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, 1997
[ ] 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)
PO 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 973/777-7373
---------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
Common Stock None
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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 [ ] No [X]
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 $413,310
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,808,982 which is based on the closing price of
$0.69 on August 4, 1998.
The number of shares of Common Stock outstanding on August 4, 1998 was
5,968,516.
Transitional Small Business Disclosure Format: Yes [ ] No [X].
DOCUMENTS INCORPORATED BY REFERENCE
No information is incorporated by reference.
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FORM 10-KSB ANNUAL REPORT
INDEX
<TABLE>
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PAGE
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<S> <C> <C>
PART I
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Item 1. Description of Business ..................................... 3
Item 2. Description of Property ..................................... 17
Item 3. Legal Proceedings ........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ......... 17
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters .... 18
Item 6. Management's Discussion and Analysis or Plan of Operation ... 19
Item 7. Financial Statements ........................................ F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 27
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act .......... 28
Item 10. Executive Compensation ...................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and
Management ................................................. 32
Item 12. Certain Relationships and Related Transactions .............. 33
Item 13. Exhibits and Reports on Form 8-K ............................ 34
Signatures .................................................. 58
</TABLE>
<PAGE>
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 commercial and military use.
Based upon tests conducted by the Company and independent testing companies, the
Company believes that its rotary engines have demonstrated important benefits
which will allow them to compete favorably with reciprocating diesel, gasoline
and natural gas engines and turbines in chosen major market segments.
The Company believes that the rotary 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 superior to 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.
The Company believes that its rotary engines can be successfully marketed to a
wide variety of commercial industrial and marine markets following appropriate
pre-production programs which include cost reduction, value improvement, pilot
production run, accelerated reliability testing, and field trials.
Through the fiscal year ended 12/31/96, the Company 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 Series 40 engine in Unmanned Aerial
Vehicles and Auxiliary Power Units. The end of the Company's military contract
business came earlier than the Company had anticipated and before the Company's
commercial engine activities had reached a point where they are profitable.
In 1996, the Company, in response to the loss of the military contract business,
began redirecting its efforts mainly to produce engines for 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, 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.
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The Company's accelerated Value Improvement and pilot production of the 580
Series commercial marine engine, and its commercial product thrusts with the 65
Series industrial and marine engine programs were severely curtailed in the
fourth quarter of 1996 due to the failure of Hydrolance Maritime Transport, Inc.
to meet its financial commitment to the Company. Beginning in October of 1996
the Company was forced to layoff more than 50% of its personnel by year-end and
seek new financing for its continued operations.
In December 1996, the Company reached an agreement with PowerCold Corporation
(formerly known as International Cryogenic Systems Corporation) whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 shares of
the Company's common stock. Simultaneously, the Company and PowerCold agreed in
principle to merge the two companies in a stock-for-stock acquisition whereby
the Company would have become a wholly-owned subsidiary of PowerCold. The
acquisition agreement with PowerCold was terminated in August, 1997 and the
merger never took place.
During the first four months of 1997, the Company experienced negative cash flow
from operations, including net interest paid, of $375,000 per month. By July,
1997, PowerCold had loaned the Company $217,000. This money was used to meet the
payroll which was owed to employees (other than the payroll for the week ended
May 23, 1997) and to pay certain outstanding payables. Apart from this loan,
neither PowerCold nor the Company was able to secure equity or debt financing in
this time period. As of May 23, 1997, therefore, the Company terminated all of
its remaining employees in an effort to reduce its costs until it could raise
the additional funding required for continued operations. After May 23, 1997, a
few employees resumed work on a full or part-time basis for the Company and its
subsidiary, Rotary Power Marine, Inc. and those employees have been paid for
their time (exclusive of earned vacation pay, which has been largely settled
since then).
The Company was not successful in raising additional equity throughout the
remainder of 1997. On November 24, 1997 Mr. Richard M.H. Thompson, sole
Director, President and CEO of the Company, appointed Mr. Ken Brody sole
Director, President and CEO of the Company. Thereafter Mr. Thompson resigned
from these positions.
Commencing in June, 1997, and in each month thereafter, the Company failed to
make its monthly payments to the Trustee for the Company's 1992 bond financing
with the New Jersey Economic Development Authority (NJEDA), and as a result, the
bondholder's Trustee declared an event of default on July 2 under the terms of
the Trust Indenture.
On December 24, 1997, the Company issued $10,000,000 maturing principal amount
of 10.412% zero-coupon bonds, due December 15, 2007, to yield approximately $3.6
million. This money, together with approximately $2.9 million of the net
proceeds from the sale of FICO strips held as collateral for the NJEDA bonds,
was used to redeem and pay off the NJEDA bond issue for approximately $6.5
million.
On October 30, 1997, following a Notice to Quit and Surrender Possession of the
space leased by the Company, the landlord, Curtiss-Wright, locked the premises.
Unpaid rent at that point was $591, 850. In order to regain limited access, the
Company paid $10,000 to Curtiss-Wright in December, and also reached agreement
to settle the arrearage and prepay rent to February 28, 1998. The value of the
settlement rent was approximately $706,000. In accordance with the settlement,
the Company issued
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a 4% promissory note to Curtiss-Wright for $400,000 due January 1, 2003, and
paid Curtiss-Wright $115,000 in February, 1998.
"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.
Markets and Business Environment
The commercial redirection of the Company's products has identified three areas
where the Company's products are believed to have intrinsic advantages over
reciprocating engines: marine propulsion and shipboard use; energy generation,
and refrigeration/compressors.
Recent successful hull designs, such as FastShip and catamaran ferries, strongly
favor lightweight, powerful engines. Furthermore, a combination of environmental
pressures are forcing redesign of many traditional engines, such as two-stroke
diesels, outboards, ship engines and stationery generators, all developments
favorable to the Company's products. These redesigned engines are more
expensive, heavier and even less competitive with rotary engines, whose
environmental virtues are innate.
Stringent requirements for reduction of ship emissions, now scheduled for
implementation in 2003, are to be measured on a fleet basis. By replacing
non-propulsion engines in shipping fleets with the Company's low-emissions
engines, some fleets will be able to meet emissions requirements without refit
to the propulsion engines. Refitting a ship's main engines to meet the proposed
emission standards is much more costly than the replacement of non-propulsion
engines with less polluting SCORE engines.
Two major factors in the business environment strongly favor the Company's
products in the energy market: the deregulation of power, now the law in several
states and expected to spread to other states and countries, and the retuning of
major refineries toward the production of diesel fuels over gasoline. This
latter trend comes in response to the world-wide environmental pressures that
favor the economy of diesel, and will result in an increase in the cost and
declining availability of high-grade gasolines and a price reduction and
increase in the availability of diesel fuels. The Company's SCORE technology
allows a single engine, unmodified, to run on either fuel, but produces the
expected economies when run on diesel.
Reserves of natural gas far exceed reserves of oil. The Company has developed
SCORE engines running on gaseous fuels, including natural gas. Together with
light weight screw compressors, these
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engines satisfy a large market for electricity peak-shaving in buildings,
shopping malls and supermarkets, as well as cold-storage facilities and gas
field storage facilities.
Electricity supplied by large utilities remains scarce in developing nations and
is expensive in other countries with limited natural energy resources, such as
Japan. Light weight, powerful engine driven generators based on the Company's
SCORE engines can be airlifted to locations inaccessible by truck, such as
fishing villages in Alaska and rural clothing factories in South America. These
units can be installed on rooftops where conventional units would require major
structural reinforcement. Because they are SCORE engines, they can run on any
locally available fuel.
In other markets, especially where generators can be mortgaged as part of a long
life asset, the cost of power generation with the Company's products may be
significantly less than the peak price per kilowatt, and owning a generator
allows flexibility when dealing with power contracts that stipulate minimum and
maximum usage, which are common on the Pacific Rim. The deregulation of power
provides an opportunity to sell excess power back to the utility grid, which
encourages users to install larger private generators than would be required for
peak shaving alone.
Internationally, the Company finds itself in a favorable position in Pacific Rim
countries, with possible alliances with a major Japanese kairetsu and a major
Korean chaibol, as well as promising contacts in China and Taiwan. These
prospects have sought us out as suppliers to give their products, primarily in
the energy market, a competitive thrust, and frequently to enable the creation
of hitherto impossible products, such as quiet, 750KW 50/60 HZ truck-mounted
generators capable of negotiating Japan's narrow streets, or a hatchable engine
to replace an aging engine in a generator on a submarine.
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.
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"), including all of the intellectual property of
these companies. 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).
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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
displacement per rotor. 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.
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 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 designated the 65 Series Natural Gas Rotary Engine
("NGRE").
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.
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 transferred its teaming agreement with TVS to
GDLS. This agreement terminated when the United States Marine Corps and General
Dynamics Land Systems Division did not select the Company's rotary engine for
their Advanced Amphibious Assault Vehicle in June of 1996.
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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 was 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. The General Office of RPM is at the
Company's headquarters in Wood-Ridge, New Jersey.
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 bordering the Pacific coast of Mexico, Canada
and the United States, including Hawaii. Abejon's area of responsibility was
increased to all of the United States during the equity investment negotiation
discussed in the following paragraph.
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 and no further scheduled payments were received in 1996 or
during 1997. As a result of this default, certificates for 822,916 shares of the
Company's common stock, issued to Abejon, were cancelled.
In December 1996, the Company concluded an agreement with PowerCold whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 shares of
the Company's Common Stock. Simultaneously, the Company and PowerCold agreed in
principle to merge the two companies in a stock-for-stock acquisition, whereby
the Company would become a wholly-owned subsidiary of PowerCold. The Company and
PowerCold signed a Plan and Agreement of Merger on March 21, 1997. This Plan and
Agreement was never completed and was terminated in August, 1997.
Technology
History
The Wankel GmbH rotary engine, upon which the Company's rotary engines are
based, was first demonstrated in 1954 and is named after its developer, the late
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 performance engines. In the past 16 years, enormous progress in
materials technology, such as the development of advanced ceramic
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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 solved these early rotary engine
problems. Testing of ceramic apex seals has shown an order of magnitude
improvement in apex seal wear over the metal seal. Further, apex seal design
refinements have resulted in a significant reduction in side housing surface
wear.
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.
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, exemplified by the 580 Series
implementation, 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 into a stationary flame front as the
rotor sweeps past it, creating a layered (stratified) charge. This dual
injection system results in more complete combustion of the fuel, reducing
emissions, improving fuel economy and allows the engine to run on a wide range
of fuels which burn at different rates (omnivorous).
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. Diesel fuel is the fuel of choice for
the commercial marine marketplace because of safety of operation and
desirability for insurance coverage.
Engine Products
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The Company currently has five different displacement rotary engines as
exhibited in the following table. As reported earlier, the Company is in the
process of selling its 65 Series natural gas and 65 Series gasoline marine
engine product lines.
The heavy fuel (Diesel) 580 Series is the primary product thrust by the Company.
Company equity and external funding will be used to put this family of engines
into the commercial marine marketplace. Outside funding has been proposed for
the natural gas variant of the 580 Series. The 70 Series was developed in the
late 1980s by the Deere & Company Rotary Engine Division for military power
generation and for commercial and pleasure craft marine applications. It was put
on the shelf in 1990 and requires an upgrading to take advantage of the
technology and material advancements over the past eight years.
The 170 Series has been shelved until commercial funding for the final
development of this engine 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:
<TABLE>
<CAPTION>
Displacement per Current Potential Family
Family Rotor Horsepower/Rotor Horsepower Range
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<S> <C> <C> <C>
(1-6 Rotors)
40 Series HF* 0.407 liters 15-50 15-200(4)
65 Series NG** 0.65 liters(s) 40 40-120(3)
65 Series G*** 0.65 liters(s) 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)
</TABLE>
*HF = Heavy Fuel (Diesel, Jet and Gasoline Fuels)
**NG = Natural Gas
***G = Gasoline
(S) = Production stopped in 1997, assets partially sold
( ) = Number of rotors per engine at top of horsepower range
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 unit power module. In each module the rotor and rotor housing are
identical. Engines from one rotor up to six rotors can be constructed either by
stacking the modules or by coupling 2-rotor engines into 4- and 6-rotor
versions. The latter is the preferred choice by the Company for all rotary
engines exceeding two rotors.
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.
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Research and Development Contracts
The Company does not currently have any research and development contracts for
rotary engines with the U.S. Government or any commercial company. All contracts
with the U.S. Government have been stopped pending close-out and government
property disposal in accordance with applicable government property regulations.
Commercial 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, air compressor, chiller and refrigeration markets. 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 engines 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.
Industrial Markets - 580 Series
With successful and profitable production of the 580 Series diesel-fueled
engines for commercial marine applications, the Company believes there is a
substantial industrial market in power generation including stationary, mobile
and standby operations. The natural gas variant of the 580 Series engines, for
which the Company will solicit funding, has excellent potential in the
industrial markets of power generation, refrigeration, cooling, water cooling,
process and compression.
In 1992, the Company initiated a natural gas development program which continued
development originally started 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 pounds.
Further, based
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upon the Company's interpretation of the CARB specification, levels of non-
methane hydrocarbons and carbon monoxide were also well under CARB emissions
requirements without after treatment.
Military Markets
In looking at the potential of the Company's commercial SCORE(TM) products in
defense, there are many prospects for engine/propulsion systems requiring the
power density and multi-fuel capability advantages of the Company's SCORE(TM).
These opportunities will be addressed by the Company following successful
commercial market introduction and production of the 580 and/or 70 Series
engines. There are no assurances that any military prototype and production
orders will be received. The Company, both by intention and due to adverse
circumstances, had in 1995 and 1996 significantly reduced its reliance on
military/government R&D programs in its move toward commercial business in the
future.
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 U.S. Army and U.S. Navy. The request for a proposal for a
family of heavy fuel engines for military Outrider (Tactical) and Predator UAV
was not issued by the government in 1997 as expected. Its delay is due to the
lack of funds and indecision by the U.S. Army and U.S. Navy on operational
procedures; however, the Company will remain vigilant of this potential
opportunity. There is no assurance that the Company will be awarded a Heavy Fuel
Engine contract for its 40 Series multi-fuel rotary engine.
Auxiliary Power Units
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With developmental success for unmanned vehicles resulting in production of the
40 Series engines the Company will pursue auxiliary power unit military
opportunities. There is no assurance that any new auxiliary power unit business
will be acquired with the U.S. Government.
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 580 Series natural gas engine development which the Company will reactivate
upon receipt of equity funding 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.
Although federal 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
expected in 2001, however will apply to outboards and personal watercraft only.
Emission regulations on inboard, inboard/ outboard and stern drives is not
expected before 2005. 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. Proposed
regulations require reduced NOx emissions, which favor the Company's SCORE
technology engines.
Like all electric power-generating and other fossil fuel- burning systems, the
generators, chillers and cogeneration products that the Company may sell engines
for demonstration and product sales 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 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, 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 fueled
vehicles.
13
<PAGE>
Product Regulation - Marine Industry Regulations
Marine engines are required to comply with certain regulations promulgated by
the U.S. Coast Guard. The Company's 580 Series marine engines are being designed
and produced to comply with U.S. Coast Guard regulations. Marine engine
emissions regulation is expected in the year 2003. The U.S. is signatory to the
proposed IMO (International Maritime Organization) regulations which, for the
first time, specify exhaust stack emission units for shipping on the high seas.
The fleet emissions standards will favor RPI's engines in shipboard applications
as auxiliary power and propulsion. Finally, in order to qualify for passenger
vessels, the Company's larger engines should be submitted for classification by
one or a few marine classification agencies, such as American Bureau of
Shipping, or Lloyd's Registry.
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.
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 has adequate capacity to
manufacture and test prototypes and limited production quantities of the 70
Series and 580 Series SCORE(TM) engines, and to assemble and test
14
<PAGE>
engine-alternator units based on these engines. The Company has retained
sufficient machining capability to manufacture the critical features of the
major housing components.
The Company purchases many of the components used in its rotary engines and
completely assembles each engine at its facilities. The Company believes that
virtually all of the parts necessary to manufacture its engine, such as rotors,
crankshafts, castings, and forgings, are available from a variety of vendors in
the United States and Canada.
Sales & Service
The primary task of an engine manufacturer must be to produce high quality
engines in quantity at a marketable price, with good availability and strong
service. The Company's sales and service policies are directed toward these
ends.
Major accounts, such as SeaBank and Marubeni, continue to be serviced directly
by Company executives and Company personnel in international sales management.
For major accounts, the solicitation of orders, contract management, delivery
and service logistics and production orders will remain with the Company, even
though the contracts originate elsewhere, and commissions may be payable on
these orders.
Providing engines to special markets is the business of the Company's Master
Engine Distributors, each one having a contractual segment of a vertical market
and a territory and engine line. Master Distributors are required to stock
engines and meet minimum sales targets, make a substantial investment, and to
provide service where practical. In 1997 the Company had one Master Distributor;
the Company anticipates that several more will be added in 1998.
Aside from purchased components such as starters, pumps and injectors, a typical
two-rotor engine has only three moving parts. This core of the engine,
consisting of the housing and internal parts, is called a Power Core. Any
problem internal to an engine is remedied by a replacement of the Power Core.
Therefore, rotary engines do not require as extensive a parts and service
network as required for reciprocating diesels.
Master Engine Distributors are responsible for service for all external
components and to stock replacement Power Cores. The Company has sufficient
spare parts and Power Cores to service existing engines in the domestic market.
PowerCold and its subsidiaries and acquisitions continue to market the Company's
products in refrigeration markets, as well as oil field development and
stationary engines for peak load shaving applications.
15
<PAGE>
Intellectual Property
The Company believes that it owns or has license and patent protection for
certain elements of the technology necessary to develop and produce its rotary
engine. The Company owns approximately 24 patents and four new patent
applications covering the design, materials, and manufacture of its rotary
engine. These patents cover the concepts used in the SCORE(TM) 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 that 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 or group of its patents to be of such
importance that their expiration, termination, or invalidity would materially
affect the Company 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 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 gas turbines and small fuel cells for sale to industry. These companies
may 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, 1997, the Company had one employee.
Until the first quarter of 1997, 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 to be good.
PART I
16
<PAGE>
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 Street, Wood-Ridge, New Jersey
07075. 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 and throughout 1997,
the Company was in default on its lease obligations in the amount of $591,850 as
of December 15, 1997.
On December 22, 1997, the Company negotiated a settlement of the rents due
Curtiss-Wright until February 28, 1998. As part of the settlement, the Company
gave up the 54,000 square foot manufacturing area and consolidated its
manufacturing in the test cell areas. In addition to the test cells, the Company
occupies approximately 10,000 square feet of office space.
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
Due to the lack of available capital and the cessation of operations, the
Company did not hold an annual meeting of the stockholders in 1997.
As of the close of business on January 30, 1997, Messrs. Warren D. Bagatelle,
James P. Wade and James M. Beggs resigned as Directors of the Company.
On March 31, 1997, the Directors of the Company elected Francis L. Simola,
Chairman, CEO and President of PowerCold, to fill a vacancy on the Board of
Directors and also to serve as the Secretary of the Company. Simultaneously
therewith, based on a written demand received from counsel to PowerCold and on
the belief that Mr. Simola's election as a Director and Secretary of the Company
had become effective, the four other Directors of the Company, Richard M.H.
Thompson, Robert L. Osborn, William T. Figart and Ken Brody, resigned as
Officers and/or Directors of the Company effective April 1, 1997. On June 17,
1997, Mr. Simola informed the previous Officers and Directors of the Company in
writing that he did not, and had not, accepted the positions of Director and
Secretary of the Company. After several consultations with Mr. Simola, on July
16, 1997, Messrs. Thompson,
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<PAGE>
Osborn and Figart, three of the four former Directors who had resigned effective
April 1, 1997, held a meeting, rescinding their resignations as Directors and
elected Mr. Thompson as President and CEO of the Company to serve as such at
least through the effective date, if any, of the merger with PowerCold.
Following the July 16, 1997 Board Meeting Messrs. Figart and Osborn resigned as
Directors of the Company.
On November 24, 1997, Mr. Richard M.H. Thompson appointed Mr. Ken Brody, a
former Director of the Company and principal in Abejon Rotary Power, President,
Sole Director, and Chief Executive Officer of the Company, and then Mr. Thompson
resigned.
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 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"). On July 23, 1998, the trading symbol for the
common stock changed to RPIN on OTCBB.
There was no public market for the Company's Common Stock prior to February 9,
1994.
The following table sets forth 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 over the counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
COMMON STOCK
- ------------
<TABLE>
<CAPTION>
BID ASK
-------------------- -----------------------
HIGH LOW HIGH LOW
-------------------- -----------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/97
First Quarter .625 .15625 1.03125 .22
Second Quarter .3125 .13 .375 .18
Third Quarter .14 .04 .18 .0499
Fourth Quarter .1 .03125 .135 .04
Year Ended 12/31/96
First Quarter 3 5/8 2 4 2 3/8
Second Quarter 3 3/8 2 3 11/16 2 1/4
Third Quarter 2 5/8 0 3/4 3 0 15/16
Fourth Quarter .21875 .0625 .28125 .15625
</TABLE>
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<PAGE>
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 August 1, 1998, there were approximately 750 common stockholders of record.
The following table sets forth all equity securities sold by the Company during
the fiscal year ending December 31, 1997 that were not registered under the
Securities Act. All such equity securities sold by the Company were shares of
Common Stock.
<TABLE>
<CAPTION>
SALE DATE SHARES CONSIDERATION PERSONS TO WHOM SOLD
- --------- ------ ------------ --------------------
(Price/Share)
<S> <C> <C> <C>
December 20, 1996 2,000,000 $0.50 PowerCold Corp.((1))
March 13, 1997 150,000 $0.50 Rickel Securities, Inc. and its affiliates((2))
</TABLE>
- ----------------------------------
((1)) Sold in connection with the Plan and Agreement of Merger. Such shares were
sold in December 1996, but were not delivered to the purchaser until
January 1997.
((2)) Sold as consideration for services rendered in connection with the sale of
the FICO Strips.
All of the Common Stock listed above was issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and no public offering was involved. All of the purchasers acquired the
Common Stock for investment, and there was no general advertising or general
solicitation in connection with the offer and sale of the Common Stock. The
Company believes that each purchaser was given or had access to detailed
financial and other information with respect to the Company and in connection
with these sales.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
General Overview
The Company and its wholly-owned subsidiary, Rotary Power Marine, Inc. ("RPM")
are engaged in the research, development, demonstration and production of rotary
engines and electric power generation units capable of operating on a variety of
liquid fuels and natural gas. The Company's strategic thrust
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<PAGE>
is to penetrate commercial engine markets. The Company's commercialization
efforts are focusing on natural gas rotary engines for industrial markets and
liquid fuel engines for the commercial and recreational marine markets.
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.
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 up to $300 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. The Company did not make a payment of $150,000 on January 30, 1997. Also,
in 1996 the Company was unable to make the full payment of $150,000 which was
due to the seller on January 30, 1996, deferring the remaining $75,000 balance
to January 30, 1997, which was not paid.
To date, the Company has earned substantially all of its revenues from contracts
or subcontracts with the U.S. Government. All these contracts have been
completed or otherwise terminated, and the Company does not anticipate
substantial revenues from the U.S. Government in the future.
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 engines for commercial and recreational marine markets. RPM's
business has been unprofitable due to sales volume well below initial
projections, while RPM also competed for capital from projects related to the
Company's main businesses. Therefore, management has decided to divest the
Series 65 engine inventory and related assets, as well as the Company's
non-exclusive right to purchase engines under its contract with Mazda, and
redirect the recovered capital into the Company's operations. The subsidiary,
RPM, will be redirected to the manufacture of the alternator assemblies and
other components of the Company's power generation units.
In accordance with its plans to redirect the RPM subsidiary, the Company signed
a contract for the sale of a portion of RPM's 65 Series gasoline marine pleasure
craft engine inventory and some associated production equipment with Rotary
Power Marine Corporation, a New York corporation, on June 4, 1998, which closed
on July 28, 1998. Under this agreement the purchaser will also assume the Rotary
Power Marine name and trademark.
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 (the "Licensed Engines") sold by the Company in varying amounts through
the year 2008. However, the Company advised Wankel GmbH
20
<PAGE>
on January 10, 1996, that know-how required to be supplied under the provisions
of the Wankel License Agreement was not delivered. The Wankel License Agreement
was terminated by mutual consent on September 19, 1996, with no further payments
due.
To obtain additional working capital for its planned operations in 1998, the
Company signed a contract with Rotary Power Enterprise, Inc. ("RPE") on July 2,
1998 for the sale of its 65 Series Natural Gas Rotary Engine product line and a
Distributor Agreement for the Natural Gas fueled 580 Series engines. Upon
completion of the transaction, which is subject to the fulfillment of various
closing conditions, the Mazda NGRE agreements and the Hussmann agreement will be
included in the sale of the 65 Series Natural Gas engine product line asset to
RPE. The anticipated proceeds from this sale includes the release of a lien for
$217,000, issued to secure a loan by PowerCold to the Company.
Business Environment
The Company has targeted significant potential commercial markets for the
Company's small and lightweight rotary engines and power generating units,
operating with reduced vibrations and emissions. Such potential markets include
the stationary gaseous fuel industrial market (chillers, compressors,
generators, and refrigeration units), the commercial and recreational marine
market, and the electrical power generation market. In addition, through Master
Distributor Agreements with value-added resellers of the Company's products, the
Company anticipates sales in heavy off-road trucking, military vehicles, and the
general aviation market. During 1994 and 1995, the Company accelerated the
product development of natural gas rotary engines for the commercial and
industrial markets. 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. The Company has
distribution agreements in place with Abejon for the 580 Series marine engines.
Results of Operations
Twelve months ended December 31, 1997 vs Twelve months ended December 31, 1996
Financial results of the Company for the year ended December 31, 1997, represent
the results of five months of operations severely limited by funding followed by
seven months of plant closure. Revenue for 1997 decreased by 92% due to the
completion of all U.S. Government contracts and seven months of non-operation.
The net loss of $5,032,819 increases the Company's net operating loss
carryforward to approximately $15 million. This loss includes write-offs of
$1,541,183 in anticipation of the disposition of assets and the change in
markets.
Cost of revenues decreased 51% to $3.0 million, which includes an inventory
reduction of $1.3 million and $475,000 of gross margin reduction taken on the
Series 580 Mark I engine build.
General and administrative expenses decreased 43% to $1.3 million primarily due
to the May layoff of virtually all employees, with rent and other fixed expenses
making up the bulk of the continuing expenses after that date.
21
<PAGE>
Research and development expenses decreased 74% to $0.4 million again due to the
May layoff. Engineering staff worked on the development of the gaseous fueled
engines and the Series 580 value improvement program until the layoff.
Although expenses for 1997 were sharply curtailed, the reduction in revenues was
abrupt, resulting in a loss of $4.3 million from operations, exceeding the 1996
loss by less than 2%.
Interest expense, reflecting the interest on the NJEDA bonds, remained roughly
the same in 1997 as in 1996. Interest income decreased by 59% due to the
liquidation of a portion of the FICO Strips and the exchange of the remaining
FICO Strips for a different issue of FICO Strips with a lower yield.
In 1997, the Company had other income of $148,188 consisting of the net of the
realized gain on the retirement of the NJEDA bonds of $167,445 and a loss on the
disposal of assets of $19,257. In 1996, the Company incurred other net expenses
of $59,000.
As part of this restructuring, the Company redeemed and paid off all $6.5
million of its NJEDA bonds outstanding by liquidating the balance of its FICO
strips, applying $2.9 million of the net proceeds from the FICO strips towards
the NJEDA bonds, and floating a new $10,000,000 maturing principal amount of
ten-year, 10.412% bonds due December 15, 2007, which raised the remaining
balance, $3.6 million. The liquidation of the FICO strips resulted in a gain of
$479,014. Redemption of the NJEDA bonds cured various default conditions under
the loan agreement with the NJEDA. The new bonds are callable any time at their
accreted value and are zero-coupon bonds, preserving the Company's cash flow
during the restructuring and for some time thereafter. The Indenture of Trust
for these bonds requires the Company to establish and maintain a Bond Reserve
Fund equal to 50% of the principal amount of the then outstanding bonds on
December 31. 2000. With no bonds called, the requirement for this Bond Reserve
Fund would be $2,457,000 on January 1, 2001.
In conjunction with the restructuring of long-term debt, the Company negotiated
a settlement of the $705,890 rents due its landlord, Curtiss-Wright, until
February 28, 1998, by paying $125,000 in cash ($115,000 of which is a current
liability at year-end), and a $400,000 note, due January 1, 2003, bearing
interest at 4% and secured by any excess unsecured collateral after the
satisfaction of provisions in the bond Security Agreement. The Company also
agreed to relinquish its 54,000 square foot manufacturing facility to
Curtiss-Wright, and to renegotiate a lease for the Company's executive office
space and the existing Engine Test Facility. At this time the Company has
complied in all respects with its agreements with Curtiss-Wright and has
consolidated its manufacturing facilities within the Engine Test facilities.
As at the end of the year the Company had entered into discussions with an
auctioneer for the conversion of underutilized production machinery and
furniture to capital for payment of the Company's general debts. This
transaction was consummated in February, 1998.
As a result of the above, net loss for the Company increased from $4970,054 in
1996 to $5,031,819 in 1997.
22
<PAGE>
During early 1998 the Company advanced a plan to negotiate its ordinary debts
via a composition of creditors, which was carried out, successfully, by the end
of June, 1998. No filing under any bankruptcy or reorganization statute was
required.
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 (United States Marine Corp) 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 released to the costs of the pre-production
580 Series 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 was 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
23
<PAGE>
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 collateral for the NJEDA bonds. Interest income in 1996
was offset by a reduction in the interest income 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.
Management
As of November 24, 1997, Richard M. H. Thompson was succeeded by Ken Brody as
President, Chief Executive Officer and Sole Director. Mr. Brody, at one time a
Director of the Company, came in for the express purpose of restructuring the
Company's finances, markets and directions. Mr. Brody then hired back John Mack
as Chief Engineer, along with several of the Company's experienced and loyal
administrative, engineering and production people to create a core staff. As
further decision support for the restructuring, the Company retains the
consulting services of William T. Figart, former Director and officer, and Gary
LaBouff, former Vice President of Engineering. Subsequent events have shown this
team to be effective, flexible and capable of carrying forward the Company's
mission.
In order to retain topnotch employees without investing heavily in management
infrastructure and benefits, the Company leases its employees, except the
President, from Employee Solutions Inc. as of February 15, 1998. Under ESI
leasing arrangement the Company's employees get medical insurance, workers
compensation and an employee-contribution 401K plan.
24
<PAGE>
Other
The Company does not consider the impact of inflation to be significant to the
results of its operations in the periods from January 1, 1995, to December 31,
1997, due to the nature of its cost reimbursement contracts with the U.S.
Government. Thereafter, inflation at recent rates are not considered a factor in
the Company's performance.
Liquidity and Capital Resources
During 1997, cash was used to (i) maintain the Company in a viable condition,
(ii) redeem the NJEDA bonds, (iii) fund the continued development of the
Company's industrial engines, and (iv) fund the Value Improvement Program on the
Series 580 engines.
The Company's stock subscription agreement with Hydro Lance Maritime Transport
defaulted in the fourth quarter of 1996 after bringing in $800,000 of equity,
for which Abejon Rotary Power Corporation, a party to the subscription
agreement, received 177,084 shares of common stock. Abejon further committed
$500,000 to the Company as a deposit against an order of fifteen Series 580
two-rotor production units for marine use. The Company acknowledges this order
and retains the deposit.
In December, 1996, the Company concluded an agreement with PowerCold, whereby
PowerCold invested $1,000,000 in the Company in exchange for 2,000,000 of the
Company's Common Stock. Simultaneously, the Company and PowerCold agreed to
merge the two companies in a stock-for-stock acquisition, whereby the Company
would become a wholly-owned subsidiary of PowerCold. This merger was never
consummated and was terminated in August, 1997.
Working capital decreased from $588,000 at December 31, 1996, to a deficit of
$1,796,287 by December 31, 1997. This decrease was due to (i) a decrease in cash
and receivables of roughly $1.0 million; (ii) a decrease in inventories of $1.3
million; and (iii) a $500,000 increase in the deferred acquisition obligation
due JDTI. These were offset by the $328,000 held by the Trustee for the NJEDA to
complete the liquidation of long-term debt due to NJEDA bondholders.
In March 1997, the Company received $1,000,000 from the Trustee for the NJEDA
bondholders for the proceeds of the sale of FICO strips held by the Trustee as
collateral for 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 proceeds from
anticipated sales of assets in 1998, is sufficient to enable the Company to meet
its anticipated operating needs until September, 1998.
The Company will solicit external funding for the completion of the production
design of the 40 Series family of engines for commercial and/or military
applications.
Year 2000 Compliance
The Company's accounting, manufacturing, order entry, bill of materials, and
inventory systems are currently being converted to a new system and will be
compliant with processing requirements for the
25
<PAGE>
year 2000 by the fourth quarter of 1998. There are no other systems considered
material to the Company's operations that would be vulnerable to this problem.
26
<PAGE>
PART II
ITEM 7. FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Consolidated Financial Statements
for the years ended December 31, 1997 and 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ROTARY POWER INTERNATIONAL, INC.
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996 F-6
Notes to Financial Statements F-7 - F-20
</TABLE>
<PAGE>
ROTARY POWER INTERNATIONAL K-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Rotary Power International, Inc.
We have audited the accompanying consolidated balance sheets of Rotary Power
International, Inc. and subsidiary (the "Company") as of December 31, 1997 and
1996, and the consolidated statements of operations, changes in stockholders'
equity (deficiency), and cash flows for the years 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 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, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the years then
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 18 to the
financial statements, the Company's significant operating losses and deficiency
in working capital 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.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
July 22, 1998
F-2
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,894 $ 633,597
Cash held by trustee 328,113
Accounts receivable 42,723 452,015
Other receivables 15,000 9,083
Inventories 1,341,665 2,657,030
Other current assets 500 9,814
------------ ------------
Total Current Assets 1,770,895 3,761,539
Fixed assets 1,280,794 2,279,959
Patents 615,817 677,399
Investment held by Trustee 3,925,761
Other assets, net 266,214 664,154
------------ ------------
$ 3,933,720 $ 11,308,812
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 274,275 $ 183,750
Accounts payable 939,274 1,103,167
Loan Payable 216,768
Accrued liabilities 904,865 1,096,638
Other current liabilities 507,000 564,904
Deferred acquistion obligation - current 725,000 225,000
------------ ------------
Total Current Liabilities 3,567,182 3,173,459
Long-term liabilities:
Deferred acquisition obligation 2,644,049 2,857,143
Long-term debt 3,631,265 6,629,167
Note Payable 400,000
------------ ------------
Total Liabilities 10,242,496 12,659,769
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, 500,000 shares authorized Common stock, par value $.01;
10,000,000 shares authorized; 5,968,516 for 1997 and 6,641,432 for
1996 shares issued and outstanding 59,685 66,414
Subscription receivable (3,150,000)
Paid-in capital 11,336,367 14,404,638
Accumulated deficit (17,704,828) (12,672,009)
------------ ------------
Total Stockholders' Deficiency (6,308,776) (1,350,957)
------------ ------------
$ 3,933,720 $ 11,308,812
============ ============
</TABLE>
The accompanying notes are an integral part of the statements. F-3
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $ 413,310 $ 5,768,143
------------ ------------
Costs and expenses:
Cost of revenues 2,979,763 6,031,334
General and administrative 1,349,473 2,354,788
Research and development 434,412 1,666,366
------------ ------------
Total Cost and Expenses 4,763,648 10,052,488
------------ ------------
Loss From Operations (4,350,338) (4,284,345)
Other income (expense):
Interest expense (983,618) (998,581)
Interest income 152,949 371,869
Other, net 148,188 (58,997)
------------ ------------
Total Other Expense (682,481) (685,709)
------------ ------------
Net Loss $ (5,032,819) $ (4,970,054)
============ ============
Net loss per common share - primary: $ (0.82) $ (1.10)
Weighted average common shares outstanding: 6,118,880 4,502,265
</TABLE>
The accompanying notes are an integral part of the statements. F-4
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<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> <C>
Balance at December 31, 1995 3,391,432 $ 33,914 $ -- $ 8,823,879
Issuance of common stock 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
Cancellation of common stock (822,916) (8,229) 3,150,000 (3,141,771)
Issuance of common sotck 150,000 1,500 73,500
Net loss
-----------------------------------------------------------------------------
Balance at December 31, 1997 5,968,516 $ 59,685 $ -- $ 11,336,367
=============================================================================
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Accumulated Available Stockholders'
Deficit For Sale Equity (Deficiency)
-------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (7,701,955) $ 297 $ 1,156,135
Issuance of common stock 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)
Cancellation of common stock
Issuance of common sotck 75,000
Net loss (5,032,819) (5,032,819)
-------------------------------------------------------
Balance at December 31, 1997 $(17,704,828) $ -- $ (6,308,776)
=======================================================
</TABLE>
The accompanying notes are an integral part of the statements. F-5
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,032,819) $ (4,970,054)
Adjustments to reconcile to net cash used in operating activities:
Depreciation 955,988 943,748
Amortization 80,017 95,052
Interest, net 145,501 (13,002)
Other 117,681 (61,262)
Deposit surrender for rent payment 50,000
Rent payment with long term note payable 400,000
Gain on sale of long term investment (651,639)
Write off deferred issuance cost 471,145
Loss on disposals of fixed assets 19,257 60,638
Loss on contract close 152,641
Inventory write down 1,369,285
Changes in assets and liabilities:
Accounts receivable 256,651 1,285,838
Other receivables (5,917) 6,653
Inventories (53,920) (1,615,330)
Other current assets 9,314 (434)
Other assets (25,663)
Accounts payable (163,893) 572,979
Accrued liabilities (191,773) 799,275
Other current liabilities (57,904) 523,403
Other long-term liabilities (25,000)
--------------- ---------------
Net Cash Used in Operating Activities (2,156,048) (2,397,496)
--------------- ---------------
Cash flows from investing activities:
Purchase of securities available-for-sale (647,422)
Sales of securities available-for-sale 1,277,633
Purchase of long term investment (1,583,112)
Sale of long term investment 6,381,108
Proceeds from the sale of fixed assets 20,000
Purchases of fixed assets (144,199)
--------------- ---------------
Net Cash Provided by Investing Activities 4,817,996 486,012
--------------- ---------------
Cash flows from financing activities:
Loan Payable 216,768
Repayment of long-term debt (6,538,642) (170,833)
Issuance of long-term debt 3,631,265
Deferred issuance cost (233,929)
Issuance of common stock 2,463,259
Payment of deferred acquistion obligation (75,000)
--------------- ---------------
Net Cash Provided by (Used in) Financing Activities (2,924,538) 2,217,426
--------------- ---------------
Net Increase (Decrease) in Cash (262,590) 305,942
Cash and cash equivalents at beginning of year 633,597 327,655
--------------- ---------------
Cash and Cash Held in Escrow at End of Year $ 371,007 $ 633,597
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid during the year $ 692,578 $ 786,689
Income taxes paid during the year -- --
</TABLE>
See Note 17 for supplemental cash flow information
The accompanying notes are an integral part of the statements. F-6
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
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.
c. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
F-7
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 from the commercial sales of engines are recognized
when shipped to the customer.
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. 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 $
-0- and $5,127,000 for the years ended December 31, 1997 and
1996, respectively. Revenues billed to the U.S. Government
represented 89% of the Company's total revenues in 1996.
F-8
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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. Patents
Purchased patents are amortized on a straight-line basis over
the useful lives, generally seventeen years. Amortization
expense was $61,582 for each of the years ended December 31,
1997 and 1996. Accumulated amortization was $369,490 and
$307,908 for the years ended December 31, 1997 and 1996,
respectively.
h. 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.
i. 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.
j. 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.
F-9
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
U.S. Government:
Other unbilled costs $ 61,732
Commercial $ 42,723 390,283
-------- --------
Total $ 42,723 $452,015
======== ========
</TABLE>
Other unbilled costs are subject to future negotiation and are expected
to be billed and collected within one year.
4. INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Fuel and oil $ 1,344 $ 1,344
Parts 399,496 972,807
Work in process 767,069 1,467,970
Finished goods 173,756 214,909
---------- ----------
$1,341,665 $2,657,030
========== ==========
</TABLE>
At December 31, 1997, the Company has inventory at cost totaling
$1,908,705. The Company has estimated the net realizable value of the
parts and engines to be $1,341,665. While the ultimate outcome of the
net realizable value may differ, management believes that any
additional loss will not have a material impact on the Company's
financial position.
F-10
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. FIXED ASSETS
Fixed assets at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
Useful Lives 1997 1996
----------- -----------
<S> <C> <C> <C>
Machinery and equipment 7 $ 5,439,417 $ 5,489,594
Furniture and fixtures 7 68,388 68,388
Office equipment 7 59,444 59,444
Computer equipment 5 333,796 333,796
Autos and trucks 5 8,500 8,500
Boats 5 27,195 32,108
Tooling 3 564,598 564,598
Demonstration equipment 3 261,663 261,663
Construction in process - 25,941 32,941
----------- -----------
6,788,942 6,851,032
Less accumulated depreciation (5,508,148) (4,571,073)
----------- -----------
$ 1,280,794 $ 2,279,959
=========== ===========
</TABLE>
6. OTHER ASSETS
Other assets as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred issuance cost $ 233,929
Deferred financing costs $ 632,054
Capitalized production cost 25,663
Deposits 6,622 56,622
Other 117,680
--------- ---------
266,214 806,356
Less Accumulated Amortization -- (142,202)
--------- ---------
$ 266,214 $ 664,154
========= =========
</TABLE>
F-11
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Provision for loss on contracts $ 697,821 $ 876,861
Contract adjustments 62,000 62,000
Professional fees 15,338 71,938
Other 129,706 85,839
---------- ----------
$ 904,865 $1,096,638
========== ==========
</TABLE>
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, 1997 and 1996 is payable to the seller as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
$150,000 per annum, payable
January 31, 1996 through 1997 $ 225,000 $ 225,000
$500,000 per annum, payable
January 31, 1998 through 2006 4,500,000 4,500,000
----------- -----------
Total remaining payments 4,725,000 4,725,000
Less:
Unamortized discount at 10% (1,355,951) (1,642,857)
Current portion (725,000) (225,000)
----------- -----------
Long term portion $ 2,644,049 $ 2,857,143
=========== ===========
</TABLE>
The Company did not make a payment of $150,000 on January 30, 1997.
Also, in 1996 the Company was unable to make the full payment of
$150,000 which was due to the seller on January 31, 1996, but paid
$75,000, deferring the remaining balance of $75,000 to January 30,
1997, which was not paid.
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 1997
and 1996.
F-12
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
8. DEFERRED ACQUISITION OBLIGATION (Continued)
The Company is in negotiations with Deere & Company with regard to the
fixed minimum payments due to John Deere Technologies International
("JDTI") under the deferred acquisition obligation.
9. LOAN PAYABLE AND NOTE PAYABLE
a. Loan Payable
In May and June 1997, Powercold Corp., a shareholder, loaned
the Company a total of $216,768. The loan is non-interest
bearing. It is management's intention to pay back the loan in
1998.
b. Note Payable
In December 1997, the Company issued a $400,000 promissory
note to its landlord for satisfaction of rent due through
December 31, 1997. The note is due January 1, 2003 and bears
interest at 4% per annum. The note is collateralized by a
second position in inventory and property and equipment.
10. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
` 1997 1996
----------- -----------
<S> <C> <C>
$10,000,000 aggregate principal amount
of 10.412% bonds due December 15, 2007 $ 3,631,265
New Jersey Economic Development
Authority Bonds 274,275 $ 6,812,917
Less current portion (274,275) (183,750)
----------- -----------
$ 3,631,265 $ 6,629,167
=========== ===========
</TABLE>
On December 22, 1997, the Company sold obligations issued by the
Financing Corporation, a mixed ownership government corporation
chartered by the Federal Home Loan Bank Board (the "FICO Strips"),
which were collateral for the New Jersey Economic Development Authority
bonds ("NJEDA"). Proceeds from the sale totaled $3,797,997 resulting in
a gain of $479,014.
F-13
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. LONG-TERM DEBT (Continued)
Also on December 22, 1997, the Company issued $10,000,000 aggregate
maturing principal amount of 10.412% bonds due December 15, 2007. Total
proceeds from the issuance was $3,631,265, and bond discount is being
amortized over the bonds' life. The bonds are collateralized by certain
property and equipment. On or prior to December 31, 2000, the Company
shall deposit into a Bond Reserve Fund an amount equal to at least 50%
of the principal amount of bonds outstanding on such date.
As a result of these events, the Company used the proceeds to pay off
$6,465,725 of the NJEDA bonds. As of December 31, 1997, $274,275 of the
NJEDA bonds was outstanding. The bond trustee was holding in escrow the
balance due, and on January 22, 1998, the balance due was paid in full
by the trustee.
11. COMMITMENTS AND CONTINGENCIES
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, 1994 and 1995; 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 year ended December 31, 1996 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 (see Note 9b). The Company is
currently negotiating a new lease with its landlord. Rent expense for
the years ended December 31, 1997 and 1996 was $551,000 and $451,000,
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.
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-14
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
11. 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 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.
12. RELATED PARTY TRANSACTIONS
Ken Brody, President of the Company, is an officer and shareholder of
Abejon Rotary Power Corporation (Abejon). At December 31, 1997 and
1996, the Company has an advance payable to Abejon of $500,000 for
future sales of engines. The advance is recorded in other current
liabilities.
13. 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, 1997 and 1996.
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, 1997 and 1996 437,340 shares of preferred
stock were issuable.
F-15
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
13. 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:
On March 13, 1997, the Company issued 150,000 shares as commission for
the sale of FICO strips.
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
822,916 shares of the Company's common stock which are owned by Abejon
and were 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.
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.
F-16
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
13. SHAREHOLDERS' EQUITY (Continued)
There were 45,000 warrants to purchase common stock outstanding at
December 31, 1997, which are exercisable between 1998 and 1999 at
$4.625.
At December 31, 1997 and 1996, 177,000 and 566,000 shares of common
stock, respectively, have been reserved for exercise of warrants and
stock options.
14. STOCK OPTION PLAN
In 1992, the Board of Directors adopted the 1992 Stock Option Plan (the
"Plan"). Under the terms of the Plan, incentive stock options to
purchase up to 400,000 shares of common stock may be granted to key
employees and directors of the Company at the fair market value at the
date of grant (or 110% of the fair market value for grants issued to
holders of more than 10% of the voting stock of the Company). Options
granted under the Plan become exercisable in whole or in part from time
to time as determined by the Board of Directors, provided, however, in
no event shall any option become exercisable earlier than the date six
months following the date on which the option is granted. Options
granted under the Plan shall have a maximum term of ten years from the
date of grant. The option price must be paid in full on the date of
exercise in cash or in common shares of the Company having a fair
market value on the date of exercise equal to the option price. Stock
options outstanding are exercisable commencing one year after grant at
a rate of either 20% or 25% of such shares in each succeeding year.
Option status and activity were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Outstanding, beginning of year 291,000 342,200
Canceled ($.19125 to $5.00 1997 and 1996) (239,000) (51,200)
-------- --------
Outstanding ($3.00 per share)
end of year 52,000 291,000
======== ========
Available for grant 95,000 95,000
======== ========
Exercisable 31,200 216,200
======== ========
</TABLE>
F-17
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
15. 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
$14,576 and $89,913 of matching contributions and $1,206 and $5,637 of
administrative expenses related to this plan in 1997 and 1996,
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 1997 and
1996.
16. INCOME TAXES
Deferred tax accounts as of December 31, 1997 and 1996 comprise the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets $ 6,371,549 $ 4,592,000
Deferred tax liabilities (24,595) (121,000)
----------- -----------
Deferred tax assets, net 6,346,954 4,471,000
Valuation allowance (6,346,954) (4,471,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1997, the Company has federal and state net
operating loss carryforwards available for tax purposes of
approximately $14,934,508 and $13,971,648 expiring through 2012 and
2006, respectively.
F-18
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded $145,536 and $287,461 of accreted interest income
on the FICO Strips during 1997 and 1996, 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. During 1997, 822,916 shares of the Company's common stock
were canceled, and the subscription receivable of $3,150,000 was offset
against paid in capital.
During 1997, the Company issued 150,000 common shares at $0.50 per
share as commission for the sale of FICO strips.
During 1996, the Company recorded $61,262 of income related to the
increase in the cash surrender value of life insurance policies on
certain officers. In 1997, the Company forfeited the cash surrender
value of $117,681 to certain officers as additional compensation.
Additionally, the Company recorded imputed interest expense of $286,906
and $199,462 on its deferred acquisition obligation during December 31,
1997 and 1996, respectively.
18. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
net losses of $5,032,819 and $4,970,054 during the years ended December
31, 1997 and 1996, respectively. As of December 31, 1997 the Company
had working capital deficiency of $1,796,287 and its total liabilities
exceeded total assets by $6,308,776. 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. In 1997, Management reduced
current liabilities by paying NJEDA bonds with the proceeds of the sale
of FICO strips and issuance of new long-term bonds. In January 1998,
the Company auctioned fixed assets resulting in net proceeds of
$575,000 and in May 1998, a settlement was reached with unsecured
creditors, reducing account payable approximately $491,000. (See Note
19). The ability of the Company to continue as a going concern is
mainly dependent on obtaining financing 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-19
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
19. SUBSEQUENT EVENTS
On January 27, 1998 the Company held an auction of certain property and
equipment. Proceeds , net of commissions of $46,280, totaled $575,000
resulting in a gain of $198,730.
In May 1998, unsecured vendors agreed to settle accounts payable
balances as follows:
a. In cash, 10% of the accounts payable balance.
b. In stock, 15% of the remaining balance.
As a result, $56,171 was paid to vendors, $491,303 was forgiven by
vendors, and 73,695 shares of common stock were issued.
F-20
<PAGE>
PART II
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
27
<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:
<TABLE>
<CAPTION>
Position with the
Name Age Company
---- --- -------
<S> <C> <C>
Kenneth Leighton Brody 56 President and Chief Executive
Officer and Sole Director
</TABLE>
Ken Brody was a director of the Company from February 1996 until March, 1997. He
was President of Abejon Rotary Power Corporation, a marine engine and
electronics distributor, a post he held since May 1995. Mr. Brody has also been
Chairman of Hydro Lance Maritime Transport Corporation, a builder of high-speed
ferries. 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.
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.
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 1997, all
such requirements imposed on such persons have been complied with.
28
<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 $100,000 for services
in all capacities to the Company during the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Annual underlying All Other
Compensation Other Compensation options/
Name and Principal Position Year Salary($) Bonus($) $ SARS(#) ($)(1)
- --------------------------- ---- --------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kenneth L. Brody
President and 1997 $ 7,500 -- --
Chief Executive Officer
Richard M.H. Thompson 1997 $ 64,623 -- -- $76,495(1)
President and 1996 $203,850 -- -- $16,927(2)
Chief Executive Officer 1995 $220,512 $44,102 -- $16,448(3)
</TABLE>
- ------------------------------
((1)) This reflects the cash surrender value of split-dollar life insurance
re-assigned to Mr. Thompson on his termination.
((2)) This amount reflect the premiums the Company pays for Group Term Life
Insurance in excess of $50,000.
29
<PAGE>
The following two tables set forth certain information with respect to (i)
option grants to the Named Executive Officers during the fiscal year ended
December 31, 1997, and (ii) the aggregated number and value of options
exercisable and unexercisable by the Named Executive Officers as of December 31,
1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/ EXERCISE
UNDERLYING SARS GRANTED OR
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE
- ---- ------------ -------------- ---------- ----------
<S> <C> <C> <C> <C>
None granted in 1997
</TABLE>
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
SHARES AT FY-END OPTIONS/SARS AT
ACQUIRED 12/31/97 FY-END 12/31/97
ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) ($) (1)
---- -------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Richard M.H. Thompson -0- -0- 24,000(2) -0-
John Mack -0- -0- 7,200(1) -0-
</TABLE>
(1) Based upon a closing price of $0.08 per share of the Company's Common Stock
on December 29, 1997 on the OTCBB minus the respective option exercise
price, none of the options were in-the-money.
(2) Exercisable, up to three months after termination (2/24/98). They were not
exercised, and the options have expired.
30
<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.
As of December 31, 1997, there were stock options for 31,200 shares outstanding
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
It is the policy of the Company to pay $750 per quarterly meeting to its outside
directors. The Company also reimburses all outside directors for reasonable
expenses incurred in connection with the performance of their duties as
directors. In addition, outside directors are eligible to receive stock options
under the Company's Stock Option Plan.
31
<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 July 23, 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.
<TABLE>
<CAPTION>
Number of
Common Shares Percentage
Name and Address Beneficially of
of Beneficial Owner Owned Class
- ------------------- ------------- ----------
<S> <C> <C>
PowerCold Corporation 2,000,000 33.5
103 Guadalupe Drive
Cibolo, Texas 78108
Loeb Investors Co. 104 (2) 933,074 15.6
61 Broadway
New York, New York 10006
Richard M.H. Thompson (3) 236,645 4.0
6191 N. Ocean Boulevard
Ocean Ridge, Florida 33435
Abejon Rotary Power Corporation 177,084 3.0
4960 North Harbor Drive
San Diego, CA 92106
Ken Brody(1)
c/o Abejon Rotary Power Corporation 177,084 3.0
4960 North Harbor Drive
San Diego, CA 92106
All directors and executive
officers as a group (1 person) 177,084(1) 3.0
</TABLE>
- ---------------
(1) Includes 177,084 shares of Common Stock owned by Abejon Rotary Power
Corporation. Mr. Brody is a 24% shareholder in Abejon Rotary Power
Corporation.
(2) 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").
(3) Mr. Thompson's shares include currently exercisable options to purchase
24,000 Common Shares.
32
<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 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. Bagattelle resigned as Director on March 31,
1997.
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 1995, 1996 or 1997.
33
<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))
4.0 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 Warrant 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))
34
<PAGE>
10.9 Asset Purchase Agreement dated August 6, 1992 between 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, 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))
35
<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 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))
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 (Abejon) Rotary Power Corporation.((6))
36
<PAGE>
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
(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.((9))
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.((9))
10.46 Vessel Purchase and Sales Agreement (Partial Interest) between Abejon and
RPI dated as of October 31, 1996.((9))
10.47 Mar-Trans Affiliates LLC: Operating Agreement between Abejon and RPI
dated as of October 31, 1996.((9))
10.48 Agreement of Merger between International Cryogenic Systems Corporation
and Rotary Power International dated as of March 21, 1997.((9))
10.49 Security Agreement, dated December 1, 1998, between Sentinel Trust
Company, trustees for the holders of the $10,000,000 bonds due December
15, 2007.
10.50 Indenture of Trust between Sentinel Trust Company and Rotary Power
International, Inc, dated December 1, 1997.
10.51 Curtiss-Wright Security Agreement, dated December 22, 1997.
10.52 Curtiss-Wright Settlement of Claims with RPI, dated December 22, dated
December 22, 1997.
10.53 Asset Purchase Agreement, dated June 4, 1998, with Rotary Power Marine
Corporation , for the sale of Series 65 gasoline engines.
10.54 Asset Sale Agreement, dated July 2, 1998, for the sale of certain assets
of the Company (Series 65 NGRE engines) to Rotary Power Enterprise, Inc.
11 Calculation of Income (Loss) per Common Share filed herewith.
21 Subsidiaries of the Company.
27 Financial Data Schedule**
37
<PAGE>
- ---------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-KSB.
** Filed in Edgar format only.
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.
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.
9 Incorporated by reference to exhibit of the same number
contained in the Company's Form 10-KSB for the year ending
December 31, 1996.
(b) Reports on Form 8-K
The Company did not file any Form 8-K during the last quarter of the
fiscal year ended December 31, 1997.
38
<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/
- -------------------------------------
By: KENNETH LEIGHTON BRODY, PRESIDENT
August 20, 1998
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/
----------------------
BY: Kenneth Leighton Brody
Director, President and Chief
Executive Officer (Principal Executive Officer & Principal Financial Officer)
DATE: August 20, 1998
58
ASSET PURCHASE AGREEMENT
ASSETS PURCHASE AGREEMENT, dated as of June 4, 1998, by and
among ROTARY POWER MARINE, INC., a Delaware corporation ("Seller") and ROTARY
POWER MARINE CORPORATION, a New York corporation ("Purchaser").
RECITALS:
A. Seller is engaged in the business of the manufacture and
sale of rotary engines for marine uses (the "Business").
B. Subject to the terms and conditions contained in this
Agreement, Seller desires to sell and Purchaser desires to purchase certain
tangible and intangible assets utilized by Seller in the Business.
NOW, THEREFORE, in consideration of the recitals and of the
respective covenants, representations, warranties and agreements herein
contained, and intending to be legally bound hereby, the parties hereto hereby
agree as follows:
ARTICLE I. - PURCHASE AND SALE
1.1 Agreement to Sell. At the Closing hereunder (as defined in
Section 2.1 hereof) and except as otherwise specifically provided in this
Section 1.1, Seller shall grant, sell, convey, assign, transfer and deliver to
Purchaser, upon and subject to the terms and conditions of this Agreement, all
right, title and interest of Seller in and to the following, free and clear of
all mortgages, liens, pledges, security interests, charges, claims, restrictions
and encumbrances of any nature whatsoever ("Encumbrances"): (a) certain
inventory of Seller, as listed in Schedule 1.1(a) annexed hereto and made a part
hereof, which shall include ninety-five (95) unused gasoline Mazda engines in
original Mazda packaging ("New Mazda Engines"), four (4) work in progress
engines, used engines and parts; (b) certain fixed assets of Seller listed in
Schedule 1.1(b) hereto, which shall include four sets of office furniture,
benches, shelving, one boat and trailer, a Superflow SF-901 Dynamometer and
controls with Serial Number __________; (c) certain intangible assets of Seller
related to Series 65 engines including, without limitation, the name and logo of
"Rotary Power Marine, Inc." (and all variations thereof) and all Series 65
gasoline manufacturing procedures, Series 65 gasoline bills of materials, Series
65 gasoline operator and service manuals, Series 65 gasoline designs, drawings
and blueprints created after September 1, 1995 and Series 65 gasoline vendor and
customer lists; (d) all engine supply agreements for the Series 65 gasoline
engines; and (e) all claims, defenses and choses of action
<PAGE>
Seller may have related to the intangible assets utilized in its business prior
to the date of this Agreement (all of (a), (b), (c), (d) and (e) to be
collectively referred to herein as, the "Purchased Assets"). The parties hereto
agree that the Purchased Assets do not include one Superflow Dynamometer with
Serial Number __________ (the "Retained Dynamometer"), and that Seller shall
retain all right, title and interest in the Retained Dynamometer.
1.2 Agreement to Purchase. At the Closing hereunder, Purchaser
shall purchase the Purchased Assets from Seller, upon and subject to the terms
and conditions of this Agreement and in reliance on the representations,
warranties and covenants of Seller contained herein, in exchange for the
Purchase Price (hereinafter defined in Section 1.3.1 hereof).
1.3 The Purchase Price.
1.3.1. Purchase Price. The Purchase Price shall be an amount
equal to:
(a) One hundred forty thousand ($140,000) dollars,
which shall be paid by the Purchaser as follows:
(i) eighty-four thousand ($84,000) dollars (the
"Down Payment") which shall be delivered by (y)
cash or certified check representing the escrow
amount, if any, recommended by the State of New
Jersey Department of the Treasury Division of
Taxation Bulk Sale Unit (the "Bulk Sales
Department"), delivered to Seller's attorney at
the Closing to be held in escrow until receipt of
notification of satisfaction and release of all
tax liability of the Seller by the State of New
Jersey Department of the Treasury Division of
Taxation, and (z) cash or certified check
representing the balance of the Down Payment to be
delivered to Seller at the Closing; and (ii)
fifty-six thousand ($56,000.00) dollars to be
delivered to Seller in cash or certified or bank
check on or before September 1, 1998. In addition,
Purchaser shall pay interest on the amount due
Seller pursuant to this Section 1.3.1(a)(ii)
(until such amount is paid in full) at the rate of
six (6%) percent per annum, with such accrued
interest to be paid on the 1st day of each month;
(b) an amount not to exceed eight thousand six hundred
($8,600) dollars to fund repairs and
<PAGE>
upgrades to the Retained Dynamometer ("Upgrade
Costs") which repairs and upgrades may become
necessary for the Retained Dynamometer to perform
the same functions as a Superflow model SF-901
during series production testing of 70 series
engines. In no event shall Purchaser be required
to pay more than $8,600 in Upgrade Costs, and the
Upgrade Costs shall be paid in cash or certified
or bank check by Purchaser within thirty (30) days
of Purchaser's receipt of a written notification
from Seller, sworn to by the President of Seller,
which states that the Retained Dynamometer no
longer performs at least the functions of a
Superflow model SF-901 during series production
testing of 70 series engines (the "Dynamometer
Notice"). Notwithstanding the foregoing, in lieu
of payment of $8,600 to Seller as set forth above,
Purchaser may have the necessary repairs and
upgrades made to the Retained Dynamometer at its
own expense, within thirty (30) days of receipt of
the Dynamometer Notice.
Effective upon the Closing, Purchaser shall grant Seller a
security interest in the Purchased Assets, and will cause to be filed
appropriate UCC-1 financing statements in respect thereof, to secure payment of
the interest and principal referenced in Sections 1.3.1(a)(ii) above. Nothing
contained herein or in the UCC-1 financing statements shall be construed to
prevent Purchaser from using and selling inventory in the ordinary course of
business.
1.3.2. Allocation of Purchase Price. The Purchase Price
shall be allocated among the Purchased Assets acquired hereunder as described in
Schedule 1.3.2. hereto. Seller and Purchaser each hereby covenant and agree that
they or it will not take a position on any income tax return, before any
governmental agency charged with the collection of any income taxes, or in any
judicial proceeding that is in any way inconsistent with the terms of this
Section 1.3.2. The allocation described in Schedule 1.3.2. shall be reflected in
the notification of bulk sale which shall be delivered to the New Jersey Tax
Department by Purchaser immediately following execution of this Agreement.
1.4 Assumption of Liabilities. As of the Closing, Purchaser
shall either (i) assume and agree to perform, discharge and pay all of the
rights, duties, liabilities and obligations of Seller under the Agreement dated
November 10, 1995 (the "Mazda
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<PAGE>
Agreement") by and among Mazda Motor Corporation, Mazda (North America), Inc.
(collectively, "Mazda"), and Seller, or (ii) in the event Purchaser decides to
enter into a new agreement with Mazda, produce a confirmation of the termination
of the Mazda Agreement as required by Section 2.2(b)(v) hereof. Except as
otherwise set forth in the preceding sentence, in no event shall Purchaser
assume, pay, perform or discharge any liabilities or obligations of the Seller
whatsoever, including without limitation any of the following:
(a) any product liability or similar claim for injury
to person or property, regardless of when made or asserted,
which arises out of or is based upon any express or implied
representation, warranty, agreement or guarantee made by
Seller, or alleged to have been made by Seller, or which is
imposed or asserted to be imposed by operation of law, in
connection with any service performed or product sold or
leased by or on behalf of Seller on or prior to the Closing,
including without limitation any claim relating to any product
delivered in connection with the performance of such service
and any claim seeking recovery for consequential damage, lost
revenue or income;
(b) any federal, state or local income or other tax
(i) payable with respect to the business, assets, properties
or operations of Seller (or any member of any affiliated group
of which Seller is a member) for any period prior to the
Closing Date, or (ii) incident to or arising as a consequence
of the negotiation or consummation by Seller (or any member of
any affiliated group of which Seller is a member) of this
Agreement and the transactions contemplated hereby, except
that Purchaser shall be responsible for payment of sales tax
arising from the sale of the Purchased Assets by the Seller;
(c) any liability or obligation arising prior to or
as a result of the Closing to any employees, agents or
independent contractors of Seller, whether or not employed by
Purchaser after the Closing, or under any benefit arrangement
with respect thereto;
(d) any liability or obligation of Seller arising
from Seller's violation of any Regulations related to soil,
land surface or subsurface strata, surface waters (including
navigable waters and ocean waters), ground waters, drinking
water supply, stream sediments, ambient
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<PAGE>
air (including indoor air), plant and animal life, and any
other environmental medium or natural resource (the
"Environment"), including the United States Comprehensive
Environmental Response, Compensation and Liability Act, 42
U.S.C. ss. 9601 et seq., as amended ("CERCLA"), the Hazardous
Materials Transportation Act, 49 U.S.C. ss. 1801 et seq., the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss.
6901 et seq., the Clean Water Act, 33 U.S.C. ss. 1251 et seq.,
the Clean Air Act, 33 U.S.C. ss. 2601 et seq., the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 et seq., the
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C.
ss. 136 et seq., the Oil Pollution Act of 1990, 33 U.S.C. ss.
2701 et seq. and the Occupational Safety and Health Act
("OSHA"), 39 U.S.C. ss. 651 et seq., as such laws have been or
will be amended or supplemented and the regulations
promulgated pursuant thereto and all analogous state or local
statutes including any environmental property transfer laws
(all of the foregoing collectively referred to herein as
"Environmental Laws");
(e) any liability or obligation of Seller arising or
incurred in connection with the negotiation, preparation and
execution of this Agreement and the transactions contemplated
hereby and fees and expenses of counsel, accountants and other
experts;
(f) any liability or obligation which may arise by
reason or with respect to the dissolution or liquidation of
Seller; or
(g) liabilities or obligations of Seller arising
after the Closing Date.
1.5. Escrow of Funds. The parties hereto agree that the
portion of the Purchase Price referenced in Section 1.3.1(a)(i) (the "Escrowed
Funds") shall be held in escrow by Seller's attorney, Wilentz, Goldman &
Spitzer, P.A. (the "Escrow Agent"), until receipt of notification of release and
satisfaction of all tax liability of the Seller from the State of New Jersey
Department of the Treasury Division of Taxation. In no event shall this Section
1.5 be construed to limit Seller's liability under Article VII to the amount
held in escrow, and Seller shall be liable for all Losses to the fullest extent.
ARTICLE II. - CLOSING, ITEMS TO BE DELIVERED, THIRD PARTY
CONSENTS, CHANGE IN NAME AND FURTHER ASSURANCES
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<PAGE>
2.1 Closing. The closing (the "Closing") of the sale and
purchase of the Purchased Assets shall take place within thirty (30) days of
execution of this Agreement at such time, date and location as may be mutually
agreed upon in writing by Purchaser and Seller. The date of the Closing is
sometimes herein referred to as the "Closing Date".
2.2 Items to be Delivered at Closing. At the Closing and
subject to the terms and conditions herein contained:
(a) Seller shall deliver to Purchaser such bills of
sale with covenants of warranty, assignments, endorsements,
and other good and sufficient instruments and documents of
conveyance and transfer, in form reasonably satisfactory to
Purchaser and its counsel, as shall be necessary and effective
to transfer and assign to, and vest in, Purchaser all of
Seller's right, title and interest in and to the Purchased
Assets, including without limitation, (A) good and valid title
in and to all of the Purchased Assets and (B) all of Seller's
rights under all agreements, contracts, commitments, and other
documents included in the Purchased Assets to which either
Seller is a party or by which either Seller has rights on the
Closing Date.
Simultaneously with such delivery, all such steps will be taken as may be
required to put Purchaser in actual possession and operating control of the
Purchased Assets.
(b) Purchaser shall deliver the following:
(i) the escrow amount recommended by the Bulk
Sales Department to the Escrow Agent;
(ii) the balance of the Down Payment to the
Seller;
(iii) a promissory note in the principal amount
of $56,000.00 bearing interest at 6% per
annum (the "Promissory Note");
(iv) such UCC-1 financing statements and other
documents executed by Purchaser as may be
necessary to grant Seller a security
interest in the Purchased Assets as
security for
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<PAGE>
Purchaser's performance of its obligations
under the Promissory Note; and
(v) an Assignment and Assumption of the Mazda
Agreement, or in the event Purchaser enters
into a new agreement, a confirmation of
termination of the Mazda Agreement.
(c) At or prior to the Closing, the parties hereto shall also
deliver to each other the agreements, opinions, certificates and other documents
and instruments referred to in Article V hereof.
2.3 Third Party Consents. To the extent that Seller's rights
under any agreement, contract, commitment, or other Purchased Asset to be
assigned to Purchaser hereunder may not be assigned without the consent of
another person which has not been obtained, this Agreement shall not constitute
an agreement to assign the same if an attempted assignment would constitute a
breach thereof or be unlawful, and Seller, at its expense, shall use its best
efforts to obtain any such required consent(s) as promptly as possible. If any
such consent shall not be obtained or if any attempted assignment would be
ineffective or would impair Purchaser's rights under the Purchased Asset in
question so that Purchaser would not in effect acquire the benefit of all such
rights, Seller, to the maximum extent permitted by law and the Purchased Asset,
shall act after the Closing as Purchaser's agent in order to obtain for it the
benefits thereunder and shall cooperate, to the maximum extent permitted by law
and the Purchased Asset, with Purchaser in any other reasonable arrangement
designed to provide such benefits to Purchaser. Notwithstanding the foregoing,
it is an express condition of Closing that Seller shall have obtained an
assignment of all engine supply agreements, or that new agreements with terms
satisfactory to Purchaser in its sole discretion shall have been entered into by
Purchaser to assure the continuous supply of Mazda engines to Purchaser after
the Closing Date.
2.4 Change in Name. On the Closing Date, Seller shall deliver
to Purchaser all such executed documents as may be required to change RPM's name
on that date to another name bearing no similarity to Rotary Power Marine, Inc.,
including but not limited to a name change amendment with the Secretary of State
of Delaware and an appropriate name change notice for each state where RPM is
qualified to do business. Seller hereby appoints Purchaser as its
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<PAGE>
attorney-in-fact to file all such documents on or after the Closing Date.
2.5 Further Assurances. Seller from time to time after the
Closing, at Purchaser's request, will execute, acknowledge and deliver to
Purchaser such other instruments of conveyance and transfer and will take such
other actions and execute and deliver such other documents, certifications and
further assurances as Purchaser may reasonably require in order to vest more
effectively in Purchaser, or to put Purchaser more fully in possession of, any
of the Purchased Assets. Each of the parties hereto will cooperate with the
other and execute and deliver to the other parties hereto such other instruments
and documents and take such other actions as may be reasonably requested from
time to time by any other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement.
ARTICLE III. - REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Seller. Seller
hereby represents and warrants to Purchaser that, except as set forth on the
Schedules attached hereto and made a part hereof, each of which exceptions shall
specifically identify the relevant subsection hereto to which it relates:
3.1.1. Corporate Existence. Seller (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and (b) has full corporate power and
authority to conduct its business as it is now being conducted, to own or use
its properties and assets that it purports to own or use, and to perform all its
obligations under all contracts, agreements or instruments to which it is a
party.
3.1.2. Corporate Power; Authorization; Enforceable
Obligations. Seller has the corporate power, authority and legal right to
execute, deliver and perform this Agreement. The execution, delivery and
performance of this Agreement by Seller has been duly authorized by all
necessary corporate and shareholder action. This Agreement has been, and the
other agreements, documents and instruments required to be delivered by Seller
in accordance with the provisions hereof (the "Seller's Documents") will be,
duly executed and delivered on behalf of Seller by duly authorized officers of
the Seller, and this Agreement constitutes, and the Seller's Documents when
executed and delivered will constitute, the legal, valid and binding joint and
several obligations of Seller, enforceable against it in accordance with their
respective terms.
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<PAGE>
3.1.3. Validity of Contemplated Transactions, etc.
The execution, delivery and performance of this Agreement by Seller does not and
will not violate, conflict with or result in the breach of any term, condition
or provision of, or require the consent of any other person under, (a) any
existing law, ordinance, or governmental rule or regulation to which Seller are
subject, (b) any judgment, order, writ, injunction, decree or award of any
court, arbitrator or governmental or regulatory official, body or authority
which is applicable to Seller, (c) the charter documents of Seller, any
resolutions adopted by the board of directors or shareholders of either Seller,
any shareholder voting agreement entered into by the shareholders of either
Seller, (d) any mortgage, indenture, agreement, contract, commitment, or other
instrument, document or understanding, oral or written, to which Seller is a
party, by which Seller may have rights or by which any of the Purchased Assets
may be bound or affected, or give any party with rights thereunder the right to
terminate, modify, accelerate or otherwise change the existing rights or
obligations of Seller thereunder. Except as aforesaid, no authorization,
approval or consent of, and no registration or filing with, any governmental or
regulatory official, body or authority is required in connection with the
execution, delivery or performance of this Agreement by Seller.
3.1.4. No Third Party Options. There are no existing
agreements, options, commitments or rights with, of or to any person to acquire
any of Seller's assets, properties or rights included in the Purchased Assets or
any interest therein, except for those contracts entered into in the normal
course of business consistent with past practice for the sale of inventory of
Seller.
3.1.5. Business Transactions. Except as set forth on
Schedule 3.1.5., since December 31, 1997, Seller, with respect to the Business,
has not entered into any transaction other than in the ordinary course of
business consistent with past practice.
3.1.6. Title to Properties. Seller has good, valid
and marketable title to all of its properties and assets, real, personal and
mixed, included in the Purchased Assets, free and clear of all Encumbrances and
defects of title of any nature whatsoever, except as set forth in Schedule 3.1.6
annexed hereto. All Encumbrances set forth in such Schedule shall be removed at
or prior to Closing, and Seller shall deliver fully executed UCC-3 statements
evidencing termination of such Encumbrances.
3.1.7. Compliance with Law; Authorizations. Each
Seller has complied with, and is not in violation of any, law, ordinance, or
governmental or regulatory rule or regulation,
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<PAGE>
whether federal, state, local or foreign, to which Seller's business,
operations, assets or properties is subject ("Regulations").
3.1.8. Litigation. Except as set forth on Schedule
3.1.8. annexed hereto, no litigation, including any arbitration, investigation
or other proceeding (collectively, "Proceedings") of or before any court,
arbitrator or governmental or regulatory official, body or authority is pending
or, to the best knowledge of Seller, threatened against Seller or which relates
to the Purchased Assets or the transactions contemplated by this Agreement, nor
does Seller know of any reasonably likely basis for any Proceeding. Seller is
not a party to or subject to the provisions of any judgment, order, writ,
injunction, decree or award of any court, arbitrator or governmental or
regulatory official, body or authority which may adversely affect the Purchased
Assets or the transactions contemplated hereby. Seller has delivered to
Purchaser copies of all pleadings, correspondence or other documents relating to
each Proceeding set forth in Schedule 3.1.8. There are no Proceedings listed in
Schedule 3.1.8 or required to be listed that may have a material adverse effect
on the Business, its operations, assets, condition or prospects, or upon the
Purchased Assets.
3.1.9. Contracts and Commitments. Except as set forth
in Schedule 3.1.9 annexed hereto, Seller is not party to any written or oral
agreement, contract or commitment relating to the Purchased Assets.
3.1.10. Availability of Documents. Seller has made
available to Purchaser copies of all documents listed in the Schedules annexed
hereto or referred to herein. Such copies are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
modifications thereunder.
3.1.11. Completeness of Disclosure. No representation
or warranty by Seller in this Agreement nor any certificate, schedule,
statement, document or instrument furnished or to be furnished to Purchaser
pursuant hereto, or in connection with the negotiation, execution of performance
of this Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact required to be stated herein
or therein or necessary to make any statement herein or therein not misleading.
3.2. Representations and Warranties of Purchaser. Purchaser
represents and warrants to Seller as follows:
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<PAGE>
3.2.1. Corporate Existence. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York.
3.2.2. Corporate Power and Authorization. Purchaser
has the corporate power, authority and legal right to execute, deliver and
perform this Agreement and the Promissory Note. The execution, delivery and
performance of this Agreement and the Promissory Note by Purchaser have been
duly authorized by all necessary corporate action. This Agreement and the
Promissory Note have been duly executed and delivered by Purchaser and
constitutes the legal, valid and binding obligations of Purchaser enforceable
against Purchaser in accordance with their terms.
3.2.3. Validity of Contemplated Transactions, etc.
The execution, delivery and performance of this Agreement by Purchaser does not
and will not violate, conflict with or result in the breach of any term,
condition or provision of, or require the consent of any other party to, (a) any
existing law, ordinance, or governmental rule or regulation to which Purchaser
is subject, (b) any judgment, order, writ, injunction, decree or award of any
court, arbitrator or governmental or regulatory official, body or authority
which is applicable to Purchaser, (c) the charter documents or ByLaws of, or any
securities issued by, Purchaser, or (d) any mortgage, indenture, agreement,
contract, commitment, lease, plan or other instrument, document or
understanding, oral or written, to which Purchaser is a party or by which
Purchaser is otherwise bound. Except as aforesaid, no authorization, approval or
consent of, and no registration or filing with, any governmental or regulatory
official, body or authority is required in connection with the execution,
delivery and performance of this Agreement by Purchaser.
3.3. Survival of Representations and Warranties. All
representations and warranties made by the parties in this Agreement or in any
certificate, schedule, statement, document or instrument furnished hereunder or
in connection with negotiation, execution and performance of this Agreement
shall survive the Closing for a period of two years. Notwithstanding any
investigation or audit conducted before or after the Closing Date or the
decision of any party to complete the Closing, each party shall be entitled to
rely upon the representations and warranties set forth herein or therein.
ARTICLE IV. - AGREEMENTS PENDING CLOSING
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4.1 Agreements of Seller Pending the Closing. Seller covenants
and agrees that, pending the Closing and except otherwise agreed to in writing
by Purchaser:
4.1.1. Maintenance of Purchased Assets. Seller shall
continue to maintain and service the Purchased Assets used in the conduct of the
Business in the same manner as been its consistent past practice.
4.1.2. Business Relations. Seller shall use its best
efforts to maintain the relations and good will with the suppliers, customers,
distributors and any others having business relations with the Business.
4.1.3. Compliance with Laws, etc. Seller shall comply
with all laws, ordinances, rules, regulations and orders applicable to the
Business, or Seller's operations, assets or properties in respect thereof, the
noncompliance with which might materially adversely affect the Business or the
Purchased Assets.
4.1.4. Update Schedules. Seller shall promptly
disclose to Purchaser any information contained in its representations and
warranties or the Schedules which, because of an event occurring after the date
hereof, is incomplete or is no longer correct as of all times after the date
hereof until the Closing Date; provided, however, that none of such disclosures
shall be deemed to modify, amend or supplement the representations and
warranties of Seller or the schedules hereto for the purposes of Article V
hereof, unless Purchaser shall have consented thereto in writing.
4.1.5. Sale of Assets; Negotiations. Seller shall
not, directly or indirectly, sell or encumber all or any part of the Purchased
Assets or initiate or participate in any discussions or negotiations or enter
into any agreement to do so. Seller shall not provide any confidential
information concerning the Business or the Purchased Assets to any third party
other than in the ordinary course of business.
4.1.6. Access. Seller shall give Purchaser reasonable
access to the Purchased Assets at the then location of such Purchased Assets,
and at such times as may be mutually agreed by Seller and Purchaser, for the
purposes of making physical inventories and inspections of the Purchased Assets.
4.1.7. Press Releases. Except as required by
applicable law or Regulation, Seller shall not give notice to third parties or
otherwise make any public statement or releases
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concerning this Agreement or the transactions contemplated hereby except for
such written information as shall have been approved in writing as to form
content by Purchaser, which approval shall not be unreasonably withheld.
4.2 Agreements of Purchaser Pending the Closing. Purchaser
covenants and agrees that, pending the Closing and except as otherwise agreed to
in writing by Seller:
4.2.1. Actions of Purchaser. Purchaser will not
knowingly take any action which would result in a breach of any of its
representations or warranties hereunder. Furthermore, Purchaser shall cooperate
with Seller and use its best efforts to cause all of the conditions to the
obligations of Purchaser under this Agreement to be satisfied on or prior to the
Closing Date.
4.2.2. Confidentiality. Unless and until the Closing
has been consummated, Purchaser will hold, and shall cause its counsel,
accountants and agents to hold in confidence any confidential data or
information made available to Purchaser in connection with this Agreement with
respect to the Business using the same standard of care to protect such
confidential data or information as is used to protect Purchaser's confidential
information. If the transactions contemplated by this Agreement are not
consummated, Purchaser shall return or cause to be returned to Seller all
written materials and all copies thereof that were supplied to Purchaser by
Seller and that contain any such confidential data or information.
ARTICLE V. - CONDITIONS PRECEDENT TO THE CLOSING
5.1. Conditions Precedent to Purchaser's Obligations. All
obligations of Purchaser under this Agreement are subject to the fulfillment or
satisfaction, prior to or at the Closing, of each of the following conditions
precedent:
5.1.1. Representations and Warranties True as of the
Closing Date. The representations and warranties of Seller contained in this
Agreement or in any schedule, certificate or document delivered by Seller to
Purchaser pursuant to the provisions hereof shall have been true on the date
hereof without regard to any schedule updates furnished by Seller after the date
hereof and shall be true on the Closing Date with the same effect as though such
representations and warranties were made as of such date.
5.1.2. Compliance with this Agreement. Seller shall
have performed and complied with all agreements and
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conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
5.1.3. Closing Certificate. Purchaser shall have
received a certificate from Seller dated the Closing Date, certifying in such
detail as Purchaser may reasonably request that the conditions specified in
Sections 5.1.1. and 5.1.2. hereof have been fulfilled and certifying that Seller
have obtained all consents and approvals required with respect to Seller or the
Purchased Assets by Section 5.1.5. hereof.
5.1.4. No Threatened or Pending Litigation. On the
Closing Date, no suit, action or other proceeding, or injunction or final
judgment relating thereto, shall be threatened or be pending before any court or
governmental or regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with
this Agreement or the consummation of the transactions contemplated hereby, and
no investigation that might result in any such suit, action or proceeding shall
be pending or threatened.
5.1.5. Consents and Approvals. All consents and
approvals necessary to be obtained for the consummation of the transactions
contemplated hereby shall have been obtained.
5.1.6. Material Adverse Changes. The Purchased Assets
shall not have been and shall not be threatened to be materially adversely
affected in any way as a result of any event or occurrence.
5.1.7. Release of Liens. Seller shall have provided
Purchaser with evidence satisfactory to Purchaser that all liens, pledges,
security interests, charges, claims, restrictions and other encumbrances
relating to any of the Purchased Assets have been released on or prior to the
Closing Date.
5.1.8. Mazda Agreement. Purchaser shall have assumed
the rights, duties, liabilities and obligations of Seller under the Mazda
Agreement. After the Closing Date, Purchaser may negotiate a new agreement with
Mazda at Purchaser's own risk.
5.1.9. Compliance with ISRA. Seller shall have (i)
complied with all provisions of the Industrial Site Recovery Act, N.J.S.A.
13:1D-1 et seq., 13:1K-6 (ISRA) and the Industrial Site Recovery Act Rules,
N.J.A.C. 7:26 B-1 et seq. and satisfied all requirements thereunder, and shall
have received from the New Jersey Department of Environmental Protection (the
"DEP") the written approval of a negative declaration, a remedial action work
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plan or a remediation agreement, or (ii) in the alternative, filed a diminimus
quantity exemption application with the DEP to be exempt from the provisions of
ISRA and shall have received a written determination from the DEP that such an
exemption is available to the Seller.
5.2 Conditions Precedent to the Obligations of Seller. All
obligations of Seller under this Agreement are subject to the fulfillment or
satisfaction, prior to or at the Closing, of each of the following conditions
precedent:
5.2.1. Representations and Warranties True as of the
Closing Date. The Representations and warranties of Purchaser contained in this
Agreement or in any list, certificate or document delivered by Purchaser to
Seller pursuant to the provisions hereof shall be true on the Closing Date with
the same effect as though such representations and warranties were made as of
such date.
5.2.2. Compliance with this Agreement. Purchaser
shall have performed and complied with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or at the
Closing.
5.2.3. Closing Certificates. Seller shall have
received a certificate from Purchaser dated the Closing Date, certifying in such
detail as Purchaser may reasonably request that the conditions specified in
Sections 5.2.1. and 5.2.2. hereof have been fulfilled.
5.2.4. No Threatened or Pending Litigation. On the
Closing Date, no suit, action or other proceeding, or injunction or final
judgment relating thereto, shall be threatened or be pending before any court or
governmental or regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with
this Agreement or the consummation of the transactions contemplated hereby, and
no investigation that might result in any such suit, action or proceeding shall
be pending or threatened.
ARTICLE VI. - POST CLOSING MATTERS
6.1 Use of Name. From and after the Closing Date, Seller will
sign such consents and take such other action as Purchaser shall reasonably
request in order to permit Purchaser to use the name "Rotary Power Marine" and
variants thereof. From and after the Closing Date, Seller will not itself use
the name or any names similar thereto or variants thereof.
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6.2 Covenant Not to Compete and Not to Use or Disclose Certain
Information. Seller, on behalf of itself and its affiliates covenants that, for
a period of five (5) years after the Closing Date such person will not, directly
or indirectly, operate, join, control or participate in management, operation or
control of, any company, corporation, proprietorship or partnership which
engages in the sale or distribution of Series 65 gasoline engines to any marine
market. Seller, on behalf of itself and its affiliates further covenants that it
shall treat as confidential and proprietary all Series 65 gasoline designs,
drawings and blueprints used in its business prior to the date of this
Agreement, whether or not such Series 65 gasoline designs, drawings and
blueprints are part of the Purchased Assets, and shall not disclose any Series
65 gasoline designs, drawings and blueprints used in its business prior to the
date of this Agreement to any person or entity other than Purchaser, nor shall
Seller use them to compete with Purchaser. The parties specifically acknowledge
and agree that the remedy at law for any breach of the foregoing restrictions
will be inadequate and that the Purchaser, in addition to any other relief
available to it, shall be entitled to temporary and permanent injunctive relief
without the necessity of proving actual damage. In the event that the provisions
of this Section 6.2 should ever be deemed to exceed the limitation provided by
applicable law, then the parties agree that such provisions shall be reformed to
set forth the maximum limitations permitted.
6.3 Transfer of Possession of Tangible Purchased Assets. The
parties hereto agree that although transfer of title and ownership of the
Purchased Assets shall take place at Closing, Purchaser shall have up to two
weeks after the date of Closing to take actual physical possession of the
tangible Purchased Assets. Purchaser shall obtain all necessary insurance to
cover risk of loss from and after the Closing Date. Seller shall not be liable
for any damage or loss to the Purchased Assets after the Closing Date, except to
the extent such damage or loss is caused by the gross negligence or willful
misconduct of Seller, or any of their employees, officers, directors, agents or
affiliates. Seller shall cooperate with Purchaser in arranging physical transfer
of the Purchased Assets during Seller's normal business hours.
ARTICLE VII - INDEMNIFICATION
Section 7.1 Indemnification of the Purchaser . The Seller
agrees to indemnify, defend and hold harmless the Purchaser and any of its
affiliates, shareholders, members, officers, partners, employees, successors and
assigns from and against any and all losses, liabilities (including punitive or
exemplary damages and fines or penalties and any interest thereon), expenses
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(including fees and disbursements of counsel and expenses of investigation and
defense), claims, liens or other obligations of any nature whatsoever
(hereinafter individually, a "Loss" and collectively, "Losses") which, directly
or indirectly, arise out of, result from or relate to:
(i) any inaccuracy in or any breach of any representation and
warranty, or any breach of any covenant or agreement, of the Seller contained in
this Agreement or in any other document contemplated by this Agreement;
(ii) any claim by a creditor of the Seller;
(iii) (A) contamination occurring after January 5, 1998 on any
real property, leasehold or other interests currently or formerly owned or
operated by Seller by any substance, material or waste which is or will
foreseeably be regulated by any governmental body, including any material,
substance or waste which is defined as a "hazardous waste", "hazardous
material", "hazardous substance", "extremely hazardous waste", "restricted
hazardous waste", "contaminant", "toxic waste", or "toxic substance" under any
provision of Environmental Law, which includes petroleum, petroleum products,
asbestos, presumed asbestos-containing material or asbestos-containing material,
urea formaldehyde and polychlorinated biphenyls (all of the foregoing
collectively referred to herein as "Hazardous Materials");
(B) Seller's financial responsibility arising after
January 5, 1998 under any Environmental Laws for cleanup costs or corrective
action, including any cleanup, removal, containment, or other remediation or
responsive actions ("Cleanup") required by any applicable Environmental Laws
(whether or not such Cleanup has been required or requested by any governmental
body or any other person) and for any natural resource damages;
(C) Seller's failure after January 5, 1998 to obtain and
maintain all permits, approvals, authorizations, licenses, variances,
registrations or permissions required under any applicable Environmental Laws or
order thereunder ("Environmental Permits") necessary for its operations; or
(iv) any liability or obligation of Seller arising from
Seller's violation after January 5, 1998 of any Regulations related to soil,
land surface or subsurface strata, surface waters (including navigable waters
and ocean waters), ground waters, drinking water supply, stream sediments,
ambient air (including indoor air), plant and animal life, and any other
environmental medium or natural resource (the "Environment"), including the
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United States Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601 et seq., as amended ("CERCLA"), the Hazardous Materials
Transportation Act, 49 U.S.C. ss. 1801 et seq., the Clean Air Act, 33 U.S.C. ss.
2601 et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., the
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss. 136 et seq.,
the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq. and the Occupational
Safety and Health Act ("OSHA"), 39 U.S.C. ss. 651 et seq., as such laws have
been or will be amended or supplemented and the regulations promulgated pursuant
thereto and all analogous state or local statutes including any environmental
property transfer laws (all of the foregoing collectively referred to herein as
"Environmental Laws");
(v) Seller's use after January 5, 1998 of any patent,
trademark, service mark, copyright, software, trade secret or know-how not owned
by Seller;
(vi) (A) Seller's failure to file on a timely basis all tax
returns required to be filed after January 5, 1998 by or with respect to
applicable local, state or federal Regulations;
(B) Seller's failure to file true, correct and complete
tax returns after January 5, 1998;
(C) Seller's failure to pay all taxes (federal, state and
local) when due, if such taxes were due after January 5, 1998.
(vii) (A) Seller's failure to make full payment of all amounts
which are required to be paid after January 5, 1998 under the terms of any
"employee benefit plans" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), all specified fringe benefit
plans as defined in the Internal Revenue Code of 1986, as amended (the "Code"),
and all other bonus, incentive compensation, deferred compensation, profit
sharing, stock option, stock appreciation right, stock bonus, stock purchase,
employee stock ownership, savings, severance, supplemental unemployment, layoff,
salary continuation, retirement, pension, health, life insurance, disability,
accident, group insurance and any other employee compensation or benefit plan,
agreement, policy, practice, commitment, contract or other understanding
(whether qualified, unqualified, written or unwritten), and any trust, escrow,
or other agreement related thereto, that (I) is maintained or contributed to by
either Seller or any other corporation or trade or business controlled by,
controlling or under common control with either Seller (within the meaning of
Section 414 of the Code or Section
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4001(a)(14) or 4001(b) of ERISA) ("ERISA Affiliate") or has been maintained or
contributed to in the last six years by either Seller or an ERISA Affiliate, or
with respect to which either Seller or an ERISA Affiliate has any liability, and
(II) provides benefits, or describes policies or procedures applicable to any
current or former director, officer or employee of either Seller or an ERISA
Affiliate, or dependents thereof, regardless of whether funded (the "Employee
Plans");
(B) any proceeding instituted at any time regarding
Seller's termination of any Employee Plan after January 5, 1998;
(C) Seller's failure after January 5, 1998 to pay
insurance premiums with regard to any Employee Plan;
(D) Seller's failure after January 5, 1998 to comply
with the continuation coverage provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") or to operate all "group health
plans" as defined in Section 5000(b) of the Code, in conformance with the
Medicare as Secondary Payor provisions of the Social Security Act;
(E) Seller's failure after January 5, 1998 to timely
file all reports and descriptions of Employee Plans required to be filed
pursuant to ERISA, the Code and any other applicable laws or failure to give all
notices required thereunder;
(F) Seller's failure after January 5, 1998 to maintain
workers' compensation coverage as required by applicable state law;
(G) Seller's failure after January 5, 1998 to otherwise
comply with federal, state or local regulations related to Employee Plans.
(viii) either Seller's failure after January 5, 1998 to comply
in all respects with all legal requirements and laws relating to employment
practices, terms and conditions of employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining
and other requirements under 29 U.S.C. ss.ss. 141-187, the payment of social
security and similar taxes, and occupational safety and health.
(ix) any liability of the Seller not assumed by Purchaser,
whether or not related to the Purchased Assets, whenever arising.
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Section 7.3 Indemnification of the Seller .
The Purchaser agrees to indemnify, defend and hold harmless
the Seller and any of its affiliates, shareholders, directors, officers,
partners, employees, successors and assigns from and against any and all Losses
which, directly or indirectly, arise out of, result from or relate to any
inaccuracy in or any breach of any representation and warranty, or any breach of
any covenant or agreement, of the Purchaser contained in this Agreement.
Section 7.4 Method of Asserting Claims . A claim for indemnity
by any party (the "Indemnitee") against any other party (the "Indemnitor") may
only be made by a written notice from the Indemnitee to the Indemnitor. Such
written notice shall set forth in reasonable detail the basis upon which such
claim for indemnity is made. In the event any person or entity not a party to
this Agreement shall make a demand or claim, or file or threaten to file any
lawsuit which demand, claim or lawsuit may result in any liability, damage or
loss to an Indemnitee, then, in any such event, after notice from the Indemnitee
to the Indemnitor of such demand, claim or lawsuit, the Indemnitor shall have
the duty at its or their sole expense and cost to retain counsel for the
Indemnitee and to defend any such demand, claim or lawsuit. In the event that
the Indemnitor shall fail to respond within ten (10) days (or such earlier date
as may be required by law to respond to such demand, claim or lawsuit) after
receipt of such notice of any such demand, claim or lawsuit, then the Indemnitee
shall have the right to retain counsel and conduct a defense of such demand,
claim or lawsuit, as he may in his discretion deem proper, at the sole cost and
expense of the Indemnitor.
ARTICLE VIII - MISCELLANEOUS
8.1 Termination. (a) Anything herein or elsewhere to the
contrary notwithstanding, this Agreement may be terminated by written notice of
termination at any time before the Closing Date only as follows:
(i) by mutual consent of Seller and Purchaser;
(ii) by Purchaser, (A) at any time if the
representations and warranties of Seller contained in Section 3.1
hereof were incorrect in any material respect when made or at any time
thereafter, or (B) upon written notice to Seller given at any time
after the expiration of thirty (30) days from the date of this
Agreement (or such later date as shall have been specified in a writing
authorized on behalf of
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Seller and Purchaser) if all of the conditions precedent set forth in
Section 5.1 hereof have not been met; or
(iii) by Seller, (A) at any time if the
representations and warranties of Purchaser contained in Section 3.2
hereof were incorrect in any material respect when made or at any time
thereafter, or (B) upon written notice to Purchaser given at any time
after the expiration of thirty (30) days from the date of this
Agreement (or such later date as shall have been specified in a writing
authorized on behalf of Seller and Purchaser) if all of the conditions
precedent set forth in Section 5.2 hereof have not been met.
(B) In the event of the termination and abandonment
hereof pursuant to the provisions of this Section 8.1, this Agreement
(except for Section 4.2.2. which shall continue) shall become void and
have no effect, without any liability on the part of any of the parties
or their directors or officers or stockholders in respect to this
Agreement.
8.2 Brokers' and Finders' Fees.
(a) Seller represents and warrants to Purchaser that all
negotiations relative to this Agreement have been carried on by it
directly without the intervention of any person, who may be entitled to
any brokerage or finder's fee or other commission in respect of this
Agreement or the consummation of the transactions contemplated hereby,
and Seller agrees to indemnify and hold harmless Purchaser against any
and all claims, losses, liabilities and expenses which may be asserted
against or incurred by it as a result of Seller's dealing, arrangements
or agreements with any such person.
(b) Purchaser represents and warrants that all negotiations
relative to this Agreement have been carried on by it directly without
the intervention of any person who may be entitled to any brokerage or
finder's fee or other commission in respect of this Agreement or the
consummation of the transaction contemplated hereby, and Purchaser
agrees to indemnify and hold harmless Seller against any and all
claims, losses, liabilities and expenses which may be asserted against
or incurred by it as a result of Purchaser's dealings, arrangements or
agreements with or any such person.
8.3. Sales, Transfer and Documentary Taxes, etc. Purchaser
shall pay all federal, state and local sales, documentary and other transfer
taxes, if any, due as a result of the sale or transfer of the Purchased Assets
in accordance herewith whether
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imposed by law on Seller or Purchaser and Purchaser shall indemnify, reimburse
and hold harmless Seller in respect of the liability for payment of or failure
to pay such taxes or the filing of or failure to file any reports required in
connection therewith.
8.4. Expenses. Each party hereto shall pay its own expenses
incidental to the preparation of this Agreement, the carrying out of the
provisions of this Agreement and the consummation of the transactions
contemplated hereby.
8.5. Contents of Agreement; Parties in Interest; etc. This
Agreement sets forth the entire understanding of the parties hereto with respect
to the transactions contemplated hereby. It shall not be amended or modified
except by written instrument duly executed by each of the parties hereto. Any
and all previous agreements and understandings between or among the parties
regarding the subject matter hereof, whether written or oral, are superseded by
this Agreement.
8.6. Assignment and Binding Effect. This Agreement may not be
assigned prior to the Closing by any party hereto without the prior written
consent of the other parties. Subject to the foregoing, all of the terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the successors and assigns of Seller and Purchaser.
8.7. Waiver. Any term or provision of this Agreement may be
waived at any time by the party entitled to the benefit thereof by a written
instrument duly executed by such party.
8.8 Notices. Any notice, request, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given only if delivered personally or sent by
telegram or by registered or certified mail, postage prepaid, as follows:
If to Purchaser, to:
Rotary Power Marine Corporation
11 Shore Drive
Great Neck, New York 11021
Attention: Jonathan Lauter
If to Seller, to:
Rotary Power Marine, Inc.
P.O. Box 128
Wood-Ridge, NJ 07075-0128
Attention: Ken Brody
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or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered, telegraphed or mailed.
8.9. New Jersey Law to Govern. This Agreement shall be
governed by and interpreted and enforced in accordance with the laws of the
State of New Jersey.
8.10. No Benefit to Others. The representations, warranties,
covenants and agreements contained in this Agreement are for the sole benefit of
the parties hereto and their heirs, executors, administrators, legal
representatives, successors and assigns, and they shall not be construed as
conferring any rights on any other persons.
8.11. Headings, Gender and "Person". All section headings
contained in this Agreement are for convenience of reference only, do not form a
part of this Agreement and shall not affect in any way the meaning or
interpretation of this Agreement. Words used herein, regardless of the number
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine, or
neuter, as the context requires. Any reference to a "person" herein shall
include an individual, firm, corporation, partnership, trust, governmental
authority or body, association, unincorporated organization or any other entity.
8.12. Schedules and Exhibits. All Exhibits and Schedules
referred to herein are intended to be and hereby are specifically made a part of
this Agreement.
8.13. Severability. Any provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability without invalidating or rendering
unenforceable the remaining provisions hereof, and any such invalidity or
unenforceability shall not invalidate or render unenforceable such provision in
any other jurisdiction.
8.14. Presumption. Should any of the provisions of this
Agreement require interpretation, it is agreed that the Court interpreting or
construing this Agreement shall not apply a presumption that the terms or
provisions hereof shall be more strictly construed against one party by reason
of the rule of
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construction that a document is to be construed more strictly
against the party who itself or through its agent prepared such document, it
being agreed that all parties and their respective agents have participated in
the preparation of this Agreement.
8.15. Counterparts. This Agreement may be executed in any
number of counterparts and any party hereto may execute any such counterpart,
each of which when executed and delivered shall be deemed to be an original and
all of which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered by the parties. It shall
not be necessary in making proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first written.
ROTARY POWER MARINE, INC.
By: /s/ Ken Brody
-------------
Name: Ken Brody
Title: President
ROTARY POWER MARINE CORPORATION
By: /s/ Jonathan Lauter
-------------------
Name: Jonathan Lauter
Title: President
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AGREEMENT
FOR THE
SALE OF CERTAIN ASSETS OF
ROTARY POWER INTERNATIONAL, INC.,
A DELAWARE CORPORATION
TO ROTARY POWER ENTERPRISE, INC.,
A NEVADA CORPORATION
DATED MAY , 1998
<PAGE>
AGREEMENT
THIS AGREEMENT, dated as of May , 1998, between ROTARY POWER ENTERPRISE, a
Nevada Corporation ("Purchaser"), having its principal place of business at
__________________________________________________, and ROTARY POWER
INTERNATIONAL, INC., a Delaware Corporation ("RPI"), having its principal place
of business at One Passaic Street, Wood-Ridge, NJ 07075. RPI and Purchaser are
together referred to in this Agreement as the "Parties".
W I T N E S S E T H
WHEREAS, RPI is engaged in the business of selling engines and
related parts and equipment;
WHEREAS, RPI has certain assets, including but not limited to
intellectual property, licenses, contracts, inventory and manufacturing
capability in the field of natural gas and propane fueled engines, which assets
are part of RPI's natural gas engine business;
WHEREAS, RPI desires to sell to Purchaser, and Purchaser desires to
purchase from RPI certain of the assets of RPI, including all of the assets
employed or used in RPI's natural gas and propane engine business (the "NG
Business"); and
WHEREAS, the Parties intend to effect such acquisition upon the
terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements stated in this Agreement, the Parties agree as follows:
1. Sale of Assets. RPI agrees to sell, convey, transfer, assign, and deliver
to Purchaser, and Purchaser agrees to purchase from RPI, all of its right,
title and interest in the following assets (the "NG Business Assets"):
1.1. The entire right, title and interest in and to RPI's rotary power
natural gas and propane engine business, which includes the
exclusive right to sell Mazda rotor engines modified for natural
gas/propane service in North America (Mexico, USA and Canada) for
all natural gas and propane applications, except passenger
automobiles and minivan applications.
1.2. All right, tit le, and interest in and to the Mazda Agreement
dated April 1, 1997, by and between RPI and Mazda, a copy of which
is attached to this Agreement as Exhibit A.
1.3. All of the assets of RPI listed on Exhibit B attached hereto.
1.4. In addition to the assets listed on Exhibit B, all intangible
assets and financial statements and information used or related to
the operation of the NG Business, including but not limited to
intellectual property, documents, papers, financial statements,
books, advertising, show display materials used by RPI in
conducting said
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business, and all business records relating to the NG Business
including property records, sales records, purchase orders,
customer lists, catalogs and brochures.
1.5. All right, title and interest in and to the Hussmann Agreement
dated October 16, 1995, a copy of which is attached hereto as
Exhibit C, including the transfer of all rights and technical
development of the GRI/Hussmann Contract completed to date,
subject to Hussmann's approval of such assignment.
2. Assets to be Sold Free of All Liabilities. The NG Business Assets
shall be transferred, assigned and conveyed to Purchaser free and clear of
all claims, liabilities, obligations, liens and encumbrances. Purchaser is
not agreeing to assume or pay any accounts payable or other obligation or
liability of RPI (except as specifically set forth in Section 3.2 of this
Agreement), and Purchaser is not agreeing to assume or otherwise perform any
contractual duty or obligation of RPI, except those specific duties and
obligations to be performed under the Mazda Agreement and the Hussmann
Agreement arising after the effective date of Purchaser's acceptance of the
assignment of the Mazda Agreement and the Hussmann Agreement as provided for
in this Agreement.
3. Purchase Price for NG Business Assets. The purchase price of the
NG Business Assets shall be $360,265.00 to be paid as follows:
3.1. $30,000 to be paid to RPI at the time of, and contingent upon, the
full performance and satisfaction of the Closing Contingencies, as
defined below.
3.2. $21,017 to be paid by Purchaser to Mazda and applied against
outstanding invoices (accounts payable balance) issued by Mazda to
RPI for the purchase of four engines. This payment shall be made
at the time of, and contingent upon, the full performance and
satisfaction of the Closing Contingencies.
3.3. $50,000 to be paid upon the assignment and transfer of all of the
NG Business Assets to Purchaser (the date of such assignment and
transfer is referred to in this Agreement as the "Closing" or
"Closing Date").
3.4. $217,000 to be credited to RPI at Closing by forgiveness and
cancellation of an accounts payable balance due from RPI to
PowerCold Corporation ("PowerCold") for the purchase of 60 engines
by RPI. At Closing, PowerCold shall release its outstanding UCC
filings and security interest in the 60 engines sold to RPI and
any other assets of RPI.
3.5. $24,000 to be paid to RPI upon the sale by Purchaser of twelve
(12) finished RPI 65 Series GRI completed engines, with $2,000 to
be remitted by Purchaser to RPI within sixty (60) days following
Purchaser's sale of, and delivery to the buyer of a sales invoice
for, each engine, until the balance shall be paid in full. Any
remaining unpaid balance due to RPI under this subparagraph 3.5
shall become due and payable in full on the later of December 31,
1998, or 180 days following the date of Closing.
3.6. $18,248 to be paid to RPI upon the sale of sixty-four (64) Mazda
13B short block NG engines, with $285 to be remitted by Purchaser
to RPI within sixty (60) days following
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Purchaser's sale of, and delivery to the buyer of a sales invoice
for, each engine, until the balance shall be paid in full.
4. Closing Contingencies. Closing and Purchaser's obligation to make certain of
the payments representing a part of the purchase price for the NG Business
Assets under Sections 3.1 and 3.2 of this Agreement are conditioned and
contingent upon the following (the "Closing Contingencies"):
4.1. Mazda's approval of the assignment of the existing Mazda Agreement
to Purchaser, and the assignment thereof to Purchaser without any
modification or condition except as approved by Purchaser in
writing..
4.2. Mazda's execution and delivery to Purchaser of a new agreement for
natural gas and propane engines, in form and content acceptable to
Purchaser in its sole discretion, and Purchaser's execution and
acceptance of such new agreement.
4.3. Mazda's execution and delivery to Purchaser of an agreement for the
partial staged shipment of one hundred and twenty (120) engines
currently in inventory at Mazda in Flat Rock, Michigan, in form and
content acceptable to Purchaser in its sole discretion, and
Purchaser's execution and acceptance of such agreement.
4.4. Hussmann's approval of the assignment of the existing Hussmann
Agreement dated October 16, 1995 between RPI and Hussmann
Corporation, to Purchaser, and the assignment thereof to Purchaser,
without any modification or condition except as approved by
Purchaser in writing, and said assignment shall include the transfer
to Purchaser of all rights and technical development of the
GRI/Hussmann Contract completed to date.
5. Representations and Warranties of RPI. RPI represents and warrants
to Purchaser that at and as of the Closing Date:
5.1. RPI is a corporation duly organized and validly existing and in
good standing under the laws of the State of Delaware with all
requisite corporate power to own and operate its properties and to
carry on its business as presently conducted;
5.2. RPI has all requisite corporate power and authority to enter into,
execute and deliver this Agreement, and has taken all necessary
corporate action, including obtaining any required shareholder
and/or lender approvals, to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated
hereby;
5.3. RPI has the right to enter into this Agreement and perform all of
its obligations in this Agreement without the consent or approval of
any third parties;
5.4. The NG Business Assets will be sold and transferred to Purchaser at
Closing free and clear of all liens, claims and encumbrances of any
nature whatsoever, and upon such sale and transfer, no creditor of
RPI will have or retain any security or other interest in the NG
Business Assets, or any of them, and no such creditor claim or
interest will be chargeable or enforceable against any of the NG
Business Assets;
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5.5. The NG Business Assets do not constitute all or substantially all of
the assets of RPI;
5.6. RPI and the NG Business Assets are not subject to any bankruptcy,
insolvency or receivership proceedings of any nature whatsoever, and
RPI is not insolvent;
5.7. The transactions contemplated by this Agreement will not violate or
result in a breach of or constitute a default under any provision of
any agreement, charter, bylaw, order, judgment, decree, ordinance,
or regulation to which RPI or its assets are subject or by which RPI
is bound;
5.8. RPI has good and marketable title to the NG Business Assets free and
clear of all claims, liabilities, liens and encumbrances whatsoever,
and has not entered into any contract, arrangement or agreement
providing for the hypothecation, sale, transfer or other disposition
of the NG Business Assets, except this Agreement;
5.9. RPI is not in default in any material respect of its obligations
under the Mazda Agreement or the Hussmann Agreement, except as set
forth on Exhibit D attached hereto, and each of the NG Business
Assets listed on Exhibit B attached hereto are in salable and
merchantable condition without material defects or deficiencies,
latent or otherwise, except as specifically disclosed on Exhibit B;
5.10. There are no judgments, actions or proceedings in any court or
before any federal, state or local administrative agency pending
against RPI relating to or affecting this contemplated transaction
or the NG Business Assets;
5.11. The licensing, distribution and marketing of the 580 Series engines
and the 40 Series engines by Purchaser pursuant to the Engine
Distributor Agreement to be entered into between RPI and Purchaser
has been duly and validly authorized by RPI, does not require the
consent or approval of any third parties, is legally binding upon
and valid and enforceable against RPI, and does not and will not
infringe any rights of any person or entity; and
5.12. Up to and including the Closing Date, RPI has paid or will pay
before same shall become past due all amounts which have accrued or
become payable under the Mazda Agreement and the Hussmann Agreement,
except as specifically provided in this Agreement are to be paid by
Purchaser, and RPI has paid and will pay any and all debts,
obligations, fees and taxes which constitute, or if unpaid would
constitute, a lien on all or any portion of the NG Business Assets.
Purchaser's Representations and Warranties.
6. Purchaser represents and warrants to RPI that at and as of the Closing Date:
6.1. Purchaser is a corporation duly organized and validly existing and
in good standing under the laws of the State of Nevada with all
requisite corporate power to own and operate its properties and to
carry on its business as presently conducted;
6.2. Purchaser has all requisite power and authority to enter into,
execute and deliver this Agreement and has taken all necessary
corporate action, including the obtaining of all
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required Board of Director approvals (if any), to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby; and
6.3. The transactions contemplated by this Agreement will not violate or
result in a breach of or constitute a default under any provision of
any agreement, charter, bylaw, order, judgment, decree, ordinance,
regulation or any other restriction to which Purchaser is subject or
by which it is bound.
7. Survival of Representations and Warranties. The representations and
warranties made herein shall be effective on and as of the date hereof and on
and as of the Closing Date and shall survive the Closing Date.
8. Covenants.
8.1. RPI's Pre-Closing Covenants. RPI covenants and agrees that up to and
including the Closing Date:
8.1.1. RPI will continue to perform its obligations under the Mazda
Agreement and the Hussmann Agreement, and will use its best efforts
to preserve the good will of its customers, suppliers, independent
contractors and others having business relations with RPI;
8.1.2. RPI will not enter into any material contracts or agreements
outside of the ordinary course of business in connection with the NG
Business;
8.1.3. RPI will not take any action which would render any representation
or warranty made herein materially untrue or incorrect as of such
date;
8.1.4. RPI will cooperate fully with Purchaser, assist Purchaser and act
diligently and in good faith to cause all of the Closing
Contingencies and conditions precedent to Closing under this
Agreement to be satisfied and performed from and after the date of
this Agreement through the Closing Date; and
8.1.5. RPI will comply with any and all applicable bulk sales or similar
laws, including the timely notification of creditors of RPI of the
transactions contemplated by this Agreement, so that the NG Business
Assets can and will be sold and transferred to Purchaser at Closing
free and clear of all liens, claims and encumbrances, including but
not limited to any claim on the part of any creditor of RPI that it
may assert its claim against Purchaser or the NG Business Assets.
8.2. Purchaser's Pre-Closing Covenant. Purchaser covenants and agrees
that up to and including the Closing Date, Purchaser will not take
any action which would render any representation or warranty made
herein materially untrue or incorrect as of said date.
8.3. RPI's Post-Closing Covenants. The parties acknowledge that the
natural gas engine business of RPI is very competitive, and that to
protect the interests of Purchaser, RPI has agreed to abide by and
comply with the restrictive covenants in this Section 8.3.
Accordingly, RPI hereby agrees that, as a material condition of
Purchaser's obligations under this Agreement, and in consideration
of this Agreement and the payment of the
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Purchase Price and other consideration to RPI provided for herein,
RPI from and after the Closing Date, and for a period of ten (10)
years thereafter, will be subject to the following restrictive
covenants:
8.3.1. RPI will not divulge, use, furnish, disclose or make available to
anyone other than Purchaser or its subsidiaries or affiliates, any
Confidential Information. For purposes of this Agreement,
"Confidential Information" shall mean any and all information, data
and knowledge that (i) has been created, discovered, developed or
otherwise become known to RPI, or in which property rights have been
assigned or otherwise conveyed to RPI, which information, data or
knowledge has commercial value in the NG Business. By way of
illustration, but not limitation, Confidential Information includes
trade secrets, business and customers links and relations,
processes, formulas, know-how, improvements, discoveries,
developments, designs, inventions, techniques, marketing plans,
strategies, forecasts, new products, unpublished financial
statements or parts thereof, budgets, projections, licenses, prices,
costs, and employee, customer and supplier lists or parts thereof,
and any information relating to the legal or business affairs of RPI
or any affiliate thereof.
8.3.2. RPI agrees that it shall not make or retain a copy of, nor make or
cause to be made any notes of, any document or recording
incorporating any trade secret or Confidential Information belonging
to or relating to RPI's NG Business, or any of the intellectual
property or other documents comprising part of the NG Business
Assets being sold and transferred to Purchaser under this Agreement.
RPI will not take or possess, or deliver to any other person or
entity, any of the foregoing or any reproduction of any of the
foregoing.
8.3.3. RPI shall not itself, or by through any parent, subsidiary or
affiliate (or in any other relationship or capacity), directly or
indirectly, conduct or engage in the NG Business, and shall not,
directly or indirectly, market, promote, distribute, or sell any
natural gas engines, natural gas engine parts or spare parts, or
enter into any contract, agreement or arrangement to do any of the
foregoing, in the United States, Canada and Mexico.
8.3.4. RPI shall not itself, or by through any parent, subsidiary or
affiliate (or in any other relationship or capacity), directly or
indirectly (i) solicit or induce, or in any manner attempt to
solicit or induce any person employed by, or acting as an agent of
Purchaser or any affiliate of Purchaser to leave the employment or
engagement by Purchaser or any affiliate, or to join another
enterprise or company as an employee or agent; or (ii) divert, or
attempt to divert any person, concern, or entity which is furnished
services by Purchaser or any such affiliate or furnishes services
for or to Purchaser or any such affiliate from doing business with
Purchaser or any such affiliate; or (iii) induce or attempt to
induce any customer or supplier of Purchaser or any affiliate to
cease being a customer or supplier of Purchaser or any affiliate.
8.3.5. If RPI commits a breach of any of the provisions of this Section
8.3, Purchaser shall have the right and remedy to have the
provisions of this Agreement specifically enforced by way of
preliminary and/or permanent injunction by any court having
jurisdiction, it being acknowledged and agreed by RPI and Purchaser
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that any such breach will cause irreparable injury to Purchaser
and that money damages will not provide an adequate remedy to
Purchaser. Such right and remedy shall be in addition to, and not in
lieu of, any other rights and remedies available to Purchaser
under law or in equity.
8.3.6. If any of the covenants or provisions contained in this Section 8.3,
or any subsection or part thereof, is hereafter construed to be
invalid or unenforceable in any respect, the same shall not affect
the remainder of the covenant, covenants or provisions which shall
be given the maximum effect possible without regard to the invalid
portions and the remainder shall then be fully enforceable.
8.3.7. If any of the covenants contained in this Sections 8.3, or any
subsection or part thereof, is held to be unenforceable because of
the duration of such provision or the geographical or
product/business area covered thereby, the parties agree that such
provisions shall be reformed and construed to reduce the duration
and/or area of such provision to the extent necessary for
enforceability and, in its reduced form, said provision shall then
be fully enforceable.
8.3.8. The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in this Section 8.3, upon the courts
of the Commonwealth of Pennsylvania (and the federal courts resident
in such State).
8.3.9. The covenants and provisions of this Article 8 shall survive Closing
under this Agreement. Conditions Precedent to Closing.
9.0 Conditions Precedent to Closing.
9.1. Conditions to Purchaser's Obligations. The obligations of Purchaser
under this Agreement, including but not limited to Purchaser's
obligations to make the payments required under Sections 3.3, 3.4,
3.5 and 3.6 of this Agreement, are conditioned and contingent upon
the satisfaction on or prior to the Closing Date of the following
conditions, any of which may be waived by Purchaser in its sole
discretion, but no such waiver shall be effective unless delivered
in writing to RPI by Purchaser:
9.1.1. RPI shall have performed all obligations and agreements and
complied with all covenants contained in this Agreement to be
performed andcomplied with by it at or prior to the Closing Date;
9.1.2. The representations and warranties of RPI herein contained shall
be true and correct in all material respects on and as of the date
of this Agreement and the Closing Date with the same force and
effect as though made on and as of such date, except as affected
by the transactions contemplated hereby;
9.1.3. RPI shall have executed and delivered to Purchaser that certain
master Engine Distributor Agreement ("Engine Distributor Agreement")
for distribution of the 580 Series NG engines in the form attached
hereto as Exhibit E;
9.1.4. RPI shall have executed and delivered to Purchaser a master Engine
Distributor Agreement for the 40 Series NG engines, in form and
content
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satisfactory to Purchaser, or have amended the Engine Distributor
Agreement to cover the distribution of the 40 Series NG engines by
an amendment in form and content satisfactory to Purchaser;
9.1.5. All of the Closing Contingencies shall have occurred or been
fully satisfied, performed and completed to Purchaser's
satisfaction; and 9.1.6. RPI shall have delivered to Purchaser an
opinion of counsel in form and content reasonably acceptable to
Purchaser.
9.2. Conditions to RPI's Obligation. The obligations of RPI under this
Agreement are conditioned and contingent upon the satisfaction on or
prior to the Closing Date of the following conditions, any of which
may be waived by RPI in its sole discretion, but no such waiver shall
be effective unless delivered in writing to Purchaser by RPI:
9.2.1. Purchaser shall have performed all obligations and agreements
contained in this Agreement to be performed by it prior to the
Closing Date; and
9.2.2. The representations and warranties of Purchaser herein contained
shall be true and correct in all material respects on and as of the
date of this Agreement and the Closing Date with the same force and
effect as though made on and as of such date, except as affected by
transactions contemplated hereby.
10. Closing Date and Closing Procedure.
10.1. Closing. Closing will occur on or before thirty (30) days following
the satisfaction and performance of the Closing Contingencies. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby at Closing shall be performed
through the execution and exchange of executed counterpart documents
and the delivery of funds and other documents either at Purchaser's
counsel's office in Philadelphia, Pennsylvania, or, with Purchaser's
consent, via Federal Express or other courier services. The Closing
Date shall occur no later than _________, 1998, unless otherwise
agreed in writing by Purchaser and RPI.
10.2. RPI's Deliveries at Closing. At the Closing, RPI shall deliver or
cause to be delivered to Purchaser (or any other person or entity
designated by Purchaser) any and all bills of sale, certificates,
assignments or other documents of transfer as shall be necessary or
appropriate, in the opinion of Purchaser's counsel, to vest in
Purchaser or its designee good and marketable title to the NG
Business Assets. Such documents shall be provided by Purchaser to
RPI at or prior to the Closing for RPI's execution, and may be
signed and held in escrow by RPI's or Purchaser's counsel for
delivery at the Closing. As soon as practicable, but in no event
less than five (5) days before the scheduled Closing Date, RPI shall
deliver all of the assets listed on Exhibit B and all documents in
the possession or control of RPI relating to the conduct of the NG
Business, including but not limited to all financial statements,
books, advertising, show display materials and business records to
such place or places specified by Purchaser.
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10.3. Sales Taxes. Purchaser shall pay all sales, use, transfer and
documentary taxes, if any, payable in connection with the sale,
transfer, assignment and delivery of the NG Business Assets to
Purchaser hereunder.
10.4. RPI to Settle Production Parts Accounts Payable Obligation.
Purchaser shall be entitled to be paid on or before the Closing Date
all amounts owed to Purchaser on book account, including but not
limited to the currently due account payable to Purchaser in the
amount of Seventeen Thousand Nine Hundred Seventy-seven Dollars
($17,977).
10.5. RPI to Use Closing Proceeds to Pay Other Creditor Obligations. RPI
shall provide to Purchaser, five (5) days prior to the scheduled
Closing Date and again at Closing, a true, correct and up to date
list of all accounts payable and other amounts owed to all creditors
of RPI. RPI agrees that all amounts to be paid to RPI at Closing by
Purchaser for the NG Business Assets shall be allocated equitably
among and paid to all such listed creditors out of the Closing net
proceeds of the transaction contemplated by this Agreement. In the
event that any such creditor claims are disputed, RPI shall so
notify Purchaser of such dispute, and the Closing net proceeds that
would have been allocated and paid to the holders of such disputed
claims shall be placed in escrow and not distributed or released
until such disputed claims are finally settled or resolved.
11. Additional Rights and Obligations.
11.1. Additional Documentation. Subsequent to Closing, RPI will execute
and deliver from time to time at the request of Purchaser all such
further instruments of transfer and assignment, as may be necessary
in order to vest and confirm in Purchaser title to and the right to
use and enjoy the NG Business Assets hereby agreed to be transferred
and assigned to Purchaser. Purchaser agrees to execute and deliver
from time to time at the request of RPI all such instruments
necessary to effectuate its undertakings hereunder. RPI shall
deliver to Purchaser copies of any and all documents, books,
records, papers, plans, drawings, specifications, patents, licenses,
contracts and other materials as may be necessary or appropriate for
Purchaser to fully market, promote, develop, operate, utilize,
maintain, repair, and service the NG Business Assets acquired under
this Agreement.
11.2. S580 Natural Gas Engine Development Plan. RPI has agreed to
undertake certain research and development to lower the production
cost of the Series 580 natural gas engine, which is intended to
allow Purchaser to distribute, market and sell such engines as a
master distributor under the Engine Distributor Agreement. Purchaser
has agreed to pay to RPI the sum of $25,000 in installments for the
purpose of conducting such research and development, to be paid upon
achievement or performance of certain development milestones as set
forth in Exhibit F attached hereto. RPI shall undertake and perform
the research and development in accordance with Exhibit F, and
Purchaser shall contribute said installments aggregating $25,000, as
provided for in Exhibit F.
11.3. RPI to Assist Purchaser. RPI shall, without charge to Purchaser,
make its key natural gas engineer, John Mack, available to Purchaser
for not less than four (4) hours per week (engineering time) with
regard to the 65 Series NG engine. In addition, RPI shall, without
charge to Purchaser, make its personnel available to Purchaser to
provide
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assistance, training and instruction of Purchaser's personnel with
regard to all aspects of the marketing, sale, operation,
maintenance, repair and servicing of the natural gas engines being
acquired as part of the NG Business or being sold by Purchaser under
the Engine Distributor Agreement. If RPI's personnel are required to
travel off-site to provide any services for Purchaser (other than
warranty work), Purchaser will reimburse RPI for all reasonable
expenses incurred by RPI personnel for travel, meals and lodging.
11.4. Exclusive Right to Distribute RPI Series 580 Natural Gas Engine. RPI
grants Purchaser the exclusive right to distribute, market and sell
(and in certain circumstances manufacture under license) the Series
580 natural gas/propane engine in the territory defined in the
Engine Distributor Agreement for stationary industrial/commercial
applications and oil and gas field applications, except for air
compression applications where air compression is not the primary
load. The distribution terms and conditions are set forth in the
Engine Distributor Agreement attached to this Agreement as Exhibit
E.
11.5. Exclusive Right to Distribute RPI Series 40 Natural Gas Engine. RPI
grants Purchaser the exclusive right to distribute, market and sell
(and in certain circumstances manufacture under license) the Series
40 natural gas/propane engine in the territory defined in the Engine
Distributor Agreement for stationary industrial/commercial
applications and oil and gas field applications, except for air
compression applications where air compression is not the primary
load. The Series 40 NG engines are not currently in production by
RPI. The distribution terms and conditions are set forth in Exhibit
G attached to this Agreement. Upon request of Purchaser, RPI will
enter into an amendment of the Engine Distributor Agreement, or a
separate master engine distribution agreement with Purchaser, for
the distribution and/or manufacture of the Series 40 NG engines.
11.6. PowerCold Interest in Transaction. RPI acknowledges that Purchaser
will be a subsidiary of PowerCold on or before the Closing Date, and
that PowerCold has participated in the negotiation of this
Agreement. RPI and its Board of Directors have independently
evaluated the terms and conditions of this Agreement, and its Board
of Directors has approved this Agreement as being in the best
interests of RPI and further as being on terms and conditions that
are fair and as favorable to RPI as could be obtained from any
independent third party purchaser. RPI further acknowledges and
agrees that the terms and conditions of this Agreement were the
product of extensive negotiations between representatives of RPI and
the Purchaser, and that such negotiations were conducted on an arms
length basis.
11.7. Release. Because of certain disputes and commercial dealings between
RPI and PowerCold preceding the date of this Agreement, the parties
intend that upon entering this Agreement, and as additional
consideration for Purchaser entering into this Agreement, RPI shall
release Purchaser and PowerCold from any and all claims and
liabilities of any nature whatsoever that may have existed prior to
the date of this Agreement. Accordingly, RPI, in consideration of
Purchaser entering into this Agreement, and other good and valuable
consideration, does hereby remise, release and forever discharge
Purchaser, PowerCold, and all of their respective officers,
directors, principals, affiliates, employees, agents and
shareholders (the "Released Parties"), and their respective
successors and assigns, of and from any and all claims,
counterclaims,
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demands, actions, causes of action, suits, debts, dues, accounts,
awards, bonds, covenants, contracts, agreements, judgments, losses,
damages, expenses or liabilities, of any nature whatsoever
(together, the "Claims"), whether at law or in equity, which against
the Released Parties, RPI, or its successors and assigns, or any of
them, now has or hereafter can or may have, for or by reason of or
relating in any way to any cause, matter or thing whatsoever, known
or unknown, relating in any way to the business of RPI, or any
property or assets owned by RPI, or any business dealings or
agreements by and between or among RPI and any one or more of the
Released Parties, or any stock ownership interest held in RPI by any
of the Released Parties, through and including the date of this
Agreement. Notwithstanding anything to the contrary herein, this
Release is not intended to release, and shall have no effect upon,
the obligations of RPI and Purchaser set forth in this Agreement.
RPI covenants that it has not and will not commence or bring any
legal or other proceedings of any nature whatsoever against the
Released Parties or any of them to recover for or enforce any Claim
or Claims, or seek any remedy or relief with respect thereto. The
provisions of this Section 11.6 shall survive termination of, or
Closing under, this Agreement.
12.Indemnification.
12.1. RPI Indemnity. RPI hereby agrees that it shall and shall be liable
to indemnify, defend and hold harmless Purchaser from and against
any and all claims, demands, liens, encumbrances, liabilities,
losses, damages, costs and expenses, including reasonable
attorneys' fees and costs, asserted against or incurred by
Purchaser in connection with (i) any breach of any representation
or warranty, or failure to perform its obligations, under this
Agreement, or (ii) any actual or alleged breach of contract or
negligent or wrongful act or omission by RPI before the Closing
Date regarding the NG Business and/or the NG Business Assets,
including but not limited to a breach of any express or implied
warranties given by RPI to any customers, and this indemnity
paragraph shall survive the Closing for a period of five (5) years
thereafter.
12.2. Purchaser's Indemnity. Purchaser hereby agrees that it shall and
shall be liable to indemnify, defend and hold harmless RPI from and
against any and all claims, demands, liens, encumbrances,
liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees and costs, asserted against or incurred
by RPI in connection with (i) any breach of any representation or
warranty, or failure to perform its obligations, under this
Agreement, or (ii) any liability of RPI to Mazda or Hussmann
arising, in whole or in part, from the failure of Purchaser to
perform, after the Closing Date, any duty or obligation assumed by
Purchaser as assignee of RPI's interest in the Mazda Agreement or
the Hussmann Agreement, and this indemnity paragraph shall survive
the Closing for a period of five (5) years thereafter.
12.3. Indemnification Procedure. The party seeking indemnification
hereunder (the "Indemnitee") shall give the party obligated to
provide indemnification (the "Indemnitor") prompt written notice of
any claims which may give rise to liability for indemnification
hereunder. The Indemnitor shall have the right to control the
defense or settlement of any such claim and the defense of any
action or proceeding shall be at the sole cost and expense of the
Indemnitor. Should the Indemnitor fail to defend any such action
within a reasonable period of time following receipt of such notice,
then, in
11
<PAGE>
addition to any other remedies, the Indemnitee may settle
(provided that no settlement shall be accepted by the Indemnitee
unless ten (10) days prior written notice of the terms thereof and
the right to reject the same, and instead, to undertake such defense
shall have been given to the Indemnitor) or defend such action or
proceeding through legal counsel of the Indemnitee's own choosing
and the amount of such settlement, demand, or any judgment or decree
and all of the costs and expenses of the Indemnitee including
Indemnitee's reasonable legal fees and costs, with respect thereto,
shall be damages hereunder.
12.4. Survival. The provisions of this Section 12 shall survive
termination of, or Closing under, this Agreement.
13. Default. Neither party hereunder shall exercise any right or remedy under
this Agreement for a breach or default of any term or provision of this
Agreement unless such party has first given notice of default to the other
in accordance with the notice provisions of this Agreement, and (i) such
breach or default is not cured or corrected within thirty (30) days after
receipt of such notice, or (ii) in the case of any non-monetary default,
action is not commenced to cure or correct such breach or default within
such thirty (30) day period and diligently pursued until such cure or
correction is completed.
14. Miscellaneous.
14.1. Expenses. Each party hereto shall pay its own expenses of the
transactions contemplated hereby and, in the event this Agreement is
not consummated for any reason, each of the parties shall pay its
own costs and expenses incident hereto, including, without
limitation, the fees and expenses of its respective counsel and
accountants.
14.2. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been given
when delivered in person or by overnight air courier or when
postmarked, if mailed by registered or certified mail, return
receipt requested, postage prepaid, and addressed as follows:
If to RPI:
Ken Brody, President
ROTARY POWER
INTERNATIONAL, INC.
One Passaic Street
Wood-Ridge, NJ 07075
12
Copy to:
If to Purchaser:
Jack Kazmar, President
ROTARY POWER
ENTERPRISES, INC.
46 Passaic Street
Wood-Ridge, NJ 07075
Copy to:
Stephen M. Foxman
Connolly Epstein Chicco
Foxman Oxholm & Ewing
1515 Market Street - 9th Flr.
Philadelphia, PA 19102
and
Frank Simola, President
PowerCold Corporation
9408 Meadowbrook Avenue
Philadelphia, PA 19118
or such other address as may be specified by the parties hereto
pursuant to notice given to the other party in accordance with the
provisions of this Section.
14.3. Entire Agreement. The exhibits attached to this Agreement are
incorporated into this Agreement. This Agreement and the exhibits,
schedules and documents delivered pursuant hereto, and the Engine
Distributor Agreement to be entered into between the Parties at
Closing, constitute the entire agreement between the parties,
supplanting in their entirety all previous agreements, memoranda,
oral representations and other understandings between or among the
parties, their principals, agents, or employees, and shall not be
construed against or for any party on account of such party having
drafted or not drafted this Agreement or any portion thereof.
14.4. Amendment and Modification. No term or provision of this Agreement
may be amended or modified in any respect except in writing signed
by the parties to this Agreement.
14.5. Successors and Assigns. Unless otherwise stated herein, each and
every representation, warranty, covenant, agreement, indemnification
and provision of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties.
14.6. Governing Law. This Agreement shall be interpreted and governed in
accordance with the laws of the Commonwealth of Pennsylvania.
13
<PAGE>
14.7. Waiver. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this
Agreement.
14.8. Severability. The unenforceability or invalidity of any provision of
this Agreement shall not affect the enforceability or validity of
the balance of this Agreement.
14.9. Costs and Fees. In the event that any of the parties hereto
institutes any action, suit or proceeding to enforce the provisions
of this Agreement, or for breach thereof, or to declare the rights
of the parties with respect thereto, the non-prevailing party agrees
to pay the prevailing party's reasonable costs and expenses,
including reasonable attorney's fees and costs incurred in the
furtherance of such action, suit or proceeding.
14.10. Neither Party Agent of the Other. Neither party to this Agreement
shall be the agent of the other, and neither party shall have the
right to bind the other to any agreement or obligation unless such
other party shall agree in writing to be so bound.
14.11. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be
an original instrument, but all such counterparts together shall
constitute but one agreement.
14.12. No Assignment. Neither party shall have the right to assign this
Agreement or any rights hereunder without the prior written consent
of the other party, such consent not to be unreasonably withheld or
delayed, except that Purchaser shall have the right without RPI's
consent to assign this Agreement to any entity controlled, directly
or indirectly, by PowerCold.
14.13. Limitation of Liability. Neither party shall be liable for any
incidental, indirect, special, or consequential damages, or loss of
revenue or profit, even if it is has been advised of the possibility
of such damage.
14.14. Confidentiality and Non-Disclosure. All information concerning the
terms and business transactions contemplated in this Agreement shall
for all purposes be regarded as strictly confidential and may not be
disclosed except to the Parties, their respective attorneys,
accountants and other professional advisers. Nothing herein shall
prevent disclosure as may be required pursuant to any legal
requirements or the order of any court, or as may be required to
satisfy any Closing Contingencies or conditions precedent to Closing
hereunder. The provisions of this section shall be effective for a
period of one (1) year following the earlier of Closing or the
termination of this Agreement for any reason whatsoever.
15.Arbitration. In the event of any controversy, dispute or claim arising out of
or related to this Agreement, the parties shall negotiate in good faith in an
attempt to reach a mutually acceptable settlement of such dispute. If
negotiations in good faith do not result in a settlement of any such
controversy, dispute or claim, it shall be finally settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, except to the extent deemed modified by the following:
14
<PAGE>
15.1. The expenses of the arbitration shall be borne equally by each
party; and each party shall bear its own legal fees and expenses,
except that a party shall be awarded its reasonable attorney's fees
and expenses if an award is rendered by the Arbitrator in its favor.
15.2. The Arbitrator shall determine whether and to what extent any party
shall be entitled to damages under this Agreement. No party shall be
entitled to punitive damages, and each party waives all such rights,
if any.
15.3. Each party shall prepare a submission and proposed finding with such
affidavits, memoranda of law, exhibits and other documents as are
appropriate to support the position taken by such party. The
Arbitrator shall take such evidence in the hearing or request
further submissions that the Arbitrator believes would be necessary
to evaluate the submission or the credibility of the evidence,
provided that the Arbitrator will use reasonable efforts to avoid a
general hearing. The Arbitrator shall select one or the other or the
proposed findings as the final determination of the matter in
controversy. The Arbitrator shall not have the power to add nor
modify any of the terms or conditions of the proposed findings or
this Agreement.
15.4. The Arbitrator's written decision shall be rendered within 60 days
of the submission by both parties, or if the Arbitrator determines
to hold a hearing, then within 60 days of the hearing. The decision
reached by the Arbitrator shall be final and binding upon the
parties as to the matter in dispute. To the extent that the relief
or remedy granted by the Arbitrator is relief or a remedy on which a
court could enter a judgment, a judgment upon the award rendered by
the Arbitrator shall be entered in any court of competent
jurisdiction (unless in the case of an award of damages, the full
amount of the award is paid within 10 days of its determination by
the Arbitrator). Otherwise, the award shall be binding on the
parties in connection with their continuing performance of this
Agreement and in any subsequent arbitration or judicial proceedings
between the parties.
15.5. The arbitration shall take place in Philadelphia, Pennsylvania.
15.6. The arbitration proceeding and all filings, testimony, documents and
information relating to or presented during the arbitration
proceeding shall be disclosed exclusively for the purpose of
facilitating the arbitration process and for no other purpose and
shall be deemed to be confidential.
15.7. Except as otherwise provided herein, the parties shall continue
performing their respective obligations under this Agreement
notwithstanding the existence of a dispute while the dispute is
being resolved unless and until such obligations are terminated or
expire in accordance with the provisions hereof.
15.8. Discovery shall be permitted pursuant to the Pennsylvania Rules of
Civil Procedure. The parties may obtain information including
depositions, interrogatories, production of documents, exchange of
summaries of testimony or exchange of statements of position, and
the Arbitrator shall limit such disclosure to avoid unnecessary
burden to the parties and shall schedule promptly all discovery and
other procedural steps and otherwise assume case management
initiative and control to effect an efficient and expeditious
15
<PAGE>
resolution of the dispute. At any oral hearing of evidence in
connection with an arbitration proceeding, each party and its
counsel shall have the right to examine its witnesses and to
cross-examine the witnesses of the other party who testify at the
hearing.
15.9. Notwithstanding the dispute resolution procedures contained in this
Section, either party may apply to any court having jurisdiction (i)
to enforce the Agreement to arbitrate, (ii) to seek provisional
injunctive relief so as to maintain the status quo until the
arbitration award is rendered or the dispute is otherwise resolved,
or (iii) to challenge or vacate any final judgment, award or
decision of the Arbitrator that does not comport with the express
provisions of the Section.
IN WITNESS WHEREOF, the parties have signed this Agreement by their
officers thereunto duly authorized, as of the day and date set forth
above.
ROTARY POWER INTERNATIONAL, INC.
By:
-------------------------------
Ken Brody, President
ROTARY POWER ENTERPRISE, INC.
By:
-------------------------------
Jack Kazmar, President
16
<PAGE>
EXHIBIT A
Mazda Agreement
17
<PAGE>
EXHIBIT B
MAZDA Engines and Parts Inventory
NATURAL GAS ENGINE INVENTORY SUMMARY
(12) RPI 65 Series GRI completed engines
(01) RPI 65 Series Show model engine
(44) Mazda 13B Short Blocks in sealed cartons
(10) Mazda 13B Short Blocks in opened cartons
(04) Mazda 13B Short Blocks work in process
(02) Mazda 13B Short Blocks test in process
(All) Natural gas production parts located in Natural Gas production
storage cage currently valued at $33,188 per RPI September 23, 1997
inventory list
(All) Spare parts inventory
(03) Damaged Mazda Short Blocks in opened cartons
PRODUCTION TOOLS
Tooling i.e. - Exhaust manifold, intake adapter, intake collector, "S" Tube,
oil filter bracket, etc.
Pallet Racks dependent on availability
Five (5) Engine Assembly Stands
Parts Shelves and Fencing
Engine Timing Tool
Belt Tension Testers
Mazda Compression Tester to be located
Timing Light
Torque Wrench to be located
One (1) Vidmar Cabinet with production hardware
Office Equipment for (4) Office Suits
18
<PAGE>
MAZDA Engines and Parts Inventory- (con't)
INTELLECTUAL PROPERTY
N.G. Engineering Drawings
N.G. Bills of Materials
N.G. Vendor Lists
N.G. Copies of Vendors Purchase Orders
N.G. Engineering Samples and Components
N.G. Manufacturing Assembly Instructions
N.G. Manufacturing Test Instructions
N.G. All Previous Engines Test Reports
N.G. GRI Test Reports
19
<PAGE>
EXHIBIT C
Hussmann Agreement
20
<PAGE>
EXHIBIT D
Defaults Under Mazda and/or Hussmann Agreements
21
<PAGE>
EXHIBIT E
Engine Distributor Agreement
22
<PAGE>
EXHIBIT F
S580 Natural Gas Development Plan
RPI shall undertake and perform the following development plan for Natural Gas
Engines:
<TABLE>
<CAPTION>
Est. Date Item Description
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
5/15/98 1.a. Locate parts in house for Mk 0 NGRE engine; intake manifolds, rotor castings, housings, etc. for 1st engine
- -------------------------------------------------------------------------------------------------------------------------------
5/30/98 1.b. Identify sources and suppliers of Mk 0 NGRE parts for 2nd engine
- -------------------------------------------------------------------------------------------------------------------------------
5/30/98 1.c. Define production schedule for completion of 2 Mk 0 NGRE engines
- -------------------------------------------------------------------------------------------------------------------------------
2.a. Complete 1st engine
- -------------------------------------------------------------------------------------------------------------------------------
2.b. Complete 2nd engine
- -------------------------------------------------------------------------------------------------------------------------------
7/1/98 3.a. Install 1st engine on NGRE test stand
- -------------------------------------------------------------------------------------------------------------------------------
3.b. Run tip seal design alternatives: gopalite vs ceramic, unitary ceramic vs 3 pc ceramic
- -------------------------------------------------------------------------------------------------------------------------------
3.c. Refine and tune carburation and ignition parameters
- -------------------------------------------------------------------------------------------------------------------------------
3.d. Test 2nd engine on test stand
- -------------------------------------------------------------------------------------------------------------------------------
4.a. Tear down 1st engine and inspect for end housing wear
- -------------------------------------------------------------------------------------------------------------------------------
4.b. Tear down 2nd engine and inspect for end housing wear, if necessary
- -------------------------------------------------------------------------------------------------------------------------------
9/30/98 4.c. Reassemble both engines, run final tests
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Purchaser will contribute $25,000 toward this test program on a milestone basis
as follows:
<TABLE>
<CAPTION>
Item Payment
<S> <C>
- ----------------------------------
1.c. $10,000
- ----------------------------------
2.b. $5,000
- ----------------------------------
3.d. $5,000
- ----------------------------------
4.c. $5,000
- ----------------------------------
</TABLE>
RPI will undertake a Value Improvement Program (VIP) to reduce the cost of the
S580 NGRE rotors from $20,000 to $7,500 (a target cost, not a contractual
obligation). Purchaser will contribute $25,000 toward this VIP on a milestone
basis to be defined.
23
<PAGE>
EXHIBIT G
Master Distributor Agreement for Series 40 NGRE Engines
1. RPI is not in production with the Series 40 engine and has not currently
defined a plan for the production of this engine.
2. If RPI does define a plan for the production of Series 40 NGRE engines, and
such plan calls for outside production of these engines by an unrelated third
party, then RPI will offer Purchaser the opportunity to manufacture these
engines under the same terms and conditions as the first party, on a first
right of refusal basis. Since engine manufacture is a capital-intensive
business, Purchaser will have to demonstrate sufficient financial strength to
fund economic build quantities and to provide a satisfactory build plan for
these engines. Purchaser will also have to accept the rights of failure to
meet acceptable manufacturing volumes and pricing requirements as defined in
the Engine Distributor Agreement for S580 NGRE engines, and accept the
necessary computer systems and quality control standards allowing integration
into the planned RPI systems and according to RPI's quality and warranty
standards.
3. Purchaser will have 90 days to respond to the proposal, after which the first
right of refusal will expire and the contract will go to the first party.
4. If RPI produces, either in house or through third parties, the Series 40 NGRE
engine, then RPI will negotiate with Purchaser, in good faith, a Master
Distributor Agreement for Series 40 NGRE engines for those markets and
territories served by Purchaser under any existing Series 580 NGRE
distribution agreement in good standing.
24
EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
1997 1996
---- ----
<S> <C> <C>
PRIMARY
Shares outstanding,
beginning of period 6,641,432 3,391,432
Weighted average number
of shares issued,
retired and issuable
share equivalents -522,552 1,110,883
----------- -----------
Weighted average number
of common and common
equivalent shares
outstanding 6,118,880 4,502,265
=========== ===========
Net loss $(5,032,819) $(4,970,054)
=========== ===========
Net loss per
common share $ (.82) $ (1.10)
=========== ==========
FULLY DILUTED
Weighted average number
of common and common
equivalent shares
outstanding as
adjusted to full
dilution 6,118,880 4,502,265
=========== ===========
Net loss $(5,032,819) $(4,970,054)
=========== ===========
Net loss per
common share $ (.82)* $ (1.10)*
=========== ===========
</TABLE>
*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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(ANNUAL SEC REPORT FINANCIAL SUMMARY)
</LEGEND>
<CIK> 0000914539
<NAME> ROTARY POWER INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> $US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 371,007
<SECURITIES> 3,925,761
<RECEIVABLES> 57,723
<ALLOWANCES> 0
<INVENTORY> 1,341,665
<CURRENT-ASSETS> 1,770,895
<PP&E> 1,280,794
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,933,720
<CURRENT-LIABILITIES> 3,567,182
<BONDS> 3,631,265
0
0
<COMMON> 59,685
<OTHER-SE> (9,518,461)
<TOTAL-LIABILITY-AND-EQUITY> 3,933,720
<SALES> 413,310
<TOTAL-REVENUES> 413,310
<CGS> 2,979,763
<TOTAL-COSTS> 4,763,648
<OTHER-EXPENSES> 148,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 760,669
<INCOME-PRETAX> (5,052,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,052,819)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
