that the increase in the Bison interest rate will increase our interest expense by approximately $150,000 during the first quarter of 2004, although in certain circumstances we are permitted to capitalize those interest payments by adding them to the principal balance outstanding under the Bison loan. We also are seeking to revise our financial covenants in both loans to reflect more conservative estimates of future financial performance. However, we cannot be assured that the lenders will agree to amend our financial covenants or grant further or continuing waivers in the future. If we cannot obtain the necessary waivers or amendments, or return to compliance with these and all other loan covenants, our lenders may accelerate our debt, foreclose on our assets, or take other legal actions against us which, alone or in the aggregate, may have a material adverse effect on our business. During 2003, we received proceeds of approximately $4.1 million in bridge loans and $8.0 million in loan commitments. As of December 31, 2003, we had repaid all of the bridge loans and the loan commitment expired without us exercising our option to borrow under its terms.

Our ratio of current assets to current liabilities was 2.0:1.0 at December 31, 2003 as compared to 1.5:1.0 at December 31, 2002. During this same period our total working capital increased by $10.9 million from $11.2 million at December 31, 2002 to $22.1 million at December 31, 2003. Current assets increased by $8.9 million due primarily to the stock offering in December 2003 yielding net proceeds of $9.0 million and current liabilities decreased by $2.0 million due primarily to payment of the Bank of America debt that was classified as a current liability at December 31, 2002.

Net cash provided by operating activities for fiscal 2003 was $0.8 million, compared to cash provided by operations for the eight months ended December 31, 2002 of $1.7 million. The decline in cash flow was attributed to the launch of the Spectrum product line during 2003, which required working capital investments in accounts receivable and inventory in the amounts of $2.4 million and $0.6 million, respectively. Increases in accounts payable and accrued expenses during 2003 resulted in a $6.2 million source of cash, which provided the necessary working capital to fund the Spectrum launch and to fund the loss from continuing operations of approximately $2.1 million after the effect of non-cash items totaling $4.8 million. In the eight months ended December 31, 2002, cash flow from operating activities benefited from reductions in inventory and accounts receivables totaling $2.8 million attributed primarily to the 19% decline in revenues during the three months ended December 31, 2002.

37

Net cash used in investing activities for the fiscal year ended December 31, 2003 was $15.4 million, an increase of $11.2 million from $4.2 million for the eight months ended December 31, 2002. This increase is due primarily to costs related to the 50% acquisition of BRC.

Net cash provided by financing activities for the fiscal year ended December 31, 2003 was $20.7 million or an increase of $9.2 million from $11.5 million for the eight months ended December 31, 2002. During December 2003, we raised approximately $9.0 million in net proceeds from the issuance of 1.5 million shares of common stock to institutional investors.

For the fiscal year ended December 31, 2003, cash provided by continuing operations totaled $6.1 million or a decrease of $2.9 million from the eight months ended December 31, 2002.

At December 31, 2003 the Company had received waivers from its two lenders, LaSalle and Bison, for covenant non-compliance conditions at December 31, 2003. In addition: a) Bison granted the Company a modified EBITDA calculation for 2004 and a further waiver in maintaining its Term Loan status as a long term liability throughout 2004; b) LaSalle granted the Company a favorable amendment on March 12, 2004 which resulted in additional borrowing line capacity of $2.6 million; and c) we believe that LaSalle will work with the Company to amend its credit arrangement for the remainder of its term. Accordingly, we believe that the Company has sufficient resources to meet its current financial obligations and finance its operations over the next twelve months.

Should we be unable to obtain waivers or amendments, the Company believes that its current cash balances, available cash drawn from its subsidiaries, other financing alternatives, our history of being able to raise equity, and our ability to obtain bridge loans will result in adequate liquidity to continue operations through December 31, 2004.

Derivative Financial Instruments

We use in the ordinary course of business derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest and foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. We are not a party to leveraged derivatives and do not hold or issue financial instruments for speculative purposes. As of December 31, 2002, the Company had entered into one interest rate swap contract, which matures on September 30, 2004. On March 31, 2003, the Company cancelled the interest rate swap and recognized a loss of $117,000 in the carrying value of the swap, which had been accounted for as a cash flow hedge and included as part of accumulated other comprehensive income, and charged to interest expense in the consolidated statement of operations for the transition period ended December 31, 2002. As of December 31, 2003 and 2004, we did not have any foreign exchange forward contracts for the purpose of hedging foreign exchange exposure. On January 5, 2005, our 50% owned affiliate, BRC initiated a foreign exchange forward contract for the purpose of hedging against foreign currency devaluations that might occur in the future between the euro and the U.S. dollar in connection with the December 22, 2004 $22.0 million loan made between IMPCO and MTM, a subsidiary of BRC.

Foreign Currency Management.    The results and financial condition of our international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. Dollar. Our exposure to fluctuations in currency exchange rates has increased as a

38

result of the growth of our international subsidiaries. The functional currency for all of our international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. Dollar increases the costs incurred by our subsidiaries, as most of our international subsidiaries’ inventory purchases are U.S. Dollar denominated, and thus the cost of our products, adversely affecting our competitiveness and profitability. We monitor this risk and attempt to minimize the exposure through the management of cash disbursements in local currencies and, when deemed appropriate, the use of forward currency contracts. At December 31, 2004, we had no forward currency contracts. We seek to manage our foreign currency economic risk by minimizing our U.S. Dollar investment in foreign operations using foreign currency term-loans to finance the operations of our foreign subsidiaries. At December 31, 2003, we have a single foreign exchange forward contract of approximately $0.5 million in which gains and losses are recognized in the statement of operations as the fair value of the contracts fluctuates.

The Financial Accounting Standards board has issued SFAS No. 133, “Accounting for Derivative Instruments and for Hedging Activities,” as amended by SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities-An Amendment of SFASB No. 133,” which require the Company to recognize all derivatives on the balance sheet at fair market value. Derivatives that are not designated as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.

Debt Obligations.    The following table summarizes our debt obligations at December 31, 2004. The interest rates represent weighted average rates, with the period end rate used for the variable rate debt obligations. The fair value of the debt obligations approximated the recorded value as of December 31, 2004 (U.S. dollar equivalent in thousands).

39

Recent Accounting Pronouncements

FASB 123R, (revised December 2004), “Share-Based Payment” sets accounting requirements for “share-based” compensation to employees, including employee-stock-purchase- plans (ESPPs) and provides guidance on accounting for awards to non-employees. This statement will require us to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. For public entities, this statement is effective for the first interim period beginning after June 15, 2005. We will adopt this statement in the third quarter of fiscal 2005 and we are evaluating this pronouncement’s effect on our financial position and net income.

FASB 151, “Inventory Costs” eliminates the “so abnormal” criterion in ARB 43 “Inventory Pricing”. This statement no longer permits a company to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. The statement reduces the differences between U.S. and international accounting standards. This statement is effective for inventory cost incurred during annual periods beginning after June 15, 2005. We will adopt this statement in the third quarter of fiscal 2005. We do not believe that this pronouncement will have a material effect on our financial position and net income.

In December 2004, the FASB issued FASB Staff Position No. FAS109-1 (FSP FAS 109-1), “Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP FAS 109-1 clarifies that the deduction will be treated as a “special deduction” as described in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the deduction will be reported in the period in which the deduction is claimed. We are currently assessing the financial impact of FSP FAS 109-1 on our consolidated financial statements.

In December 2004, the FASB issued FASB Staff Position FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004 (the Act)” (FSP FAS 109-2) to allow additional time beyond the financial reporting period of enactment to evaluate the effect of the Act on IMPCO’s plan for reinvestment or repatriation of foreign earnings for purposes of calculating the income tax provision. We are currently assessing the financial impact of FSP FAS 109-2 on our consolidated financial statements.

In December 2004, the FASB issued the Statement of Financial Account Standards No. 153, “Exchange of Nonmonetary Assets, An Amendment of APB Opinion No. 29” (SFAS No. 153). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. The provisions of this Statement shall be applied prospectively. We are currently assessing the financial impact of SFAS No. 153 on our consolidated financial statements.

40

Contractual Obligations

The following table contains supplemental information regarding total contractual obligations as of December 31, 2004. The capital lease obligations are undiscounted and represent total minimum lease payments.

41

RISK FACTORS

We currently have substantial debt that we may be unable to service.

We are highly leveraged and have significant debt service obligations. As of December 31, 2004, we had aggregate outstanding indebtedness of $39.9 million and total stockholders’ equity of $46.5 million. Our loan agreement with LaSalle Business Credit, LLC, (“LaSalle”) has a maximum borrowing limit of $9.0 million, which was limited based on our eligible accounts receivable and our eligible inventory as of December 31, 2004, to approximately $8.9 million. Of that amount, $7.7 million was outstanding under the LaSalle loan agreement as of that same date, leaving approximately $1.2 million unused and available.

We have borrowed approximately $22.0 million from MTM, and MTM has incurred an additional $13.0 million of indebtedness in connection with the BRC acquisition. This loan may be accelerated in the event that any payment is not made within 15 days of the date when due, the termination of Mariano Costamagna’s employment for any reason whatsoever, with limited exceptions for termination occasioned by his death or we materially breach Mariano Costamagna’s employment agreement. The MTM loan agreement also provides for acceleration of the loan upon notice from MTM in case of any other default under the loan agreement. Also, Mariano Costamagna and Pier Antonio Costamagna have guaranteed the MTM loan. In return for Messrs. Costamagnas’ guarantee, we have pledged our equity interest in BRC as collateral in the event the guarantee is utilized. In addition, as of December 31, 2004, BRC had other outstanding indebtedness of approximately $1.2 million.

Our substantial debt subjects us to numerous risks, including the following:

We also may directly or indirectly incur additional indebtedness in connection with the current BRC acquisition or with our ongoing operations. Although management expects a substantial reduction in interest expense after the closing of the BRC acquisition as a result of the redemption of our senior subordinated secured note, our loans after the acquisition will continue to represent significant indebtedness and will impose substantial limitations on our ability to respond to changes in our operational circumstances or in our strategic goals.

42

We have recently been in default under our primary debt facilities, and we cannot assure you that we will be able to avoid events of default or noncompliance in the future, to obtain amendments to our debt facilities, or to reference our indebtedness if events of default were to occur.

Our debt requires us to maintain specified financial ratios and meet specific financial tests. For example, our amended loan agreement with LaSalle requires us to generate specified amounts of pre-tax income before income tax, tested quarterly during 2005 and on a rolling basis thereafter. Our failure to comply with these covenants would result in events of default that, if not cured or waived, could result in us being required to repay these borrowings before their due date. If we were unable to make a required repayment or refinance these borrowings, our lenders could foreclose on our assets. If we were unable to refinance these borrowings on favorable terms, our business could be adversely impacted.

At December 31, 2003, March 31, 2004, April 30, 2004 and at June 30, 2004, we were in default on the LaSalle loan for not meeting certain financial measurement covenants at each of these dates. We paid LaSalle amendment fees of $85,000 in the aggregate and obtained waivers of these events of noncompliance at December 31, 2003, May 7, 2004, and at June 30, 2004, respectively. We are currently paying a rate of interest at prime plus 1%, which at December 31, 2004 was equal to 6.25%. In October 2004, we concluded negotiations with LaSalle and executed an agreement, effective June 30, 2004, which revised the financial covenants to be more consistent with our business projections through the end of the previously amended term of the loan in 2006. As of December 31, 2004, we were in compliance with the terms and conditions of the loan agreement, as amended by the third amendment to our loan agreement dated March 29, 2005. However, we cannot assure you that we will remain in compliance with the amended terms.

The terms of our debt may severely limit our ability to plan for or respond to changes in our business.

Our debt agreements contain a number of restrictive covenants that impose significant operating and financial restrictions on our operations. Among other things, these restrictions limit our ability to:

Mariano and Pier Antonio Costamagna have guaranteed our performance under the MTM loan and, in connection with those guarantees, we have pledged our BRC equity interest and made certain other concessions to the founders.

Because of certain requirements arising under Italian law, Mariano and Pier Antonio Costamagna have jointly and severally guaranteed our performance under the MTM loan

43

agreement. In order to secure their recourse in the event that guaranty is exercised and the founders are required to make payments of the amounts due, we have pledged to the founders our initial 50% interest in BRC, and upon consummation of the BRC acquisition, we have pledged to the founders the remaining 50% interest in BRC that we acquired pursuant to the BRC acquisition. If we fail to perform the terms of the MTM loan and the founders are required to fulfill their guarantees, the founders may require us to reimburse them for their payments as guarantors, or they may take possession of our equity interest in BRC, or both. If the founders were to take possession of the BRC equity interest in total or partial satisfaction of their rights under the pledge agreement, we would lose our rights to participate in BRC’s earnings and assets. This could have a material adverse effect upon our earnings or our assets.

We have a history of significant cash outflows that may limit our ability to grow and may materially and adversely impact our prospective revenues and liquidity.

Until recently, we have experienced operating losses and net cash outflows. At December 31, 2004, our cash and cash equivalents totaled approximately $8.4 million and our working capital was $15.1 million. We have experienced significant cash outflows in connection with our initial equity investment in BRC and servicing our debt, and based upon our eligible accounts receivable and our eligible inventory as of December 31, 2004 our funds available for borrowing under our senior secured credit facility were approximately $8.9 million, of which approximately $7.7 million was outstanding, leaving approximately $1.2 million unused and available. As of December 31, 2004, we had total stockholders’ equity of $46.5 million and an accumulated deficit of $89.2 million. Moreover, our loan agreement with MTM requires us to repay to MTM the principal according to the following schedule, with an additional $5.0 million “balloon payment” of accrued interest and unpaid principal due on December 31, 2009:

Our current cash position and upcoming cash obligations, including, but not limited to, cash we expect to expend for general and administrative expenses associated with the BRC acquisition and in connection with Sarbanes-Oxley Act compliance, especially if combined with stagnant or declining revenues, may force us to take steps such as personnel reductions or curtailment of growth as a means to manage our liquidity. Such measures could have an adverse impact on our production capacity, our growth strategy, or other aspects of our business that might have a material adverse impact on results of operations. In some instances, these impacts may last beyond the term of the immediate cash shortfall.

Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.

Technology companies in general and our company in particular have a history of depending upon and using broad based employee stock option programs to hire, incentivize and retain employees in a competitive marketplace. Currently, we do not recognize compensation expense for stock options issued to employees or directors, except in limited cases involving

44

modifications of stock options, and we instead disclose in the notes to our financial statements information about what such charges would be if they were expensed. An accounting standard setting body has recently adopted a new accounting standard that will require us to record equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. We will be required to record these expenses beginning with our third quarter of fiscal 2005. The change in accounting rules will lead to increased reported net loss or, should we become profitable, a decrease in reported earnings. This may negatively impact our future stock price. In addition, this change in accounting rules could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

Our business may be subject to product liability claims, which could be expensive and could divert management’s attention.

We face exposure to product liability claims if our products (or the equipment into which our products are incorporated) malfunction in a way that results or is alleged to have resulted in personal injury or death, or property damage. We may be named in product liability actions even if there is no evidence that our systems or components caused a loss. Product liability claims could result in significant losses from defense costs or damages awards. The sale of our systems and components entails a high risk of these claims. In addition, we may be required to participate in a recall involving these systems if any of our systems prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Each of these actions would likely harm our reputation and lead to substantial expense. We cannot assure you that product liability insurance will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our reputation and business.

We may be subject to increased warranty claims.

In response to consumer demand, vehicle and industrial equipment manufacturers have been providing, and may continue to provide, increasingly longer warranty periods for their products, thus requiring their suppliers, such as us, to provide correspondingly longer product warranties. Due to the longer warranty periods, we could incur substantially greater warranty claims in the future. We establish a reserve for warranty claims by taking a charge against earnings at the time that such earnings are recognized based on our historical claims experience. Our warranty expense for the 12 months ended December 31, 2003 was approximately $0.4 million and for the fiscal year ended December 31, 2004 was $0.8 million. Our warranty reserve as of December 31, 2004 was $1.4 million. Our warranty expense is determined by examining revenues against our historical cost of warranty claims. This reserve necessarily involve estimates of future claims, and actual claims, the cost of resolving such claims, or both may exceed our estimates and may be greater than our established reserves. If that were to occur, we may experience increased warranty expenses, which would adversely affect our results of operations.

We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.

We rely on patent, trademark, and copyright law, trade secret protection, and confidentiality and other agreements with our employees, customers, partners, and with the

45

BRC founders and others to protect our intellectual property. However, much of our intellectual property is not covered by any patent or patent application and, despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization and without affording us an adequate remedy.

Furthermore, the laws of some foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. For instance, it may be difficult for us to enforce certain of our intellectual property rights against third parties who may have inappropriately acquired interests in our intellectual property rights by filing unauthorized patent or trademark applications in foreign countries to register rights that belong to us. This disparity in protection of intellectual property rights affects us significantly because we do a substantial portion of our business in international markets, particularly in developing countries where the issue is most acute.

Those patents we own are not likely to provide us with meaningful commercial protection of our products, and patent applications that we file may not result in issued patents. Moreover, patent applications and issued patents may be challenged or invalidated. We could incur substantial costs in prosecuting our patent applications or defending patent infringement suits that may arise.

As part of our confidentiality procedures, we generally have entered into non-disclosure agreements with our employees, consultants, and corporate partners and we have attempted to control access to and distribution of our technologies, documentation, and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies or independently develop similar technologies. The steps we have taken and that we may take in the future may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

We cannot assure you that we will be successful in protecting our proprietary rights. Any infringement of our intellectual property rights could have an adverse effect on our ability to develop and sell successfully commercially competitive systems and components.

If third parties claim that our products infringe their intellectual property rights, we may be forced to expend significant financial resources and management time, and our operating results would suffer.

Third parties may claim that our products and systems infringe their patents or other intellectual property rights. Identifying third-party patent rights can be particularly difficult, especially since patent applications are not published until 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to design around their patents, pay substantial damages or even be forced to cease our operations, any of which could be expensive and/or have an adverse effect on our operating results. Third-party infringement claims, regardless of their outcome, would not only drain our financial resources, but also would divert the time and effort of our management and could result in our customers or potential customers deferring or limiting their purchase or use of the affected products or services until resolution of the litigation.

46

We are dependent on certain key customers, and the loss of one or more customers could have a material adverse effect on our business.

A substantial portion of our business results from sales to key customers. During fiscal years 2003 and 2004, sales to these customers accounted for 44% and 56% of our revenue, respectively. If several of these key customers were to reduce their orders substantially, we would suffer a decline in revenue and profits, and those declines may be material and adverse.

Mariano Costamagna’s employment agreement and the terms of the MTM loan may limit our board of directors’ ability to effect changes in our senior management.

Mariano Costamagna, BRC’s co-founder and our director, has entered into an employment agreement, pursuant to which he became our Chief Executive Officer until May 31, 2009. Mariano Costamagna’s employment will include an initial base salary of $360,000 annually, as well as bonuses, benefits and expenses. If, during the term of his employment, we terminate Mr. Costamagna’s employment other than for “cause,” or if Mr. Costamagna resigns for “good reason,” we must pay Mr. Costamagna a severance payment equal to $5.0 million (subject to certain limited reductions if Mr. Costamagna sells more than 20% of the stock he has received in connection with our acquisition of BRC). The required severance payment may limit our board of directors’ ability to decide whether to retain or replace Mr. Costamagna or to reallocate management responsibilities among our senior executives, a fact that may, in certain circumstances, have an adverse effect on our business, operations and financial condition. Moreover, the loan to us from MTM can be accelerated in the event that Mr. Costamagna’s employment is terminated for any reason (with limited exceptions for termination upon Mr. Costamagna’s death) or if we otherwise materially breach his employment agreement.

We depend on third-party suppliers for key materials and components for our products.

We have established relationships with third-party suppliers that provide materials and components for our products. A supplier’s failure to supply materials or components in a timely manner or to supply materials and components that meet our quality, quantity or cost requirements, combined with a delay in our ability to obtain substitute sources for these materials and components in a timely manner or on terms acceptable to us, would harm our ability to manufacture our products or would significantly increase our production costs, either of which would negatively impact our results of operations and business. In addition, IMPCO relies on a limited number of suppliers for certain high quality IMPCO proprietary precision die cast parts as well as dress engines for use in our products. Approximately 61% of IMPCO’s raw materials are supplied by ten entities. We could incur significant costs in the event that we are forced to utilize alternative suppliers.

Our business could be harmed if we fail to meet original equipment manufacturer specifications.

We offer integrated alternative fuel systems, which include tanks, brackets, electronics, software, and other components required to allow these products to operate in alternative fuel applications. We sell these products principally to original equipment manufacturer, or OEM, customers. Our OEM customers require that these products meet strict standards. Our compliance with these requirements has resulted in increased development, manufacturing, warranty and administrative costs. A significant increase in these costs could adversely affect our profitability. If we fail to meet OEM specifications on a timely basis, our relationships with OEMs may be harmed.

47

We may experience unionized labor disputes at original equipment manufacturer facilities.

As we become more dependent on vehicle conversion programs with OEMs, we will become increasingly dependent on OEM production and the associated labor forces at OEM sites. For the fiscal years ended December 31, 2003 and 2004, direct OEM product sales accounted for 60% and 68% of IMPCO’s revenues, respectively. Labor unions represent most of the labor forces at OEM facilities. In the past, labor disputes have occurred at OEM facilities, which adversely impacted our direct OEM product sales. Such labor disputes are likely to occur in the future and, if so, will negatively impact our sales and profitability.

Adverse currency fluctuations may hinder our ability to economically procure key materials and services from overseas vendors and suppliers, may affect the value of our debt, and may affect our sales margins.

We have significant operations outside of the United States. As a result, we engage in business relationships and transactions that involve many different currencies. Exchange rates between our functional currencies (the U.S. dollar and the Euro) and the local currencies in these foreign locations where we do business can vary unpredictably. These variations may have an effect on the prices we pay for key materials and services from overseas vendors in our functional currencies under agreements that are priced in local currencies. If exchange rates with local currencies decline, our effective costs for such materials and services would increase, adversely affecting our profitability.

We face risks associated with marketing, distributing, and servicing our products internationally.

In addition to the Unites States, we currently operate in Australia, Europe, India, Japan, and Mexico, and market our products and technologies in other international markets, including both industrialized and developing countries. During the year ended December 31, 2004, approximately 55% of IMPCO’s revenue was derived from sales to customers located within the United States, and the remaining 45% was derived from sales in Asia, Europe, and Latin America where economics and fuel availability make our products more competitive. Additionally, approximately 73% of IMPCO’s employees and 75% of IMPCO’s approximately 400 distributors and dealers worldwide are located outside the United States. Our combined international operations are subject to various risks common to international activities, such as the following: