U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________ to ______________________
1934 Act Commission File Number 1-12756
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Rotary Power International, Inc.
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(Name of small business issuer in its charter)
Delaware 13-3632860
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
P.O. Box 128, Wood-Ridge, New Jersey 07075-0128
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (201) 777-7373
Securities registered under Section 12(b) of the Exchange Act:
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<S> <C>
Name of each exchange on which
Title of each class registered
Common Stock National Assoc. of Securities Dealers Automated Quotation System
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Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ---
- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year
$ 5,768,143 ------------
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $ 627,000 which is based on the closing price of
$0.28 March 20, 1997.
The number of shares of Common Stock outstanding on March 20, 1997 was
6,641,432. ----------
Transitional Small Business Disclosure Format: Yes No X .
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DOCUMENTS INCORPORATED BY REFERENCE
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No information is incorporated by reference.
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FORM 10-KSB ANNUAL REPORT
INDEX
PAGE
PART I
Item 1. Description of Business......................... 3
Item 2. Description of Property......................... 26
Item 3. Legal Proceedings............................... 26
Item 4. Submission of Matters to a Vote of Security .... 26
Holders
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters............................ 28
Item 6. Management's Discussion and Analysis or
Plan of Operation.............................. 30
Item 7. Financial Statements............................ F-1
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 39
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act....................... 40
Item 10. Executive Compensation........................... 43
Item 11. Security Ownership of Certain Beneficial Owners
and Management.................................. 47
Item 12. Certain Relationships and Related Transactions... 49
Item 13. Exhibits and Reports on Form 8-K................. 50
Signatures....................................... 55
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Rotary Power International, Inc. (the "Company") is in the business of
developing and manufacturing rotary engines for military and commercial use.
Based on tests conducted by the Company and independent testing companies, the
Company believes that its rotary engines have demonstrated important benefits
which provide the potential to compete favorably with reciprocating diesel,
gasoline and natural gas engines and turbines in certain important market
segments.
Through the fiscal year ending December 31, 1996, the Company has earned
substantially all of its revenues from research and development contracts and
subcontracts with the U.S. Government. However, during 1996, the Company
finished the last of its U.S. Marine Corps Research and Development contracts
and does not anticipate any major government research and development contracts
on any of its engines in the future, with the possible exception of the 40
Series engine in Unmanned Aerial Vehicles and Auxiliary Power Units. The end of
the Company's military contract business has come earlier than the Company had
anticipated and before the Company's commercial engine activities had reached a
point where they are profitable.
The Company, in response to the loss of the military contract business,
is redirecting its efforts mainly toward commercial markets. The Company
believes that its 580 Series rotary engine currently undergoing a cost reduction
and manufacturing engineering program ("Value Improvement Program") to reduce
its manufacturing cost, along with the 65 Series engines it is importing and
packaging, can be successfully marketed to a wide variety of commercial and
industrial markets, including the marine market, the power generation,
compressor, refrigeration and chiller markets and the hybrid electric vehicle
markets.
However, its accelerated Value Improvement program on the 580 Series
engine and its marketing efforts on both the 580 and 65 Series engines were
severely curtailed in the last quarter of 1996 due to the inability of Hydro
Lance Maritime Transport, Inc. ("Hydro Lance"), an affiliate of Abejon Rotary
Power Corporation ("Abejon") to meet its financial commitment to the Company.
Beginning in October, the Company was forced to lay off more than 50% of its
personnel in the last quarter of 1996 and seek new financing for its continued
operation.
In December 1996, the Company reached an agreement with International
Cryogenic Systems Corporation ("ICSC") whereby ICSC
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invested $1,000,000 in the Company in exchange for 2,000,000 shares of the
Company's common stock. Simultaneously, the Company and ICSC agreed in principle
to merge the two companies in a stock-for-stock acquisition whereby the Company
would become a wholly-owned subsidiary of ICSC. Upon completion of the
transaction, which is subject to the execution of a definitive merger agreement
and approval by the stockholders of RPI, it is the intention of ICSC to apply
for listing on the NASDAQ SmallCap Market. Each shareholder of RPI will receive
.363 shares of ICSC common stock for each share of RPI Common Stock upon the
closing of the merger.
The Company believes that the rotary engine design of its engines
provides advantages over other internal combustion engine designs. Rotary
engines do not have reciprocating parts. The compact nature of the power train
of a rotary engine results in a high power-to-weight ratio. Since a rotary
engine does not require the use of conventional connecting rods between the
rotors and the crankshaft, engine volume reduction is realized making the power
density of the rotary engine greater than that of a conventional four-stroke
reciprocating engine. The Company believes that its patented SCORE(TM) engine
technology offers several advantages over reciprocating engines, such as
multi-fuel capability, superior size and weight characteristics for a given
power output, low vibration, greater reliability and design simplicity with a
high commonality of parts and, in a natural gas-fueled version, lower emissions
of oxides of nitrogen. The Company also believes that its SCORE(TM) engine can
be manufactured and produced at a significantly lower cost than turbines and
will operate with better fuel economy than turbines. The SCORE(TM) engine is
also ideally configured to operate at high efficiency on heavy fuels, which
include diesel and jet fuel and their derivatives.
History
The Company, a Delaware corporation, was formed on October 23, 1991 for
the purpose of purchasing substantially all of the assets and the business of
the Rotary Engine Division (the "Division") from John Deere Technologies
International, Inc. ("JDTI"), which it completed on December 31, 1991. JDTI, a
wholly-owned subsidiary of Deere and Company, was, at the time, the leading
company in the United States in the development and production of prototype
rotary engines and the Company believes that JDTI was, at that time, the only
company in the world producing large rotary engines. JDTI purchased its rotary
engine division from the Curtiss-Wright Corporation ("Curtiss-Wright") in 1984.
Curtiss-Wright had operated its rotary engine division since 1958.
As a result of its acquisition of the assets of the Division, the
Company is the sole owner of all of the rotary engine assets of JDTI and
Curtiss-Wright, including the proprietary technology and currently enforceable
patent rights developed by JDTI from 1984 to 1991 and Curtiss-Wright from 1958
to 1984.
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In 1992, the Company acquired certain fixed assets of Defense Group
Industries Inc. ("DGII") and substantially all of the fixed assets of ROTEC
Manufacturing and Engineering Corp. ("ROTEC"). These assets had been used by
these companies for the development of a small multi-fuel rotary engine (now,
the Company's 40 Series engine) and all of the proprietary technology of these
companies. ROTEC's assets were purchased from its owner, Dr. Michael Soimar, who
was the Vice-President - Business Development of the Company until December 31,
1996.
As a result of the transactions described above, the Company has
accumulated an extensive data base of rotary engine technology. The Company's
data base includes rotary engine designs and data derived from more than 90,000
hours of rotary engine tests in a variety of sizes from 70 to 40,967 cubic
centimeters per rotor. Through the retention of key technical and management
personnel with prior JDTI and Curtiss-Wright experience and the utilization of
the experimental, production and testing facilities at its Wood-Ridge, New
Jersey location, the Company has continued to maintain and expand this data
base.
In October 1992, the Company entered into a license agreement with
Wankel GmbH (the "Wankel Licensing Agreement"), to license Wankel GmbH's
technology, know-how and approximately 70 patents and patent applications in six
countries relating to all of its small rotary engines. Under the Wankel
Licensing Agreement, the Company was not required to pay a license fee but was
obligated to pay minimum annual royalty payments, commencing with a $100,000
payment in January 1994. The Company was also obligated to pay earned royalties
on sales of small rotary engines using the Wankel technology, but the Company
was permitted to offset royalties with work subcontracted to Wankel under the
Company's development contracts.
The Company advised Wankel GmbH on January 10, 1996 that, due to
Wankel's failure to deliver the know-how or drawings required to be supplied
under the provisions of the Wankel License Agreement, the Company was
terminating the Agreement, effective immediately, and withholding the minimum
royalty payment due Wankel on January 31, 1996. On September 19, 1996, Wankel
although objecting to RPI's method of termination, agreed, through its
attorneys, to terminate the Wankel License Agreement by mutual consent effective
September 20, 1996.
On February 16, 1994, the Company closed on its initial public offering
of 800,000 shares of its Common Stock.
The Company, realizing the need to increase the commercial content of
its business and reduce its reliance on military/ government programs, formed an
Industrial Products Group within the Company in March of 1994 to develop and
sell natural gas rotary
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engines into commercial industrial markets. The Company executed a
Development Agreement with Mazda North America (MANA) of Flat Rock, Michigan and
Mazda Motor Corporation (MC) of Hiroshima, Japan on December 7, 1993 for import
of rotary short block engines converted to a natural gas configuration agreed
upon by MC Engineering and the Company's Engineering Department. The Company
acquired the services of highly experienced individuals as sales and marketing
personnel through a consulting agreement to lead this initiative. A natural gas
version of the Mazda rotary was developed during the 1994 and 1995 calendar
years. Details of the Company's progress are presented in the Commercial and
Industrial Markets section below.
The Company signed an exclusive four year agreement with the Hussmann
Corporation on October 16, 1995 for the 65 Series natural gas rotary engine
(NGRE) for supermarket refrigeration equipment and food store heating. Hussmann
supplies such equipment to 48% of the 31,000 supermarkets in the United States.
This four year agreement includes a minimum new order goal of 1075 engines: 25
in the first year (which order was received by the Company), 150 in the second
year, 300 in the third year and 600 in the fourth year.
The Company signed a teaming agreement with Teledyne Vehicle Systems
(TVS) of Muskegon, Michigan on July 25, 1995 to work together on the
development, marketing, manufacture and sale of the Company's 580 Series rotary
engine for the United States Marine Corps (USMC). General Dynamics Land Systems
Inc. (GDLS), a wholly-owned subsidiary of General Dynamics Corporation, bought
the assets of TVS in 1996. The Company has transferred its teaming agreement
with TVS to GDLS.
To further augment its commercial product thrust, the Company created a
wholly-owned subsidiary called Rotary Power Marine, Inc. (RPM) on July 26, 1995
to address the commercial pleasure craft marine market. RPM purchased
essentially all of the assets of Rotary Marine Industries ("RMI") of Sandpoint,
Idaho on August 30, 1995. RMI had been developing a marine rotary engine
utilizing the Mazda RX-7 automobile short block under an agreement with MANA and
MC. This agreement was terminated and the Company signed a new 65 Series rotary
marine gasoline engine agreement with MANA and MC on November 10, 1995. All RMI
manufacturing operations have been moved from Spokane, Washington to the
Company's Wood-Ridge, New Jersey plant. A principal of RMI continues to be
retained as an employee of RPM. RPM maintains an OEM sales/application center in
Spokane, Washington while the General Office is at the Company's headquarters in
Wood-Ridge, New Jersey. The Company has signed 4 Distributor Agreements for the
distribution of the 65 Series marine engine and has engaged a Sales Manager
located in Florida.
The Company signed a Distributor Agreement on the 580 Series diesel
marine engine family with Abejon on October 5, 1995. The area of responsibility
of Abejon is the states and provinces
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bordering the Pacific coast of Mexico, Canada and the United
States, including Hawaii.
In addition, in February, 1996, Abejon invested a total of $4 million to
purchase one million shares of the Company's Common Stock at a price of $4.00
per share. Simultaneously with the sale of the Common Stock, the Company loaned
$3,750,000 to Hydro Lance, an affiliate of Abejon. Hydro Lance repaid $850,000
of the loan plus interest. A $1 million repayment which was due on September 30,
1996 was not paid.
In December 1996, the Company concluded an agreement with International
Cryogenic Systems Corporation ("ICSC") whereby ICSC invested $1,000,000 in the
Company in exchange for 2,000,000 shares of the Company's Common Stock.
Simultaneously, the Company and ICSC agreed in principle to merge the two
companies in a stock-for-stock acquisition, whereby the Company would become a
wholly-owned subsidiary of ICSC. The Company and ICSC signed a Plan and
Agreement of Merger on March 21, 1997 and, upon approval by the stockholders of
the Company, the transaction will be completed. ICSC, located in Cibolo, Texas,
manufactures and markets industrial refrigeration and freezing systems for use
worldwide. The merger with ICSC will provide the Company with a growing outlet
for its natural gas and diesel-fueled engines. The ICSC subsidiaries all require
packaged accessory refrigeration equipment to complete their systems and RPI's
engines can be used to provide ICSC's customers with the ability to select a
system to minimize their energy costs. In addition, ICSC's packaging ability
will enable the merged company to offer packaged power systems operating off
both natural gas and diesel fuel.
Technology
History
The Wankel rotary engine, upon which the Company's rotary engines are
based, was first demonstrated in 1954 and is named after its developer, Dr.
Felix Wankel, a specialist in the design of sealing devices.
In 1958, Curtiss-Wright obtained the first license for rotary engine
technology from Wankel GmbH, which gave Curtiss-Wright an exclusive license for
North America and certain non-exclusive rights outside of North America.
Curtiss-Wright's research and development efforts initially involved gasoline
rotary engines with a wide range of power for use in military vehicles and
aircraft, and for various commercial uses including automobiles, aircraft,
marine pleasure craft and lawn mowers. In the 1960's, the early rotary engines
experienced serious problems with gas sealing and poor reliability. These
problems were primarily caused by the unavailability of materials that would
permit the principles of the rotary engine to be successfully transformed into
competitive
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performance engines. In the past 15 years, enormous progress in materials
technology, such as the development of advanced ceramic material, has
significantly contributed to the solution of past sealing and reliability
problems. The Company and its predecessors and Mazda Motors Corporation
("Mazda"), utilizing advances in material science and machining technology, have
independently addressed and completely solved these early rotary engine
problems.
Curtiss-Wright also initiated work on the stratified charge rotary
engine in the mid-1960's in order to provide the advantage of multi-fuel
capability for use in military vehicles and aircraft. JDTI purchased the rotary
engine division of Curtiss-Wright in 1984, including, without limitation, the
license agreement with Audi NSU/Wankel GmbH, and thereafter continued to develop
stratified charge rotary engines, leading to a series of patents covering
stratified charge technology, seal design, cooling systems and new longer life
materials. In 1984, JDTI canceled the license agreement with Audi NSU/Wankel
GmbH when it realized that its recently developed technology was more important
to its future business than the technology being licensed from Audi NSU/Wankel
GmbH, which, by that time, was already in the public domain.
Since its acquisition of the assets of the Division, the Company has
continued to develop and improve the rotary engine. These developments and
improvements include reduction in fuel consumption and emissions, the use of
ceramics for increased durability, the use of high speed electronic fuel
injection systems and controls, and increased power density. The Company's
rotary engine technology has now advanced to the point that its 580 Series
engine, producing 1000 horsepower, and its 40 Series engine, producing 15
horsepower, have both successfully completed a 400 hour test operating on the
standard North Atlantic Treaty Organization ("NATO") test cycle. The development
work over the past 30 years by the Company and its predecessor companies and the
resulting engineering requirements have resulted in approximately 29 current
patents and patent applications in six countries for the Company's proprietary
rotary engine technology.
Description of the SCORE(TM) Engine
The patented stratified charge combustion concept is used by the Company
in its SCORE(TM) engines in order to improve the burning of the fuel in the
elongated combustion chamber. In this process, there are two high-pressure
injection nozzles. The pilot injector injects a small amount of fuel that is
ignited by an electrically energized source. This creates a pilot flame which
ignites a larger amount of fuel which is injected by the main injector as the
rotor sweeps past it, creating a layered stratified charge. This dual injection
system results in more complete combustion of the fuel thus reducing emissions
and improving fuel economy.
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The injection and ignition system of the SCORE(TM) engine allows the
engine to operate using heavy fuels over a wide horsepower and speed range
without the additional weight required by a reciprocating diesel engine. The
SCORE(TM) engine is configured to operate at high efficiency on heavy fuels,
which include diesel and jet fuel and their derivatives. Heavy fuel is now
mandated by the United States Department of Defense (the "DOD") and NATO for all
their new internal combustion engines and turbines for logistical reasons and
because it has lower volatility than gasoline-based fuels, and is thus less
hazardous.
In 1992, the Company initiated a natural gas development program which
continued development originally started by the Division through funding from
the Gas Research Institute. The Company's natural gas development program on its
580 Series engines is intended to lead to the production of low emission rotary
engines suitable for use in areas with stringent air quality regulations. Due to
its unique geometry, the rotary engine is able to operate at a very lean fuel to
air ratio compared to reciprocating engines. This ratio results in relatively
low emissions of oxides of nitrogen, without some of the negative side effects,
such as the adverse effect on fuel economy and hydrocarbon emissions,
experienced with reciprocating engines. As a result of an internal development
program at the Company, a 580 Series prototype engine operating on natural gas
has demonstrated emissions of oxides of nitrogen of less than 1.0 gram per
horsepower hour, compared to the 4.0 gram limit specified for 1998 by the
California Air Resources Board ("CARB"), for heavy-duty vehicles of greater than
14,000 lbs. Further, based upon the Company's interpretation of the CARB
specification, levels of non-methane hydrocarbons and carbon monoxide were also
well under CARB emission requirements without after treatment.
During 1994 and 1995, the Company broadened its natural gas activities
through its Product Development Agreement with Mazda North America. Under the
arrangement, the Company has imported natural gas twin rotor rotary engine
blocks to be built into complete natural gas fueled RPI 65 Series (654cc
displacement per rotor) rotary engines for packaging into industrial products
such as industrial cooling, air compression, refrigeration, power generation
hybrid electric vehicle systems. The 65 Series engine block is a derivative of
the engine used in the sporty RX-7 Mazda automobile, modified to provide
industrial durability and reliability. During 1995 several of these engines were
in service in prototype applications, providing cooling and electrical power at
several sites. Also, several of these engines were delivered for use in hybrid
electric vehicles, including one application in which the engine had been
modified to operate on propane fuel.
During 1995 this product line was expanded to include gasoline fueled
short blocks based on the same engine to be built into RPM 65 Series marine
engines. These engines are available in both a
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naturally aspirated version, producing 175HP, and a supercharged electronic
fuel-injected version, producing 240HP, and are offered as a complete marine
packages.
Products
The Company has five families of rotary engines. Two of these (65 Series
and 580 Series) are currently under durability testing, demonstration and sale
into commercial and marine markets. The 40 Series is under development and
testing for demonstration and sale to military markets. The 70 and 170 Series
have been temporarily shelved until either military or commercial funding for
the final development of these engines is obtained. The series designation for
each family, the displacement per rotor, the current and potential horsepower
per rotor and the maximum potential horsepower of each family of the Company's
rotary engines, are listed below:
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Displacement per Potential Family
Family Rotor Horsepower/Rotor Horsepower Range
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(1-6 Rotors)
40 Series HF* 0.407 liters 15-60 15-240 (4)
65 Series NG** 0.65 liters 40 40-120 (3)
65 Series G *** 0.65 liters 100 100-300 (3)
70 Series HF* 0.67 liters 80-125 80-500 (4)
170 Series HF* 1.72 liters 200-325 200-1200 (4)
580 Series HF* 5.8 liters 450-520 450-3000 (6)
580 Series NG** 5.8 liters 250 250-1500 (6)
*HF = Heavy Fuel (Diesel, Jet and Gasoline Fuels)
**NG = Natural Gas
***G = Gasoline
Modularity is one of the attributes of the rotary engine that does not
exist with reciprocating engines. A given rotor and rotor housing configuration
constitute a power module unit. In each module the rotor and rotor housing are
identical. Engines from one rotor up to six rotors can be constructed either by
simply stacking the modules or by coupling 2-rotor power module units into 4-
and 6-rotor versions.
The power output is then equal to the power of the power module unit
times the number of rotors or number of power module units. The addition of each
module entails adding an intermediate housing (to separate the rotor housings,
provide a bearing support and accommodate cooling provisions) and lengthening
the crankshaft, or by coupling 2-rotor engines together. Accessory items, such
as the starter and pumps, must be re-sized to accommodate the increased engine
size, but, because of this modularity, the commonality of parts between
different models of engines in the same family is greater than 90%, reducing
manufacturing cost and spare parts inventory.
Research and Development Contracts
General
The Company, from its incorporation through December 31, 1996 has
derived substantially all of its revenues from the research and development
contracts with the United States Government (both Military and NASA) and
subcontracts with U.S. Government prime military contractors. With the extreme
down-sizing of the U.S. Defense Budget Research & Development funds in the last
four years, the Company had begun to direct its activities away from military
and government contracts to the commercial marketplace. However, the end of the
Company's government research and development contracts came earlier than the
Company had anticipated and before the Company's commercial engine activities
had reached a point where they are profitable. There is no new military or NASA
business forecast for the 580 and 70 Series for the foreseeable future. The 40
Series remains a viable candidate for military UAV and APU research and
development and production. The potential in the future for continued
independent research and development and
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bid and proposal funds recoverable under government contracts is minimal
compared to the past five years.
The Company's contract costs under its contracts with the U.S.
Government are subject to audit by the Defense contract Audit Agency ("DCAA"). A
final indirect rate audit and an audit of contract costs for the years ended
December 31, 1995 and December 31, 1996 have not been performed. The Company
believes that any adjustment from the forthcoming 1995 and 1996 audits will not
have a material affect on the Company's operations or financial position.
United States Marine Corps
o Advanced Assault Amphibious Vehicles Engine Subsystem
The Company has received Research & Development funding from the United
States Marine Corps ("USMC") over the last five years for a high power density
stratified charge rotary engine for its Advanced Assault Amphibious Vehicle
("AAAV"). The culmination of the USMC AAAV activity in 1996 was a contract award
to General Dynamics Land Systems Division ("GDLS") for the Demonstration and
Validation of the USMC AAAV. The propulsion subsystem for AAAV was competitively
chosen and the Company's five rotor 2600BHP engine was not selected by GDLS.
The Company was not successful in completing the Proof of Power Test and
the 100 Hour Modified NATO Test on its Model 5290 580 Series 2600BHP engine
within the contract funding in 1996. Due to the lack of additional funding from
the USMC, this contract activity was terminated in October 1996 and close-out of
all contract items is underway and will be completed in 1997. Termination of
this contract has led directly to a reduction in the number of Company employees
and the Company's activity level as compared to its initial five years. No
further business with the USMC on the 580 Series is forecast for the foreseeable
future.
o AAV 8.5kW Auxiliary Power Unit
The Company received a Phase II Small Business Innovative Research
Contract ($410,000) from the USMC on December 22, 1995 for the design, build,
test and delivery of one 8.5kW Auxiliary Power Unit ("APU") for the command
version of the USMC 7A1 Assault Amphibious Vehicle ("AAV"). The unit was built
in 1996 utilizing a single rotor 40 Series rotary engine and will undergo
reliability testing during the first half of 1997 at the Company's facilities in
Wood-Ridge, NJ and is expected to be shipped late in the second quarter of 1997
for vehicle installation and trials. Although initial tests have been
successful, there is no assurance that the APU to be delivered by the Company
will successfully complete its installation trials and that production will
follow.
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Lockheed Martin
o U.S. Army JT-UAV
The close-out of the subcontract from Lockheed Martin ("LM") for the
development of the twin rotor 40 Series for the U.S. Army Hunter Unmanned Aerial
Vehicle ("UAV"), which was terminated for the convenience of the Government, was
completed during 1996.
As a follow-on to the LM subcontract, the Company expects to propose
that its 40 Series family of heavy fuel rotary engines be utilized as part of
the military's UAV Heavy Fuel Engine Risk Reduction Program which is expected to
be initiated during 1997. However, there is no assurance that the Company will
be awarded one of the competitively awarded contracts by the U.S. Navy's Joint
Program Office.
United Defense Limited Partners
The Company is a subcontractor to United Defense Limited Partners
("UDLP") for the vehicle/engine test support of the Company's twin rotor 580
Series diesel electric propulsion system installed in a USMC prototype 7A1 AAV.
This program has encountered many delays and a change of sponsorship; however,
the Company's contract required UDLP to pay approximately $80,000 for the
support of the Company's engine in this vehicle. Vehicle testing is currently
scheduled to begin late in 1997.
National Aeronautics and Space Administration
After many years of technology enablement research of the Company's 70
Series engine, the National Aeronautics and Space Administration ("NASA") Lewis
Research Center ("LeRC") issued a Cooperative Announcement Agreement ("CAN") for
the development and flight demonstration of lightweight, innovative intermittent
combustion propulsion systems for General Aviation. The CAN required a fifty
percent cost-sharing on the part of any team responding with a proposal. The
Company was not successful in soliciting appropriate partners because of the 50%
cost-sharing requirement. Due to the inability of the Company to find airframe
partners who would share in the proposal activity and the inability of the
Company to assume the 50% cost-share required, the Company declined to bid on
the NASA LeRC CAN. The Company does not plan on any further Company investment
in the General Aviation Rotary Engine for the foreseeable future.
Backlog
The Company's backlog of government contracts as of December 31, 1995
was approximately $6.6 million, and as of December 31, 1996 was approximately
$110,000. The Company's backlog consisted of the remaining activity on the 8.5kW
APU contract for the USMC and
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the support activity due UDLP on the 580 hybrid electric drive USMC 7A1 AAV.
Commercial and Industrial Markets
The Company believes that the rotary engines which it was developing for
the military can be modified and adapted for use in a wide variety of commercial
and industrial markets, including the commercial and pleasure craft marine
market, the power generation, compressor, chiller and refrigeration markets and
the hybrid electric vehicle market. Set forth below is a description of the
various marine, commercial and industrial markets to which the Company has sold
or believes, working on its own or through manufacturers, distributors, and
dealers, it can successfully sell its engines. There can be no assurance that
the Company will be able to sell its engines successfully into any of these
markets.
Commercial and Recreational Marine Markets - 580 Series
The Company believes that there is a substantial market for its rotary
engines in the 1000 to 3000 horsepower category, and multiples thereof, for use
in ferry boats and other commercial marine craft and yachts. The Company
believes that the size, weight, smoothness of operation, acceleration and diesel
fuel capability of the SCORE(TM) 580 Series engine give this engine advantages
in the marine environment over reciprocating engines. The Company further
believes that the weight advantage of SCORE(TM) engines may result in reduced
draft, improved fuel economy and higher payloads in boats using SCORE(TM)
engines than in boats using reciprocating engines. The compact size advantage of
the rotary engine also allows for smaller engine compartments, which may be of
significance to boat designers.
The Company delivered its first prototype twin rotor 580 Series marine
diesel engine to Abejon late in 1995. Shipment of two additional prototype
engines is on hold because of the financial difficulty being experienced by
Abejon. The Company has received an additional order for nine (9) twin rotor and
two six rotor Mark I engines from Abejon; however, these are also on hold for
the same reason. A marinization design and Value Improvement Program on the 580
Series twin rotor Mark 0 engine was initiated in 1996 by funds from Abejon to
reduce its cost to the commercial competitive range. The interim twin rotor
engine with marinization design features, called Mark I, incorporating some
value improvements, are being manufactured to meet the nine two rotor and two
six rotor engine order from Abejon if they are able to take delivery. However,
since delivery of these engines to Abejon is essentially on hold due to their
current financial difficulties, the Company has been aggressively soliciting
alternative purchasers for these engines, which are expected to be completed in
time to commence initial delivery in December 1997 with the remaining engines
being delivered through the first five months of 1998.
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There is no assurance that the required funds to complete the
marinization, Value Improvement Program and procurement of hardware for the Mark
1 engines will be obtained to successfully complete these production orders.
Recreational Marine Market - 65 Series Marine
The jet-boat segment of the personal watercraft market is a new segment
of the market which first appeared in 1992. Jet-boats are fast, easy to maneuver
and can be operated in shallow water since they do not use propellers. Not
having propellers is also a safety feature because you do not have to be
concerned about the inherent danger posed by an exposed propeller to swimmers,
water skiers and marine life. There has been continued jet boat market
expansion, as well as growth, in power needs up to the 200HP range.
To profit from this pleasure craft marine market the Company created a
wholly-owned subsidiary called Rotary Power Marine, Inc. ("RPM") in July of 1995
and purchased the assets of Rotary Marine Industries, Inc. ("RMI") in August of
1995. RMI had been developing a marine rotary engine utilizing the Mazda RX-7
engine short block. After the acquisition of the assets of RMI, RPM began
producing 65 Series rotary marine engines at the Company's Wood-Ridge, NJ plant.
Two engines have been developed and will be offered to the market in 1997: a
naturally aspirated engine developing 175HP and a 240HP supercharged engine with
electronic fuel injection.
In November 1995, the Company entered into a 65 Series Rotary Marine
Gasoline Engine Agreement with Mazda North America (MANA) in Detroit and Mazda
Motor Corporation of Hiroshima, Japan (MC) which assures the Company of a supply
of rotary short blocks from Japan.
RPM has appointed a Sales Manager working out of Florida, and has
established stocking distributors to sell and service the 65 Series marine
engines. RPM intends to appoint additional stocking distributors as well as to
work directly with boat manufacturers.
RPM presently offers an engine/jet pump package and a package with a
Hurth reversing gearbox and plans to add additional propulsion packages, such as
stern drives, during 1997.
Industrial Markets - 65 Series
The commercialization of stationary Natural Gas Rotary Engines ("NGRE")
for use in cooling, water chillers, process and supermarket refrigeration
systems, compression and hybrid electric vehicles is a primary strategic
objective of the Company.
Deregulation of the natural gas industry has increased customer energy
choices and emphasizes energy cost reduction for the consumer. The Company
believes that the NGRE will benefit from this trend since substituting the NGRE
for electric motors in all the
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above applications will provide significant operating savings due to the
comparatively low cost of natural gas versus electricity in many areas of the
United States.
Response to the Company's marketing effort to-date has shown that the
utility industry deregulation has raised customer expectations for reduced
energy costs and also that there is a need for a natural gas driven engine of
smaller size, higher speed, lower weight and low vibration to drive rotary
devices such as screw compressors.
The unique characteristics of the NGRE will allow the Company to
successfully compete in commercial and industrial market sectors for air
conditioning, refrigeration, plant air compression systems, natural gas
well-head gas gathering, pumping and hybrid electric vehicles.
In addition to the cost motives, the failure of many large metropolitan
areas to meet national standards established by the Clean Air Act amendments of
1990 for nitrous oxides and other pollutants, coupled with a growing dependence
on foreign oil, has stimulated a national interest by government and utilities
in natural gas as a fuel. In addition, many electric utilities are attempting to
reduce seasonal peak demand by convincing their industrial and residential
customers to install systems which use engines fueled by natural gas rather than
electric motors.
Further, the Company, through the assistance of the American Gas
Association ("AGA") and the American Gas Cooling Center ("AGCC"), should benefit
from participating in the future electric "wheeling" and "natural gas transport"
programs being put in place throughout the country fostered by deregulation of
the utility infrastructure in the United States.
The Company signed a Product Development Agreement with MANA and MC in
December 1993 which provided that MANA and MC will cooperate with the Company in
the product development, testing and demonstration of special Mazda rotary
engines which were modified for natural gas and strengthened for long life.
Natural gas short blocks purchased from MC under the Development Agreement were
accessorized by the Company and the engines were undergoing endurance testing at
the Company's facilities in New Jersey. The Company completed the fundamental
development of the 65 Series Natural Gas Rotary Engine ("NGRE") in 1996 and
requested a Production Agreement from MC and MANA.
MC and MANA and the Company negotiated an exclusive formal agreement
with respect to the production and sale of the NGRE engines in North America
late in 1996. This agreement, signed by the Company and MANA, is awaiting
signature by MC in the second quarter of 1997.
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The Mazda modified natural gas engine is being exclusively marketed by
the Company as the RPI 65 Series natural gas rotary engine.
During 1995 and 1996, the Company focused on the 65 Series twin rotor 80
horsepower NGRE and invested heavily in performance and durability testing. In
1996, the Company completed a 11,000 hour endurance test on a 45kW generator set
powered by a twin rotor 65 Series NGRE. Disassembly and inspection did not
reveal any damaged or excessive wear components. The engine was reassembled for
further endurance testing to the 20,000 hour mark in the future. Nine thousand
and five hundred (9,500) hours of dynamometer and development testing was
accomplished through 1996 resulting in the confidence to test market the 65
Series NGRE product. This dynamometer testing will continue through the 20,000
hour mark which is the life expectancy required in the commercial market.
The Company has entered into an exclusive Teaming Agreement for
supermarket refrigeration systems with Hussmann, a division of Whitman
Corporation, a major supplier of supermarket refrigeration units in the U.S.
Hussmann has placed refrigeration units in supermarkets of major chains
(Big Y and A&P) to demonstrate reliability and reduced energy costs. The Big Y
installation was the Company's initial supermarket testing in 1995 and 1996
wherein installation problems were defined and resolved. The A&P installation in
May of 1996 proved extremely successful with resolution of durable exhaust
system treatment. The A&P installation accumulated approximately 1,850 hours
operating during daily peak demand time from June to November 1996 until winter
close-down, demonstrating 97% overall reliability of starting up and operating
seventeen hours a day for five days each week, plus successfully sustained
operation of the frozen food cases during a power black-out on September 19,
1996. This ability to preserve frozen foods during a power black-out is a major
advantage, enabling supermarket operators to sell frozen product during
emergency situations. The unit at Big Y has a total running time to-date of
approximately 2,200 hours.
The Company made its initial commercial sales into the supermarket
refrigeration market in the second half of 1995 and has developed sales goals
with Hussmann for the four years of the exclusive team selling agreement, which
goals reach 600 units in the final year of the agreement.
There can be no assurance that the Company will be successful with its
NGREs in the commercial and industrial markets in North America. However the
supermarket and commercial refrigeration industry and natural gas utility
acceptance to date has exceeded expectations.
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Hussmann received a contract from the Gas Research Institute (GRI) to
place hybrid refrigeration systems in six (6) supermarket stores across the U.S.
for extensive testing under operating conditions of the Company's 65 Series
NGRE. The Company received a subcontract from Hussmann to supply sixteen 65
Series NGREs and conduct various tests for definition of heat rejection, heat
recovery and emissions from the 65 Series. In addition, it is expected that
twenty five (25) units will also be placed with the assistance of the AGA and
AGCC by various natural gas utilities throughout the country to familiarize the
principal supermarket chains with the NGRE and screw compressor combination and
to evaluate the system under various regional conditions. Each store will
require two (2) or three (3) 65 Series natural gas engines.
The supermarket sector currently consumes approximately 4% of the total
electric power production of the U.S. and the AGCC is supportive of the
Company's activities to utilize natural gas to drive engines in the 31,000
supermarkets in the U.S.
Systems similar to the units in operation supplying supermarket
refrigeration have been proposed to customers for food processing operations,
air conditioning and air compression. In these industrial processing operations,
the engine supplies heat in the form of steam or hot water along with process
refrigeration or compressed air. In 1996, three additional 65 Series NGREs have
been sold for supermarket refrigeration and one for supermarket air
conditioning. These demonstration units will be operational in 1997.
A new marketing effort has focused selling gas engine driven screw
compression equipment to companies servicing old, low pressure natural gas
wells. There are many old natural gas wells with low pressure which are not
productive. The current equipment in place is expensive to upgrade and the
option of lightweight, compact rotary engine driven screw compressors which can
be easily transported to the site and installed is very attractive to well
operators seeking to get the maximum natural gas out of their fields. Because
the compressors are smooth and vibration-free, no foundations are required.
While there is no guarantee that this market will develop as expected,
preliminary indications are that there will be a significant demand for these
types of units in the gas well servicing industry.
Vehicular Markets
Due to air quality regulations, as well as the national energy policy
favoring the use of alternative fuels in federal fleets and in commercial light
truck and bus fleets, the Company believes that a large potential market exists
for the use of propane and natural gas rotary engines in fleet vehicles and
school buses.
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The Company believes that its rotary engines will be attractive to this
market.
The Company intends to develop and market propane and natural gas
versions of its natural gas rotary engines for sale to the fleet vehicle and
school bus market. A June 1991 Gas Research Institute survey indicated that the
current installed school bus market is 500,000 buses.
The Company also believes that a significant market for its rotary
engines exists in connection with the production of hybrid electric vehicles,
which use a combination of electric storage and internal combustion engines for
propulsion. Compared to vehicles that can operate only with liquid fuels, hybrid
electric vehicles can be extremely efficient on-road energy converters,
resulting in higher mileage performance, as well as lower emissions. Unlike
vehicles that can operate only with battery-stored power, hybrid electric
vehicles offer a significantly extended range, which the company believes should
result in increased consumer acceptance.
In 1995 the Company initiated sales of NGRE's to this market for test
versions of hybrid powered bus and light trucks. These vehicles use NGRE's
combined with compact generators and batteries (both traditional and new
technologies) for a hybrid propulsion system.
A hybrid electric city bus, developed under a Department of Energy
contract, utilizing two 65 Series rotary engines driving compact permanent
magnet generators were installed in a bus and initiallysuccessfully tested in
1996. The bus is operated by batteries driving DC motors in the wheels. The bus
uses two compact rotary engines, located in the bus motor compartment to
recharge these batteries, drive the bus accessory systems and provide heating.
There can be no assurance that the Company will be successful with its
NGREs in the hybrid electric vehicle market; however, tests to-date are viewed
as very positive in the industry.
Military Markets
In looking at the potential of the Company's SCORETM products in defense
in view of the significant down-turn in the military budgets, there are a few
prospects for engine/propulsion systems having the power density and multi-fuel
capability advantages of the Company's SCORETM. Near term potential programs and
applications are discussed below; however, there are no assurances that any of
these will receive Government funding. The Company, both by intention and due to
adverse circumstances, has in 1996 significantly reduced its reliance on
military/government R&D programs in its move towards commercial business in the
future.
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Unmanned Aerial Vehicles
The Company believes that a potential market exists for use of its 40
Series engines in Unmanned Aerial Vehicles ("UAVs") utilized by the Armed
Forces. Unmanned Aerial Vehicle systems greatly improve the quality and
timeliness of battlefield information while reducing the risk of capture or loss
of personnel, thus allowing faster and more informed decision-making by
battlefield commanders. The Company believes that the U.S. Government will
increase its funding for development and procurement of UAV systems over the
next few years, even as funding for manned weapon systems is being decreased.
Commercial opportunities for UAV technology include crop- spraying,
package delivery, atmosphere sampling, communications relay, border patrols,
aerial photography and scouting for forest fires.
The Company believes that its 40 Series heavy-fueled rotary engine is
the only heavy-fueled engine currently in advanced development that can deliver
between 50 and 60HP per rotor within the weight, size and specific fuel
consumption requirements of the military UAV market. As discussed earlier, the
Company won the Heavy Fuel Engine subcontract for the TRW/IAI Hunter UAV from
Lockheed Martin in November 1994, which subcontract was terminated for the
convenience of Lockheed Martin, TRW/IAI and the U.S. Army on August 4, 1995. The
entire Hunter UAV program was terminated for the convenience of the Government
early in 1996. Its replacement will be the Tactical UAV (formerly Short Range
Maneuver UAV). The Company is in pursuit of the Heavy Fuel Engine development
for this Tactical UAV to be used by the United States Army and United States
Navy. A request for a proposal for a family of heavy fuel engines for military
Outrider (Tactical) and Predator UAV is anticipated in the second quarter of
1997 to which the Company will respond either alone or preferably with a partner
who will greatly strengthen the Company's offer. There is no assurance that the
Company will be awarded a Heavy Fuel Engine contract for its 40 Series
multi-fuel rotary engine or that it will find an appropriate partner.
Auxiliary Power Units
The AAV APU contract with the USMC and the electric drive Assault
Amphibious Vehicle contract with UDLP referenced in the Research and Development
section of this report are examples of the potential for the Company's heavy
fuel engines in military APU and power generation applications. With
developmental success resulting in production for either of these contract
efforts other similar military opportunities will arise. The Company's Teaming
Agreement with Teledyne Vehicle Systems, now owned by GDLS, provides further
opportunities for pursuit of military business; however, there is no assurance
that any new business will be acquired as a result of this alliance.
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Regulation
Product Regulation - Government
The demand for some of the Company's products is affected by various
federal, state and local energy and environmental laws and regulations. All of
these laws and regulations are subject to revocation or amendment, and the
Company cannot predict what effect revocation or amendment may have on the
Company's sales, business or operations.
The natural gas engines which the Company is developing and has under
demonstrations will be subject to various provisions of recent amendments to the
Clean Air Act, as well as energy and environmental legislation enacted at state
and local levels which may be more stringent than federal laws. The 1990
amendments to the Clean Air Act mandate that entities owning or operating a
fleet (defined as 10 or more cars, trucks and/or buses) in certain pollution
non-attainment areas purchase a percentage of clean fuel vehicles. The
percentage of each fleet that must be powered by clean fuel increases from 1998
to 2000, with 70% of new cars and light trucks and 50% of heavy trucks required
to be clean fuel vehicles by the year 2000.
Moreover, although regulatory standards have been imposed only in
connection with on-highway (i.e., truck and bus) vehicles, the United States
Environmental Protection Agency, in accordance with the 1990 Clean Air Act
amendments, has proposed regulations for engines in non-road equipment and
vehicles of 50 horsepower or higher, including agricultural and construction
vehicles with full implementation expected in 2000. Initial regulations for
marine engines are also expected in 1998. In addition, in early 1992, the
California Air Resources Board finalized regulations for certain off-highway
equipment and vehicles using engines rated at 175 horsepower or greater that
began in 1996.
Like all electric power-generating and other fossil fuel- burning
systems, the generators, chillers and cogeneration products that the Company is
selling for demonstration and proposes to demonstrate and sell must comply with
federal, state and local environmental laws and regulations. Regulation of
products such as those to be sold by the Company is conducted primarily at the
state and local levels, where standards can vary. In particular, applicable
environmental standards in California are stricter than comparable federal
guidelines. The Company believes that its natural gas engines comply with
applicable federal and state environmental standards, including those currently
in effect in California, though the Company cannot predict whether its products
will comply with all environmental standards promulgated in the future. The
Company does not believe that the costs and effects of complying with
environmental laws relating to the Company's
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business will have a material adverse effect on the Company's
business or operations.
Natural gas is one of the many alternative fuels which are addressed by
these new laws and regulations. Others include methanol, ethanol, liquefied
petroleum gas, hydrogen, electricity and reformulated gasoline. Although the
Company believes that natural gas will become a preferred alternative fuel for
vehicles, there can be no assurance of this or that existing and future laws or
regulations or their enforcement will create material long-term demand for
natural gas-powered vehicles.
Product Regulation - Marine Industry Regulations
Marine engines are required to comply with certain regulations
promulgated by the U.S. Coast Guard. The Company's 65 Series engines have been
reconfigured to comply with these regulations and the 580 Series marine engines
are being designed and produced to comply with U.S. Coast Guard regulations.
Environmental Regulation
The Company operates its facility in compliance with Federal, New
Jersey, and local environmental laws and regulations. Provisions in the
Company's lease with Curtiss-Wright Corporation hold the Company harmless from
fines, suits, procedures, claims and/or actions associated with environmental
hazards or clean-ups arising from or resulting from prior or subsequent use of
the premises by Curtiss-Wright or others for whom the Company is not
responsible.
The discharge of pollutants to the waters of the State of New Jersey is
controlled and restricted by the New Jersey Department of Environmental
Protection ("NJDEP") in accordance with applicable laws and regulations. The
Company uses clean, non-contact water in a closed loop system for cooling
engines and test equipment. The cooling water is analyzed and treated monthly.
Discharge is for emergency only. Since the Company has never discharged water
during its operation, the NJDEP determined that as of March 21, 1995, the
Company is no longer required to submit monthly discharge monitor reports.
Outdoor noise levels resulting from operations are in accordance with
the town of Wood-Ridge Ordinance.
The Company has NJDEP stack permits for control apparatus and equipment.
The Company has no underground storage tanks. Short term fuel and fuel
oil storage is contained in above ground tanks surrounded by containment walls.
The Company has a Spill Prevention Control & Countermeasures Plan, as required
by federal regulations.
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The Company has filed a Notification of Hazardous Waste Activity in
compliance with the Resource Conservation and Recovery Act. Transportation and
disposal of hazardous waste is handled by Safety Kleen Corporation in accordance
with applicable federal and State of New Jersey regulations. The Company
maintains a transport manifest of all hazardous waste removal from the facility.
Manufacturing and Assembly
The Company has sufficient capital equipment and manufacturing space
available to support its current operations. The Company is currently
manufacturing prototype quantities of the 40 and 580 Series engines. The power
sections of these engines, which have the most critical tolerances, utilize
proprietary manufacturing processes and account for one half the cost of the
engines, are completely manufactured by the Company. The Company's manufacturing
equipment has modern computer numerical controls ("CNC"). CNC machine programs
can be created through the use of the Company's computer aided design and
manufacturing system.
The Company purchases many of the components used in its rotary engines
and completely assembles each engine at its facilities. The Company's assembly
area is equipped with benches and fixtures for sub-assembly, and power torque
systems and assembly carts for final engine assembly.
The Company believes that virtually all of the parts necessary to
manufacture its engines, such as rotors, crankshafts, castings, and forgings,
are readily available from a variety of vendors in the United States and Canada.
The Company is producing 65 Series Industrial and Marine engines on two
separate lines. These engines are natural gas and gasoline powered respectively.
For these products, the Company purchases short blocks from MC, under a
production agreement for marine short blocks valid through September, 1997 with
an automatic yearly renewal provision. As discussed earlier, the Company has
negotiated a Production Agreement for natural gas short blocks, currently signed
by the Company and MANA which awaits MC signature early in the second quarter of
1997.
The Company believes it has the facilities, equipment, and tooling
necessary to meet its manufacturing needs for at least the next twelve months.
The Company's Quality Assurance Program currently meets MIL-I-45208A.
Constant temperature is maintained in the machining and inspection centers to
maintain required machining and inspection tolerance levels. The Company has
eight (8) fully instrumented test cells for development and production engine
testing which provide the capability of testing engines from 10 to 3,350
horsepower.
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Sales and Service
The Company has extensive experience pursuing, negotiating and
consummating U.S. Government and other development contracts. The Company has
increased its sales marketing staff as its business has expanded into commercial
marine and industrial markets. The Company believes that it has an experienced
Sales and Marketing Department for the sale of its engines into the industrial
market and has experienced sales and service personnel for coordination with its
distributor and dealer networks in the marketing and servicing of its 65 Series
gasoline marine engines. In addition, it has established dealers on both the
East and West Coasts of the United States and in Europe for the sale and service
of these engines. The Company believes that it can adequately provide support to
its distributors, dealers, customers and field personnel from its Wood-Ridge,
New Jersey facility and from its marine sales and applications center in
Spokane, Washington.
Patents
The Company believes that it owns or has licensed and has patent
protection for certain elements of the technology necessary to develop and
produce its rotary engines. The Company owns a total of approximately 29 patents
or patent applications covering the design, materials, and manufacture of its
rotary engines. Of this number, approximately 25 patents have been granted and
are in force in the United States. At the current time, four new patent
disclosures are being prepared for filing for U.S. patents. These patents seek
to give the Company exclusive rights to the concepts used in the SCORETM engine
combustion system and certain areas of the design and materials used in the
sealing elements and in other critical technology areas. These patents cover not
only the design currently used in the engines, but also those concepts which
have been identified for future research and development. A portion of the
patents and intellectual property of the Company is subject to the rights of the
U.S. Government for military uses.
The Company does not consider any one of its patents or any related
group of its patents to be of such importance that their expiration, termination
or invalidity would materially affect the Company's business. There can be no
assurance that the issued patents or the licensed rights of the Company will
fully, or even partially, protect the Company's technology from competitors'
approaches, or that new patent applications will be allowed.
Competition
The Company's success depends upon its ability to maintain a competitive
position in the development and commercialization of its rotary engine
technology in relation to other existing and emerging technologies and upon its
ability to displace current four-stroke and two-stroke reciprocating engines and
turbines, all
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of which have an established and dominant position in the field. The Company
expects competition from automobile engine manufacturers and other engine
manufacturing firms specializing in the development of both diesel and gasoline
reciprocating engines.
In addition, the Company may face competition from engineering firms
developing small turbines for sale to industry. These companies have
substantially greater resources for research, development and manufacturing than
the Company. Despite the fact that the Company has developed and patented its
rotary engine technology, it is possible that the Company's competitors may
succeed in developing technologies and products that are more effective or
commercially acceptable than those developed by the Company.
Employees
As of December 31, 1996, the Company had 12 full-time employees. Of
these full-time employees, all 12 were engineers, management and other
professionals. The Company laid off 8 employees in October 1996, 24 in November
1996 and 2 in December 1996 in order to reduce its cash outflow after Hydro
Lance, an affiliate of Abejon, defaulted on its $1,000,000 principal plus
interest repayment due on September 30, 1996 and the Company's main military
contract with the USMC was scheduled to be terminated. The Company re-called 12
employees in January and February 1997, bringing the total number of full-time
employees as at March 15, 1997 to 24. As at March 15, 1997, the Company also had
7 part-time employees. Until the last quarter of 1996, the Company had been able
to attract and retain the engineers, professionals and other personnel required
by its business. Due to the financial difficulties encountered by the Company
since October 1996, it may be more difficult to recruit and retain employees in
the future. None of the Company's employees is represented by a labor union and
the Company considers relations with its employees, inspite of the necessity to
lay-off 34 employees in the last quarter of 1996, to be good.
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PART I
ITEM 2. DESCRIPTION OF PROPERTY
Property
The Company leased 127,640 square feet of space from Curtiss- Wright at
an average annual lease expense of $500,000 per year on a three-year lease
ending December 31, 1994. The Company exercised a three-year renewal option
extending the lease term to December 31, 1997 at an average annual lease expense
of $575,000. The facility is located at 1 Passaic Avenue, Wood-Ridge, New Jersey
07075. As of December 31, 1996, the Company subleased approximately 26,000
square feet of its factory space pursuant to a sublease agreement which
terminates on December 31, 1997. Such sublease may be terminated with 120 days'
notice after the first year. The sub-lessee pays annualized rent of $140,350 per
year. Approximately 54,000 square feet at the facility are used by the Company
for manufacturing and assembly. Twelve fully instrumented engine test cells,
with the capability of testing engines from 10 to 3,350 horsepower, occupy a
further 20,000 square feet. The balance of the facility includes offices for
design, development engineering, marketing, and administration. Due to the
Company's financial problems in the last quarter of 1996, the Company is in
default on its lease obligations as of March 15, 1997. Although the Company
expects to be able to settle its default and negotiate a new lease for reduced
space and lease cost with Curtiss-Wright, there can be no assurance that the
Company will be able to do so.
PART I
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, and the Company's property is not the
subject of, any material pending legal proceedings, nor, to the Company's
knowledge is any material legal proceeding threatened.
PART I
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 10, 1996,
the following members were elected to the Board of Directors:
Warren D. Bagatelle Robert L. Osborn
James M. Beggs Michael C. Stewart
Ken Brody Richard M.H. Thompson
William T. Figart Dr. James P. Wade
The vote for each director was 4,090,032 votes For, 29,002 votes Against
and zero votes Abstained.
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At such Annual Meeting of Shareholders, Coopers & Lybrand L.L.P. was
ratified as the Company's auditors for the fiscal year ending December 31, 1995.
The vote was 4,089,284 votes For, 23,200 votes Against and 6,550 votes
Abstained. On March 6, 1997, the Company, pursuant to a unanimous decision by
its Board of Directors, dismissed Coopers and Lybrand ("Coopers") as its
independent accountants for the fiscal year ending December 31, 1996 and
appointed Demetrius & Company L.L.C. of Wayne, NJ to take their place. The
reason for the dismissal was that the Company and Coopers could not come to an
agreement with regard to the fees to be paid to Coopers. There was no other
point of disagreement between the Company and Coopers.
As of September 1, 1996, Michael C. Stewart resigned as a Director of
the Company.
As of the close of business on January 30, 1997 and after the unanimous
approval by the Board of Directors of the Plan and Agreement of Merger between
the Company and ICSC, Messrs. Warren D. Bagatelle, James P. Wade and James M.
Beggs resigned as Directors of the Company.
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Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock ("Common Stock"), par value $.01, has been
publicly traded since February 9, 1994. The Common Stock was traded in the
over-the-counter market on the National Association of Securities Automated
Quotation System (NASDAQ) Small Capitalization Issues under the symbol RPII and
on the Pacific Stock Exchange (PSE) under the symbol RPX until December 14, 1996
in the case of NASDAQ and December 4, 1996 in the case of the PSE. The common
stock of the Company was deleted from NASDAQ on December 19, 1996 and was
suspended from the PSE on December 4, 1996. Since December 19, 1996 it has
traded on the Over The Counter Bulletin Board ("OTCBB").
There was no public market for the Company's Common Stock prior to
February 9, 1994.
The following table sets forth for the year 1996 only the high, low and
closing prices, representing actual transactions, for each period as reported in
the NASDAQ Summary of Activity for each month through December 19, 1996 and as
reported by NASDAQ for the OTCBB for the period from December 19, 1996 through
December 31, 1996.
The table also sets forth for the years 1994 and 1995 the range of high
and low bid and ask prices of the Common Stock on the NASDAQ for the fiscal
quarters indicated, as reported by NASDAQ. All these over the counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
High Low Close
---- --- -----
COMMON STOCK
- ------------
Year Ended 12/31/96
- -------------------
First Quarter 3 15/16 2 1/8 2 1/4
Second Quarter 3 11/16 2 2 7/8
Third Quarter 3 3/4 7/8
Fourth Quarter* 1 0.09375 0.21875
BID ASK
------------------ ------------------
HIGH LOW HIGH LOW
------------------ ------------------
Year Ended 12/31/95
- -------------------
First Quarter 8 5/8 5 3/4 8 6 1/4
Second Quarter 9 5/16 4 7/8 9 7/16 5 1/16
Third Quarter 7 1/4 5 1/8 7 1/2 5 3/8
Fourth Quarter 5 7/8 2 6 1/8 2 3/8
Year Ended 12/31/94
- -------------------
First Quarter 8 4 1/4 8 1/2 4 7/16
Second Quarter 5 7/16 3 1/4 5 11/16 3 5/8
Third Quarter 7 4 5/8 7 1/4 4 3/4
Fourth Quarter 9 6 1/4 9 5/16 6 1/2
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* The common stock of the Company was deleted from NASDAQ on December 19, 1996.
Since that date, it has traded on the OTCBB.
The Company has never paid any dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Board of
Directors of the Company currently anticipates retaining any available earnings
for the growth and expansion of the Company's business. The declaration and
payment of future cash dividends, if any, generally would depend upon the
Company's earnings, financial condition, results of operations, current and
anticipated capital requirements, plans for expansion, if any, future prospects,
restrictions under then existing credit and other debt instruments and
arrangements and other factors deemed relevant by the Board of Directors.
On March 15, 1997, there were approximately 900 common stockholders of
record.
29
<PAGE>
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
General Overview
On December 31, 1991, the Company acquired substantially all of the
fixed assets, patents, know-how and technology and other tangible and intangible
assets of the Rotary Engine Division (the "Division") of John Deere Technologies
International, Inc. ("JDTI"). The purchase price was $9.3 million consisting of
$4.2 million of cash and notes, which have been paid, and a non-interest bearing
deferred acquisition obligation of $5.1 million payable over thirteen years.
JDTI and Deere & Company retained all liabilities, including potential liability
for claims resulting from JDTI's contract performance for the U.S. Government.
The Company and its wholly-owned subsidiary, Rotary Power Marine, Inc.
("RPMI") are engaged in the research, development, demonstration and production
of rotary engines capable of operating on a variety of liquid fuels and natural
gas. The Company's strategic thrust has always been to manufacture and sell its
engines into world-wide commercial engine markets. However, due to the
termination in 1996 of the great majority of its research and development
contracts with the United States Government, the Company has had to accelerate
this plan, and, without revenue from the the U.S. Government contracts, the
Company has to obtain additional financing to carry it out. The Company's
commercialization efforts are initially focusing on natural gas rotary engines
for industrial markets and liquid fuel engines for the commercial and
recreational marine markets.
From its inception in 1992 through the end of 1996, the Company has
earned substantially all of its revenues from contracts or subcontracts with the
U.S. Government. The U.S. Government contracts were generally multi-year, cost
reimbursement plus fee contracts. The Company reasonably expected the
continuation of these contracts but due to the U.S. Government's reduction in
defense expenditures, and especially of research and development expenditures,
over the last few years, it has been unable to obtain new and continuing
contracts. In particular, the Company's contract with the United States Marine
Corps ("USMC") ended in 1996, and it does not expect any new contracts for its
580 Series engine from the USMC. The Company expects to continue to pursue
research and development contracts from the U.S. Government for its 40 Series
engine. The Company's failure to obtain new and continuing contracts in 1996 has
had an adverse effect upon the Company.
In 1995, the Company established RPM, a wholly-owned subsidiary, which
acquired certain assets of Rotary Marine Industries, Inc. (RMI) for
approximately $165,000 and a royalty on future 65 Series rotary marine engine
sales. RPM produces rotary
30
<PAGE>
engines for commercial and recreational marine markets. RPM's primary customers
consist of builders of commercial and recreational boats as well as distributors
of engines, who sell to a diverse customer base.
Pursuant to the purchase agreement with JDTI, the Company has an
obligation to pay JDTI earned deferred payments for applicable rotary engines
sold. The deferred payments are 3.0% of the first $100 million of engine sales,
2.5% of the next $100 million, 1.5% of the next $100 million and 0.5% of all
applicable rotary engine sales thereafter. These earned deferred payments are
reduced by the amount of the deferred obligations of $5.1 million discussed
above.
In addition, pursuant to the Company's licensing agreement with Wankel
GmbH (the "Wankel Licensing Agreement"), the Company had an obligation to pay
Wankel GmbH royalty fees for all small rotary engines up to and including 650
cubic centimeters per rotor sold by the Company. However, the Company advised
Wankel GmbH on January 10, 1996 that due to Wankel GmbH's failure to deliver the
know-how required to be supplied under the provisions of the Wankel Licensing
Agreement, the Company was terminating the Wankel Licensing Agreement, effective
immediately, and withholding the minimum royalty payment due to Wankel GmbH on
January 31, 1996. On September 19, 1996, Wankel wrote to the Company, and while
protesting the manner in which the Company had terminated the agreement, agreed
to termination by mutual consent.
Business Environment
The defense industry has downsized and the U.S. defense budget has
shrunk as the threat of large scale conflict between superpowers has diminished.
In 1996 the Company finished the last of its major contracts with the USMC and,
with the possible exception of future contracts with the 40 Series engine, the
Company does not expect major research and development contracts from the U.S.
Government in the future. Although the Company had always had as its strategic
goal the manufacture and sale of its rotary engines into the commercial
marketplace, the end of the Company's military contracts came earlier than it
had anticipated and before the commercial engine activities had reached a point
where they were profitable.
However, the Company has always believed there are significant
commercial markets for the Company's small and lightweight rotary engines
operating with reduced emissions. Such potential markets include the natural gas
industrial market (chillers, compressors, generators, and refrigeration units),
the hybrid electric vehicle market and the commercial and recreational marine
market. During 1994 and 1995, the Company accelerated the product development of
natural gas rotary engines, in particular, the twin rotor 65 Series rotary
engine for the commercial and industrial markets. Also in 1995, through RPM, the
Company purchased the assets of RMI and
31
<PAGE>
began producing and selling 65 Series rotary marine engines into the
recreational marine market. In addition, in 1995, the Company received and
delivered its first commercial order for a 580 Series rotary marine engine.
Early in 1996, the Company received an order from Abejon Rotary Power
Corporation ("Abejon") for nine twin rotor and two six rotor 580 Series rotary
marine engines, but due to the financial difficulties of Abejon in 1996 which
resulted in the default of Abejon's affiliated company, Hydro Lance, on its loan
from the Company, it does not currently expect Abejon to be able to take
delivery of these engines. However, the Company is actively seeking alternative
customers for these engines.
Results of Operations
Twelve months ended December 31, 1996 vs Twelve months ended
December 31, 1995
Revenue for 1996 decreased 37%, or $3,339,000, to $5,768,000 compared to
$9,107,000 in 1995. The decrease in revenue was due to a decline in all the
Company's research and development contracts with the U.S. Government,
including, in particular, a decline of $211,000 in the company's principal
contract received in December 1994 from the USMC to design, test and deliver a
five-rotor 580 Series engine at a 2600HP rating; and decreased revenue of
$2,660,000 from a contract awarded in November 1994 by Lockheed Martin for
development and delivery of 40 Series turbocharged engines for the U.S. Army's
Joint Tactical Unmanned Aerial Vehicle (JT-UAV) Hunter aircraft. This contract
was terminated for the convenience of the Government as of August 4, 1995. On
March 1, 1996, the Company and Lockheed Martin entered into a termination
settlement agreement relating to the JT-UAV contract pursuant to which the
Company received payment of the settlement amount less amounts previously paid
to the Company. Applicable write-off of receivables were taken in the 1995
period. Other declines in contract revenue were $793,000 in the Basic USMC 580
Series contract, $159,000 in a 40 Series Dual-Use APU contract with Martin
Marietta and decreased revenue of $88,000 from other small contract activity.
The decreases in revenue discussed above were offset by increased revenue of
$90,000 from a small NASA contract; $308,000 on a new contract to build and
demonstrate an 8.5kW APU powered by the 40 Series engine for the command version
of the USMC AAV and $39,000 from two other small contracts. In addition to the
above, as a result of the Company's commercialization efforts, the Company
realized increased commercial revenues in 1996 in the amount of $539,000 from
the sale of its 65 Series natural gas and marine engines.
Cost of revenue decreased 1%, or $42,000 in 1996 as compared to 1995.
This reduction resulted from a decrease in costs on government programs due to
the substantial reduction in government revenues from 1995 to 1996 offset by an
increase of approximately $785,000 related to the costs of the pre-production
580 Series
32
<PAGE>
commercial marine engine and $788,000 due to the increased pre-production costs
on the commercial 65 Series engines.
General and administrative expenses decreased 10% or $259,000, from
$2,614,000 in 1995 to $2,355,000 in 1996. The decrease is primarily due to (i)
lower salaries and benefits in 1996 of $178,000, (ii) a $30,000 decrease in
legal costs incurred in 1996, (iii) the elimination of royalty expense
associated with the Wankel GmbH License Agreement of $105,000, (iv) reduced
expenses associated with consultants of $60,000, and (v) reduced travel and
other expenses of $26,000. These decreases were offset by increases in expenses
of $178,000 to support the Company's Rotary Power Marine, Inc. subsidiary.
Research and development expenses decreased 17%, or $340,000, from
$2,006,000 in 1995 to $1,666,000 in 1996. This decrease was due to a reduction
in most of the Company's independent research and development projects: the
development of 65 Series engines running on natural gas for industrial purposes;
the development of the 580 Series natural gas engine; the finalization of the
design of the 65 Series marine engine and all 40 Series engine applications and
costs associated with NASA and other aviation engine related proposals. These
reductions in research and development expenditures were offset by an increase
of $686,000 in the development, marinization and value improvement program on
the 580 Series commercial marine engine.
Loss from operations increased 170% from a $1,586,000 loss in 1995 to a
$4,284,000 loss in 1996. This increase in the Company's loss from operations was
as a result of sharply lower revenues and a gross margin loss offset by only
small reductions in general and administrative and research and development
expenditures. The gross margin loss was due primarily to the loss on the
pre-production 65 Series and 580 Series pre-production engines.
Interest expense remained approximately the same in 1996 as in 1995
($998,000 in 1996 and $1,001,000 in 1995). The 1996 amount included
approximately $724,000 interest paid on the Company's 1992 bond financing with
the New Jersey Economic Development Authority ("NJEDA") and $274,000 of interest
on the deferred acquisition obligation owed to JDTI. The interest expense for
the 1995 period included approximately $737,000 of interest paid on the NJEDA
bond financing and $263,000 of interest on the deferred debt obligation owed to
JDTI.
Interest income was higher in 1996 by 5% or $19,000 due primarily to
interest from the Hydro Lance loan and a small increase in interest earned from
certain obligations issued by the Financing Corporation, a mixed ownership
government corporation chartered by the Federal Home Loan Bank and Board (the
"FICO Strips"), which serve as collaterial for the NJEDA bonds. Interest income
in 1996 was offset by a reduction in the interest income
33
<PAGE>
from investing the remainder of the net proceeds of the Company's initial public
offering of Common Stock. Other Net Expense decreased by $33,000 from $92,000 in
1995 to $59,000 in 1996. This decrease is due to a lower loss on disposal of
fixed assets of $61,000 in 1996 as compared to $163,000 in 1995, which was
offset by a realized gain in 1995 of $68,000 on the sale of Securities Available
for Sale.
As a result of the above, net loss increased from $2,326,171 in 1995 to
$4,970,054 in 1996.
Twelve months ended December 31, 1995 vs Twelve months ended
December 31, 1994
Revenue for 1995 increased 17%, or $1,298,000, to $9,107,000 compared to
$7,809,000 in 1994. The increase in revenue was due to a number of factors
including increased revenue of $4,367,000 from a contract received in December
1994 from the United States Marine Corps (USMC) to design, test and deliver a
five-rotor 580 Series engine at a 2600 HP rating and increased revenue of
$1,119,000 from a contract awarded in November 1994 by Lockheed Martin for
development and delivery of 40 Series turbocharged engines for the U.S. Army's
Joint Tactical Unmanned Aerial Vehicle (JT-UAV) Hunter aircraft. This contract
was terminated for the convenience of the Government as of August 4, 1995. On
March 1, 1996, the Company and Lockheed Martin entered into a termination
settlement agreement relating to the JT-UAV contract pursuant to which the
Company received payment of the settlement amount less amounts previously paid
to the Company. Applicable write-off of receivables were taken in the 1995
period. The increases in revenue discussed above were offset by (i) decreased
revenue of $2,827,000 from the planned reduction in activity related to the
Company's original 580 Series engine development under a USMC contract, (ii)
decreased revenue of $1,462,000 from the Company's contract with the National
Aeronautics and Space Administration which was fundamentally completed by the
end of 1994, (iii) decreased revenue of $66,000 from the sale of 40 Series
engines and (iv) decreased revenue of $50,000 from other small contract
activity. In addition to the above, as a result of the Company's
commercialization efforts, the Company realized commercial revenues for the
first time in 1995 in the amount of $217,000.
Cost of revenue increased 2%, or $118,000 in 1995 as compared to 1994.
This increase comprises an increase of approximately $1,000,000 related to the
higher revenue in the 1995 period as compared to the 1994 period, which increase
was offset by lower costs of approximately $872,000, of which $823,000 was
associated with expected losses incurred in 1994 related to the pre-production
costs of 40 Series engines.
General and administrative expenses increased 6% or $148,000,
from $2,466,000 in 1994 to $2,614,000 in 1995. The increase is
34
<PAGE>
primarily due to (i) higher salaries and benefits in 1995 of $75,000 and (ii) a
$19,000 increase in legal, auditing and other costs incurred in 1995 associated
with an increased level of required activities as a public company. These
increases were offset by reduced expenses associated with consultants of $30,000
and reduced travel expenses of $13,000. In addition, in 1995, the Company
acquired the assets of RMI and retained two previous employees of RMI which, in
conjunction with other expenses, added $97,000 to the Company's general and
administrative expenses.
Research and development expenses increased 36%, or $530,000, from
$1,476,000 in 1994 to $2,006,000 in 1995. This increase was due to several
factors including (i) increased efforts associated with independent research and
development projects for the development of 65 Series engines running on natural
gas for industrial purposes; for 580 Series natural gas engine development; for
finalizing the design, bill of material and start-up of the 65 Series marine
engine production; and for preparing proposals for the 580 Series engine for the
advanced amphibious assault vehicle and (ii) decreased activity for projects
associated with the Company's Technology Reinvestment Program contribution; UAV
and other 40 Series engine applications; and NASA and other aviation engine
related proposals.
Loss from operations decreased 24% from a $2,088,000 loss in 1994 to a
$1,586,000 loss in 1995. This decrease resulted from the higher margins due to
the increased revenues offset by the higher general and administrative and
research and development expenses noted above.
Interest expense decreased 2% from $1,024,000 in 1994 to $1,001,000 in
1995. The 1995 amount included approximately $737,000 interest paid on the
Company's 1992 bond financing with the New Jersey Economic Development Authority
("NJEDA") and $263,000 of interest on the deferred acquisition obligation owed
to JDTI. The interest expense for the 1994 period included approximately
$750,000 of interest paid on the NJEDA bond financing, $252,000 of interest on
the deferred debt obligation owed to JDTI and $10,000 of interest related to an
accounts receivable credit line.
Interest income was lower in 1995 by 3% or $12,000 due primarily to a
small decrease in interest earned from investing the remainder of the net
proceeds of the Company's initial public offering of Common Stock. Other net
expense increased by $70,000 from $22,000 in 1994 to $92,000 in 1995. This
increase is due to a higher loss on disposal of fixed assets of $163,000 in 1995
as compared to $22,000 in 1994, which was offset by a realized gain in 1995 of
$68,000 on the sale of securities available for sale.
As a result of the above, net loss decreased from $2,769,000 in 1994 to
$2,326,000 in 1995.
35
<PAGE>
Other
The Company does not consider the impact of inflation to be significant
to the results of its operations in the periods since January 1, 1994 due to the
nature of its cost reimbursement contracts with the U.S. Government.
Liquidity and Capital Resources
During 1996, cash was used to (i) fund the development and the Value
Improvement Program on the 580 Series marine engines, (ii) continue to fund the
Company's activities in developing, producing and marketing 65 Series engines
for marine and industrial markets, (iii) purchase inventory, including Mazda
short blocks, to produce 65 Series rotary marine engines for the recreational
marine market and 65 Series natural gas engines for the supermarket
refrigeration market, (iv) purchase fixed assets, primarily improving test cell
equipment for production engine testing, and (v) pay debt service on the
Company's 1992 NJEDA bonds. These uses of cash, offset by the cash received from
the proceeds of sale of Common Stock and the cash received pursuant to the
exercise of warrants resulted in a decrease in the cash equivalents and
securities available for sale of approximately $325,000 during 1996.
In February 1996, the Company sold 1,000,000 shares of Common Stock at
$4.00 per share to Abejon and received a purchase order from Abejon for the sale
of 580 Series marine engines. Simultaneously with the sale of the Common Stock,
the Company loaned $3,750,000 to Hydro Lance, an affiliate of Abejon. It was
intended that the net amount received from the sale of the Common Stock to
Abejon less the loan to Hydro Lance plus the scheduled principal and interest
payments from Hydro Lance would fund the Company's development, marinization and
Value Improvement Program on the 580 Series commercial marine engines. However,
after making the first scheduled payment of $600,000 plus accrued interest in
April 1996, Hydro Lance defaulted on the $1,000,000 principal payment plus
accrued interest due on September 30, 1996 (the "September Installment"). When
the payment was still not made after a 30-day extension granted by the Company,
Abejon, Hydro Lance and the Company entered into an agreement in which a 47.7%
interest in a ferry boat then owned by Abejon was sold to the Company. Abejon
retained the remaining 52.3% interest in the ferry boat. Simultaneously
therewith, the Company and Abejon formed a limited liability company (the "LLC")
and the Company and Abejon each contributed their ownership interest in the
ferry boat to the LLC. The ferry boat is the only asset of the LLC. The
objective of the sale of an interest in the ferry boat to the Company and the
creation of the LLC to own the ferry boat was the eventual repayment to the
Company of the September Installment which was to be made out of the Company's
share of the proceeds from the sale of the boat, which, at the time, Abejon had
estimated was worth approximately $2.325 million. The ferry boat has not been
sold as
36
<PAGE>
of the date of this report. When Hydro Lance failed to make the next repayment
installment on its loan on December 30, 1996 of $250,000, the Company notified
Hydro Lance, on January 29, 1997, that they were in default of the loan
agreement. Hydro Lance did not cure the second default; and, the Company, on
March 21, 1997, sent Hydro Lance and Abejon a notice declaring an event of
default under the loan agreement and declaring the amounts due by Hydro Lance
under the loan agreement to be immediately due and payable. The Company
furthermore elected to take possession of and execute on the shares of the
Company's common stock owned by Abejon that were pledged as collateral for the
loan agreement.
In March 1996, pursuant to a termination settlement agreement with
Lockheed Martin, the Company was paid $833,000.
In December 1996, the Company concluded an agreement with International
Cryogenic Systems Corporation ("ICSC") whereby ICSC invested $1,000,000 in the
Company in exchange for 2,000,000 shares of the Company's Common Stock.
Simultaneously, the Company and ICSC agreed in principle to merge the two
companies in a stock-for-stock acquisition, whereby the Company would become a
wholly-owned subsidiary of ICSC. The Company and ICSC signed a Plan and
Agreement of Merger on March 21, 1997 and, upon approval by the stockholders of
the Company, the transaction will be completed.
The Company has an accounts receivable line of credit with a finance
company which permits the Company to borrow up to 80% of the invoice value of
its assigned receivables. Since March 1994, the Company has not utilized this
credit line.
Capital expenditures were approximately $144,000 in 1996 compared to
$503,000 in the 1995 period. Funds for these expenditures were provided through
sale of common stock and the exercise of warrants.
Working capital decreased approximately $1,985,000 from $2,573,000 at
the end of 1995 to $588,000 at December 31, 1996. This decrease is due (i) to
the use of cash and securities available for sale, and the increase in cash due
to the sale of Common Stock and exercise of warrants, as described above; (ii)
to much lower receivables from government contracts; (iii) to increased
inventories for both the 65 Series natural gas and marine products and the 580
Series commercial marine engine, (iv) increased accounts payable, due to the
Company's financial position at the end of 1996; and (v) to increased accrued
liabilities due mainly to the gross margin loss anticipated in 1997 on the sale
of the first 580 Series Mark 1 marine engines.
In March, 1997, the Company received $1,000,000 from the Trustee for the
bondholders of the New Jersey Economic Development Authority Taxable Revenue
Bonds, Series 1992, from the proceeds of the sale of the FICO Strips held by the
Trustee as collateral for
37
<PAGE>
the bondholders. The remaining proceeds from the sale were reinvested in FICO
Strips with a different maturity and redeposited with the Trustee to continue to
serve as collateral for the bondholders.
The Company's current and anticipated cash resources, including the
$1,000,000 equity investment by ICSC and the $1,000,000 proceeds from the sale
of the FICO Strips, are expected to be sufficient to enable the Company to
continue its operations in an orderly manner through June 30, 1997. Accordingly,
the Company requires additional financing by June 30, 1997 and thereafter in
order fo fund its operations until it achieves positive cash flow from the sale
of its 580 and 65 Series engines. Therefore, the long-term future of the Company
depends on its ability to obtain additional sources of financing and there can
be no assurance that such financing can be obtained on acceptable terms or at
all.
"Safe Harbor" Statement
Forward looking statements made herein are based on current expectations
of the Company that involve a number of risks and uncertainties and should not
be considered as guarantees of future performance. These statements are made
under the Safe Harbor Provisions of the Private Securities Litigation Reform Act
of 1995. The factors that could cause actual results to differ materially
include interruptions or cancellation of existing contracts, the impact of
competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources than the Company,
product development and commercialization risks and an inability to arrange
additional debt or equity financing.
38
<PAGE>
PART II
ITEM 7. FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Consolidated Financial Statements
for the years ended December 31, 1996 and 1995
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ROTARY POWER INTERNATIONAL, INC.
CONTENTS
Independent Auditors' Report of Demetrius & Company L.L.C. F-2
Independent Accountants' Report of Coopers & Lybrand L.L.P. F-3
Consolidated Balance Sheets - December 31, 1996 and 1995 F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the Years Ended December 31, 1996
and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995 F-7
Notes to Financial Statements F-8 - F-23
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Rotary Power International, Inc.
We have audited the accompanying consolidated balance sheet of Rotary Power
International, Inc. and subsidiary (the "Company") as of December 31, 1996, and
the consolidated statements of operations, changes in stockholders' equity
(deficiency), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated financial statements of Rotary Power International, Inc. and
subsidiary as of December 31, 1995, were audited by other auditors whose report
dated March 8, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rotary Power
International, Inc. and subsidiary as of December 31, 1996 and the consolidated
results of their operations and their cash flows for the year ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Demetrius & Company, L.L.C.
- -------------------------------
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
March 21, 1997
F-2
<PAGE>
[LOGO]
COOPERS & LYBRAND L.L.P.
Report of Independent Accountants
To the Board of Directors of
Rotary Power International, Inc.
We have audited the accompanying consolidated sheet of Rotary Power
International, Inc. (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted out audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rotary Power
International, Inc. as of December 31, 1995 and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/Coopers & Lybrand LLP
------------------------
COOPERS & LYBRAND LLP
Stamford, Connecticut
March 8, 1996
F-3
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 633,597 $ 327,655
Securities available-for-sale (Note 2) 630,508
Accounts receivable (Note 3) 452,015 1,737,854
Other receivables 9,083 15,736
Inventories (Note 4) 2,657,030 1,041,700
Other current assets 9,814 9,380
------------ ------------
Total Current Assets 3,761,539 3,762,833
Fixed assets (Note 5) 2,279,959 3,117,990
Patents (Note 2) 677,399 738,980
Investment held by Trustee (Note 9) 3,925,761 3,638,299
Other assets, net (Note 6) 664,154 658,518
------------ ------------
$ 11,308,812 $ 11,916,620
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt (Note 9) $ 183,750 $ 170,833
Accounts payable 1,103,167 530,188
Accrued liabilities (Note 7) 1,096,638 297,363
Other liabilities 564,904 41,501
Deferred acquistion obligation - current (Note 8) 225,000 150,000
------------ ------------
Total Current Liabilities 3,173,459 1,189,885
Long-term liabilities:
Deferred acquisition obligation (Note 8) 2,857,143 2,732,683
Long-term debt (Note 9) 6,629,167 6,812,917
Other liabilities 25,000
------------ ------------
Total Liabilities 12,659,769 10,760,485
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity (deficiency) (Note 1, 12, and 13): Preferred stock, 500,000
shares authorized Common stock, par value $.01; 10,000,000 shares
authorized; 6,641,432 for 1996 and 3,391,432 for 1995 shares issued
and outstanding 66,414 33,914
Subscription receivable (3,150,000)
Paid-in capital 14,404,638 8,823,879
Accumulated deficit (12,672,009) (7,701,955)
Unrealized gain on securities available-for-sale, net of tax 297
------------ ------------
Total Stockholders' Equity (Deficiency) (1,350,957) 1,156,135
------------ ------------
$ 11,308,812 $ 11,916,620
============ ============
</TABLE>
The accompanying notes are an integral part of the statements.
F-4
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 5,768,143 $ 9,107,157
----------- -----------
Costs and expenses:
Cost of revenues 6,031,334 6,073,281
General and administrative 2,354,788 2,613,725
Research and development 1,666,366 2,006,113
----------- -----------
Total Cost and Expenses 10,052,488 10,693,119
----------- -----------
Loss From Operations (4,284,345) (1,585,962)
----------- -----------
Other income (expense):
Interest expense (998,581) (1,000,660)
Interest income 371,869 352,906
Other, net (58,997) (92,455)
----------- -----------
Total Other Expense (685,709) (740,209)
----------- -----------
Net Loss ($4,970,054) ($2,326,171)
=========== ===========
Net loss per common share - primary (Note 2): ($1.10) ($0.70)
Weighted average common shares outstanding (Note 2): 4,502,265 3,329,337
</TABLE>
The accompanying notes are an integral part of the statements.
F-5
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Series 1 Convertible
Preferred Stock Common Stock
------------------------------------------------- Subscriptions Paid-In
Shares Value Shares Par Value Receivable Capital
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,269,208 $32,692 ($ 112,500) $ 8,284,905
Issuance of common stock (Note 12) 122,224 1,222 538,974
Collection of subscriptions receivable 112,500
Net change in unrealized gain (loss)
on securities available-for-sale,
net of tax
Net loss
----------------------------------------------------------------------------------
Balance at December 31, 1995 3,391,432 33,914 -- 8,823,879
Issuance of common stock (Note 12) 3,250,000 32,500 (3,150,000) 5,580,759
Net change in unrealized gain (loss)
on securities available-for-sale,
net of tax
Net loss
----------------------------------------------------------------------------------
Balance at December 31, 1996 6,641,432 $66,414 ($3,150,000) $14,404,638
==================================================================================
Unrealized
Gain (Loss)
on Securities Stockholders'
Accumulated Available Equity
Deficit For Sale (Deficiency)
--------------------------------------------------
<C> <C> <C>
Balance at December 31, 1994 ($5,375,784) ($29,003) $2,800,310
Issuance of common stock (Note 12) 540,196
Collection of subscriptions receivable 112,500
Net change in unrealized gain (loss)
on securities available-for-sale,
net of tax 29,300 29,300
Net loss (2,326,171) (2,326,171)
--------------------------------------------------
Balance at December 31, 1995 (7,701,955) 297 1,156,135
Issuance of common stock (Note 12) 2,463,259
Net change in unrealized gain (loss)
on securities available-for-sale,
net of tax (297) (297)
Net loss (4,970,054) (4,970,054)
--------------------------------------------------
Balance at December 31, 1996 ($12,672,009) $ -- ($1,350,957)
==================================================
</TABLE>
The accompanying notes are an integral part of the statements.
F-6
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,970,054) ($2,326,171)
Adjustments to reconcile to net cash used in operating activities:
Deprecation 943,748 885,206
Amortization 95,052 145,054
Interest, net (13,002) (1,490)
Other (61,262) (36,337)
Loss on disposals of fixed assets 60,638 163,054
Changes in assets and liabilities:
Accounts receivable 1,285,838 (308,839)
Other receivables 6,653 22,780
Inventories (1,615,330) (674,825)
Other current assets (434) (2,462)
Other assets (122)
Accounts payable 572,979 153,733
Accrued liabilities 799,275 (256,131)
Other current liabilities 523,403 (1,633)
Other long-term liabilities (25,000) 25,000
----------- -----------
Net Cash Used in Operating Activities (2,397,496) (2,213,183)
----------- -----------
Cash flows from investing activities:
Purchase of securities available-for-sale (647,422) (627,550)
Sales of securities available-for-sale 1,277,633 2,622,169
Proceeds from the sale of fixed assets 30,000
Purchases of fixed assets (144,199) (502,880)
----------- -----------
Net Cash Provided by Investing Activities 486,012 1,521,739
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (170,833) (158,750)
Issuance of common stock 2,463,259 652,696
Payment of deferred acquistion ogligation (75,000) (150,000)
----------- -----------
Net Cash Provided by Financing Activities 2,217,426 343,946
----------- -----------
Net Increase (Decrease) in Cash 305,942 (347,498)
Cash and cash equivalents at beginning of year 327,655 675,153
----------- -----------
Cash and Cash Equivalents at End of Year $ 633,597 $ 327,655
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the year $ 786,689 $ 875,271
Income taxes paid during the year -- --
</TABLE>
See Note 16 for supplemental cash flow information
The accompanying notes are an integral part of the statements.
F-7
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
1. GENERAL
Rotary Power International, Inc. ("RPI" or the "Company") and its
wholly-owned subsidiary, Rotary Power Marine, Inc. are engaged in the
development, demonstration and production of rotary engines capable of
operating on a variety of liquid fuels and natural gases. The Company's
strategic thrust is to penetrate commercial engine markets. The Company's
commercialization efforts are focusing on natural gas rotary engines for
commercial refrigeration, compressors and generators, and on diesel engines
in the commercial and recreational marine market and for commercial
generator sets.
In 1995, the Company established a wholly-owned subsidiary, Rotary Power
Marine, Inc. ("RPM") which acquired certain assets of Rotary Marine
Industries, Inc. for approximately $165,000 and a royalty on future 65
Series rotary marine engine sales. RPM produces rotary engines for
commercial and recreational marine markets. RPM's primary customers consist
of builders of commercial and recreational marine boats as well as
distributors of engines, who sell to a diverse customer base.
In December 1996, International Cryogenic Systems Corporation ("ICSC")
purchased 2,000,000 shares of the authorized but unissued common stock, par
value $0.01 per share, of the Company for a cash consideration of
$1,000,000. Simultaneously with this transaction, the Company and ICSC
entered into a letter agreement whereby the two companies agreed that ICSC
would purchase all the outstanding shares of the Company for a number of
shares of the common stock, of ICSC to be negotiated (see "Subsequent
Events" Note 18 ).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, RPM. All significant
intercompany accounts and transactions have been eliminated.
b. Cash and Cash equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with an original maturity of three months or less.
As of December 31, 1996 the Company had cash deposited in one bank in
the amount of $982,673.
F-8
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
d. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation
provided on the straight-line method over the estimated useful lives
of the respective assets. Assets under construction are depreciated
over their respective useful lives when they are placed in service.
When fixed assets are sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the statement of operations for
the period.
e. Revenue Recognition
Revenues on long-term contracts, including government cost
reimbursement contracts, are recognized on the percentage of
completion method. Percentage of completion is measured by costs
(including applicable general and administrative) incurred and accrued
to date compared to total estimated costs.
Contracts typically extend over a period of one or more years. In
accordance with industry practice, receivables include amounts
relating to contracts and programs having production cycles longer
than one year and a portion thereof will not be realized within one
year. Provisions for estimated losses, if any, are made in the period
in which such losses are determined.
Revenues billed to the U.S. Government and its agencies directly and
through prime contractors were approximately $5,127,000 and $8,756,000
for the years ended December 31, 1996 and 1995, respectively. Revenues
billed to the U.S. Government represent 89% and 96% of the Company's
total revenues in 1996 and 1995, respectively. Future revenues and
income of the Company would be materially affected by changes in
procurement policies or a reduction in expenditures for the services
provided by the Company which are subject to the U.S. Government
appropriation of funds. The loss of continued funding could have a
material adverse effect on the Company's operations.
F-9
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from the estimates.
g. Securities Available for Sale
Investment securities available for sale are reported at fair value
and related fair value adjustments are included as a component of
stockholder's equity, net of related deferred tax effects, if any.
Realized gains and losses on sales of investment securities are
included in income on a specific identification basis.
h. Patents
Purchased patents are amortized on a straight-line basis over the
useful lives, generally seventeen years. Amortization expense was
$61,581 for each of the years ended December 31, 1996 and 1995.
Accumulated amortization was $307,908 and $246,327 for the years ended
December 31, 1996 and 1995, respectively.
i. Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on
future years of temporary differences between the tax bases of assets
and liabilities, principally inventory, fixed assets, accrued
liabilities and deferred acquisition obligation, and their financial
reporting amounts at each year-end and net operating loss
carryforwards.
j. Net Loss Per Common Share
Primary and fully diluted net loss per common share is based on the
net loss divided by the weighted average number of common shares
outstanding during the period. The exercise of stock options and
warrants was not assumed as their effect would be anti-dilutive.
F-10
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Stock Based Compensation
In accordance with the provisions of SFAS No. 123, the Company applied
APB Opinion 25 and related interpretations in accounting for its stock
option plans, and accordingly, does not recognize compensation cost.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---------- ----------
U.S. Government:
Amount billed $1,068,950
Unbilled recoverable costs 337,295
Other unbilled costs $ 61,732 305,402
---------- ----------
61,732 1,711,647
Commercial 390,283 26,207
---------- ----------
Total $ 452,015 $1,737,854
========== ==========
Unbilled recoverable costs represent revenue recognized on costs incurred
on contracts in progress which will be billed within the next 30 days.
Other unbilled costs are subject to future negotiation and are expected to
be billed and collected within one year.
Concentration of receivables in the marine industry is 23% as of December
31, 1996.
4. INVENTORIES
Inventories at December 31, 1996 and 1995 consisted of the following:
1996 1995
---------- ----------
Fuel and oil $ 1,344 $ 10,157
Parts 972,807 87,204
Work in process 1,467,970 887,289
Finished goods 214,909 57,050
---------- ----------
$2,657,030 $1,041,700
========== ==========
F-11
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
4. INVENTORIES (Continued)
Of the total 1996 inventory, $748,432 relates to purchases of short block
engines, component parts, labor and related overhead costs at RPM for its
commercial 65 series rotary marine engine market. Since the establishment
of RPM on July 26, 1995, rotary marine engine sales have been limited.
Management has received orders in 1996 and expects to receive orders in the
near term for a substantial portion of its December 31, 1996 inventory from
distributors of marine engines and from several boat manufacturers whose
designs utilize RPM's engine. Should these orders not be consummated,
management believes there are other markets for the sale of these engines
and, accordingly, does not believe a loss will occur on disposition.
RPI's 1996 inventory includes $112,619 relating to the production of its 65
Series natural gas rotary engine for which it has orders or expects to
receive orders that will be sufficient to recover its costs.
RPI and RPM purchases short block engines under agreements with one foreign
vendor. Any disruption in the vendor's ability to supply these engines
could affect RPI and RPM's manufacturing and adversely affect operating
results.
5. FIXED ASSETS
Fixed assets at December 31, 1996 and 1995 consisted of the following:
Useful Lives 1996 1995
---------- ----------
Machinery and equipment 7 $5,491,844 $5,353,631
Furniture and fixtures 7 68,388 68,388
Office equipment 7 57,194 57,194
Computer equipment 5 333,796 328,161
Autos and trucks 5 8,500 8,500
Boats 5 32,108 32,108
Tooling 3 564,598 564,598
Demonstration equipment 3 261,663 203,591
Construction in process -- 32,941 129,145
---------- ----------
6,851,032 6,745,316
Less accumulated depreciation (4,571,073) (3,627,326)
---------- ----------
$2,279,959 $3,117,990
========== ==========
F-12
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
6. OTHER ASSETS
Other assets as of December 31, 1996 and 1995 consisted of the following:
1996 1995
-------- --------
Deferred financing costs $632,054 $632,054
Covenants not to compete 200,000
Deposits 56,622 56,622
Other 117,680 86,314
-------- --------
806,356 974,990
Less Accumulated Amortization (142,202) (316,472)
-------- --------
$664,154 $658,518
======== ========
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---------- --------
Provision for loss on contracts $ 876,861 $ 25,127
Contract adjustments 62,000 25,000
Employee contracts 90,678
Professional fees 71,938 50,993
Other 85,839 105,565
---------- --------
$1,096,638 $297,363
========== ========
F-13
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
8. DEFERRED ACQUISITION OBLIGATION
Pursuant to the acquisition of certain assets at the Company's inception in
1991, a deferred acquisition obligation was incurred, which as of December
31, 1996 and 1995 is payable to the seller as follows:
1996 1995
---------- ----------
$150 per annum, payable
January 31, 1995 through 1997 $ 225,000 $ 300,000
$500,000 per annum, payable
January 31, 1998 through 2006 4,500,000 4,500,000
---------- ----------
Total remaining payments 4,725,000 4,800,000
Less:
Unamortized discount at 10% (1,642,857) (1,914,317)
Current portion (225,000) (150,000)
---------- ----------
Long-term portion $2,857,143 $2,732,683
========== ==========
The Company was unable to make the full payment of $150,000 which was due
to the seller on January 31, 1996 and paid $75,000 giving the seller a
collateral interest in certain of the Company's unencumbered fixed assets
for the balance.
The fair value of this obligation approximates carrying value. In addition
to the deferred acquisition obligation, the Company may be required to make
additional payments to the seller based upon a certain percentage of engine
sales. No additional payments were made in 1996 and 1995.
F-14
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
9. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 consisted of the following:
1996 1995
---------- ----------
New Jersey Economic Development
Authority Bonds $6,812,917 $6,983,750
Less current portion (183,750) (170,833)
---------- ----------
$6,629,167 $6,812,917
========== ==========
The Company has entered into a loan agreement with the New Jersey Economic
Development Authority ("NJEDA") pursuant to which the proceeds of
$7,500,000 worth of NJEDA taxable revenue bonds were loaned to the Company.
The loan agreement requires the Company to pay the debt service on these
bonds. The bonds mature annually through June 1, 2013 and accrue interest
at rates from 8.4% to 11%. The bonds require semi-annual interest and
annual principal payments to the bondholders. The Company is required to
make monthly principal and interest deposits to Summit Bank (the "Trustee")
which acts as the Trustee for the bonds. The Trustee makes the semi-annual
payments of interest and annual payments of principal to the bondholders.
The fair value of these bonds is approximately $6,956,000 based on market
quotes for NJEDA bonds with similar maturities.
The bonds are collaterzlized by the inventory, fixed assets, receivables
and other personal property except for intellectual property of the
Company. In addition, the Company has three key-man life insurance policies
each with a face amount of $1,000,000 payable to the Trustee.
At December 31, 1996, the minimum payments to the Trustee for the next five
years and thereafter are as follows:
1997 $ 183,750
1998 201,667
1999 218,750
2000 239,583
2001 261,667
Thereafter 5,707,500
----------
$6,812,917
==========
F-15
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
9. LONG-TERM DEBT (Continued)
As required by the loan agreement, simultaneously with the issuance of the
bonds, the Company purchased $7,500,000 of obligations issued by the
Financing Corporation, a mixed ownership government corporation chartered
by the Federal Home Loan Bank Board (the "FICO Strips") at a cost of
$2,798,565, including a premium of $118,586, which are registered in the
name of and held by the Trustee. Of the total outstanding, $3,500,000 of
the FICO Strips mature on September 26, 2005 and $4,000,000 mature on June
6, 2004. Assuming the principal, payments on the bonds are paid at their
respective maturity dates, on or after December 1, 2001, the value of the
FICO Strips will be sufficient to repay the principal of all bonds
outstanding. (see "Subsequent Events" Note 18)
The FICO Strips at December 31, 1996 and 1995 consist of the following:
1996 1995
---------- ----------
FICO Strips, including
accreted interest $3,847,093 $3,550,761
Plus unamortized premium based
on imputed interest of
6.35% to 6.41% 78,668 87,538
---------- ----------
FICO Strips, plus accreted interest
and unamortized premium $3,925,761 $3,638,299
========== ==========
The fair value of these strips at December 31, 1996 was approximately
$4,302,000 based on market quotes.
F-16
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES
The Company has no employment agreements with any of its officers and
employees. Previous employment agreements expired on December 31, 1996.
In prior years, the Company issued 31,660 shares of its common stock,
valued at $94,980, in satisfaction of certain employment obligations
accrued at December 31, 1992. The Company may be required to provide
certain of its executive officers with noninterest bearing loans for an
amount equal to the tax liability of the executives for the stock issuance.
The U.S. Government's Defense Contract Audit Agency has performed final
indirect rate audits of the Company's contract costs for the years ended
December 31, 1992, 1993 and 1994; the results of the audits did not have a
material effect on the Company's financial position or results of its
operations. A final indirect rate audit and an audit of contract costs for
the years ended December 31, 1996 and 1995 have not yet been performed. The
Company provides for potential adjustments from such audits and believes
that any adjustments from such audits will not have a material effect on
the Company's financial position or results of operations.
The Company leases office, factory and laboratory space under an operating
lease expiring in 1997 with the Company having an option to renew the lease
through 2000. Rent expense for the years ended December 31, 1996 and 1995
was $451,000 and $437,000, respectively, net of sublease income. Rent
expense is recognized on a straight-line basis over the term of the lease.
The excess of rent expense accrued on a straight-line basis over rental
payments is included in other liabilities on the Company's balance sheet.
At December 31, 1996, aggregate minimum annual payment for the next year is
$600,000 and anticipated sub lease income is $140,350.
In 1992, the Company entered into a license and technical assistance
agreement with the Wankel GmbH, the rights and obligations of which were
assigned to Wankel Rotary GmbH, ("Wankel") a subsidiary of Gneiser GmbH.
F-17
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (Continued)
On January 10, 1996, however, the Company advised Wankel that due to
Wankel's failure to deliver the know-how required to be supplied under the
provisions of the Wankel License Agreement the Company was terminating the
Agreement, effective immediately, and withholding the minimum royalty
payment of $200,000 for calendar year 1996 due Wankel on January 31, 1996.
Wankel advised the Company on September 19, 1996 that it accepted the
cancellation of the Wankel license agreement by mutual consent.
In connection with the acquisition of certain assets of Rotary Marine
Industries, Inc. ("RMI") in 1995, the Company may be required to make
additional payments to RMI of 2 1/2% of 65 Series rotary marine engine
sales between 1997 and 2005.
11. RELATED PARTY TRANSACTIONS
During 1995 the Company paid $25,000, to Loeb Partners Corporation for
advisory and management consulting services. A director of the Company is a
managing director of Loeb Partners Corporation.
12. SHAREHOLDERS' EQUITY
Preferred Stock:
The Company is authorized to issue 500,000 shares of preferred stock, $.01
par value per share. The Company's Board of Directors, may issue from time
to time the authorized and unissued shares of Preferred Stock in one or
more series, and may determine as to each series the dividend rights and
terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred
Stock.
The Company has designated Series 1 convertible preferred stock and Series
2 (nonvoting) preferred stock. None of the Series 1 or Series 2 preferred
stock was outstanding at December 31, 1996 and 1995. Furthermore, with the
completion of the Company's initial public offering, neither the Series 1
or Series 2 preferred stock is available for issuance. At December 31, 1996
and 1995 437,340 shares of preferred stock were issuable.
F-18
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
12. SHAREHOLDERS' EQUITY (Continued)
Preferred Stock: (Continued)
In connection with the successful completion of the Company's initial
public offering of its common stock in 1994, the Series 1 convertible
preferred stock and accumulated dividends were converted into 734,598
shares of common stock.
Common Stock:
During 1996, the Company issued a total of 3,250,000 shares of its common
stock. Warrants to purchase 250,000 shares of common stock at a price of
$2.50 per share were exercised.
On February 16, 1994, the Company completed an initial public offering of
800,000 shares of its common stock at $8 per share. The Company received
proceeds of $5,824,000, net of underwriting discounts and commissions. The
net proceeds, less related costs and expenses, were credited to capital
stock and paid-in capital. The Company's common shares are traded on the
Over the Counter Bulletin Board.
In connection with the initial public offering, the Company sold to the
underwriters, for $800, warrants to purchase from the Company 80,000 shares
of common stock at $9.60 per share, which are exercisable for a period of
four years commencing February 9, 1995.
There were 140,000 warrants to purchase common stock outstanding at
December 31, 1996, which are exercisable between 1997 and 1999 at prices
ranging from $4.625 to $9.60.
At December 31, 1996 and 1995, 445,000 and 617,200 shares of common stock,
respectively, have been reserved for exercise of warrants and stock
options.
F-19
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
13. STOCK OPTION PLAN
In 1992, the Board of Directors adopted the 1992 Stock Option Plan (the
"Plan"). Under the terms of the Plan, incentive stock options to purchase
up to 400,000 shares of common stock may be granted to key employees and
directors of the Company at the fair market value at the date of grant (or
110% of the fair market value for grants issued to holders of more than 10%
of the voting stock of the Company). Options granted under the Plan become
exercisable in whole or in part from time to time as determined by the
Board of Directors, provided, however, in no event shall any option become
exercisable earlier than the date six months following the date on which
the option is granted. Options granted under the Plan shall have a maximum
term of ten years from the date of grant. The option price must be paid in
full on the date of exercise in cash or in common shares of the Company
having a fair market value on the date of exercise equal to the option
price. Stock options outstanding are exercisable commencing one year after
grant at a rate of either 20% or 25% of such shares in each succeeding
year.
Option status and activity were as follows for the years ended December 31:
1996 1995
------- --------
Outstanding, beginning of year 342,200 355,000
Exercised ($3.00 per share in 1995) (3,200)
Canceled ($3.00 per share in 1996 and 1995) (51,200) (9,600)
------- -------
Outstanding ($.19125 to $5.00 per share)
end of year 291,000 342,200
======= =======
Available for grant 95,000 44,000
======= =======
Exercisable 216,200 162,100
======= =======
F-20
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
14. EMPLOYEE BENEFITS
The Company is the sponsor of a defined contribution retirement savings
plan. All employees of the Company are eligible for participation after one
year of service. The Company matches 100% of pre-tax contributions up to
3.0% of the participant's total salary. The Company recorded $89,913 and
$107,100 of matching contributions and $5,637 and $5,155 of administrative
expenses related to this plan in 1996 and 1995, respectively.
The Company has established an incentive compensation plan to provide
incentive compensation to the Company's officers and key employees. Any
awards must be approved by the Board of Directors and are paid in quarterly
installments and shall not exceed 100% of the participant's salary. There
were no such awards granted or accrued during 1996 and 1995.
15. INCOME TAXES
Deferred tax accounts as of December 31, 1996 and 1995 comprise the
following:
1996 1995
---------- ----------
Deferred tax assets $4,592,000 $2,877,098
Deferred tax liabilities (121,000) (121,496)
---------- ----------
Deferrred tax assets, net 4,471,000 2,755,602
Valuation allowance (4,471,000) (2,755,602)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
As of December 31, 1996, the Company has federal and state net operating
loss carryforwards available for tax purposes of approximately $10,418,000
and $9,351,000 expiring through 2011 and 2005, respectively.
F-21
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
16. SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded $287,461 and $264,635 of accreted interest income on
the FICO Strips during 1996 and 1995, respectively.
During 1996, the Company issued 1,000,000 common shares for $250,000 and a
subscription receivable of $3,750,000 and received payment of $600,000.
(see "Subsequent Events" Note 18).
During 1996 and 1995, the Company recorded $61,262 and $36,337 of income
related to the increase in the cash surrender value of life insurance
policies on certain officers.
Additionally, the Company recorded imputed interest expense of $199,462 and
$113,145 on its deferred acquisition obligation during December 31, 1996
and 1995, respectively.
17. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred net
losses of $4,970,054 and $2,326,171 during the years ended December 31,
1996 and 1995, respectively. As of December 31, 1996 the Company had
working capital of $588,080, however, its total liabilities exceeded total
assets by $1,350,957. The 1996 loss of all the Company's government
contracts was the main contributor towards the large size of the 1996
operating loss. The Company is in default with the deferred acquisition
obligation and is four months in arrears on its office, factory and
laboratory space lease. These factors, as well as the uncertain conditions
the Company faces regarding obtaining financing or additional capital
investment create uncertainty about the Company's ability to continue as a
going concern. Management of the Company has signed an agreement to merge
it into another company for the purpose of raising additional equity and
increasing its capability for marketing its commercial products. (see
"Subsequent Events" Note 18). Also, subsequent to December 31, 1996 the
Company was able to obtain partial release of investments held by the
Trustee and realized $1,000,000 cash infusion through their sale. (see
"Subsequent Events" Note 18). The ability of the Company to continue as a
going concern is mainly dependent on the successful completion of the
merger and marketing of its commercial products. The financial statements
do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
F-22
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 1996
18. SUBSEQUENT EVENTS
On December 19, 1996, the Company concluded an agreement with International
Cryogenic Systems Corporation ("ICSC") whereby ICSC invested $1,000,000 in
the Company in exchange for 2,000,00 shares of the Company's Common Stock.
Simultaneously, the Company and ICSC agreed in principle to merge the two
companies in a stock-for-stock acquisition, whereby the Company would
become a wholly-owned subsidiary of ICSC. Each stockholder of the Company
will receive .363 shares of the Common Stock of ICSC for each share of RPI
held. The Company and ICSC signed a Plan and Agreement of Merger on March
21, 1997 and, upon approval of the stockholders of the Company, the
transaction will be completed.
On March 13, 1997, at the written direction of the Company, the Trustee
liquidated and sold a portion of the FICO Strips which serve as collateral
for the NJEDA bonds and received $2,583,110 from such liquidation and sale.
The FICO Strips sold by the Trustee included all of the $3,500,000
principal amount of the FICO Strips maturing on September 26, 2005 and
$1,050,000 of the principal amount of the FICO Strips maturing on June 6,
2004. The Trustee paid $1,000,000 from the proceeds of such sale and
liquidation over to the Company for use as general working capital, and
used substantially all of the remaining proceeds to purchase FICO Strips
maturing on September 26, 2007 in the principal amount of $3,272,000. As a
result of this transaction, and assuming the principal payments on the
NJEDA bonds are paid at their respective maturity dates, the value of the
FICO Strips currently held by the Trustee will be sufficient to repay the
principal of all the NJEDA bonds outstanding on and after January 1, 2004.
In conjunction with this transaction, Rickel & Associates, Inc., investment
bankers, received 150,000 RPI warrants at $.50 per share.
On March 21, 1997, the Company sent notice to Hydro Lance Maritime
Transport, Inc. (Hydro) and Abejon Rotary Power Corporation (Abejon),
declaring the occurrence of an event of default under the Company's loan
agreement with Hydro and Abejon. The event of the default was declared as a
result of Hydro's failure to make a principal payment of $175,000 and an
interest payment of $28,435, both of which were due to the Company on
December 20, 1996. In its notice to Hydro and Abejon, the Company elected
to declare the principal of and interest on the loan and other amounts
payable under the loan agreement to be immediately due and payable and to
take possession of and execute upon 614,583 shares of the Company's common
stock which are owned by Abejon and are pledged as collateral and security
for the obligations of Hydro under the loan agreement. In its notice, the
Company also reserved any and all of its rights and remedies with respect
to other shares of the Company's common stock owned by Abejon.
F-23
<PAGE>
PART II
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On March 6, 1997, the Company retained Demetrius & Co., L.L.C. of Wayne,
New Jersey, ("Demetrius") as its new independent accountants, to audit the
Company's financial statements for the year ending December 31, 1996, dismissing
Coopers & Lybrand L.L.P. ("Coopers"), which had served in such capacity prior
thereto.
The change in independent accountants was made solely because the
Company and Coopers could not agree on acceptable fees for its services. The
Company retained Demetrius to reduce the costs of such services to the Company.
The Company's decision to change its independent accountants was approved by the
Company's Board of Directors.
The reports of Coopers on the Company's financial statements for the
fiscal years ending December 31, 1994 and 1995 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's two most recent fiscal years and subsequent interim
periods through the date of this report, there were no disagreements between the
Company and Coopers of the type described in Item 304(a)(iv)(A) of Regulation
S-B.
39
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
MANAGEMENT
The directors and executive officers of the Company are as follows:
Position with the
Name Age Company
---- --- -------
Richard M.H. Thompson 62 President and Chief Executive
Officer and Director
Robert L. Osborn 56 Vice President & General
Manager and Director
William T. Figart 70 Director and Consultant to
the Company
Gary A. LaBouff 43 Vice President
- Engineering
Ken Brody 54 Director
Richard M. H. Thompson has been a director and President and Chief
Executive Officer of the Company since its incorporation in October 1991 and
devotes substantially all of his time to his duties with the Company. Since
1981, Mr. Thompson has acted through his company, Richard M.H. Thompson &
Associates, Inc., as a financial and management advisor. He is a director and
Chairman of the Executive Committee of Energy Research Corporation ("ERC"), a
company specializing in the development and commercialization of fuel cell
technology. Mr. Thompson received his M.A. in mathematics and engineering from
Cambridge University and his M.B.A. from Harvard University.
Robert L. Osborn has been a director and Vice President and General
Manager of the Company since January 1992. Prior to joining the Company, Mr.
Osborn held a variety of management positions with Deere & Company, including
most recently, from 1987 to 1991, manager of manufacturing operations at the
Rotary Engine Division of John Deere Technologies International, Inc. (JDTI),
where he was responsible for the planning, machine selection and start-up of the
manufacturing and testing facilities. He received his B.S. degree in business
administration from Upper Iowa University.
William T. Figart was the Vice President of Advanced Programs for the
Company from January 1992 through June 1996 and has been a director of the
Company since November 1993. He was responsible for military and U.S. government
marketing and business plans, program
40
<PAGE>
management and sales of rotary engines to original equipment manufacturers, and,
since July 1, 1996, now acts as a consultant to the Company. For the five years
prior to joining the Company, Mr. Figart was a Vice President of JDTI and
Manager of Advanced Programs for JDTI's Rotary Engine Division, and, prior
thereto, was Vice President and General Manager of the Rotary Engine Division of
Curtiss Wright Corporation. He received a B.S. in mechanical engineering from
Pennsylvania State University and a M.S.in mechanical engineering from Stevens
Institute of Technology.
Gary A. LaBouff has been Vice President - Engineering of the Company
since April 1992. From August 1990 to April 1992, he was Manager of Engineering
for JDTI and had full responsibility for design and development of the SCORETM
70, 170 and 580 Series rotary engines. For the three years prior thereto, he had
engineering responsibility in JDTI for the 70 and 170 Series rotary engine
design and development and the development of generator sets. He joined JDTI in
1984 as Manager, Technical Support. He received his B.S. and M.S. in mechanical
engineering from the University of Missouri.
Ken Brody has been a director of the Company since February 1996. He is
President of Abejon Rotary Power Corporation, a marine engine and electronics
distributor, a post he has held since May 1995. Mr. Brody has also been Chairman
of Hydro Lance Maritime Transport Corporation, a builder of high-speed ferries,
since January 1996. From April 1991 he has been General Manager and a partner of
Cadenza Marine, a marine electronics service and sales firm. From February 1985
through December 1991, Mr. Brody was a Principal in Pragma Associates, a
computer science consulting firm. Mr. Brody is a Certified Public Accountant and
holds a United States Coast Guard Captain's license. He attended Rensselaer
Polytechnic Institute as a physics major and completed a VLSI Design Course at
the Massachusetts Institute of Technology in 1980.
Directors of the Company are elected at each annual meeting of the
shareholders of the Company and hold office until the next annual meeting of
shareholders, except as otherwise provided in the Company's by-laws. Each
director holds office until the expiration of the term for which elected and
until a successor has been elected and qualified.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934
The Securities Exchange Act of 1934 requires the Company's executive
officers and directors, and any persons owning more than 10% of a class of the
Company's stock to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission (the "SEC"). Copies of these reports
must also be furnished to the Company.
41
<PAGE>
Based solely on a review of copies of reports filed with the SEC and
representations of certain officers, directors and shareholders owning more than
10% of the Company's Common Stock, the Company believes that, during 1996, all
such requirements imposed on such persons have been complied with.
42
<PAGE>
PART III
ITEM 10
EXECUTIVE COMPENSATION
The following table sets forth the compensation during the last three
fiscal years of the Chief Executive Officer and each of the other four most
highly-compensated executive officers of the Company (the "Named Executive
Officers") whose annual salary and bonus, if any, exceeded $100,000 for services
in all capacities to the Company during the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
Other Securities
Annual underlying All Other
Compensation options/ Compensation
Name and Principal Position Year Salary($) Bonus($) $ SARS(#) ($)(1)
- --------------------------- ---- --------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard M.H. Thompson 1996 $203,850 -- $16,927(2)
President and 1995 220,512 $44,102 -- $16,448
Chief Executive Officer 1994 206,088 41,218 -- 15,865
Robert L. Osborn 1996 150,729 -- 2,706(3)
Vice President & 1995 159,264 31,853 -- 2,675
General Manager 1994 148,848 29,770 -- 1,998
William T. Figart 1996 86,796 -- 41,380(6) 1,421(5)
Vice President 1995 173,592 -- -- 3,478
- Advanced Programs 1994 162,240 11,357 -- 2,977
(through June 30, 1996)
Gary A. LaBouff 1996 139,142 -- 886(4)
Vice President 1995 147,024 14,702 -- 853
- Engineering 1994 137,400 13,740 -- 828
Dr. Michael Soimar 1996 122,256 -- 1,056(5)
Vice President 1995 139,656 -- -- 1,152
- Business Development 1994 130,512 9,136 -- 696
- -------------------------------
</TABLE>
(1) These amounts reflect the premiums the Company pays for Group Term Life
Insurance in excess of $50,000.
(2) Reflects $12,422 under Group Term Life Insurance and split dollar life
insurance, see footnote (1) above, and payment for parking in an amount
of $4,505.
(3) Reflects a $2,706 premium under Group Term Life Insurance and split
dollar life insurance, see footnote (1) above.
(4) Reflects a $886 premium under Group Term Life Insurance and split dollar
life insurance, see footnote (1) above.
(5) Reflects premium under Group Term Life Insurance.
(6) Reflects consulting fees paid from July 1, 1996 through
December 31, 1996.
43
<PAGE>
The following two tables set forth certain information with respect to (i)
option grants to the Named Executive Officers during the fiscal year ended
December 31, 1996, and (ii) the aggregated number and value of options
exercisable and unexercisable by the Named Executive Officers as of December 31,
1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/ EXERCISE
UNDERLYING SARS GRANTED OR
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE
---- ------------ -------------- ---------- ----------
None granted in 1996
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
SHARES AT FY-END OPTIONS/SARS AT
ACQUIRED 12/31/96 FY-END 12/31/96
ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) ($) (1)
---- -------- -------- ------------- --------------
Richard M.H. Thompson -0- -0- 24,000 (2) -0-
16,000 (3) -0-
Dr. Michael Soimar -0- -0- 70,000 (2) -0-
-0- (3) -0-
(1) Based upon a closing price of $0.21875 per share of the Company's Common
Stock on December 31, 1996 on the Bulletin Board minus the respective
option exercise price, none of the options were in-the-money.
(2) Exercisable
(3) Unexercisable
44
<PAGE>
Compensation Pursuant to Plans
Stock Option Plan. Effective 1992, the Board of Directors of the Company
(the "Board") adopted the Stock Option Plan. Under the terms of the Stock Option
Plan, options to purchase up to 400,000 shares of Common Stock may be granted to
officers, key employees and non-employee directors of the Company. The Board or
a committee designated by the Board in accordance with the requirements of Rule
16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as
amended, is authorized to grant options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code and options not intended
to qualify as incentive stock options ("non-qualifying stock options"), and to
select employees and non-employee directors of the Company and to determine the
participants, the number of options to be granted and other terms and provisions
of each option.
The exercise price of any incentive stock options granted under the
Stock Option Plan may not be less than 100 percent of the fair market value of
the Common Stock of the Company at the time of the grant. In the case of
incentive stock options granted to holders of more than 10 percent of the voting
power of the Company, the exercise price may not be less than 110 percent of the
fair market value nor shall the option by its terms be exercisable more than 5
years after the date the option is granted.
Under the terms of the Stock Option Plan, the aggregate fair market
value (determined at the time of grant) of shares issuable upon exercise of
incentive stock options exercisable for the first time during any one calendar
year may not exceed $100,000. Options granted under the Stock Option Plan become
exercisable in whole or in part from time to time as determined by the
committee, provided, however, in no event shall any option become exercisable
earlier than the date six months following the date on which the option is
granted. Options granted under the Stock Option Plan shall have a maximum term
of 10 years from the date of grant. The option price must be paid in full on the
date of exercise and is payable in cash or in Common Stock of the Company having
a fair market value on the date the option is exercised equal to the option
price.
During 1992, options to purchase 20,000 shares of Common Stock at an
exercise price of $.19125 per share and 70,000 shares of Common Stock at an
exercise price of $3.00 per share were granted to Gerald Horowitz and Michael
Soimar, respectively, at that time executive officers of the Company. During
fiscal 1992, no options were exercised. Mr. Horowitz exercised options to
purchase 5,000 shares of Common Stock on March 16, 1993. In accordance with the
Stock Option Plan, during 1993, the Company granted options to employees to
purchase 256,000 shares of Common Stock at $3.00 per share; in 1994, the Company
granted options to an employee to purchase 12,000 shares of Common Stock at
$3.00 per share and granted options to a director of the Company to purchase
10,000
45
<PAGE>
shares of Common Stock at $5.00 per share. During Fiscal 1994, options to
purchase 4,000 shares were exercised and during Fiscal 1995, options to purchase
3,200 shares were exercised. In 1995 and 1996, no options were granted under the
Stock Option Plan.
Employment Agreements
The Company currently has no employment agreements with any of its
employees. All employment agreements with the Company's employees terminated as
of December 31, 1996.
Compensation of Directors
The Company paid to its outside directors, effective with the April 11,
1994 Board Meeting and through the September 26, 1996 Board Meeting, $750 per
meeting. The Company did not make such payments with regard to its Board
Meetings held by telephone. The Company also reimbursed all outside directors
for reasonable expenses incurred in connection with the performance of their
duties as directors. Effective at the close of business on January 30, 1997,
after the unanimous approval of the Agreement of Plan and Merger between the
Company and ICSC by the Company's Board of Directors, Messrs. Warren D.
Bagatelle, Dr. James P. Wade and James M. Beggs, resigned from the Board.
In addition, outside directors are eligible to receive stock options
under the Company's Stock Option Plan. On April 11, 1994, James M. Beggs was
granted, under such Plan, a non-qualified stock option to purchase 10,000 shares
of the Company's Common Stock at a price of $5.00 per share. Subsequent to his
resignation as a Director of the Company, this non-qualified stock option was
canceled.
46
<PAGE>
PART III
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock by each person or group that
is known by the Company to be the beneficial owner of more than 5% of its
outstanding Common Stock, each director of the Company and each person named in
the Summary Compensation Table, and all directors and executive officers of the
Company as a group as of March 15, 1997. Unless otherwise indicated, the Company
believes that the persons named in the table below, based on information
furnished by such owners, have sole voting and investment power with respect to
the Common Stock beneficially owned by them, subject to community property laws,
where applicable.
Number of
Common Shares Percentage
Name and Address Beneficially of
of Beneficial Owner Owned Class
- ------------------- ------------- ----------
International Cryogenic Systems 2,000,000 30.1%
Corporation
Abejon Rotary Power Corporation(2) 1,000,000 15.1
4960 North Harbor Drive
San Diego, CA 92106
Ken Brody(1)(2) 1,000,000 15.1
c/o Abejon Rotary Power Corporation
4960 North Harbor Drive
San Diego, CA 92106
Loeb Investors Co. 104 (2) 933,074 14.0
61 Broadway
New York, New York 10006
Warren D. Bagatelle (3) 933,074 14.0
Loeb Partners Corporation
61 Broadway
New York, New York 10006
Richard M.H. Thompson (4) 236,645 3.6
6191 N. Ocean Boulevard
Ocean Ridge, Florida 33435
Robert L. Osborn (5) 142,500 2.1
39 Ingraham Road
Wayne, New Jersey 07470
Gary A. LaBouff 90,660 1.4
907 Greenwood Road
Teaneck, NJ 07666
William T. Figart 20,000 0.3
11 Derby Lane
Waldwick, NJ 07563
All directors and executive
officers as a group (5 persons) 4,442,879(6) 66.9%
- ---------------
(1) Includes 1,000,000 shares of Common Stock owned by Abejon Rotary Power
Corporation. Mr. Brody is the President of Abejon Rotary Power
Corporation.
(2) On March 21, 1997, the Company sent notice to Abejon and Hydro Lance of
the occurrence of an event of default on the loan agreement between the
Company and Hydro Lance and declared the principal and interest on the
loan agreement immediately due and payable. In such notice, the Company
also elected to take possession of and execute upon 614,583 shares of
the Company's Common Stock
47
<PAGE>
which are owned by Abejon and were pledged as collateral for the
obligations of Hydro Lance under the loan agreement
(3) Includes 435,325 shares of Common Stock owned by Loeb Investors Co. 104;
214,731 Common Shares owned by Loeb Partners Corporation and 198,918
Common Shares owned by Warren D. Bagatelle, Managing Director of Loeb
Partners Corporation. Also includes: (i) 28,221 Common Shares owned by
Loeb Holdings Corp.; (ii) 13,566 Common Shares owned by HSB Capital;
(iii) 14,104 Common Shares owned by Loeb Investors Co. 105; (iv) 24,686
Common Shares owned by Pinpoint Partners 1; and (v) 3,523 Common Shares
owned by the Kempner/Perlmuth Trust (collectively, "Loeb Affiliates").
(4) Mr. Thompson's shares include currently exercisable options to purchase
32,000 Common Shares. This includes 8,000 shares which Mr. Thompson will
be eligible to exercise on May 3, 1997.
(5) Includes 40,000 shares owned by Mr. Osborn's daughter. (6) Includes
currently exercisable options to purchase 32,000 Common Shares.
48
<PAGE>
PART III
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 1992, the Company entered into a consulting agreement, as
subsequently amended, with Loeb Partners Corporation (the "Consulting
Agreement"), pursuant to which the Company agreed to retain Loeb Partners
Corporation ("Loeb") for the purpose of rendering on-going advisory and
management consulting services to the Company for a period of three years at a
fee of $5,000 per month. During 1995, the Company had paid Loeb Partners
Corporation consulting fees of $25,000. Mr. Bagatelle, formerly a director of
the Company, is a Managing Director of Loeb Partners Corporation.
The Company paid no fees to Loeb during 1996.
During 1993 and 1994, the Company had non-interest bearing advances to
its President and Chief Executive Officer, Richard M.H. Thompson. The largest
amount outstanding under these advances during 1993 was $69,175 in August 1993
with an outstanding amount as of December 31, 1993 of $25,540. As of January 14,
1994, Mr. Thompson's advance was $19,206. Mr. Thompson repaid all outstanding
advances by June 15, 1994.
In the future, the Company will not enter into any transactions with
officers, directors or other affiliates unless the transactions are approved by
a majority of disinterested directors. No such transactions were entered into
during 1994, 1995 or 1996.
49
<PAGE>
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a). EXHIBITS TO 10-KSB
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 By-laws of the Company.(1)
3.3 Certificate of Designations, Preferences and Rights and Rights of
Preferred Stock of the Company, as amended.(1)
4 Warrant Agreement dated June 29, 1992 between the Company and Rickel &
Associates, Inc(1)
4.1 Non-Transferable Warrant to Purchase 25,000 Shares of Common Stock of
Rotary Power International, Inc.(3)
4.2 Non-Transferable Warrant to Purchase 175,000 Shares of Common Stock of
Rotary Power International, Inc.(3)
4.3 Non-Transferable Warrant to Purchase 200,000 Shares of Common Stock of
Rotary Power International, Inc(5)
4.4 Non-Transferable Warrent to Purchase 250,000 Shares of Common Stock of
Rotary Power International, Inc.(8)
10.1 Contract dated August 15, 1989 between the United States Marine Corps
and John Deere Technologies International, Inc. and novated to the
Company, as amended.(1)
10.2 Contract dated April 23, 1991 between FMC Corporation and John Deere
Technologies International, Inc. and novated to the Company, as
amended.(1)
10.3 Contract dated January 21, 1993 between the National Aeronautics and
Space Administration and the Company, as amended.(1)
10.4 Licensing Agreement dated October 20, 1992 between Wankel GmbH and the
Company(1)
10.5 Teaming Agreement dated May 10, 1993 between Dornier GmbH and the
Company.(1)
10.6 Teaming Agreement dated June 30, 1993 between Martin Marietta
Corporation and the Company(1)
10.7 Purchase Agreement dated November 15, 1991 between John Deere
Technologies International, Inc. and the Company.(1)
10.8 Loan Agreement dated June 1, 1992 between New Jersey Economic
Development Authority and the Company.(1)
10.9 Asset Purchase Agreement dated August 6, 1992 between
50
<PAGE>
ROTEC Manufacturing and Engineering Corp., Michael Soimar and the Company.(1)
10.10 Asset Purchase Agreement dated August 12, 1992 between Defense Group
Industries, Inc. and the Company.(1)
10.11 Assignment and Transfer of Receivables Agreement dated April 10, 1992
between Commerce Funding Corporation and the Company.(1)
10.12 Employment Agreement dated November 1, 1991 between Richard M.H.
Thompson and the Company, as amended.(1)
10.13 Employment Agreement dated December 16, 1991 between Robert L. Osborn
and the Company.(1)
10.14 Employment Agreement dated December 16, 1991 between Gary A. LaBouff and
the Company.(1)
10.15 Consulting Agreement dated June 1, 1992 between Loeb Partners
Corporation and the Company, as amended by Agreement dated
May 3, 1993.(1)
10.16 Lease dated January 1, 1992 between Curtiss-Wright Flight
Systems/Shelby, Inc. and the Company, as amended.(1)
10.17 Rotary Power International, Inc. 1992 Stock Option Plan.(1)
10.18 Stockholders Agreement dated December 31, 1991 between the Company and
its Stockholders.(1)
10.19 Modification P00035, P00036, P00037 and P00038 to the contract between
the Company and the USMC (incorporated by reference to Exhibit 10.1
contained in the Company's 10-QSB for the period ending September 30,
1994, dated November 7, 1994).
10.20 Letter Contract dated November 8, 1994 between Martin Marietta Ordnance
Systems and the Company.(2)
10.21 Letter Contract dated December 21, 1994 between the USMC and the
Company.(2)
10.22 Not used
10.23 Teaming Agreement dated July 25, 1995 between Teledyne Vehicle Systems
and the Company.(4)
10.24 Assets Purchase Agreement dated August 4, 1995 between Rotary Marine
Industries, Inc. and the Company.(4)
10.25 Engine Distributor Agreement dated October 5, 1995 between Abejon Rotary
Power Corporation and the Company.(4)
51
<PAGE>
10.26 Sales Agreement dated October 16, 1995 between Hussmann Corporation and
the Company.(4)
10.27 Modifications P00039 through P00044 to the contract between the Company
and the USMC referred to in Exhibit 10.1.(6)
10.28 Amendment, dated September 30, 1995, to Employment Agreement between
Richard M. H. Thompson and the Company referred to in exhibit 10.12.(6)
10.29 Amendment, dated September 30, 1995, to Employment Agreement between
Robert L. Osborn the Company referred to in exhibit 10.13.(6)
10.30 Amendment, dated September 30, 1995, to Employment Agreement between
Gary A. LaBouff and the Company referred to in exhibit 10.14.(6)
10.31 Agreement by and among Mazda Motor Corporation, Mazda (North America),
Inc., and the Company dated November 10, 1995 with Addendum.(6)
10.32 Contract dated December 22, 1995 between the United States Marine Corps
and the Company with modification P00001 thereto.(6)
10.33 Advice to Wankel GmbH, dated January 10, 1996 terminating the Wankel
Licensing Agreement referred to in exhibit 10.4.(6)
10.34 65 Series Distribution Agreement dated January 22, 1996 between Abejon
Rotary Power Corporation and the Company.(6)
10.35 Amendment 1, dated February 6, 1996, to Engine Distributor Agreement
between Abejon Rotary Power Corporation and the Company referred to in
exhibit 10.25.(6)
10.36 Purchase Order, dated February 6, 1996, from Abejon Rotary Power
Corporation.(6)
10.37 Consulting Agreement, dated February 6, 1996, pursuant to the sale of
1,000,000 shares of the Company's Common Stock to Abejon (Abejon) Rotary
Power Corporation.(6)
10.38 Loan Agreement, dated February 6, 1996, between Abejon, Hydro Lance
Maritime Transport, Inc. and the Company pursuant to the sale of
1,000,000 shares of the Company's Common Stock to Abejon (Abejon) Rotary
Power Corporation.(6)
10.39 Promissory Note, dated February 6, 1996, by Hydro Lance Maritime
Transport, Inc. pursuant to the sale of 1,000,000 shares of the
Company's Common Stock to Abejon (Abejon) Rotary Power Corporation.(6)
52
<PAGE>
10.40 Pledge Agreement, dated February 6, 1996, between Abejon and the Company
pursuant to the sale of 1,000,000 shares of the Company's Common Stock
to Abejon Rotary Power Corporation.(6)
10.41 Pooling Agreement, dated February 6, 1996, between Abejon, Hydro Lance
Maritime Transport, Inc. and and Affiliates of the Company pursuant to
the sale of 1,000,000 shares of the Company's Common Stock to Abejon
Rotary Power Corporation.(6)
10.42 Settlement Agreement, dated March 1, 1996, between Lockheed Martin
Ordnance Systems, Inc. and the Company referred to in Exhibit 10.20.(6)
10.43 Deviation From Purchase Agreement between John Deere Technologies
International, Inc. and the Company, dated February 19, 1996, as
referred to in exhibit 10.7.(7)
10.44 Investment Banking Consulting Agreement for One Year with R.D. White &
Company dated June 25, 1996.
10.45 Letter from Shearman & Sterling, attorneys representing Wankel GmbH,
dated 19 September 1996, to the Company accepting the termination of the
Wankel License Agreement referred to in exhibit 10.4 by mutual consent.
10.46 Vessel Purchase and Sales Agreement (Partial Interest) between Abejon
and RPI dated as of October 31, 1996.
10.47 Mar-Trans Affiliates LLC: Operating Agreement between Abejon and RPI
dated as of October 31, 1996.
10.48 Agreement of Merger between International Cryogenic Systems Corporation
and Rotary Power International dated as of March 21, 1997.
11 Calculation of Income (Loss) per Common Share filed herewith.
21 Subsidiaries of the Company.(6)
- --------------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-KSB.
1 Incorporated by reference to exhibit of the same number contained in the
Company's Registration Statement on Form SB-2, (File No. 33-71334) dated
November 5, 1994.
2 Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for year ending December 31, 1994.
53
<PAGE>
3 Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-93836) dated June 22, 1995.
4 Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for nine months ended September 30, 1995.
5 Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-98584) dated October 26, 1995.
6 Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year ending December 31, 1995.
7 Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for the three months ended March 31, 1996.
8 Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 333-06557) dated June 21, 1996.
(b) Reports on Form 8-K
On October 15, 1996, the Company filed a Form 8-K with the Securities and
Exchange Commission. Such Form 8-K discussed a press release of October
10, 1996 entitled "Rotary Power International Announces Downsizing,
Missed Payment by Hydro Lance/Abejon and Cash Flow Difficulties."
54
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROTARY POWER INTERNATIONAL, INC.
- --------------------------------
REGISTRANT
/s/Richard M.H. Thompson
- -------------------------------------
By: RICHARD M.H. THOMPSON, PRESIDENT
MARCH 28, 1997
- --------------
DATE
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Richard M.H. Thompson
- -----------------------------------------------
BY: Richard M.H. Thompson
Director, President and Chief
Executive Officer (Principal Executive Officer)
DATE: March 28, 1997
/s/ Robert L. Osborn
- -----------------------------------------------
BY: Robert L. Osborn
Director
DATE: March 28, 1997
/s/ William T. Figart
- -----------------------------------------------
BY: William T. Figart
Director
DATE: March 28, 1997
- -----------------------------------------------
BY: Ken Brody
Director
DATE: March , 1997
55
<PAGE>
Exhibit 10.44
LETTERHEAD OF R.D. WHITE & CO., INC.
R.D. WHITE & CO., INC.
Established 1937 950 Third Ave. - 57th St.
Member: NASD, SIPC New York, NY 10022
212-317-9634
800-523-3771
July 1, 1996
Mr. Richard M.H. Thompson
Rotary Power International, Inc.
P.O. Box 128
Wood-Ridge, NJ 07075-0128
RE: Investment Banking Consulting Agreement
Dear Mr. Thompson:
This will confirm the arrangements, terms and conditions pursuant to which R.D.
White & Company, Inc. (The "Consultant") has been retained to serve as a
financial consultant, advisor and investment banker to Rotary Power
International, Inc. (the "Company"), for a period of twelve (12) months
commencing upon July 1, 1996 and ending on June 30, 1997. The undersigned hereby
agree to the following terms and conditions.
1. Duties of Consultant: Consultant shall, at the request of the Company,
upon reasonable notice, render the following services to the Company from time
to time:
(a) Consulting Services: Consultant will provide such financial
consulting services and advice pertaining to the Company's business as the
Company may from time to time reasonably request. Without limiting the
generality of the foregoing, Consultant will assist the Company in developing,
studying and evaluating financing, merger and acquisition proposals, prepare
reports and studies thereon when advisable, and assist in negotiations and
discussions pertaining thereto. This Agreement is not a contract for listing
services; however, nothing in this Agreement will prohibit Consultant from
listing or making a market in the Company's securities in the OTC markets.
(b) Financing: Consultant will assist and represent the Company in
obtaining both short and long-term financing. The Consultant will be entitled to
additional compensation under such terms as may be agreed to by the parties.
(c) Wall Street Liaison: Consultant will, when appropriate, arrange
meetings between representatives of the Company and individuals and financial
institutions in the investment
<PAGE>
community, such as security analysts, portfolio managers and market makers.
The services described in this Section 1 shall be rendered by Consultant without
any direct supervision by the Company and at such time and place and in such
manner (whether by conference, telephone, letter or otherwise) as Consultant may
determine.
2. Term:This Agreement shall continue for a period of twelve (12) months from
the date hereof (the "Full Term") at which time the Agreement shall
automatically terminate unless the Company gives no less than thirty (30) days
notice, in writing, addressed to the consultant.
3. Compensation: As compensation for Consultant's services hereunder, the
Company shall pay to Consultant, in advance, the sum of One Hundred Twenty-Five
thousand ($125,000) dollars.
4. Available Time: Consultant shall make available such time as it, in its
sole discretion, shall deem appropriate for the performance of its obligations
under this Agreement.
5. Relationship: Nothing herein shall constitute Consultant as an employee or
agent of the Company, except to such extent as might hereinafter be agreed upon
for a particular purpose. Except as might hereinafter be expressly agreed,
Consultant shall not have the authority to obligate or commit the company in any
manner whatsoever.
6. Confidentiality: Consultant agrees that it shall not disclose any trade
secrets, know-how, or other proprietary information not in the public domain
learned as a result of this Agreement unless and until such information becomes
generally known, or without the specific written consent of the Company.
7. Assignment: This Agreement shall not be assignable by any party except to
successors to all or substantially all of the business of either party for any
reason whatsoever without the prior written consent of the other party, which
consent may not be unreasonably withheld by the party whose consent is required.
Agreed upon this 1st day of July 1996.
ROTARY POWER INTERNATIONAL, INC. R.D. WHITE & COMPANY, INC.
/s/ Richard M.H. Thompson /s/ John Piscopo
- ------------------------------------ --------------------------
Richard M.H. Thompson John Piscopo
President, Chief Executive Officer
<PAGE>
Exhibit 10.45
[Letterhead of Shearman & Sterling]
[Dusseldorf, Germany Office]
September 19, 1996
BY PERSONAL DELIVERY
Rotary Power International, Inc.
Attn: Mr. Richard Thompson
(or the now current Chief Executive
Officer of RPI)
P.O. Box 128
Wood-Ridge
USA - New Jersey 07075-0128
RE: Termination of License and Technical Assistance Agreement
of October 20, 1992 between Wankel Rotary GmbH,
71404 Korb, Germany and Rotary Power International,
Inc., Wood-Ridge, USA-New Jersey
Dear Sir:
We are representing Wankel Rotary GmbH, Germany. The client
has asked us to inform you about the following:
With letter of January 10, 1996, you have terminated the
above-mentioned License and Technical Assistance Agreement with immediate
effect. You have justified your notice of termination with a breach of our
obligation to deliver the know-how agreed upon. For this cause of termination,
Section 12.3(a) of the aforementioned agreement would apply.
Accordingly to our view, such termination with immediate
effect is not justified due to the following reasons:
I. In the first place, Wankel Rotary GmbH did not breach
any of its obligations under the above-mentioned
agreement, especially no delay in delivery of any
know-how subject to the License and Technical
Assistance Agreement occurred. Wankel Rotary GmbH has
delivered the know-how agreed upon.
-1-
<PAGE>
II. In the second place, your termination with immediate
effect fails to provide for the appropriate form
determined in the License and Technical Assistance
Agreement (hereinafter the "Agreement"). According to
Section 15.5, any notice to be given under the
Agreement shall be in writing and be given by
personal delivery, registered post or by overnight
delivery. As you have not delivered your termination
notice by any of this means, the notice has not
become effective.
III. Furthermore, a termination with immediate effect
pursuant to Section 12.3(a) requires that the party
accused of the breach of contract fails to remedy
such breach within thirty (30) days of notice in
writing upon requiring such remedy by the other
party. You have never required such remedy and,
therefore, notice of termination does not meet the
pre-requisite of prior notification.
As the requirements set forth in Section 12.3(a) were not met,
you were not entitled to terminate the Agreement with immediate effect for cause
(Section 12.3(a)).
However, we consider your termination as an offer to terminate
the Agreement by mutual consent and accept this offer with effectiveness of this
day September 20, 1996.
We would like to stress that you did not effectively terminate
the Agreement for cause and, therefore, you are not entitled to raise any claims
resulting from a termination for cause.
Apart from the ineffectiveness of the notice of termination,
you are in any event obliged pursuant to Section 13 of the Agreement to:
(a) immediately return to Wankel Rotary GmbH all
technical material and all copies thereof in
your possession or in the possession of your
sub-licensees and subcontractors;
(b) deliver free of charge to Wankel Rotary GmbH
all licenses and authorities from Wankel
Rotary GmbH held by you or your sub-licensees
and subcontractors in relation to the small
Rotary engines, spare parts and large Rotary
engines and all or any other Intellectual
Property relating specifically to the small
Rotary engines and large Rotary engines or to
the Agreement.
Wankel Rotary GmbH presumes that you have already informed
your clients about the termination of the License Agreement. However, Wankel
Rotary GmbH itself will inform all U.S.-clients about the expiry of all licenses
given to RPI.
Please note, that any presentation, offering, etc. of the
licensed products to third parties is prohibited.
We request your compliance with the above-mentioned
obligations until September 30, 1996.
Yours sincerely,
/s/ Georg F. Thoma
------------------
Georg F. Thoma
<PAGE>
Exhibit 10.46
VESSEL PURCHASE AND SALE AGREEMENT (PARTIAL INTEREST)
Agreement made this 31st day of October, 1996, between
Abejon Rotary Power Corporation
4960 North Harbor Drive
San Diego, CA 92106
hereinafter referred to as "SELLER;" and
Rotary Power International, Inc.
P.O. Box 128
Wood-Ridge, NJ 07075-128
hereinafter referred to as "BUYER," with reference to the
following facts:
WHEREAS, Hydro Lance Maritime Transport, Inc., a California
corporation, ("Hydro Lance") owes BUYER $1,110,250 for the September 30, 1996
installment payment (the "Hydro Lance Installment Obligation") pursuant to its
promissory note, and related documentation dated 2/6/96, (the "Loan Agreement");
WHEREAS, SELLER owes Hydro Lance $1,110,250 pursuant to its
promissory note dated 2/6/96 (the "Abejon Installment Obligation");
WHEREAS, SELLER owns certain shares of BUYER's common stock
which it pledged as security for payment of the Loan Agreement, 208,333 shares
of which are scheduled for release from pledge on payment of the Installment
Obligation (the "Released Shares"); and,
WHEREAS, Hydro Lance and BUYER are willing to satisfy the
Hydro Lance Installment Obligation, and SELLER and Hydro Lance are willing to
satisfy the Abejon Installment Obligation, as follows:
(a) SELLER shall transfer to BUYER a 47.7% interest in
the Vessel, valued at $1,110,250, in satisfaction
of the Hydro Lance Installment Obligation to BUYER,
and BUYER shall release from pledge to SELLER the
Released Shares, and send confirmation of
satisfaction of the Hydro Lance Installment
Obligation to Hydro Lance; in consideration for
such transfer of interest in the Vessel to satisfy
Hydro Lance's Installment Obligation and by
-1-
<PAGE>
separate agreement, Hydro Lance will deem satisfied
the Abejon Installment obligation to Hydro Lance of
the same amount.
(b) Contemporaneously therewith, SELLER and BUYER as
sole members shall form a limited liability
company, and contribute their respective interests
in the Vessel to the limited liability company.
The sole asset of the company shall be the Vessel,
and the members' respective percentage interests
therein shall be the same as their percentage
interests in the Vessel prior to its transfer to
the Company. SELLER shall have the obligation to
return BUYER's capital contribution, valued at
$1,110,250, on sale of the Vessel in exchange for
BUYER's membership interest.
(c) The intent of the parties is for BUYER to
ultimately receive $1,110,250 cash from proceeds of
the sale of the Vessel, with an interest in the
Vessel of like value until the sale closes, and for
the Hydro Lance Installment Obligation and Abejon
Installment Obligation Lo be satisfied and the
Released Shares released from pledge, on transfer
of an interest in the Vessel to BUYER.
NOW THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. The BUYER agrees to purchase and the SELLER agrees to sell
an undivided 47.7% interest as tenants in common, in the Vessel with Abejon
described herein as:
LIBERATED LADY, Official No. 952781, Documented Port of Long
Beach, California; a catamaran, 65' LOA, 31' beam, 3' draft,
powered by four (4) 300 HP StarDec diesel engines, complete as
to operational systems, propulsion and navigation systems, but
without a finished interior, interior carpentry, interior
doors and hatches, and safety apparatus, designed by Howard
Apolonio and Lee Engineering, built by Abejon Rotary Power
Corporation in California, U.S.A.
2. The partial interest purchase price is One Million One
Hundred Ten Thousand Two Hundred Fifty Dollars ($1,110,250) payable as follows.
RPI hereby discharges the Hydro Lance Installment Obligation of $1,110,250 and
agrees to immediately (a) release to Abejon the Released Shares and (b) send
confirmation of satisfaction of the Hydro Lance Installment Obligation to Hydro
-2-
<PAGE>
Lance at the address for notice provided in the Loan Agreement.
Contemporaneously herewith, RPI agrees to contribute its interest in the Vessel
purchased hereunder to Mar Trans Associates, L.L.C., a California L.L.C., in
exchange for a 47.7% membership interest therein.
3. The Vessel is being delivered free and clear of all debts,
claims, liens and encumbrances of any kind whatsoever, excepting only a Three
Hundred Seventy Five Thousand Dollar ($375,000) note payable to Big Bee
Holdings, an Arizona Trust, secured by a lien on the Vessel as noted
hereinafter. SELLER warrants that it has good and marketable title thereto.
SELLER will deliver to the BUYER all necessary documents for the transfer of
title on or before the closing date.
4. Vessel is moored at 4960 North Harbor Drive, San Diego,
California, in America's Cup Harbor together with all gear, machinery,
equipment, furnishings and all other articles and appurtenances thereto. BUYER
will accept its interest in the Vessel on the closing date and at that port and
mooring.
5. It is agreed that the risk of loss, injury or destruction
of said Vessel and equipment shall be borne by the SELLER until the Vessel is
delivered.
6. Sales or use taxes, value added taxes, duties and ad
valorem taxes and fees imposed on this Vessel, if any, are the responsibility of
the SELLER. Duties, taxes and fees on the Vessel to any state, country or
regulatory authority incurred prior to the date of closing, if any, shall be the
responsibility of the SELLER. If permission of any authority is necessary to
purchase or operate this Vessel it shall be the responsibility of the SELLER to
cooperate fully to obtain same, except that any costs created thereby shall be
borne by the SELLER.
7. The Vessel is purchased by BUYER "AS IS." SELLER DOES NOT
WARRANT THAT IT IS OF MERCHANTABLE QUALITY OR CAN BE USED FOR ANY PARTICULAR
PURPOSE.
8. This contract shall be binding on all parties herein, their
heirs, personal representative and/or assigns when this contract shall have been
signed by all parties or their fully authorized agents. SELLER agrees not to
sell the Vessel or enter into any contract for the sale of same while this
contract is in effect.
9. This document contains the entire agreement between the
parties hereto and is agreed and understood that there are no other duties,
obligations, liabilities or warranties, expressed or implied or otherwise,
except as therein contained.
10. The venue for any legal action arising out of this
contract shall be in San Diego County, in the State of California, in the United
States of America, and shall be determined by the laws of the State of
California. The prevailing party of any legal
-3-
<PAGE>
action or proceeding brought hereunder shall be entitled to its reasonable and
necessary expenses and legal fees.
11. This being a contract arranged between principals of BUYER
and SELLER, there will be no commissions or transaction fees paid to any
principal or agent of the parties to this contract.
BUYER:
ROTARY POWER INTERNATIONAL, INC.
By:/s/ Richard M.H. Thompson
---------------------------------
Richard M. H. Thompson, President
SELLER:
ABEJON ROTARY POWER CORPORATION
By:/s/ Ken Brody
- ------------------------------------
Ken Brody, President
-4-
<PAGE>
Exhibit 10.47
Mar Trans Affiliates, L.L.C.
Operating Agreement
This Operating Agreement (this "Agreement") is entered into
effective October 31, 1996, by and among Abejon Rotary Power Corporation, a
Wyoming corporation ("Abejon") and Rotary Power International, Inc., a Delaware
corporation ("RPI").
Explanatory Statement
WHEREAS, Hydro Lance Maritime Transport, Inc., a California
corporation, (Hydro Lance) owes RPI $1,110,250 as of October 31, 1996, for the
September 30, 1996 installment payment (the "Hydro Lance Installment
Obligation") pursuant to its promissory note, and related documentation dated
2/6/96, (the "Loan Agreement");
WHEREAS, Abejon owes Hydro Lance $1,110,250 pursuant to its
promissory note dated 2/6/96 (the "Abejon Installment Obligation");
WHEREAS, Abejon owns certain shares of RPI common stock which
it pledged as security for payment of the Loan Agreement, 208,333 shares of
which are scheduled for release from pledge on payment of the Installment
Obligation (the "Released Shares");
WHEREAS, Hydro Lance and RPI are willing to satisfy the Hydro
Lance Installment Obligation, and Abejon and Hydro Lance are willing to satisfy
the Abejon Installment Obligation, as follows:
(a) Abejon shall transfer to RPI a 47.7% interest in the
Vessel, valued at $1,110,250, in satisfaction of the Hydro
Lance Installment Obligation to RPI, and RPI shall release
from pledge to Abejon the Released Shares, and send
confirmation of satisfaction of the Hydro Lance
Installment Obligation to Hydro Lance; in consideration
for such transfer of interest in the Vessel to satisfy
Hydro Lance's Installment Obligation and by separate
agreement, Hydro Lance will deem satisfied the Abejon
Installment Obligation to Hydro Lance of the same amount.
(b) Contemporaneously therewith, Abejon and RPI as sole
members shall form a limited liability company, and
contribute their respective interests in the Vessel to the
limited liability company. The sole asset of the
1
<PAGE>
company shall be the Vessel, and the members' respective
percentage interests therein shall be the same as their
percentage interests in the Vessel prior to its transfer
to the Company. The Company shall have the obligation to
return RPI's capital contribution, valued at $1,110,250,
on sale of the Vessel in exchange for RPI's membership
interest.
(c) The intent of the parties is for RPI to ultimately receive
$1,110,250 cash from proceeds of the sale of the Vessel,
with an interest in the Vessel of like value until the
sale closes, and for the Hydro Lance Installment
Obligation and Abejon Installment Obligation to be
satisfied and the Released Shares released from pledge, on
transfer of an interest in the Vessel to RPI; and,
WHEREAS, The parties have agreed to organize a limited
liability company in accordance with the terms and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
Article I
Defined Terms
The following capitalized terms shall have the respective
meanings specified in this Article I. Capitalized terms not defined in this
Agreement shall have the meanings specified in the California Limited Liability
Act.
"Adjusted Capital Balance" means, as of any day, an interest
Holder's total Contributions less all amounts actually distributed to the
Interest Holder pursuant to Sections 4.1.3.4.1 and 4.2 hereof. If any interest
is transferred in accordance with the terms of this Agreement, the Transferee
shall succeed to the Adjusted Capital Balance of the transferor to the extent
the Adjusted Capital Balance relates to the interest transferred.
"Affiliate" means (a) a Person directly or indirectly
controlling, controlled by, or under common control with another Person; (b) an
officer, director, partner, or member of the immediate family of an officer,
director, or partner, of another Person;; and/or (c) any affiliate of any such
Person.
"Agreement" means this Operating Agreement, as amended from
time to time.
"Assignee" means the Person who has acquired on Economic
Interest in the Company but is not a Member.
"Capital Account" means the account to be maintained by the
Company for each Interest Holder in accordance with the following provisions:
(i) an Interest Holder's Capital Account shall be credited
with the amount of money and the fair market value of any property contributed
to the Company (net of liabilities
2
<PAGE>
secured by such property that the Company either assumes or to which such
property is subject), the amount of any Company unsecured liabilities assumed by
the Interest Holder, and the Interest Holder's distributive share of profit; and
(ii) an Interest Holder's Capital Account shall be debited
with the amount of money and the fair market value of any Company property
distributed to the Interest Holder (net of liabilities secured by such
distributed property that the Interest Holder either assumes or to which such
property is subject), the amount of any unsecured liabilities of the Interest
Holder assumed by the Company, and the Interest Holder's distributive share of
loss.
If any Interest is transferred pursuant to the terms of this
Agreement, the transferee shall succeed to the Capital Account of the transferor
to the extent the Capital Account is attributable to the transferred Interest.
"Capital Proceeds" means the gross receipts received by the
Company from a Capital Transaction.
"Capital Transaction" means any transaction not in the
ordinary course of business (excluding only any sale of the Vessel which is
governed by Section 6.5.1.), which results in the Company's receipt of cash or
other consideration other than Contributions, including, without limitation,
proceeds of sales, exchanges, or other dispositions of property not in the
ordinary course of business, financings, refinancings, condemnations, recoveries
of damage awards, and insurance proceeds.
"Cash Flow" means all cash derived from operations of the
Company (including interest received on reserves), without reduction for any
non-cash charges, but less cash used to pay current operating expenses and to
pay or establish reasonable reserves for future expenses, debt payments, capital
improvements, and replacements as determined by the Members. Cash Flow shall not
include Capital Proceeds but shall be increased by the reduction of any reserve
previously established.
"Contribution" means any money, property, or services
rendered, or a promissory note or other binding obligation to contribute money
or property, or to render services as permitted in the California Limited
Liability Act, which a Member contributes to the Company as capital in that
Member's capacity as a Member pursuant to an agreement between the Members,
including an agreement as to value.
"Economic Interest" means a person's right to share in the
income, gains, losses, deductions, credit, or similar items of, and to receive
Distributions from, the Company, but does not include any other rights of a
Member including, without limitation, the right to vote or to participate in
management, or any right to information concerning the business and affairs of
the Company.
"Interest Holder" means any Person who holds an Economic
Interest, whether as a Member or as an Assignee of a Member.
3
<PAGE>
"Involuntary Withdrawal" means, with respect to any Member,
the occurrence of the following events:
(i) the Member makes an assignment for the benefit of
creditors;
(ii) the Member is bankrupt;
(iii) the Member files a petition seeking for the Member any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any state law;
(iv) the Member seeks, consents to, or acquiesces in the
appointment of a trustee for, receiver for, or liquidation of the Member or of
all or any substantial part of the Member's properties;
(v) if the Member is an individual, the Member's death or
adjudication by a court of competent jurisdiction as incompetent to manage the
Member's person or property;
(vi) if the Member is acting as a Member by virtue of being a
trustee of a trust, the termination of the trust;
(vii) if the Member is a partnership or limited liability
company, the dissolution and commencement of winding up of the partnership or
limited liability company;
(viii) if the Member is a corporation, the dissolution of the
corporation or the revocation of its charter;
(ix) if the Member is an estate, the distribution by the
fiduciary of the estate's entire interest in the Company; or
(x) if the Member files an action seeking a decree of
judicial dissolution.
"Member" means any person who executes a counterpart of this
Agreement as a Member and any Person who subsequently is admitted as a Member of
the Company.
"Membership Interest" means a Member's rights in the Company,
collectively, including the Member's Economic Interest, any right to vote or
participate in management, and any right to information concerning the business
and affairs of the Company.
"Negative Capital Account" means a Capital Account with a
balance of less than zero.
"Percentage" means, as to a Member, and as to an Interest
Holder who is not a Member, the Percentage or part of the Percentage that
corresponds to the portion of a Member's Economic Interest that the Interest
Holder has acquired, to the extent the Interest Holder has succeeded to that
Member's interest.
4
<PAGE>
"Person" means and includes an individual, corporation,
partnership, association, limited liability company, trust, estate, or other
entity.
"Positive Capital Account" means a Capital Account with a
balance greater than zero.
"Transfer" means, when used as a noun, any sale,
hypothecation, pledge, assignment, attachment, or other transfer, and, when used
as a verb, to sell hypothecate, pledge, assign, or otherwise transfer.
"Vessel" means LIBERATED LADY, Official No. 952781, Documented
Port of Long Beach, California, a catamaran, 65' LOA, 31' beam, 3' draft,
powered by four (4) 300 HP StarDec engines, complete as to operational systems,
propulsion and navigation systems, but without a finished interior, interior
carpentry, interior doors and hatches, and safety apparatus, designed by Howard
Apolonio and Lee Engineering, built by Abejon Rotary Power Corporation in
California, U.S.A., which is subject to a lien in the amount of Three Hundred
Seventy Five Thousand Dollars ($375,000) to secure a note payable to Big Bee
Holdings, an Arizona Trust.
"Voluntary Withdrawal" means a Member's disassociation from
the Company by means other than a Transfer or an Involuntary Withdrawal.
Article II
Formation and Name; Office; Purpose; Term
2.1. Organization. The parties hereby organize a limited
liability company pursuant to the California Corporations Code and the
provisions of this Agreement. The Company shall cause Articles of Organization
to be prepared, executed and filed with the California Secretary of State.
2.2. Name of the Company. The name of the Company is Mar Trans
Affiliates, L.L.C.
2.3 Purpose. The Company is organized solely to engage in the
business of owning, constructing, maintaining, repairing, operating and selling
the Vessel.
2.4. Term. The Company shall continue in existence until
January 1, 2010, unless sooner dissolved as provided by this Agreement or
applicable law.
2.5. Principal Place of Business. The Company's Principal
Place of Business shall be located at 4960 North Harbor Drive, San Diego,
California, 92106, or at any other place within the State of California which
the Members select.
2.6. Resident Agent. The name and address of the Company's
resident agent in the State of California is Ken Brody, 4960 North Harbor Dr.,
San Diego, California, 92106.
5
<PAGE>
Article III
Members; Capital; Capital Accounts
3.1. Initial Contributions. Upon the execution of this
Agreement, the Members shall each contribute capital to the Company as follows:
RPI's right, title and 47.7% interest in the Vessel valued at $1,110,250.00,
Abejon's right, title and 52.3% interest in the Vessel valued at $1,214,750.00.
3.2. Additional Contributions; Personal Liability. No Member
shall be required to contribute any additional capital to the Company, and no
Member shall have personal liability for any obligation of the Company except as
expressly provided by law or herein.
3.3. No Interest on Contributions. Neither Members nor
Interest Holders shall be paid interest with respect to Contributions.
3.4. Return of Contributions. Except as otherwise provided in
this Agreement, no Member nor Interest Holder shall have the right to receive
the return of any Contribution or withdraw from the Company, except upon the
dissolution of the Company.
3.5. Form of Return of Capital. Except as otherwise provided
in this Agreement, there is no agreement for, nor time set for, return of any
capital contribution. To the extent consistent with applicable law, and unless
otherwise required by the terms of this Agreement, the Company may return said
capital out of operating revenue or out of proceeds of sale or refinancing of
the Vessel, after reserving sufficient funds for payment of debts, working
capital and contingencies.
3.6. Capital Accounts. A separate Capital Account shall be
maintained for each Member and Interest Holder. Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made by such Member to
the Company pursuant to this Agreement, (ii) the distributive share of profits
of such Member, and (iii) the amount of any Company liabilities assumed by such
Member or which are secured by any Company assets distributed to such Member;
and shall be decreased by (i) the amount of any cash and the gross asset value
of any Company assets distributed to such Member by the Company pursuant to this
Agreement, (ii) the distributive share of losses of such Member, and (iii) the
amount of any liabilities of such Member assumed by the Company or which are
secured by any property contributed by such Member to the Company.
3.7. Loans and Other Business Transactions. Any Member may, at
any time, make or cause a loan to be made to the Company in any amount and on
those terms upon which the Company and Member agree. Members may also transact
other business with the Company and, in doing so, they shall have the same
rights and be subject to the same obligations arising out of any such business
transaction as would be enjoyed by and imposed upon any Person, not a Member,
engaged in a similar business transaction with the Company.
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Article IV
Profit, Loss, and Distribution
4.1. Allocations of Profit or Loss and Distributions of Cash.
4.1.1. Profit or Loss. For any taxable year, profit
and loss shall be allocated to the Interest Holders in proportion to their
Percentages.
4.1.2. Cash Flow. Cash Flow for each taxable year
of the Company shall be distributed to the Interest Holders; to payment of
organization expense and operating expense; then to repay loans from the
partners, pan passu; then to repay Capital Contributions by the Partners, pan
passu; then the remainder shall be distributed according to each Partner's
Percentage Interest in the Partnership, pari passu.
4.1.3. Capital Proceeds. Except as provided in
Sections 5.4.2. and 6.5.1. with respect to the Distribution of Capital Proceeds
derived in connection with liquidation of the Company, Capital Proceeds shall be
distributed and applied by the Company in the following order and priority:
4.1.3.1. to the payment of all expenses
of the Company incident to the Capital Transaction; then
4.1.3.2. to the payment of debts and
liabilities of the Company then due and outstanding (including all debts due to
any Interest Holder); then
4.1.3.3. to the establishment of any
reserves which the Members deem necessary for liabilities or obligations of the
Company; then
4.1.3.4. the balance shall be distributed
as follows:
4.1.3.4.1. to the Interest Holders
in proportion to their Adjusted Capital Balances, until their remaining Adjusted
Capital Balances have been paid in full;
4.1.3.4.2. the balance, to the
Interest Holders in proportion to their Percentages.
4.2. Liquidation and Dissolution.
4.2.1. Except as otherwise provided in Section
6.5.1., upon liquidation of the Company, the assets of the Company shall be
distributed to the Interest Holders in accordance with 4.1.3.
4.2.2. No interest Holder shall be obligated to
restore a Negative Capital Account.
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4.3. General.
4.3.1. Except as otherwise provided in this
Agreement, the timing and amount of all Distributions shall be determined by the
Members.
4.3.2. If any assets of the Company are distributed
in kind to the Interest Holders, those assets shall be valued on the basis of
their fair market value, and any Interest Holder entitled to any interest in
those assets shall receive that interest as a tenant-in-common with all other
Interest Holders so entitled. Unless the Members otherwise agree, the fair
market value of the assets shall be determined by an independent appraiser who
shall be selected by the Members. The Profit or Loss for each unsold asset shall
be determined as if the asset had been sold at its fair market value, and the
Profit or Loss shall be properly credited or charged to the Capital Accounts of
the Interest Holders prior to the Distribution of the assets in liquidation
pursuant to Section 4.2.
Article V
Management: Rights, Powers, and Duties
5.1. Management.
5.1.1. The Company shall be managed by the Members.
Except as specifically provided otherwise in this Agreement, each Member shall
have the right to act for and bind the Company in the ordinary course of its
business.
5.2. Meetings of and Voting by Members.
5.2.1. A meeting of the Members may be called at
any time by those Members bolding percentages which aggregate at least 25%.
Meetings of Members shall be held at the Company's principal place of business
or at any other place designated by the Person or Persons calling the meeting.
Not less than ten (10) nor more than sixty (60) days before each meeting, the
Person or Persons calling the meeting shall give written notice of the meeting
to each Member entitled to vote at the meeting. The notice shall state the time,
place, and the purpose of the meeting. Notwithstanding the foregoing provisions,
each Member who is entitled to notice may waive notice, either before or after
the meeting, by executing a waiver of such notice, or by appearing at and
participating, in person or by proxy in the meeting. Unless this Agreement
provides otherwise, at a meeting of Members, the presence in person or by Proxy
of Members holding Percentages which aggregate to not less than sixty percent
(60%) constitutes a quorum. A Member may vote either in person or by written
Proxy signed by the Member or by the Member's duly authorized attorney in fact.
5.2.2. Except as otherwise Provided in this
Agreement, the affirmative vote of Members holding at least 60% of the aggregate
Percentages present at the meeting in person and by proxy shall be required to
approve any matter coming before the Members.
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5.2.3. In lieu of holding a meeting, the Members
may take action by written consents specifying the action to be taken, which
consents must executed and delivered to the Company by Members whose combined
voting power constitutes not less than 60% of the total Voting Power of all
Members. Any such approved action shall be effective immediately. The Company
shall give prompt notice to all Members of any action approved by Members by
less than unanimous consent.
5.2.4. The following matters shall require the vote
or consent of the percentage interest of Members indicated after each such item
for such action to be approved by the Members:
(a) A decision to continue the business
of the Company after dissolution of the Company (50%);
(b) Approval of the transfer of a
Membership Interest and admission of an Assignee as a Member (100%);
(c) An amendment to the Articles of
Organization of this Agreement (100%).
5.3. Personal Service.
5.3.1. No Member shall be required to perform
services for the Company solely by virtue of being a Member. Unless approved by
the Members or specified herein, no Member shall be obligated to perform
services for the Company or be entitled to compensation for services performed
for the Company.
5.3.2. The Members shall have the right to contract
on behalf of the Company with independent contractors for the rendition of
services.
5.4. Duties of Parties.
5.4.1. Each Member shall devote such time to the
business and affairs of the Company as is necessary to carry out the Member's
duties set forth in this Agreement.
5.4.2. Abejon will contribute manpower, office
space, and computer time to maintain the books and records, and conduct the
affairs of the Company.
5.4.3. Each Member will contribute travel expense,
meals and lodging for its own employees to attend any meetings agreed to by the
Members.
5.4.4. Each Member will contribute whatever legal
and audit expenses it alone decides to incur on behalf of the Company.
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5.4.5. Abejon shall have the authority to bind the
Company in making contracts and incurring obligations in the Company name or on
its credit for the purpose of maintaining, completing, docking keeping,
operating, insurance and selling the Vessel. Abejon will not, however, incur any
other obligations in the Company name or on its credit without RPI's express
prior consent. RPI shall not bind the Company or incur obligations in the
Company name.
5.4.6. Abejon will contribute the expense of Port
Risk and Vessel Liability insurance on the basis of existing policies or
equivalent replacement policies. Abejon shall be required to maintain such
insurance as the Members deem to be necessary and reasonable, shall arrange
competitive quotes for such insurance and may arrange to finance the premium,
including offering as collateral the general assets of the Company without
further consultation.
5.4.7. Abejon is hereby authorized to negotiate and
execute a contract for sale of the Vessel as soon as possible, for an amount not
less then Two Million Seven Hundred Thousand Dollars ($2,700,000).
5.4.8. If the Vessel remains unsold by December 31,
1996, RPI will have the authority to negotiate and execute a contract for sale
of the Vessel without further agreement among the Members, except that the net
proceeds must then exceed Two Million Four Hundred Thousand Dollars ($2,400,000)
unless otherwise approved in writing by Abejon.
5.4.9. Notwithstanding anything in this Agreement
to the contrary, upon the sale arranged by either Member, the proceeds will
first be applied to the liquidation of liens on the Vessel, then the next One
Million One Hundred Ten Thousand Two Hundred Fifty Dollars ($1,110,250.00) will
be paid to RPI in accordance with Section 6.5.1. hereof. After these payments,
Abejon, as the surviving Member, may wind up the Company, pay all debts and
obligations of the Company and distribute the remainder to itself.
5.4.10. Nothing in this Agreement shall be deemed
to restrict in any way the rights of any Member, or of any Affiliate of any
Member, to conduct any other business or activity whatsoever. No Member shall be
accountable to the Company or to any other Member with respect to that business
or activity even if the business or activity competes with the Company's
business. The organization of the Company shall be without prejudice to the
Members' respective rights (or the rights of their respective Affiliates) to
maintain, expand, or diversify such other interests and activities and to
receive and enjoy profits or compensation therefrom. Each Member waives any
rights the Member might otherwise have to share or participate in such other
interests or activities of any other Member or the Member's Affiliates.
5.4.11. The only fiduciary duties a Member owes to
the Company and the other Members are the duty of loyalty and the duty of care
set forth in subdivisions (a) and (b):
(a) A Member's duty of loyalty to the
Company and the other Members is limited to the following:
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(1) To account to the Company and
hold as trustee for it any property, profit, or benefit derived by the Member in
the conduct or winding up of the Company's business or derived from a use by the
Member of Company Property, including the appropriation of a Company
opportunity, without the consent of the other Members;
(2) To refrain from dealing with
the Company in the conduct or winding up of the Company business as or on behalf
of a party having an interest adverse to the Company without the consent of the
other Members; and
(3) To refrain from competing with
the Company in the conduct of the Company business before the dissolution of the
Company without the consent of the other Members; and
(b) A Member's duty of care to the
Company and the other Members in the conduct and winding up of the Company
business is limited to refraining from engaging in grossly negligent or reckless
conduct, intentional misconduct, or a knowing violation of law.
5.5. Indemnification of Each Member.
5.5.1. Each Member shall not be liable,
responsible, or accountable, in damages or otherwise, to any Member or to the
Company for any act performed by such Member within the scope of the authority
conferred on such Member by this Agreement, and within the standard of care
specified in Section 5.5.2.
5.5.2. The Company shall indemnify each Member for
any act performed by the Member within the scope of the authority conferred on
the Member by this Agreement, unless such act constitutes grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.
Article VI
Transfer of Interests and Withdrawals of Members
6.1. Transfers. Except as provided herein, no Member may
Transfer all, or any portion of, or any interest or rights in, the Membership
Interest owned by the Member. Each Member hereby acknowledges the reasonableness
of this prohibition in view of the purposes of the Company and the relationship
of the Members. The attempted Transfer of any portion or all of a Membership
Interest in violation of the prohibition contained in this Section 6.1 shall be
deemed invalid, null and void, and of no force or effect, except any Transfer
mandated by operation of law and then only to the extent necessary to give
effect to such Transfer by operation of law.
6.1.1. A Member may Transfer all or any portion of
or any interest or rights in the Member's Economic Interest if each of the
following conditions ("Conditions of Transfer") is satisfied:
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6.1.1.1. the Transfer may be accomplished
without registration, or similar process, under federal and state securities
laws;
6.1.1.2. the transferee delivers to the
Company a written agreement to be bound by the terms of Article VI of this
Agreement;
6.1.1.3. the Transfer will not result in
the termination of the Company pursuant to IRC Section 708;
6.1.1.4. the Transfer will not result in
the Company being subject to the Investment Company Act of 1940, as amended;
6.1.1.5. the transferor or the transferee
delivers the following information to the Company: (i) the transferee's taxpayer
identification number; and (ii) the transferee's initial tax basis in the
transferred Membership Interest; and
6.1.2. If the Conditions of Transfer are satisfied,
the Member may Transfer all or any portion of the Member's Economic Interest.
The Transfer of an Economic Interest pursuant to this Section 6.1 shall not
result in the Transfer of any of the transferor's other Membership rights. The
transferee of the Economic Interest shall have no right to: (i) become a Member;
(ii) exercise any Membership rights other than those specifically pertaining to
the ownership of an Economic Interest; or (iii) act as an agent of the Company.
6.2. Withdrawal of a Member.
6.2.1. No Member shall have the right or power to
Voluntarily Withdraw from the Company.
6.3 Optional Buy-out in Event of Involuntary Withdrawal.
6.3.1. If the Members elect to continue the Company
after an Involuntary Withdrawal, the withdrawn Member or the successor in
interest to such Member (the "Withdrawn Member") shall be deemed to offer for
sale to the Company (the "Withdrawal Offer") all of the Membership Interest of
the withdrawn Member (the "Withdrawal Interest").
6.3.2. The Withdrawal Offer shall be and remain
irrevocable for a period (the "Withdrawal Offer Period") ending at 11:59 P.M.
local time at the Company's principal office on the sixtieth (60th) day
following the date the Members elect to continue the Company. At any time during
the Withdrawal Offer Period, the Company may accept the Withdrawal Offer by
notifying the Withdrawn Member of its acceptance (the "Withdrawal Notice"). The
Withdrawn Member shall not be deemed a Member for the purpose of the Vote on
whether the Company shall accept the Withdrawal Offer.
6.3.3. If the Company accepts the Withdrawal Offer,
the Withdrawal Notice shall fix a closing date (the "Withdrawal Closing Date")
for the purchase
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which shall be not earlier than ten (10) or later than ninety (90) days after
the expiration of the Withdrawal Period.
6.3.4. If the Company accepts the Withdrawal Offer,
the Company shall purchase the Withdrawal Interest for the price equal to the
amount the Withdrawn Member would receive if the Company were liquidated and the
amount equal to the appraised value were available for distribution to the
Members pursuant to Section 4.4 (the "Withdrawal Purchase Price"). The
Withdrawal Purchase Price shall be paid in cash on the Withdrawal Closing Date.
6.3.5. If the Company fails to accept the
Withdrawal Offer, then the Withdrawn Member, upon the expiration of the
Withdrawal Offer Period, thereafter shall be treated as the unadmitted assignee
of a Member.
6.4. Appraised Value.
6.4.1. The term "Appraised Value" means the
appraised value of the Company as hereinafter provided. Within fifteen (15) days
after demand by either one to the other, the Company and the Withdrawn Member
shall each appoint an appraiser to determine the value of the Company. If the
two appraisers agree upon such value, they shall jointly render a single written
report stating that value. If the two appraisers cannot agree upon the value of
the Company, they shall each render a separate written report and shall appoint
a third appraiser, who shall appraise the Company, determine its value, and
render a written report of his or her opinion thereon. Each party shall pay the
fees and other costs of the appraiser appointed by such party, and the fees and
other costs of the third appraiser shall be shared equally by both parties.
6.4.2. The value contained in the aforesaid joint
written report or written report of the third appraiser, as the case may be,
shall be the Appraised Value; provided, however, that if the value of the equity
contained in the appraisal report of the third appraiser is more than the higher
of the first two appraisals, the higher of the first two appraisals shall
govern; and provided, further, that if the value of the equity contained in the
appraisal report of the third appraiser is less than the lower of the first two
appraisals, the lower of the first two appraisals shall govern.
6.5. Buy Out on Sale of Vessel.
6.5.1. Notwithstanding anything in this Agreement
to the contrary, simultaneously with the closing of the sale of the Vessel,
after the payment of all liens on the Vessel, the amount of One-Million One
Hundred and Ten Thousand Two-Hundred and Fifty Dollars ($1,110,250) shall be
paid over to RPI as a return of capital in repurchase of RPI's entire Membership
Interest. Such payment to RPI shall be made before any portion of such remaining
net proceeds are used for any other purpose by the Company and such payment
shall repurchase RPI's entire Membership Interest, notwithstanding any higher or
lower balance in RPI's Capital Account. Such payment shall be made, from escrow,
in cash at the closing of the sale of the Vessel.
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Article VII
Dissolution, Liquidation, and Termination of the Company
7.1. Events of Dissolution. The Company shall be dissolved
upon the happening of the first to occur of an event specified in Section 17350
of the California Corporations Code or on the date fixed for its termination in
Section 2.4;
7.2. Procedure for Winding Up and Dissolution. If the Company
is dissolved, the Members shall wind up its affairs. Except as otherwise set
forth in Section 6.5.1., on winding up of the Company, the assets of the Company
shall be distributed, first to the creditors of the Company, including Interest
Holders, who are creditors, in satisfaction of the liabilities of the Company,
and then, to the Interest Holders in accordance with Section 4.2. of this
Agreement.
7.3. Filing of Certificate of Cancellation. Upon completion of
the affairs of the Company, the Members shall promptly file the Certificate of
Cancellation of Articles of Organization with the Secretary of State. If there
is no General Manager, then the Certificate of Cancellation shall be filed by
the remaining Members; if there are no remaining Members, the Certificate shall
be filed by the last Person to be a Member, if there is neither a General
Manager, remaining Members, nor a Person who last was a Member, the Certificate
shall be filed by the legal or personal representatives of the Person who last
was a Member.
Article VIII
Books, Records, Accounting, and Tax Elections
8.1. Bank Accounts. All funds of the Company shall be
deposited in a bank account or accounts opened in the Company's name. The
Members shall determine the financial institution or institutions at which the
accounts will be opened and maintained, the types of accounts, and the Persons
who will have authority with respect to the accounts and the funds therein.
8.2. Books and Records.
8.2.1. The Members shall keep or cause to be kept
complete and accurate hooks, records, and financial statements of the Company
and supporting documentation of transactions with respect to the conduct of the
Company's business. The books, records, and financial statements of the Company
shall be maintained on the cash method of accounting. Such books. records.
financial statements. and documents shall include, but not be limited to, the
following:
(1) a current list of the full name
and last known business or residence address of each Member and Interest Holder,
in alphabetical order, with the Contribution and the share in profits and losses
of each Member and Interest Holder specified in such list;
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(2) the Articles of Organization,
including all amendments; and any powers of attorney under which the Articles of
Organization or amendments were executed;
(3) federal, state, and local
income tax or information returns and reports. if any, for the six most recent
taxable years;
(4) this Agreement and any
amendments thereto; and any Powers-of-Attorney under which this Agreement or
amendments were executed;
(5) financial statements for the
six most recent years;
(6) internal books and records for
the current and three most recent years; and,
(7) a true copy of relevant records
indicating the amount, cost, and value of all property which the Company owns,
claims, possesses, or controls.
8.2.2. Such hooks, records, and financial
statements of the Company and supporting documentation shall be kept,
maintained, and available at the Company's office within the State of
California.
8.3. Right to Inspect Books and Records; Receive Information.
8.3.1. Upon the reasonable request of a Member for
a purpose reasonably related to the interest of that Member of the Company, the
Members shall promptly deliver to the requesting Member at the expense of the
Company a copy of this Agreement, as well as the information required to be
maintained by the Company under subparagraphs (1) and (3) of Section 8.2.1.
8.3.2. Each Member has the right upon reasonable
request, and for purposes reasonably related to the interest of that Member of
the Company, to do the following:
(1) to inspect and copy during
normal business hours any of the records required to be maintained by the
Company under Section 8.2. 1 of this Agreement; and
(2) to obtain from the Company
promptly after becoming available, a copy of the Company's federal, state, and
local income tax or information returns for each year.
8.3.3. If a Member has executed an amendment to the
Articles of Organization or this Agreement pursuant to a power of attorney from
the Members, such Member must promptly furnish to the Members a copy of such
amendment.
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8.3.4. The Company shall send or shall cause to be
sent to each Member or Interest Holder within 90 days after the end of each
fiscal year of the Company: (i) such information as is necessary to complete
federal and state income tax or information returns, and (ii) if the Company has
35 or fewer Members, a copy of the Company's federal, state, and local income
tax or information returns for the fiscal year.
8.3.5. Unless otherwise expressly provided in this
Agreement, the inspecting or requesting Member as the case may be, shall
reimburse the Company for all reasonable costs and expenses incurred by the
Company in connection with such inspection and copying of the Company's hooks
and records and the production and delivery of any other books or records.
8.4. Annual Accounting Period. The annual accounting period of
the Company shall be its taxable year. The Company's taxable year shall be
selected by the Members, subject to the requirements and limitations of the
Code.
8.5. Title to Company Property. All real and personal property
acquired by the Company shall be acquired and held by the Company in the
Company's name.
Article IX
General Provisions
9.1. Assurances. Each Member shall execute all certificates
and other documents and shall do all such filing, recording, publishing, and
other acts as the Members deem appropriate to comply with the requirements of
law for the formation and operation of the Company and to comply with any laws,
rules, and regulations relating to the acquisition, operation, or holding of the
property of the Company.
9.2. Notifications. Any notice, demand, consent, election,
offer, approval, request, or other communication (collectively a "notice")
required or permitted under this Agreement must be in writing and either
delivered personally or sent by certified or registered mail, postage prepaid,
return receipt requested. Any notice to be given hereunder by the Company shall
be given by the Members. A notice must be addressed to an Interest Holder at the
Interest Holder's last known address on the records of the Company. A notice to
the Company must be addressed to the Company's principal office. A notice
delivered personally will be deemed given only when acknowledged in writing by
the Person to whom it is delivered. A notice that is sent by mail will be deemed
given three (3) business days after it is mailed. Any party may designate, by
notice to all of the others, substitute addresses or addressees for notices;
and, thereafter, notices are to be directed to those substitute addresses or
addressees. The Members initial addresses for notice shall be as follows: for
Abejon, notices shall be sent to: Ken Brody, President, Abejon Rotary Power
Corporation, 4960 North Harbor Drive, San Diego, CA, 92106; for RPI, notices
shall be to: Richard M. H. Thompson, Chairman, Rotary Power International, Inc.,
P.O. Box 128, Wood-Ridge, NJ, 07075-0128.
9.3. Specific Performance. The parties recognize that
irreparable injury will result from a breach of any provision of this Agreement
and that money damages will be
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inadequate to fully remedy the injury. Accordingly, in the event of a breach or
threatened breach of one or more of the provisions of this Agreement, any party
who may be injured (in addition to any other remedies which may be available to
that party) shall be entitled to one or more preliminary or permanent orders (i)
restraining and enjoining any act which would constitute a breach or (ii)
compelling the performance of any obligation which, if not performed, would
constitute a breach.
9.4. Complete Agreement. This Agreement constitutes the
complete and exclusive statement of the agreement among the Members. It
supersedes all prior written and oral statements, including any prior
representation, statement, condition, or warranty. Except as expressly provided
otherwise herein, this Agreement may not be amended without the written consent
of all of the Members.
9.5. Applicable Law. All questions concerning the
construction, validity, and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement shall be governed by the internal
law, not the law of conflicts, of the State of California. Except as otherwise
expressly set forth herein, nothing shall be deemed or construed to amend or
modify the rights, duties and obligations of RPI, Abejon and Hydro Lance
Maritime Transport, Inc., under the loan Agreement dated February 6, 1996, by
and among RPI, Abejon and Hydro Lance Maritime Transport, Inc., and the Pledge
Agreement, dated February 6, 1996, by and between Abejon and RPI.
9.6. Article and Section Titles. The headings herein are
inserted as a matter of convenience only and do not define, limit, or describe
the scope of this Agreement or the intent of the provisions hereof.
9.7. Binding Provisions. This Agreement is binding upon, and
to the limited extent specifically provided herein, inures to the benefit of,
the parties hereto and their respective heirs, executors, administrators,
personal and legal representatives, successors, and assigns.
9.8. Jurisdiction and Venue. Any suit involving any dispute or
matter arising under this Agreement may only be brought in the appropriate
United States District Court in California or any California State Court having
jurisdiction over the subject matter of the dispute or matter. All Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
9.9. Terms. Common nouns and pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular, and plural, as the identity of the
Person may in the context require.
9.10. Separability of Provisions. Each provision of this
Agreement shall be considered separable; and if, for any reason, any provision
or provisions herein are determined to be invalid and contrary to any existing
or future law, such invalidity shall not impair the operation of or affect those
portions of this Agreement which are valid.
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9.11. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original and all of which, when taken together, constitute one and the same
document. The signature of any party to any counterpart shall be deemed a
signature to, and may be appended to, any other counterpart.
9.12. Estoppel Certificate. Each Member shall, within ten (10)
days after written request, deliver to the requesting Person a certificate
stating, to the Member's knowledge, that: (a) this Agreement is in full force
and effect; (b) this Agreement has not been modified except by any instrument or
instruments identified in the certificate; and (c) there is no default hereunder
by the requesting Person, or if there is a default, the nature and extent
thereof. If the certificate is not received within the 10-day period, the
Members shall execute and deliver the certificate on behalf of the requested
Member, without qualification.
9.13. In the event any party to this Agreement shall be
required to initiate legal or action or proceedings to enforce performance of
any term or condition of this Agreement, including, but not limited to, the
payment of monies or the enjoining of any action prohibited hereunder, the
prevailing party shall be entitled to recover such sum, in addition to any other
damages or compensation received, as well as reimburse the prevailing party for
reasonable attorneys' fees and costs incurred on account thereof notwithstanding
the nature of the claim or cause of action asserted by the prevailing party.
9.14. Subject in all respects to the limitations on
transferability contained herein, this Agreement shall be binding upon, and
shall inure to the benefit of, the heirs, administrators, personal
representatives, successors and assigns of the respective parties hereto.
9.15 None of the provisions of this Agreement shall be for the
benefit of or enforceable by any of the creditors of the Company or the Members.
IN WITNESS WHEREOF, the parties have executed, or caused this
Agreement to be executed, under seal, as of the date set forth hereinabove.
MEMBERS:
ROTARY POWER INTERNATIONAL INC.
By: /s/ Richard M.H. Thompson
---------------------------------
Richard M.H. Thompson, President
ABEJON ROTARY POWER CORP.
By: /s/ Ken Brody
---------------------------------
Ken Brody, President
18
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Exhibit 10.48
PLAN AND AGREEMENT OF MERGER
This Plan and Agreement of Merger entered into as of March 21,
1997 by and among International Cryogenic Systems Corporation, a Nevada
corporation (the "Buyer"), Power Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Buyer (the "Transitory Subsidiary"), and Rotary
Power International, Inc., a Delaware corporation (the "Company"). The Buyer,
the Transitory Subsidiary and the Company are referred to collectively in this
Agreement as the "Parties".
R E C I T A L S:
WHEREAS, pursuant to a memorandum of agreement dated December
24, 1996, a copy of which is attached hereto as Exhibit A and incorporated
herein and made a part hereof, the Buyer acquired from the Company two million
(2,000,000) shares of the Company's authorized but unissued common stock for an
aggregate purchase price of One Million Dollars ($1,000,000) (the "Stock
Purchase");
WHEREAS, in connection with the Stock Purchase, as reflected
in Exhibit A, the Boards of Directors of the Buyer and the Company agreed,
subject to the negotiation and execution of this Agreement and certain other
conditions set forth herein, to the acquisition of the Company by Buyer pursuant
to a merger in which each share of the Company's common stock will be exchanged
for 0.363 shares of Buyer's common stock, resulting in the issuance of not more
than 1,516,196 shares of the Buyer's common stock (plus any additional shares of
Buyer's common stock that may become issuable (i) as a result of the exercise of
options or warrants to purchase common stock of the Company outstanding as of
December 24, 1996 or (ii) in respect of warrants to purchase 150,000 shares of
the Company's common stock that may become issuable to Rickel & Associates,
Inc.);
WHEREAS, this Agreement is not intended to constitute, be a
part of, or be adopted pursuant to any "plan of reorganization," as such term is
used in Section 354 of the Code, and the Merger is also not intended to
constitute a "reorganization," as such term is used in Sections 354 and 368 of
the Code. The Parties intend that the Merger be treated for federal income tax
purposes as a sale of Company Shares to the Buyer.
WHEREAS, the Boards of Directors of the Buyer and the Company
have respectively concluded that Buyer's acquisition of the Company by means of
the merger of the Transitory Subsidiary into
<PAGE>
the Company pursuant to this Agreement is in the best interests of Buyer and the
Company, respectively.
NOW, THEREFORE, in consideration of the representations,
warranties and covenants contained in this Agreement, the Parties agree as
follows.
ARTICLE I - THE MERGER
1.1 THE MERGER. Upon and subject to the terms and conditions
of this Agreement, the Transitory Subsidiary shall merge with and into the
Company (with such merger referred to in this Agreement as the "Merger") at the
Effective Time (as defined below). From and after the Effective Time, the
separate corporate existence of the Transitory Subsidiary shall cease and the
Company shall continue as the surviving corporation in the Merger (the
"Surviving Corporation"). The "Effective Time" shall be the time at which the
Company and the Transitory Subsidiary file the certificate of merger or other
appropriate documents prepared and executed in accordance with the relevant
provisions of the Delaware General Corporation Law (the "Certificate of Merger")
with the Secretary of State of the State of Delaware. The Merger shall have the
effects set forth in Section 259 of the Delaware General Corporation Law.
1.2 THE CLOSING. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at a mutually agreed upon
location, commencing at 9:00 a.m. local time on a mutually agreeable date as
soon as practicable after the date on which all of the conditions to the
obligations of the Parties to consummate the transactions contemplated by this
Agreement have been satisfied or waived (the "Closing Date"), but in no event
later than 120 days from the date hereof.
1.3 ACTIONS AT THE CLOSING. At the Closing, (a) the Company
shall deliver to the Buyer and the Transitory Subsidiary the various
certificates, instruments and documents referred to in Section 5.2, (b) the
Buyer and the Transitory Subsidiary shall deliver to the Company the various
certificates, instruments and documents referred to in Section 5.3, (c) the
Company and the Transitory Subsidiary shall file with the Secretary of State of
the State of Delaware the Certificate of Merger, and (d) the Buyer shall deliver
a certificate for the Merger Shares (as defined below) to a bank, trust company
or other entity reasonably satisfactory to the Company appointed by the Buyer to
act as the exchange agent (the "Exchange Agent") in accordance with Section 1.7.
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1.4 ADDITIONAL ACTION. The Surviving Corporation may, at any
time after the Effective Time, take any action, including executing and
delivering any document, in the name and on behalf of either the Company or the
Transitory Subsidiary, in order to consummate the transactions contemplated by
this Agreement.
1.5 CONVERSION OF SHARES. At the Effective Time, by virtue
of the Merger and without any action on the part of any Party or the holder of
any of the following securities:
(a) Each share of common stock, $0.01 par value per share, of
the Company ("Company Shares") issued and outstanding immediately prior to the
Effective Time (other than Company Shares owned beneficially by the Buyer or the
Transitory Subsidiary, Dissenting Shares (as defined below) and Company Shares
held in the Company's treasury) shall be converted into and represent the right
to receive (subject to the provisions of Section 1.9) 0.363 share of common
stock, $0.001 par value per share, of the Buyer ("Buyer Common Stock").
Stockholders of record of the Company ("Company Stockholders") shall be entitled
to receive immediately all of the shares of Buyer Common Stock into which their
Company Shares were converted pursuant to this Section 1.5(a) (the "Merger
Shares").
(b) Each Company Share held in the Company's treasury
immediately prior to the Effective Time and each Company Share owned
beneficially by the Buyer or the Transitory Subsidiary shall be cancelled and
retired without payment of any consideration therefor.
(c) Each share of common stock, no par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the Effective
Time shall be converted into and thereafter evidence one share of common stock,
no par value per share, of the Surviving Corporation.
1.6 DISSENTING SHARES.
(a) For purposes of this Agreement, "Dissenting Shares" means
Company Shares held as of the Effective Time by a Company Stockholder who has
not voted such Company Shares in favor of the adoption of this Agreement and the
Merger and with respect to which appraisal shall have been duly demanded and
perfected in accordance with Section 262 of the Delaware General Corporation Law
and not effectively withdrawn or forfeited prior to the Effective Time.
Dissenting Shares shall not be converted into or represent the right to receive
Merger Shares, unless such Company Stockholder shall have forfeited his right to
appraisal under the Delaware General Corporation Law or withdrawn, with the
consent of the
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Company, his demand for appraisal. If such Company Stockholder has so forfeited
or withdrawn his right to appraisal of Dissenting Shares, then (i) as of the
occurrence of such event, such holder's Dissenting Shares shall cease to be
Dissenting Shares and shall be converted into and represent the right to receive
the Merger Shares issuable in respect of such Company Shares pursuant to Section
1.5(a), and (ii) promptly following the occurrence of such event, the Buyer
shall deliver to the Exchange Agent a certificate representing the Merger Shares
to which such holder is entitled pursuant to Section 1.5(a).
(b) The Company shall give the Buyer (i) prompt notice of any
written demands for appraisal of any Company Shares, withdrawals of such
demands, and any other instruments that relate to such demands received by the
Company and (ii) the opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the Delaware General Corporation Law. The
Company shall not, except with the prior written consent of the Buyer, make any
payment with respect to any demands for appraisal of Company Shares or offer to
settle or settle any such demands.
1.7 EXCHANGE OF SHARES.
(a) Prior to the Effective Time, the Buyer shall appoint the
Exchange Agent to effect the exchange for the Merger Shares of certificates
that, immediately prior to the Effective Time, represented Company Shares
converted into Merger Shares pursuant to Section 1.5 (including any Company
Shares referred to in the last sentence of Section 1.6(a)) ("Certificates"). On
the Closing Date, the Buyer shall deliver to the Exchange Agent, in trust for
the benefit of holders of Certificates, a stock certificate (issued in the name
of the Exchange Agent or its nominee) representing the Merger Shares, as
described in Section 1.5(a). As soon as practicable after the Effective Time,
the Buyer shall cause the Exchange Agent to send a notice and a transmittal form
to each holder of a Certificate (other than those surrendered and paid for at
the Closing) advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent such Certificate in exchange
for the Merger Shares issuable pursuant to Section 1.5(a). Each holder of a
Certificate, upon proper surrender thereof to the Exchange Agent in accordance
with the instructions in such notice, shall be entitled to receive in exchange
therefor (subject to any taxes required to be withheld) the Merger Shares
issuable pursuant to Section 1.5(a). Until properly surrendered, each such
Certificate shall be deemed for all purposes to evidence only the right to
receive the Merger Shares issuable pursuant to Section 1.5(a). Holders of
Certificates shall not be entitled to receive certificates for the Merger Shares
to
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which they would otherwise be entitled until such Certificates are properly
surrendered.
(b) If any Merger Shares are to be issued in the name of a
person other than the person in whose name the Certificate surrendered in
exchange therefor is registered, it shall be a condition to the issuance of such
Merger Shares that (i) the Certificate so surrendered shall be transferable, and
shall be properly assigned, endorsed or accompanied by appropriate stock powers,
(ii) such transfer shall otherwise be proper and (iii) the person requesting
such transfer shall pay to the Exchange Agent any transfer or other taxes
payable by reason of the foregoing or establish to the satisfaction of the
Exchange Agent that such taxes have been paid or are not required to be paid.
Notwithstanding the foregoing, neither the Exchange Agent nor
any Party shall be liable to a holder of Company Shares for any Merger Shares
issuable to such holder pursuant to Section 1.5(a) that are delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(c) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Buyer shall issue
in exchange for such lost, stolen or destroyed Certificate the Merger Shares
issuable in exchange therefor pursuant to Section 1.5(a). The Buyer may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificate to give the Buyer a bond in
such sum as it may reasonably direct as indemnity against any claim that may be
made against the Buyer with respect to the Certificate alleged to have been
lost, stolen or destroyed.
(d) Promptly following the date which is six months after the
Closing Date, the Exchange Agent shall return to the Buyer all Merger Shares in
its possession, and the Exchange Agent's duties shall terminate. Thereafter,
each holder of a Certificate may surrender such Certificate to the Buyer and,
subject to applicable abandoned property, escheat and similar laws, receive in
exchange there for the Merger Shares issuable with respect thereto pursuant to
Section 1.5(a).
1.8 DIVIDENDS. No dividends or other distributions that are
payable to the holders of record of Buyer Common Stock as of a date on or after
the Closing Date shall be paid to former Company Stockholders entitled by reason
of the Merger to receive Merger Shares until such holders surrender their
Certificates in
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accordance with Section 1.7. Upon such surrender, the Buyer shall pay or deliver
to the persons in whose name the certificates representing such Merger Shares
are issued any dividends or other distributions that are payable to the holders
of record of Buyer Common Stock as of a date on or after the Closing Date and
which were paid or delivered between the Effective Time and the time of such
surrender; provided that no such person shall be entitled to receive any
interest on such dividends or other distributions.
1.9 FRACTIONAL SHARES. No certificates or scrip representing
fractional Merger Shares shall be issued to former Company Stockholders upon the
surrender for exchange of Certificates, and such former Company Stockholders
shall not be entitled to any voting rights, rights to receive any dividends or
distributions or other rights as a stockholder of the Buyer with respect to any
fractional Merger Shares that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Merger Shares that would otherwise be
issued, each former Company Stockholder that would have been entitled to receive
a fractional Merger Share shall, upon proper surrender of such person's
Certificates, receive a cash payment equal to the average of the closing bid and
asked prices per share of the Buyer Common Stock in the over-the-counter market,
on the business day immediately preceding the business day prior to the Closing
Date, multiplied by the fraction of a share that such Company Stockholder would
otherwise be entitled to receive. The fractional share interests of each Company
Stockholder will be aggregated, and no Company Stockholder will receive cash in
an amount equal to or greater than the value of one full share of Buyer Common
Stock.
1.10 OPTIONS AND RIGHTS.
(a) As of the Effective Time, all obligations of the Company
with respect to warrants and options to purchase Company Shares issued by the
Company listed on Schedule 1.10 ("Options"), whether vested or unvested, shall
be assumed by the Buyer.
(b) Immediately after the Effective Time, each Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Option at the Effective Time, such number of shares of
Buyer Common Stock as is equal to the number of Company Shares subject to the
unexercised portion of such Option multiplied by the Conversion Ratio (with any
fraction resulting from such multiplication to be rounded up or down to the
nearest whole number or, in the case of .5, to the nearest odd number). The
exercise price per share of each such Option shall be equal to the exercise
price of such Option immediately prior to the
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Effective Time, divided by the Conversion Ratio. The term, exercisability,
vesting schedule and all of the other terms of the Options shall otherwise
remain unchanged.
(c) Promptly following the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth such holders' rights pursuant to such Options, as amended
by this Section 1.10, and the agreements evidencing such Options shall continue
in effect on the same terms and conditions (subject to the amendments provided
for in this Section 1.10 and such notice).
(d) The Buyer shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Buyer Common Stock for
delivery upon exercise of the Options.
1.11 CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of the Surviving Corporation shall be the same as the
Certificate of Incorporation of the Transitory Subsidiary immediately prior to
the Effective Time, except that the name of the corporation set forth therein
shall be changed to the name of the Company.
1.12 BY-LAWS. The By-laws of the Surviving Corporation shall
be the same as the By-laws of the Company immediately prior to the Effective
Time.
1.13 DIRECTORS AND OFFICERS. The directors of the Transitory
Subsidiary shall become the directors of the Surviving Corporation as of the
Effective Time. The officers of the Company shall remain as officers of the
Surviving Corporation after the Effective Time, retaining their respective
positions, except as specified by the Buyer pursuant to Section 5.2(d).
1.14 NO FURTHER RIGHTS. From and after the Effective Time, no
Company Shares shall be deemed to be outstanding, and holders of Certificates
shall cease to have any rights with respect thereto, except as provided in this
Agreement or by law.
1.15 CLOSING OF TRANSFER BOOKS. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of Company
Shares shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation or the Exchange Agent, they shall be
cancelled and exchanged for Merger Shares in accordance with Section 1.5(a),
subject to applicable law in the case of Dissenting Shares.
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1.16 TAX TREATMENT. This Agreement is not intended to
constitute, be a part of, or be adopted pursuant to any "plan of
reorganization," as such term is used in Section 354 of the Code, and the Merger
is also not intended to constitute a "reorganization," as such term is used in
Sections 354 and 368 of the Code. The Parties intend that the Merger be treated
for federal income tax purposes as a sale of Company Shares to the Buyer.
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the
statements contained in this Article II are true and correct, except as set
forth in the disclosure schedule attached hereto (the "Disclosure Schedule").
The Disclosure Schedule shall be initialed by the Parties and shall be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II, and the disclosures in any paragraph of the Disclosure Schedule
shall qualify only the corresponding paragraph in this Article II.
2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation. The Company is duly qualified
to conduct business and in good standing under the laws of each jurisdiction in
which the nature of its business or the ownership or leasing of its properties
requires such qualification except where the failure to be so qualified would
not have a material adverse effect on the Company and its sole subsidiary,
Rotary Power Marine, Inc. (the "Subsidiary"), taken as a whole. The Company has
all requisite corporate power and authority to carry on its business in and to
own and use the properties owned and used by it in its business. The Company has
furnished to the Buyer true and complete copies of its Certificate of
Incorporation and By-laws, each as amended and as in effect on the date hereof.
The Company is not in violation of any provision of its Certificate of
Incorporation or By-laws.
2.2 CAPITALIZATION. The authorized capital stock of the
Company consists of 10,500,000 shares, comprised of 10,000,000 shares of common
stock, $0.01 par value per share, of which 6,641,432 shares are issued and
outstanding and no shares are held in the treasury of the Company, and 500,000
shares of preferred stock, $0.01 par value per share, of which no shares are
designated or outstanding. Section 2.2 of the Disclosure Schedule sets forth a
complete and accurate list, of all holders of Options (as defined below),
indicating the number of Company Shares subject to Options held by such holders.
All of the issued and outstanding Company
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Shares are, and all Company Shares that may be issued upon exercise of Options
in accordance with the terms thereof will be, duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights. There are no
outstanding or authorized options, warrants, rights, agreements or commitments
(collectively "Options") to which the Company is a party or which are binding
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock, other than as listed in Section 2.2 of the Disclosure
Schedule. There are no outstanding or authorized stock appreciation, phantom
stock or similar rights with respect to the Company. There are no agreements,
voting trusts, proxies, or understandings with respect to the voting, or
registration under the Securities Act, of any Company Shares other than as set
forth in Section 2.2 of the Disclosure Schedule.
2.3 AUTHORIZATION OF TRANSACTION. The Company has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
and, subject to the adoption of this Agreement and the approval of the Merger by
both (i) a majority of the votes represented by the outstanding Company Shares
entitled to vote on this Agreement and the Merger and (ii) a majority of the
votes represented by the outstanding Company Shares entitled to vote on this
Agreement and the Merger that are not owned by Buyer (the "Requisite Stockholder
Approval"), the performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated by this Agreement
have been duly and validly authorized by all necessary corporate action on the
part of the Company. This Agreement has been duly and validly executed and
delivered by the Company and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
2.4 NONCONTRAVENTION. Subject to compliance with the
applicable requirements of the Securities Act of 1933 as amended (the
"Securities Act"), any applicable state securities laws and the Securities
Exchange Act of 1934, amended (the "Exchange Act") and the filing of the
Certificate of Merger as required by the Delaware General Corporation Law,
neither the execution and delivery of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated by this Agreement
will (a) conflict with or violate any provision of the charter or By-laws of the
Company, (b) require on the part of the Company or its Subsidiary any filing
with, or any permit, authorization, consent or approval of, any court,
arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"), other
than any filing, permit, authorization, consent or approval which if not
obtained or made
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would not have a material adverse effect on the assets, business, financial
condition, results of operations or future prospects of the Company and its
Subsidiary taken as a whole or on the ability of the Parties to consummate the
transactions contemplated by this Agreement, (c) except as set forth in Section
2.4 to the Disclosure Schedule, conflict with, result in a breach of, constitute
(with or without due notice or lapse of time or both) a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any contract,
lease, sublease, license, sublicense, franchise, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest (as
defined below) or other arrangement to which the Company or its Subsidiary is a
party or by which the Company or its Subsidiary is bound or to which any of
their assets is subject, other than any conflict, breach, default, acceleration,
termination, modification or cancellation that individually or in the aggregate
would not have a material adverse effect on the assets, business, financial
condition, results of operations or future prospects of the Company and its
Subsidiary taken as a whole or on the ability of the Parties to consummate the
transactions contemplated by this Agreement, (d) result in the imposition of any
Security Interest upon any assets of the Company or its Subsidiary or (e)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, its Subsidiary or any of their properties or assets.
For purposes of this Agreement, "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge, or other lien (whether arising by
contract or by operation of law), other than (i) mechanic's, materialmen's, and
similar liens, (ii) liens arising under worker's compensation, unemployment
insurance, social security, retirement, and similar legislation, and (iii) liens
on goods in transit incurred pursuant to documentary letters of credit, in each
case arising in the ordinary course of business consistent with past custom and
practice (including with respect to frequency and amount) ("Ordinary Course of
Business") of the Company and not material to the Company.
2.5 SUBSIDIARIES. Except as listed in Section 2.5 of the
Disclosure Schedule, the Company owns no interest in any corporation,
partnership or other entity other than the Subsidiary. The Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is duly qualified to conduct
business and in good standing under the laws of each jurisdiction in which the
nature of its businesses or the ownership or leasing of its properties requires
such qualification except where the failure to be so qualified would not have a
material adverse effect on the Company
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and its Subsidiary taken as a whole. The Subsidiary has all requisite corporate
power and authority to carry on its business and to own and use the properties
owned and used by it. The Company has delivered or made available to the Buyer
correct and complete copies of the charter and By-laws of the Subsidiary, as
amended to date. The Subsidiary is not in violation of any provision of its
charter or By-laws. All of the issued and outstanding shares of capital stock of
the Subsidiary are owned of record and beneficially by the Company and are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights.
2.6 REPORTS AND FINANCIAL STATEMENTS. The Company has
previously furnished or made available to the Buyer complete and accurate
copies, as amended or supplemented, of its (a) Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission (the "SEC"), (b) proxy statements relating to all meetings
of its stockholders (whether annual or special) since December 31, 1995, and (c)
all other reports or registration statements filed by the Company with the SEC
since December 31, 1995 (such annual reports, proxy statements, registration
statements and other filings, together with any amendments or supplements
thereto, are collectively referred to in this Agreement as the "Company
Reports"). The Company Reports constitute all of the documents filed or required
to be filed by the Company with the SEC since December 31, 1995. As of their
respective dates, the Company Reports filed since December 31, 1995, did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading. The audited
financial statements and unaudited interim financial statements of the Company
included in the Company Reports filed since December 31, 1995 (together, the
"Financial Statements"), (i) comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, (ii) have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods covered thereby (except as may be indicated therein
or in the notes thereto, and in the case of quarterly financial statements, as
permitted by Form 10-QSB under the Exchange Act), (iii) fairly present the
consolidated financial condition, results of operations and cash flows of the
Company and its Subsidiary as of the respective dates thereof and for the
periods referred to therein, and (iv) are consistent with the books and records
of the Company and its Subsidiary.
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2.7 UNDISCLOSED LIABILITY. As of the date hereof, neither the
Company nor its Subsidiary has any material liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated and whether
due or to become due), except for (a) liabilities shown on the balance sheet
included in the Company's most recent Quarterly Report on Form 10-QSB for the
period ended September 30, 1996 (the "Most Recent Balance Sheet"), (b)
liabilities which have arisen since September 30, 1996, in the Ordinary Course
of Business, (c) contractual liabilities incurred in the Ordinary Course of
Business which are not required by GAAP to be reflected on a balance sheet and
(d) liabilities disclosed in Section 2.18 of the Disclosure Schedule.
2.8 TAX MATTERS. Each of the Company and its Subsidiary has
filed all material Tax Returns (as defined below) that it was required to file
(taking into account extensions) and to the knowledge of the Company no material
position is reflected in a Tax Return for which there was not substantial
authority (as defined in Section 6662 of the Code) or comparable foreign,
federal, state or local law. Each of the Company and its Subsidiary has paid all
Taxes (as defined below) that are shown to be due on any such Tax Returns. The
unpaid Taxes of the Company and its Subsidiary for tax periods through the date
of the Most Recent Balance Sheet are appropriately accrued or reserved for on
the Most Recent Balance Sheet. Neither the Company nor its Subsidiary has any
actual or potential liability for any Tax obligation of any taxpayer (including
without limitation any affiliated group of corporations or other entities that
included the Company or its Subsidiary during a prior period) other than the
Company and its Subsidiary. All material Taxes that the Company or its
Subsidiary is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Entity. For purposes of this Agreement, "Taxes" means all taxes,
charges, fees, levies or other similar assessments or liabilities, including
without limitation income, gross receipts, ad valorem, premium, value-added,
excise, real property, personal property, sales, use, transfer, withholding,
employment, payroll and franchise taxes imposed by the United States of America
or any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or dispute
thereof. For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be supplied
to a taxing authority in connection with Taxes.
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2.9 ASSETS. Each of the Company and its Subsidiary owns or
leases all tangible assets necessary for the conduct of its business as
presently conducted. Except as set forth in Section 2.9 of the Disclosure
Schedule or in Exhibit A, no material asset of the Company or its Subsidiary
(tangible or intangible) is subject to any Security Interest.
2.10 OWNED REAL PROPERTY. Neither the Company nor its
Subsidiary owns any real property.
2.11 INTELLECTUAL PROPERTY.
(a) Each of the Company and its Subsidiary owns, or is
licensed or otherwise possesses legally enforceable rights under all patents and
patent applications listed in Section 2.11 of the Disclosure Schedule and the
right to use all trademarks, trade names, service marks, copyrights, and any
applications for such trademarks, trade names, service marks and copyrights,
schematics, technology, know-how, computer software programs or applications and
tangible or intangible proprietary information or material listed in Section
2.11 of the Disclosure Schedule that are used to conduct its business
(collectively, "Intellectual Property") and, except as qualified by or disclosed
in Section 2.11 of the Disclosure Schedule, is aware of no intellectual property
right of any third party that may prevent the Company or its Subsidiary from
conducting its business as currently conducted or as planned by the Company to
be conducted. Section 2.11 of the Disclosure Schedule lists (i) all patents and
patent applications and all trademarks, registered copyrights, trade names and
service marks which are both owned by and used in the business of the Company
and its Subsidiary (ii) all material written licenses, sublicenses and other
agreements to which the Company or its Subsidiary is a party and pursuant to
which any person is authorized to use any Intellectual Property rights, and
(iii) all material written licenses, sublicenses and other agreements as to
which the Company or its Subsidiary is a party and pursuant to which the Company
or its Subsidiary is authorized to use any third party patents, trademarks or
copyrights, including software . Neither the Company nor its Subsidiary is a
party to any oral license, sublicense or agreement which, if reduced to written
form, would be required to be listed in Section 2.11 of the Disclosure Schedule
under the terms of this Section 2.11.
(b) Except as set forth in Section 2.11 of the Disclosure
Schedule, neither the Company nor its Subsidiary has been named in any suit,
action or proceeding which involves a claim of infringement of any Intellectual
Property right of any third party. Except as qualified by or disclosed in
Section 2.11 of the
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Disclosure Schedule, the manufacturing, marketing, licensing or sale of the
products or performance of the service offerings of the Company and its
Subsidiary do not, to the knowledge of the Company, infringe any Intellectual
Property right of any third party; and, to the knowledge of the Company, the
Intellectual Property rights of the Company and its Subsidiary are not being
infringed by activities, products or services of any third party.
2.12 INVENTORY. All inventory of the Company and its
Subsidiary, whether or not reflected on the Most Recent Balance Sheet, consists
of a quality and quantity usable and saleable in the Ordinary Course of
Business, except for obsolete items and items of below-standard quality, all of
which were, as of the date of the Most Recent Balance Sheet, written-off or
written-down to net realizable value or for which reserves were established and
set forth on the Most Recent Balance Sheet or which became such in the Ordinary
Course of Business after the date of the Most Recent Balance Sheet.
2.13 REAL PROPERTY LEASES. Section 2.13 of the Disclosure
Schedule lists all real property leased or subleased to the Company or its
Subsidiary. The Company has delivered or made available to the Buyer correct and
complete copies of the leases and subleases (as amended to the date hereof)
listed in Section 2.13 of the Disclosure Schedule.
2.14 CONTRACTS. Section 2.14 of the Disclosure Schedule lists
the following written arrangements (including without limitation written
agreements) to which the Company or its Subsidiary is a party:
(a) any written arrangement (or group of related written
arrangements) for the lease of personal property from or to third parties
providing for lease payments in excess of $50,000.00 per annum;
(b) any written arrangement (or group of related written
arrangements) for the purchase or sale of raw materials, commodities, supplies,
products or other personal property or for the furnishing or receipt of services
(i) which calls for performance over a period of more than one year, (ii) which
involves more than the sum of $10,000.00, to be paid from and after the date
hereof or (iii) in which the Company or its Subsidiary has granted manufacturing
rights, "most favored nation" pricing provisions or marketing or distribution
rights or has agreed to purchase a minimum quantity of goods or services or has
agreed to purchase goods or services exclusively from a certain party;
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(c) any written arrangement establishing a partnership
or joint venture;
(d) any written arrangement (or group of related written
arrangements) under which it has created, incurred, assumed, or guaranteed (or
may create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $10,000.00 or under which it has imposed
(or may impose) a Security Interest on any of its assets, tangible or intangible
and
(e) any other written arrangement (or group of related
arrangements) involving more than $10,000.00 per annum to be paid from and after
the date hereof.
The Company has delivered or made available to the Buyer a
correct and complete copy of each written arrangement (as amended to the date
hereof) listed in Section 2.14 of the Disclosure Schedule.
2.15 ACCOUNTS RECEIVABLE. All accounts receivable of the
Company and its Subsidiary reflected on the Most Recent Balance Sheet arose in
the Ordinary Course of Business.
2.16 POWERS OF ATTORNEY. There are no outstanding powers of
attorney executed on behalf of the Company or its Subsidiary.
2.17 INSURANCE. Each of the Company and its Subsidiary is
covered by insurance in scope and amount customary and reasonable for their
business. Section 2.17 of the Disclosure Schedule lists each policy of insurance
covering the Company or its Subsidiary.
2.18 LITIGATION. Section 2.18 of the Disclosure Schedule
identifies, and contains a brief description of, (a) any unsatisfied judgement,
order, decree, stipulation or injunction and (b) any claim, complaint, action,
suit, proceeding, hearing, notice os violation or investigation by or in any
Governmental Entity or before any arbitrator to which the Company or its
Subsidiary is a party or, to the knowledge of the Company or its Subsidiary, is
threatened to be made a party.
2.19 PRODUCT WARRANTY. No product manufactured, sold,
leased, licensed or delivered by the Company or its Subsidiary is subject to
any guaranty, warranty, right of return or other indemnity beyond in any
material respect the applicable standard
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terms and conditions of sale or lease, which are set forth in Section 2.19 of
the Disclosure Schedule.
2.20 EMPLOYEES. Section 2.20 of the Disclosure Schedule
contains a list of all employees of the Company and its Subsidiary who are
employed at an annual salary in excess of $50,000, along with their positions
and salaries. Neither the Company nor its Subsidiary is a party to or bound by
any collective bargaining agreement, nor has any of them experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining disputes within the last two years. The Company and its Subsidiary
have no knowledge of any organizational effort made or threatened, either
currently or within the past two years, by or on behalf of any labor union with
respect to employees of the Company or its Subsidiary.
2.21 EMPLOYEE BENEFITS. Section 2.21 (a) of the Disclosure
Schedule contains a complete and accurate list of all Employee Benefit Plans (as
defined below). For purposes of this Agreement, "Employee Benefit Plan" means
any "employee pension benefit plan" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), any "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA), and any other
written plan, agreement or arrangement involving direct or indirect severance
benefits, disability benefits, deferred compensation, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation maintained or contributed by the
Company, its Subsidiary or any ERISA Affiliate (as defined below). For purposes
of this Agreement, "ERISA Affiliate" means any entity which is a member of (i) a
controlled group of corporations (as defined in Section 414(b) of the Code),
(ii) a group of trades or businesses under common control (as defined in Section
414(c) of the Code), or (iii) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of the Code),
any of which includes the Company or its Subsidiary. Complete and accurate
copies of all written Employee Benefit Plans and related documents made
available to the Buyer. The Company and all Employee Benefit Plans are in
compliance in all material respects with the currently applicable provisions of
ERISA and the Code and the regulations thereunder.
2.22 ENVIRONMENTAL MATTERS. The building and property on
which the Company conducts its business and manufacturing operations is leased
from the Curtis-Wright Corporation pursuant to a lease (January 1, 1992) as
amended, a copy of which has been furnished to the Buyer and which expires on
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December 31, 1997. Said lease speaks for itself concerning all environmental
matters which are the responsibility of Curtis-Wright except as may have been
caused by the Company or its Subsidiary. The Company represents to the Buyer
that the use, maintenance and operation of said leased property during the term
of the aforesaid lease by it, and its sub-lessee, Outwater Plastics Industries,
do not violate applicable, federal, state or local environmental laws,
regulations or ordinances and are not subject to any existing, pending or, to
the knowledge of the Company or its Subsidiary, threatened investigation,
inquiry or proceeding by any governmental authority. No notice of any violation
of any Environmental laws has been received by the Company or its Subsidiary
concerning real properties of or used by the Company or its Subsidiary and there
are no existing or pending requirements of any governmental authority relating
to environmental matters requiring any remedial action or other work, repairs,
construction or capital expenditures with respect to the real properties.
Neither the Company nor its Subsidiary nor, to the Company's knowledge, its
sub-lessee (in respect of the subleased property), has been named as a
"potentially responsible party" in connection with any litigation, investigation
or similar matter, and neither the Company nor its Subsidiary knows of any
matter in which it may be so named.
2.23 LEGAL COMPLIANCE. Each of the Company and its Subsidiary,
and the conduct and operations of their respective businesses, are in compliance
with each law (including rules and regulations thereunder) of any federal,
state, local or foreign government, or any Governmental Entity, which (a)
affects or relates to this Agreement or the transactions contemplated by this
Agreement or (b) is applicable to the Company or its Subsidiary or such
business, except for any violation of or default under a law referred to in
clause (b) above which reasonably may be expected not to have a material adverse
effect on the assets, business, financial condition, results of operations or
future prospects of the Company and its Subsidiary taken as a whole.
2.24 PERMITS. Section 2.24 of the Disclosure Schedule sets
forth a list of all permits, licenses, registrations, certificates, orders or
approvals from any Governmental Entity ("Permits") issued to or held by the
Company or its Subsidiary. Such listed Permits are the only Permits that are
required for the Company and its Subsidiary to conduct their business as
presently conducted, except for those the absence of which would not have any
material adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company and its Subsidiary taken as a
whole. Each such Permit is in full force and effect and, to the best of the
knowledge of the Company, no suspension or cancellation of such Permit is
threatened and
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there is no basis for believing that such Permit will not be renewable upon
expiration. Each such Permit will continue in full force and effect following
the Closing.
2.25 BROKERS' FEES. Neither the Company nor its Subsidiary
has any liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by this Agreement.
2.26 BOOKS AND RECORDS. The minute books and other similar
records of the Company and its Subsidiary contain true and complete records of
all actions taken at any meetings of the Company's or its Subsidiary's
stockholders, Board of Directors or any committee thereof and of all written
consents executed in lieu of the holding of any such meeting. The books and
records of the Company and its Subsidiary accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company or its Subsidiary.
2.27 COMPANY ACTION. The Board of Directors of the Company, at
a meeting duly called and held, has by the requisite vote of the directors (i)
determined that the Merger is fair and in the best interests of the Company and
its stockholders, (ii) adopted this Agreement in accordance with the provisions
of the Delaware General Corporation Law, and (iii) directed that this Agreement
and the Merger be submitted to the Company Stockholders for their adoption and
approval and resolved to recommend that Company Stockholders vote in favor of
the adoption of this Agreement and the approval of the Merger.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
OF THE BUYER AND THE TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary, jointly and
severally, represent and warrant to the Company as follows:
3.1 ORGANIZATION. Each of the Buyer and the Transitory
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation.
3.2 CAPITALIZATION. The authorized capital stock of the Buyer
consists of 200,000,000 shares of Buyer Common Stock, of which 5,838,219 shares
are issued and outstanding and no shares were held in the treasury of the Buyer.
All of the issued and outstanding shares of Buyer Common Stock are duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. All of the Merger Shares will be, when issued
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in accordance with this Agreement, duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights.
3.3 AUTHORIZATION OF TRANSACTION. Both the Buyer and the
Transitory Subsidiary have all requisite power and authority to execute and
deliver this Agreement and to perform their obligations hereunder. The execution
and delivery of this Agreement by the Buyer and the Transitory Subsidiary and
the performance of this Agreement and the consummation of the transactions
contemplated by this Agreement by the Buyer and the Transitory Subsidiary have
been duly and validly authorized by all necessary corporate action on the part
of the Buyer and Transitory Subsidiary. This Agreement has been duly and validly
executed and delivered by the Buyer and the Transitory Subsidiary and
constitutes a valid and binding obligation of the Buyer and the Transitory
Subsidiary, enforceable against them in accordance with its terms.
3.4 NONCONTRAVENTION. Subject to compliance with the
applicable requirements of the Securities Act any applicable state securities
laws and the Exchange Act, and the filing of the Certificate of Merger as
required by the Delaware General Corporation Law, neither the execution and
delivery of this Agreement by the Buyer or the Transitory Subsidiary, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated by this Agreement, will (a) conflict or violate any provision of
the charter or By-laws of the Buyer or the Transitory Subsidiary, (b) require on
the part of the Buyer or the Transitory Subsidiary any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, other than any
filing, permit, authorization, consent or approval which if not obtained or made
would not have a material adverse effect on the assets, business, financial
condition, results of operations or future prospects of the Buyer or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement, (c) conflict with, result in breach of, constitute (with or without
due notice or lapse of time or both) a default under, result in the acceleration
of, create in any party any right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, Security Interest or other
arrangement to which the Buyer or Transitory Subsidiary is a party or by which
either is bound or to which any of their assets are subject, other than any
conflict, breach, default, acceleration, termination, modification or
cancellation which individually or in the aggregate would not have a material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Buyer or on the ability of the Parties to
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consummate the transactions contemplated by this Agreement, or (d) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Buyer or the Transitory Subsidiary or any of their properties or assets.
3.5 REPORTS AND FINANCIAL STATEMENTS. The Buyer has previously
furnished to the Company complete and accurate copies, as amended or
supplemented, of its (a) Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as filed with the SEC, and (b) all other reports or
statements filed by the Buyer under Section 13 or 14 of the Exchange Act with
the SEC since December 31, 1995 (such reports are collectively referred to in
this Agreement as the "Buyer Reports"). The Buyer Reports constitute all of the
documents required to be filed by the Buyer under Section 13 or 14 of the
Exchange Act with the SEC since December 31, 1995. As of their respective dates,
the Buyer Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The audited financial statements and unaudited interim
financial statements of the Buyer included in the Buyer Reports (i) comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, (ii) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated therein or in the notes
thereto, and in the case of quarterly financial statements, as permitted by Form
10-Q under the Exchange Act), (iii) fairly present the consolidated financial
condition, results of operations and cash flows of the Buyer as of the
respective dates thereof and for the periods referred to therein, and (iv) are
consistent with the books and records of the Buyer.
3.6 BROKERS' FEES. Neither the Buyer nor the Transitory
Subsidiary has any liability or obligation to pay any fees or commissions to
any broker, finder or agent with respect to the transactions contemplated by
this Agreement.
ARTICLE IV - COVENANTS
4.1 BEST EFFORTS. Subject to the Company Board Fiduciary
Duties (as defined below), each of the Parties shall use its best efforts to
take all actions and to do all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement.
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4.2 NOTICES AND CONSENTS. Each of the Parties shall use its
best efforts to obtain, at its expense, all such waivers, permits, consents,
approvals or other authorizations from third parties and Governmental Entities,
and to effect all such registrations, filings and notices with or to third
parties and Governmental Entities, as may be required by or with respect to such
Party in connection with the transactions contemplated by this Agreement.
4.3 SPECIAL MEETING, PROSPECTUS/PROXY STATEMENT AND
REGISTRATION STATEMENT.
(a) The Buyer and the Company shall jointly prepare, and the
Company shall file with the SEC under the Exchange Act, preliminary proxy
materials for the purpose of soliciting proxies from Company Stockholders to
vote in favor of the adoption of this Agreement at a special meeting of Company
Stockholders to be called and held for such purpose (the "Special Meeting").
Such proxy materials shall be in the form of a prospectus/proxy statement to be
used for the purpose of offering the Merger Shares to Company Stockholders and
soliciting such proxies from Company Stockholders (such prospectus/proxy
statement, together with any accompanying letter to stockholders, notice of
meeting and form of proxy, shall be referred to in this Agreement as the
"Prospectus/ Proxy Statement"). The Company, with the assistance of the Buyer,
shall promptly respond to any SEC comments on the Prospectus/Proxy Statement and
shall otherwise use its best efforts to resolve as promptly as practicable all
SEC comments to the satisfaction of the SEC.
(b) The Company shall comply with all applicable provisions of
and rules under the Exchange Act and all applicable provisions of the Delaware
General Corporation Law in the preparation, filing and distribution of the
Prospectus/Proxy Statement, the solicitation of proxies thereunder, and the
calling and holding of the Special Meeting.
(c) The Buyer shall comply with all applicable provisions of
and rules under the Securities Act and state securities laws in the preparation
and filing of the Registration Statement and the offering and issuance of the
Merger Shares.
(d) Subject to the Company Board Fiduciary Duties (as defined
below), the Company, acting through its Board of Directors, shall include in the
Prospectus/Proxy Statement the recommendation of its Board of Directors that the
Company Stockholders vote in favor of the adoption of this Agreement and the
approval of the
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Merger, and shall otherwise use its best efforts to obtain the Requisite
Stockholder Approval.
4.4 OPERATION OF BUSINESS. Except as contemplated by this
Agreement or as set forth in Section 4.4 of the Disclosure Schedule, during the
period from the date of this Agreement to the Effective Time, the Company shall
(and shall cause its Subsidiary to) conduct its operations in the Ordinary
Course of Business and in compliance with all applicable laws and regulations
and, to the extent consistent therewith, use all reasonable efforts (i) to
preserve intact its current business organization, (ii) keep its physical assets
in good working condition, (iii) keep available the services of its current
employees and (iv) preserve its relationships with customers, suppliers and
others having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect. Without limiting the
generality of the foregoing, prior to the Effective Time, neither the Company
nor its Subsidiary shall, without the written consent of the Buyer (except as
contemplated by this Agreement or as set forth in Section 4.4 of the Disclosure
Schedule), which consent shall not be unreasonably withheld:
(a) issue, sell, deliver or agree or commit to issue, sell or
deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize the
issuance, sale or delivery of, or redeem or repurchase, any stock of any class
or any other securities or any rights, warrants or options to acquire any such
stock or other securities (except pursuant to the conversion or exercise of
convertible securities or Options outstanding on the date hereof), or amend any
of the terms of any such convertible securities or Options (other than in
connection with a sale, liquidation or transfer referred to and in accordance
with clause (e) below);
(b) split, combine or reclassify any shares of its capital
stock; declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock;
(c) except in the Ordinary Course of Business create, incur or
assume any debt not currently outstanding; or become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person or entity; or make any loans, advances or capital contributions to, or
investments in, any other person or entity.
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(d) enter into, adopt or amend any Employee Benefit Plan or
any employment or severance agreement or arrangement or materially increase in
any manner the compensation or fringe benefits of, or materially modify the
employment terms of, its directors, officers or employees, generally or
individually;
(e) acquire, sell, lease, encumber or dispose of any assets or
property other than purchases and sales of assets in the Ordinary Course of
Business;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods,
principles or practices, except insofar as may be required by a generally
applicable change in GAAP or by the SEC;
(h) discharge or satisfy any Security Interest or pay
any material obligation or liability other than in the Ordinary
Course of Business;
(i) mortgage or pledge any of its property or assets or take
any action that subjects any such assets to any Security
Interest;
(j) sell, assign, transfer or license any Intellectual
Property other than sales of tangible products through resellers in the Ordinary
Course of Business;
(k) enter into, amend, terminate, take or omit to take any
action that would constitute a violation of or default under, or waive any
rights under, any material contract or agreement if such action would have a
material adverse effect on its business;
(l) make or commit to make any capital expenditure in excess
of $50,000.00 in the aggregate;
(m) take any action or fail to take any action permitted by
this Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the Company
contained in this Agreement becoming inaccurate or incomplete in any material
respect or (ii) any of the conditions of the Merger set forth in Article V not
being satisfied; or
(n) agree in writing or otherwise to take any of the
foregoing actions.
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4.5 FULL ACCESS. The Company shall (and shall cause each
Subsidiary to) permit representatives of the Buyer to have full access (at all
reasonable times, upon prior notice and in a manner so as not to interfere with
the normal business operations of the Company and its Subsidiary) to all
premises, properties, financial and accounting records, contracts, other records
and documents, and personnel, of or pertaining to the Company and its Subsidiary
other than contracts, records and documents that the Company reasonably and in
good faith determines is of a confidential and competitive nature.
4.6 NOTICE OF BREACHES. The Company shall promptly deliver to
the Buyer written notice of any event or development that would (a) render any
representation or warranty of the Company contained in this Agreement inaccurate
or incomplete in any material respect, or (b) constitute or result in a breach
by the Company of, or a failure by the Company to comply with, any agreement or
covenant in this Agreement applicable to such party. The Buyer or the Transitory
Subsidiary shall promptly deliver to the Company written notice of any event or
development that would (i) render any statement, representation or warranty of
the Buyer or the Transitory Subsidiary in this Agreement inaccurate or
incomplete in any material respect, or (ii) constitute or result in a breach by
the Buyer or the Transitory Subsidiary of, or a failure by the Buyer or the
Transitory Subsidiary to comply with, any agreement or covenant in this
Agreement applicable to such party. No such disclosure shall be deemed to avoid
or cure any such misrepresentation or breach.
4.7 EXCLUSIVITY. The Company shall not, and the Company shall
use its best efforts to cause each of its officers, directors, employees,
representatives and agents not to, directly or indirectly, (a) encourage,
solicit, initiate, engage or participate in discussions or negotiations with any
person or entity (other than the Buyer) concerning any merger, consolidation,
sale or license of material assets or property tender offer, recapitalization,
proxy solicitation or other business combination involving the Company or its
Subsidiary, or (b) provide any non-public information concerning the business,
properties or assets of the Company or any to any person or entity (other than
(i) to the Buyer, (ii) as contemplated by this Agreement, or (iii) as required
by law or court order) except to the extent that the Board of Directors of the
Company determines in good faith, based as to legal matters on the advice of
counsel, that such action is required for the Board of Directors to comply with
its fiduciary duties to stockholders imposed by law (the "Company Board
Fiduciary Duties").
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4.8 CERTAIN COVENANTS OF BUYER. From the date of this
Agreement to the Effective Time, the Company shall not split, combine or
reclassify any shares of its capital stock; declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock; or issue any shares of its
capital stock for inadequate consideration.
4.9 INDEMNIFICATION; RELEASE.
(a) The Buyer agrees that all rights to indemnification
existing in favor of the directors or officers of the Company or its Subsidiary
as provided in the Company's or its Subsidiary's respective charter or By-Laws,
as in effect as of the date hereof, with respect to matters occurring through
the Effective Time, shall survive the Merger and shall continue in full force
and effect following the Effective Time for a period at least equal to the
largest applicable period of limitations in respect of possible claims against
such directors and officers.
(b) The Buyer hereby remises and releases the directors and
officers of the Company and its Subsidiary from any and all claims it may have
against them, other than claims based solely on fraud, including claims for
fraudulent misrepresentation or fraudulent non-disclosure of material facts in
connection with the transactions contemplated by this Agreement.
(c) The Company hereby remises and releases the directors and
officers of the Buyer from any and all claims it may have against them, other
than claims based solely on fraud, including claims for fraudulent
misrepresentation or fraudulent non-disclosure of material facts in connection
with the transactions contemplated by this Agreement.
4.10 EMPLOYEE MATTERS. With respect to benefit plans available
to employees (other than officers and directors) of the Company or its
Subsidiary as set forth in Schedule 2.21, for at least one year from and after
the Effective Time, the Buyer shall use its best efforts, depending on the
financial status of the Surviving Corporation and the Subsidiary, as determined
by Buyer, to cause the Surviving Corporation to provide benefits to employees of
the Surviving Corporation and the Subsidiary that are, taken as a whole,
substantially equivalent to the benefits offered to such persons by the Company
or its Subsidiary, as the case may be, immediately prior to the Effective Time.
4.11 VOTE OF COMPANY SHARES. The Buyer covenants and
agrees to vote all Company Shares held or controlled by it in
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favor of approval of this Agreement and the Merger, and the transactions
contemplated hereby at the Special Meeting.
ARTICLE V - CONDITIONS TO CONSUMMATION OF MERGER
5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The
respective obligations of each Party to consummate the Merger are
subject to the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have received
the Requisite Stockholder Approval;
(b) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and remain in effect; and
(c) no Party hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the consummation
of the transactions contemplated by this Agreement. In the event any such order
or injunction shall have been issued, each Party agrees to use its best efforts
to have any such order or injunction lifted.
5.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE TRANSITORY
SUBSIDIARY. The obligation of each of the Buyer and the Transitory Subsidiary to
consummate the Merger is subject to the satisfaction of the following additional
conditions:
(a) the Company and its Subsidiary shall have obtained all of
the waivers, permits, consents, approvals or other authorizations, and effected
all of the registrations, filings and notices, referred to in Section 4.2,
except for any which if not obtained or effected would not have a material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company and its Subsidiary taken as a
whole or on the ability of the Parties to consummate the transactions
contemplated by this Agreement;
(b) the representations and warranties of the Company set
forth in Article II shall be true and correct when made on the date hereof and,
solely as to those contained in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.7, 2.8,
2.10, 2.16 and 2.25, shall be true and correct in all material respects as of
the Effective Time as if made as of the Effective Time;
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(c) the Company shall have performed or complied with in all
material respects its agreements and covenants required to be performed or
complied with under this Agreement as of or prior to the Effective Time; and
(d) the Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Effective Time, of each director
and officer of the Company and its Subsidiary specified by the Buyer in writing
on or prior to the Closing.
5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation
of the Company to consummate the Merger is subject to the satisfaction of the
following additional conditions:
(a) the Buyer and the Transitory Subsidiary shall have
obtained all of the waivers, permits, consents, approvals or other
authorizations, and effected all of the registrations, filings and notices,
referred to in Section 4.2, except for any which if not obtained or effected
would not have a material adverse affect on the assets, business, financial
condition, results of operations or future prospects of the Buyer or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement.
(b) the representations and warranties of the Buyer and the
Transitory Subsidiary set forth in Article III shall be true and correct when
made on the date hereof and shall be true and correct in all material respects
as of the Effective Time as if made as of the Effective Time, except for
representations and warranties made as of a specific date, which shall be true
and correct as of such date;
(c) each of the Buyer and the Transitory Subsidiary shall have
performed or complied with in all material respects its agreements and covenants
required to be performed or complied with under this Agreement as of or prior to
the Effective Time.
ARTICLE VI - TERMINATION
6.1 TERMINATION OF AGREEMENT. The Parties may terminate
this Agreement prior to the Effective Time (whether before or after Requisite
Stockholder Approval) by mutual written consent.
6.2 EFFECT OF TERMINATION. If this Agreement is
terminated pursuant to Section 6.1, all obligations of the Parties hereunder
shall terminate without any liability of any Party to any
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other Party (except for any liability of any Party for willful breach of this
Agreement).
ARTICLE VII - MISCELLANEOUS
7.1 PRESS RELEASES AND ANNOUNCEMENTS. No Party shall issue any
press release or public disclosure relating to the subject matter of this
Agreement without the prior written approval of the other Parties, which
approval shall not be unreasonably withheld; provided, however, that any Party
may make any public disclosure it believes in good faith is required by law or
regulation (in which case the disclosing Party shall advise the other Parties
and provide them with a copy of the proposed disclosure prior to making the
disclosure)
7.2 NO THIRD PARTY BENEFICIARIES. This Agreement shall not
confer any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns; provided, however, the provisions
in Article I concerning issuance of the Merger Shares and the provisions of
Section 1.16 are intended for the benefit of the Company stockholders; (ii) the
provisions of Section 4.9 are intended for the benefit of the officers and
directors of the Company and its Subsidiary and of the Buyer; and (iii) the
provisions of Section 4.10 are intended for the benefit of the employees of the
Company and its Subsidiary.
7.3 ENTIRE AGREEMENT. This Agreement (including the documents
referred to in this Agreement and Exhibit A hereto) constitutes the entire
agreement among the Parties and supersedes any prior understandings, agreements,
or representations by or among the Parties, written or oral, with respect to the
subject matter hereof.
7.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the Parties named in this Agreement
and their respective successors and assigns.
7.5 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. This Agreement, once
executed, may be delivered to either party through the use of facsimile
transmission. In this regard, any and all signatures of the parties appearing on
any facsimile copies of this Agreement shall be deemed, unless otherwise proved,
the lawful and valid signature of the executing party.
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7.6 HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.7 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
If to the Company:
Rotary Power International Inc.
P.O. Box 128
One Passaic Street
Wood-Ridge, New Jersey 07075-0218
Attention: Richard M.H. Thompson
Copy to:
C. Kenneth Shank Esq.
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Suite 900 Box 10
Woodbridge, New Jersey 07095-0958
If to the Buyer or its Transitory Subsidiary:
International Cryogenic System Corporation
P. O. Box 1022
103 Guadaloupe Drive
Cibolo, Texas 78108
Attention: Francis L. Simola
Copy to:
Robert D. Klages, Esq.
535 Country Club Road
Phoenixville, Pennsylvania 19460
Any Party may give any notice, request, demand, claim, or
other communication hereunder using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex, ordinary mail,
or electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the party for whom it is intended. Any Party may change
the address to which notices, requests, demands, claims, and other
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communications hereunder are to be delivered by giving the other Parties notice
in the manner in this Agreement set forth.
7.8 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws (and not the law of
conflicts) of the State of Delaware.
7.9 AMENDMENTS AND WAIVERS. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time; provided,
however, that any amendment effected subsequent to the Requisite Stockholder
Approval shall be subject to the restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
7.10 SEVERABILITY. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment of a
court of competent jurisdiction declares that any term or provision hereof is
invalid or unenforceable, the Parties agree that the court making the
determination of invalidity or unenforceability shall have the power to reduce
the scope, duration, or area of the term or provision, to delete specific words
or phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
7.11 EXPENSES. The Buyer and the Company shall each bear its
own costs and expenses (including legal fees and expenses) incurred in
connection with this Agreement and the transactions contemplated by this
Agreement. The fees and expenses of the Transitory Subsidiary shall be borne by
the Buyer.
7.12 CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no rule of strict construction
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shall be applied against any Party. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
7.13 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits
and Schedules identified in this Agreement are incorporated in this Agreement
by reference and made a part hereof.
7.14 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Representations and warranties of the Parties contained in this Agreement shall
not survive the Closing.
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
THE BUYER:
INTERNATIONAL CRYOGENIC SYSTEMS CORPORATION
By: /s/ Francis L. Simola
- ------------------------------------
Title: President and CEO
THE TRANSITORY SUBSIDIARY:
POWER ACQUISITION CORP.
By: /s/ Francis L. Simola
- ------------------------------------
Title: President
THE COMPANY:
ROTARY POWER INTERNATIONAL, INC.
By: /s/ Richard M.H. Thompson
- ------------------------------------
Title: President
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EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
Twelve Months
Ended December 31,
1996 1995
---- ----
PRIMARY
Shares outstanding,
beginning of period 3,391,432 3,269,208
Weighted average number
of shares issued,
retired and issuable
share equivalents 1,110,833 60,129
--------- ---------
Weighted average number
of common and common
equivalent shares
outstanding 4,502,265 3,329,337
========= =========
Net loss $(4,970,054) $(2,326,171)
========== ==========
Net loss per
common share $ (1.10) $ (.70)
========== ==========
FULLY DILUTED
Weighted average number
of common and common
equivalent shares
outstanding as
adjusted to full
dilution 4,502,265 3,421,971
========= =========
Net loss $(4,970,054) $(2,326,171)
========== ==========
Net loss per
common share $ (1.10)* $ (.68)*
========== =========
*These calculations are submitted in accordance with SEC requirements, although
they are not in accordance with APB Opinion No. 15 because they are
anti-dilutive.
