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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, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from______________________ to ________________________
1934 Act Commission File Number 1-12756
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ROTARY POWER INTERNATIONAL, INC.
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Name of small business issuer in its charter)
Delaware 13-3632860
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
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
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of Each Class Registered
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Common Stock None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
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None
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 $ 72,848
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The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,338,715, which is based on the closing price of
$0.219 on December 31, 1998.
The number of shares of Common Stock outstanding on December 31, 1998 was
6,112,855.
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
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PAGE
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PART I
Item 1. Description of Business ..................................................... 1
Item 2. Description of Property ..................................................... 14
Item 3. Legal Proceedings ..................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................... 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...................... 15
Item 6. Management's Discussion and Analysis or Plan of Operation..................... 17
Item 7. Financial Statements ..................................................... 22
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................ 23
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................. 23
Item 10. Executive Compensation ..................................................... 23
Item 11. Security Ownership of Certain Beneficial Owners and Management................ 25
Item 12. Certain Relationships and Related Transactions................................ 26
PART III
Item 13. Exhibits and Reports on Form 8-K.............................................. 26
Signatures .............................................................................. 32
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Rotary Power International, Inc. (the "Company") is in the business of
developing and manufacturing rotary engines for commercial use. The Company
intends to redirect its product development and manufacturing to three
commercial areas where the Company's products are believed to have intrinsic
advantages over reciprocating engines: (i) marine propulsion and shipboard use;
(ii) energy generation; and (iii) refrigeration/compressors. In each of these
markets, the characteristics of the Company's products, including their light
weight, small size and ability to burn unusual fuels, is important.
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. 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.
In response to the loss of the military contract business in 1996, the
Company began redirecting its efforts mainly to produce engines for commercial
markets.
HISTORY AND RECENT DEVELOPMENTS
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
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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 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. 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, which termination
was 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. 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 NGRE for supermarket refrigeration
equipment and food store heating. At the time of the agreement, Hussmann
supplied 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 USMC and
GDLS did not select the Company's rotary engine for their Advanced Amphibious
Assault Vehicle in June of 1996.
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 agreement with MANA and MC
on November 10, 1995 for RPM to produce 65 Series rotary marine gasoline
engines. All RPM
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manufacturing operations were moved from Spokane, Washington to the Company's
Wood-Ridge, New Jersey plant.
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. 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. Abejon's area of
responsibility was then increased to all of the United States. 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
Corporation ("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.
In January, 1998, new management formulated a plan to restructure the
Company's product line, financial position and direction, with the intent to
redirect the remaining assets to attract major new funding as a volume
manufacturer of commercial engines. Management then directed the Company's
efforts toward the settlement of overdue debts, the reduction of running costs,
attracting key customers willing to purchase rotary engines in advance of
production, and finding capital to finance ongoing operations and new plant
capacity. Generic equipment was sold and lines associated with the Mazda 13B
engines were liquidated. Working capital from these activities and other sources
were expended to keep a viable core until funding and customers were secured. As
a part of this restructuring, the Company's wholly-owned subsidiary, RPM was
renamed E-Drive Systems Corporation and repositioned as a supplier of electronic
controls and electric propulsion components in support of the Company's other
activities.
As part of the restructuring and pursuant to an agreement dated June 4,
1998, RPM sold a portion of its assets, consisting of Series 65 marine engines,
parts, and the supplier agreement for those engines with MANA, as well as
certain related production machinery, tooling and documentation. In accordance
with this agreement, the Company's wholly owned subsidiary was renamed E-Drive
Systems Corp, in keeping with its revised mission as a supplier of electric
drive components. The purchaser assumed the name and logo of Rotary Power Marine
Corporation, as provided by the agreement.
On July 2, 1998, the Company signed a contract with Rotary Power
Enterprises, Inc. ("RPE"), a value-added reseller of natural gas refrigeration
and power generation equipment, for the sale of the Company's Series 65 natural
gas engine inventory, parts, and intellectual property. Along with the transfer
of engines and parts, the Company assigned its existing supplier contract from
MANA for the gas version of the 13B engines, and also assigned to RPE a contract
with Hussman to sell refrigeration
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components containing those engines. The Company also signed an Engine
Distributor Agreement with RPE, giving them an exclusive industrial market
territory for the Company's Series 580 NGRE (natural gas fueled) engines.
PowerCold, who had purchased RPE and became a party to the agreement, forgave of
a note due PowerCold for $217,000 as part of the sale.
After several attempts to raise funds for working capital, the Company
made a private offering to qualified investors and sold an aggregate of 175,000
shares of Series 3 Preferred Convertible Stock at $1.00 per share on November 2,
1998. Each share is convertible to four common shares upon the request of the
shareholder. All of the shares sold in this offering are restricted shares
ineligible for resale unless they are registered or exempt from registration
under applicable federal and state securities regulations.
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 18 years, enormous progress in materials technology, such as the
development of advanced ceramic material, has significantly contributed to the
solution of past sealing and reliability problems.
Curtiss-Wright also initiated work on the stratified charge rotary
engine in the mid-1960s 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 the license agreement with
Audi NSU/Wankel GmbH, and 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.
Since its acquisition of the JDTI assets, the Company has continued to
develop and improve the rotary engine, including the 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.
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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 as well as light
bunker fuels. Diesel fuel is the fuel of choice for the commercial marine
marketplace because of safety of operation and desirability for insurance
coverage.
ENGINE PRODUCTS
The Company currently has four different types of displacement rotary
engines as exhibited in the following table, which table also includes 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. The Company has sold its 65 Series
natural gas and 65 Series gasoline marine engine product lines.
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DISPLACEMENT CURRENT POTENTIAL FAMILY
FAMILY PER ROTOR HORSEPOWER/ROTOR HORSEPOWER RANGE
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(1-6 Rotors)
40 Series HF* 0.407 liters 15-50 15- 200(4)
70 Series HF* 0.67 liters 80-125 80- 500(4)
70 Series BF*** 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 NGRE** 5.8 liters 250 250-1500(6)
580 Series BF*** 5.8 liters 250 250-1500(6)
580 Series RPGE+ 5.8 liters 250 250-1500(6)
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* HF = Heavy Fuel (Diesel, Jet and Gasoline Fuels)
** NGRE = Natural Gas
*** BF = Bunker Fuel
+ RPGE = Producer Gas
( ) = Number of rotors per engine at top of horsepower range
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The heavy fuel (Diesel) 580 Series is the primary product to be focused
upon by the Company. The proceeds from any future financing by the Company will
be used to establish a volume manufacturing facility and put this family of
engines into the commercial marine and generator marketplaces. Future financing
will also be used to manufacture the natural gas variant and the bunker fuel
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 is being
upgraded 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.
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.
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.
At December 31, 1998, all contracts with the U.S. Government are pending
close-out and government property disposal in accordance with applicable
government property regulations.
INDUSTRY AND 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.
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MARINE PROPULSION
Recent successful hull designs, such as high-speed fishing fleets,
FastShip and high speed 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 passed by the
International Maritime Organization and adopted by the Untied States as a
signatory, 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(TM) engines.
The Company believes that there are important niche markets for its
rotary engines in the 1000 to 3000 horsepower category, and multiples thereof,
for use in fast 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. Design studies
by major marine architects have shown that the weight advantage of SCORE(TM)
engines results in increased speed, 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 significantly increases the useable space on board.
At 250 HP for a 2 rotor engine, the Series 70 has several niches in the
marine pleasure craft, fishing and power generation markets. In the marine
markets, a variety of safety and economy issues are moving buyers toward engines
that burn diesel fuel, and the size and weight advantages of the engines are
material in the overall cost and performance of a boat.
The Company believes the small, light and omnivorous Series 70 engines
will find wide acceptance for peak, mobile and emergency power generation. A
large portion of this market is in the 75 to 180 kilowatt range, which matches
the power outputs of these engines.
ENERGY GENERATION AND REFRIGERATION
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.
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
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other states and countries, and the returning 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
gasoline and a price reduction and increase in the availability of diesel fuels.
The Company's SCORE(TM) 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(TM) engines running on gaseous fuels, including natural gas.
Together with light weight screw compressors, these 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(TM) 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(TM) 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.
The ability of the Company's gaseous fueled RPG series to run on
producer gas or biogas, generated by fermentation or heat decomposition of waste
products ranging from rice hulls to cow manure, has secured letters of intent
from manufacturers of biogas equipment.
Internationally, the Company finds itself in a favorable position, with
possible alliances with a major Japanese kairetsu (a group of affiliated
Japanese companies) and major Canadian energy suppliers, as well as contacts in
South America and Central America. The Company could supply its products to
these countries, primarily in the energy market and enable the creation of
products thought before to be impossible, 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/generator on a submarine.
Electricity generation is a significant portion of wellhead costs for
petroleum production. The natural gas version of the Series 580 engine is a
competitive product in this market, as well as markets for the transportation
and compression of natural gas in pipelines.
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
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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
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.
RENEWABLE ENERGY MARKETS
Nearly every waste product that is not recycled can be reduced to a
flammable gas that will fuel a Series 580 RPE engine. The Company has identified
potential customers with converters for wooden pallets, vegetation, cow manure,
rice hulls and old tires. These converters, as well as producer gas from
landfills, have a heating value too low for other engines without enrichment.
However, the Series 580 RPE will typically burn these gasses without enrichment
and still yield power outputs near their horsepower ratings. The Company has
contracted with BG Technologies to set up and run a demonstration plant that
will turn expended wooden pallets into electricity with an anticipated output of
375 kilowatts.
MILITARY MARKETS
In looking at the potential of the Company's commercial SCORE(TM)
products in defense, there are some uses 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.
UNMANNED AERIAL VEHICLES
The Company believes that a potential market exists for use of its 40 Series
engines in Unmanned Aerial Vehicles ("UAVs") for military and commercial use,
including crop-spraying, package delivery, atmosphere sampling, communications
relay, border patrols, aerial photography and scouting for forest fires.
Unmanned Aerial Vehicle systems used by the military 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 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. 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. There is no assurance that the Company will be awarded
a Heavy Fuel Engine contract for its 40 Series multi-fuel rotary engine.
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AUXILIARY POWER UNITS
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 obtained from the U.S. Government.
REGULATION
PRODUCT REGULATION - GOVERNMENT
The Company's products are regulated 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 any future equity financing 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.
Federal regulatory standards have been imposed only in connection with
on-highway (I.E., truck and bus) vehicles. Additionally, 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 are not expected before 2005. Proposed regulations, however,
require reduced NOx emissions, which favor the Company's SCORE(TM) technology
engines.
The generators, chillers and co-generation products for which the
Company supplies engines to power demonstration and sales products 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. For example, environmental
standards in California are stricter than comparable federal guidelines. The
Company believes that its natural gas engines complies with all applicable
federal and state environmental standards, though the Company cannot predict
whether its products will continue to comply with any new environmental
standards in the future. The Company does not believe that the costs and effects
of complying with new or modified 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 addressed by new laws
and regulations. Others include methanol, ethanol, liquefied petroleum gas,
hydrogen 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.
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<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 International Maritime Organization ("IMO") 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 all applicable
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 had NJDEP stack permits for control apparatus and equipment
at December 31, 1998.
The Company had no underground storage tanks at December 31, 1998.
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 on file with the NJDEP a Notification of Hazardous
Waste Activity in compliance with the Resource Conservation and Recovery Act. On
an occurrence basis, 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. The Company did not generate any
hazardous waste from its operations during the fiscal year ended December 31,
1998.
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MANUFACTURING AND ASSEMBLY
The Company had sufficient capital equipment and manufacturing space
available to support its minimal current operations at December 31, 1998. The
Company has adequate capacity in the future to manufacture and test
prototypes and limited production quantities of the Series 70 SCORE(TM),
Series 580 SCORE(TM) and Series 580 NGRE engines, and to assemble and test
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 is 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, continued to be serviced
directly by Company executives and Company personnel in international sales
management at December 31, 1998. 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 Engine Distributors are required
to stock engines and meet minimum sales targets, make a substantial investment
and to provide service where practical. Master Engine Distributors are also
responsible for service for all external components and to stock replacement
Power Cores. 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 parts and
service network as required for reciprocating diesels. The Company has
sufficient spare parts and Power Cores to service existing engines in the
domestic market. In 1998, the Company had one Master Engine Distributor; the
Company anticipates that several more will be added in 2000.
PowerCold and its subsidiaries and acquisitions continue to market the
Company's natural gas Series 580 NGRE products in refrigeration markets, oil
field development and stationary industrial engines.
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
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approximately twenty-four (24) patents and four(4) 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 of its patents to be of such
importance that its 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 position in the field.
The Company is in competition with automobile engine manufacturers and other
engine manufacturing firms specializing in the development of both diesel and
gasoline reciprocating engines that have greater financial resources and capital
than the Company.
The Company also may face competition from engineering firms developing
small gas turbines and small fuel cells for industrial sale. These companies may
have substantially greater resources for research, development and manufacturing
than the Company. Even though the Company has developed and patented its rotary
engine technology, the Company's competitors may succeed in developing
technologies and products that are more effective or commercially acceptable
than those developed by the Company. In the given markets in which the Company
intends to sell, however, there are currently no competitive products with the
weight, size, vibration or fuel range of the rotary engine.
EMPLOYEES
On December 31, 1998, the Company had one full-time employee paid by
the Company, which employee was its President, Chief Executive Officer and Sole
Director, and had three contract employees leased through Employee Solutions,
Inc. See discussion under "Management's Discussion and Analysis or Plan of
Operations" below.
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. However, due to the financial difficulties encountered by the Company
since October 1996, the Company had to lay off all of its employees. The Company
has maintained close relationships with former employees involved in design and
engineering of rotary engines and believes it will be able to rehire its core
staff; however, in the future it may be more difficult for the Company to
recruit and retain new employees in the future. None of
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<PAGE>
the Company's employees at December 31, 1998 is represented by a labor union and
the Company considers relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTY
Until December 31, 1997, the Company leased 127,640 square feet of
space from Curtiss-Wright 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 of space at the facility was used for
manufacturing and assembly. Four 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.
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 a 4% promissory note to Curtiss-Wright for
$400,000 due January 1, 2003, and paid Curtiss-Wright $115,000 in February,
1998.
In January, 1998, in order to reduce its overhead, the Company
negotiated a new rental contract with Curtiss-Wright which reduced rent from
$57,000 per month to $7,300 per month, retaining the core office space, test
cells, inventory area and a modest manufacturing space. The old space was
vacated and the equipment relocated by the end of August, 1998. There was no
change in the Company's address.
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.
On May 1, 1998, the Company signed an annual lease for the test cell
areas with Curtiss-Wright for $72,000, renewable on May 1, 1999, and May 1,
2000. In addition, the Company continues to occupy the office space on a
month-to-month rental basis at a monthly rent of $1,300.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998, the Company was not a party to, and the Company's
property was not the subject of, any material pending legal proceedings, nor, to
the Company's knowledge, was any material legal proceeding threatened.
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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 or 1998.
No vote was made by the shareholders of the Company during the fiscal year ended
December 31, 1998.
During 1997, all of the members of the Board of Directors resigned. 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 delisted 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 NASDAQ OTC Bulletin Board ("OTCBB"). On July 23, 1998, the trading
symbol for the common stock changed to "RPIN".
The following table sets forth the range of high and low bid and ask
prices for the Common Stock on the OTCBB for the fiscal quarters indicated. All
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
BID ASK
--- ---
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED 12/31/98
First Quarter 2.297 .063 2.375 .10
Second Quarter 1.297 .438 1.325 .50
Third Quarter .906 .375 .95 .40
Fourth Quarter .563 .125 .625 .15
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
BID ASK
--- ---
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 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
</TABLE>
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 December 31, 1998, there were approximately 750 common stockholders
of record.
The following table sets forth all equity securities issued by the
Company during the fiscal year ending December 31, 1998 that were not registered
under the Securities Act.
<TABLE>
<CAPTION>
SALE DATE SHARES TYPE CONSIDERATION PERSONS TO WHOM ISSUED
--------- ------ ---- ------------- ----------------------
(PRICE/SHARE)
-------------
<S> <C> <C> <C> <C>
July 8, 1998 74,339 Common 1.00 47 Vendors(1)
July 8, 1998 70,000 Common 0.38 Trien, Rosenberg, et al.(2)
</TABLE>
- --------
(1) Issued in settlement of accounts payable under agreement as part of the
composition of creditors.
(2) Issued in partial payment for professional accounting and data processing
services.
All of the Common Stock and Preferred 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
GENERAL OVERVIEW
The Company and its wholly-owned subsidiary, E-Drive Systems
Corporation ("E-Drive"), 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 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,
1998 or 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.
Prior to 1996, 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,
E-Drive, will be redirected to the manufacture of the alternator assemblies for
propulsion and power generation, engine management systems and other electrical
and electronic components of the Company's power generation units.
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<PAGE>
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 assumed the
Rotary Power Marine name and trademark and the subsidiary was renamed E-Drive
Systems.
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 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 an Engine 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.
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
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<PAGE>
as collateral for the NJEDA bonds, was used to redeem and pay off the NJEDA bond
issue for approximately $6.5 million.
The first step in this plan was to identify all generic production
assets, excess furniture and fixtures, which were auctioned to yield $575,000 on
January 27, 1998. All custom made equipment and necessary furnishings were
retained to keep a modest manufacturing capability in-house. These funds were
used to settle the rent arrearage noted above, as working capital, and as funds
for subsequent settlements.
Next, the Company conducted a composition of creditors, in which
$552,218 of the Company's debt was formally settled for $56,643 and 74,336
shares of the Company's common stock. These settlements were concluded, and the
stock issued, by June 30, 1998. No filing under any bankruptcy or reorganization
statute was required.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1998 VS. TWELVE MONTHS ENDED
DECEMBER 31, 1997
Financial results of the Company for the year ended December 31, 1998,
represent the results of the first phase of restructuring during which there
were no manufacturing operations. Revenue for 1998 was $72,847, resulting
entirely from the sales of inventory of discontinued engine lines.
Cost of revenue for 1998 of $627,695 reflects the cost of prototype and
Mazda engine blocks sold from inventory. Cost of revenue also includes fixed
period charges, such as rent on production facilities and depreciation on
production machinery and equipment that are not related to sales volume.
Payroll, benefits and rent for the year ended December 31, 1998 were
significantly reduced, but the bulk of General and Administrative costs consists
of fixed expense related to depreciation, legal and auditing expenses, period
charges and corporate expenses, therefore, General and Administrative costs
decreased $573,792, or 43%, from 1997.
Engineering staff was diverted to accommodate the planning and
relocation of inventory and equipment. No engine development was accomplished in
this period and, consequently, there was no Research and Development expense.
As a result of the above, the loss from operations decreased from a
$4,350,338 loss in 1997 to a loss of $330,528 for 1998.
Net interest expense for 1998 decreased 40%, or $330,445 over 1997,
reflecting reduced interest on the Company's 10.412% zero-coupon bonds versus
the retired NJEDA bonds, as well as the reduction in other debts.
Other income of $466,989 reflects the auction of depreciated machinery
and equipment and the sales of equipment and inventory related to the Mazda
engine businesses. In 1997, Other Income reflects the gain on the disposition of
FICO strips held as collateral for NJEDA bonds.
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<PAGE>
As a result of the above, net loss decreased dramatically by $3,522,567
to $1,510,252 in 1998 from $5,032,819 in 1997, increasing the Company's net
operating loss carryforward to approximately $15.4 million.
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 the seven months of
non-operation. The net loss of $5,032,819 increased 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 changes 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.
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 sale of FICO strips of $649,076 and the write-off of
deferred financing costs relating to the retirement of the NJEDA bonds of
$481,630, 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.
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<PAGE>
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
relinquished its 54,000 square foot manufacturing facility to Curtiss-Wright,
and renegotiated 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 a result of the above, net loss for the Company increased from
$4970,054 in 1996 to $5,031,819 in 1997.
MANAGEMENT
On 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 re-hired 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 has leased its employees,
except the Company's President, Chief Executive Officer and sole Director, from
Employee Solutions Inc. ("ESI") since February 15, 1998. Under the ESI leasing
arrangement, the Company's employees get medical insurance, workers compensation
and an employee-contribution 401K plan.
LIQUIDITY AND CAPITAL RESOURCES
It was anticipated that cash resources and the expected revenues from
further asset sales were sufficient to enable the Company to continue its
operations through January 31, 1999. Thereafter, an issue of preferred stock was
required to reach the point where major financing could be arranged.
Operating activities absorbed $779,967 in cash during 1998, including
an adjustment of $413,920 which is the amount of accounts payable forgiven in
the composition of creditors, and also including a gain of $106,280 on the sale
of fixed assets at auction.
Investing activities of $528,720 in 1998 were the proceeds of two asset
sales related to the liquidated Mazda engine lines.
-21-
<PAGE>
Revenues from the sale of capital assets in 1998 in 1998 were
directed towards the repayment of debt. Collections on the sale of the
Company's Series 3 Preferred Stock amounted to $175,000. Net cash absorbed by
these investing activities was $99,275.
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 ended 1997 with cash equivalents of
$371,007, of which $328,113 was held by the Trustee for the NJEDA bonds and was
eventually applied to the repurchase of those bonds.
YEAR 2000 COMPLIANCE
The Company's accounting, manufacturing, order entry, bill of
materials, and inventory systems at December 31, 1998 were being converted to a
new system that is compliant with processing requirements for the year 2000. The
Company had not experienced any Y2K problems at December 31, 1998. There are no
other systems considered material to the Company's operations that would be
vulnerable to this problem.
"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.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants............................................... F-1
Consolidated Balance Sheets - December 31, 1998 and 1997........................ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 ..................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
for the Years Ended December 31, 1998 and 1997.................................. F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997................................................ F-5
Notes to Financial Statements...................................................F-6 - F-18
</TABLE>
-22-
<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, 1998 and
1997, 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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, 1998 and 1997 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.
/s/ Demetrius & Company, L.L.C.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
March 6, 2000
F-1
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 485 $ 42,894
Cash held by trustee -- 328,113
Accounts receivable 43,566 42,723
Other receivables 30,000 15,000
Inventories 681,898 1,341,665
Other current assets 436 500
----------------- -----------------
Total Current Assets 756,385 1,770,895
Fixed assets 422,695 1,280,794
Patents 554,233 615,817
Other assets, net 284,849 266,214
----------------- -----------------
$ 2,018,162 $ 3,933,720
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ -- $ 274,275
Accounts payable 138,003 939,274
Loan Payable -- 216,768
Accrued liabilities 866,715 904,865
Other current liabilities 500,000 507,000
Deferred acquistion obligation - current 1,225,000 725,000
----------------- -----------------
Total Current Liabilities 2,729,718 3,567,182
Long-term liabilities:
Deferred acquisition obligation 2,412,563 2,644,049
Long-term debt 4,015,925 3,631,265
Note Payable 400,000 400,000
----------------- -----------------
Total Liabilities 9,558,206 10,242,496
----------------- -----------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, 300,000 par value $.01 shares authorized;
175,000 shares issued and outstanding 1,750 --
Common stock, par value $.01; 10,000,000 shares authorized ;
6,112,855 for 1998 and 5,968,516 for 1997 shares issued and outstanding 61,129 59,685
Paid-in capital 11,612,157 11,336,367
Accumulated deficit (19,215,080) (17,704,828)
----------------- -----------------
Total Stockholders' Deficiency (7,540,044) (6,308,776)
----------------- -----------------
$ 2,018,162 $ 3,933,720
================= =================
</TABLE>
The accompanying notes are an integral part of the statements.
F-2
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Revenues $ 72,848 $ 413,310
----------------- ------------------
Costs and expenses:
Cost of revenues 627,695 2,979,763
General and administrative 775,681 1,349,473
Research and development -- 434,412
----------------- ------------------
Total Cost and Expenses 1,403,376 4,763,648
----------------- ------------------
Loss From Operations (1,330,528) (4,350,338)
Other income (expense):
Interest expense (653,173) (983,618)
Interest income 6,460 152,949
Other, net 466,989 148,188
----------------- ------------------
Total Other Expense (179,724) (682,481)
----------------- ------------------
Net Loss $ (1,510,252) $ (5,032,819)
================= ==================
Net loss per common share - primary: $ (0.25) $ (0.82)
Weighted average common shares outstanding: 6,040,686 6,118,880
</TABLE>
The accompanying notes are an integral part of the statements.
F-3
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series 3 Convertible
Preferred Stock Common Stock Subscriptions
----------------------------------------------
Shares Value Shares Par Value --
--------------------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- -- 6,641,432 $66,414 $ (3,150,000)
Cancellation of common stock -- -- (822,916) (8,229) 3,150,000
Issuance of common stock -- -- 150,000 1,500 --
Net loss -- -- -- -- --
--------------------- ------------------------
Balance at December 31, 1997 -- -- 5,968,516 59,685 --
Issuance of common stock -- -- 144,339 1,444 --
Issuance of preferred stock 175,000 $1,750 -- -- --
Net loss -- -- -- -- --
--------------------- ------------------------ ------------------
Balance at December 31, 1998 175,000 $1,750 6,112,855 $61,129 $ --
===================== ======================== ==================
<CAPTION>
Paid-In Accumulated Stockholders'
Capital Deficit Equity (Deficiency)
----------------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 14,404,638 $(12,672,009) $ (1,350,957)
Cancellation of common stock (3,141,771) -- --
Issuance of common stock 73,500 -- 75,000
Net loss -- (5,032,819) (5,032,819)
----------------------------- ------------------
Balance at December 31, 1997 11,336,367 (17,704,828) (6,308,776)
Issuance of common stock 102,540 -- 103,984
Issuance of preferred stock 173,250 -- 175,000
Net loss -- (1,510,252) (1,510,252)
----------------------------- ------------------
Balance at December 31, 1998 $ 11,612,157 $(19,215,080) $ (7,540,044)
============================= ==================
</TABLE>
The accompanying notes are an integral part of the statements.
F-4
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,510,252) $ (5,032,819)
Adjustments to reconcile to net cash used in operating activities:
Depreciation 435,660 955,988
Amortization 61,584 80,017
Interest, net 653,174 145,501
Other -- 117,681
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
(Gain) loss on disposals of fixed assets (106,280) 19,257
Settlement of accounts payable (413,920) --
Common stock issued for professional services 26,600 --
Loss on contract close -- 152,641
Inventory write down -- 1,369,285
Changes in assets and liabilities:
Accounts receivable (843) 256,651
Other receivables (15,000) (5,917)
Inventories 442,999 (53,920)
Other current assets 64 9,314
Other assets (18,635) (25,663)
Accounts payable (309,968) (163,893)
Accrued liabilities (38,150) (191,773)
Other current liabilities (7,000) (57,904)
---------------- ----------------
Net Cash Used in Operating Activities (799,967) (2,156,048)
---------------- ----------------
Cash flows from investing activities:
Purchase of long term investment -- (1,583,112)
Sale of long term investment -- 6,381,108
Proceeds from the sale of fixed assets 528,720 20,000
---------------- ----------------
Net Cash Provided by Investing Activities 528,720 4,817,996
---------------- ----------------
Cash flows from financing activities:
Loan Payable -- 216,768
Repayment of long-term debt (274,275) (6,538,642)
Issuance of long-term debt -- 3,631,265
Deferred issuance cost -- (233,929)
Issuance of preferred stock 175,000 --
---------------- ----------------
Net Cash Used in Financing Activities (99,275) (2,924,538)
---------------- ----------------
Net Decrease in Cash (370,522) (262,590)
Cash and cash equivalents at beginning of year 371,007 633,597
---------------- ----------------
Cash and Cash Held in Escrow at End of Year $ 485 $ 371,007
================ ================
Supplemental disclosures of cash flow information:
Interest paid during the year -- $ 692,578
Income taxes paid during the year -- --
See Note 17 for supplemental cash flow information
</TABLE>
The accompanying notes are an integral part of the statements.
F-5
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, generators, and on
diesel engines for 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") renamed E-Drive Systems Corp ("E-Drive"),
which acquired certain assets of Rotary Marine Industries, Inc. for
approximately $165,000 and a royalty on future 65 Series rotary marine
engine sales. E-Drive produces rotary engines for commercial and
recreational marine markets. E-Drive'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, E-Drive. 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-6
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
for each of the years ended December 31, 1998 and 1997,
respectively.
F-7
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
there useful lives, generally seventeen years. Amortization
expense was $61,582 for each of the years ended December 31,
1998 and 1997. Accumulated amortization was $431,074 and
$369,490 for the years ended December 31, 1998 and 1997,
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
Basic and fully diluted net loss per common share is based on
the net loss divided by the weighted average number of common
shares outstanding during the period. The exercise of stock
options and warrants was not assumed as their effect would be
anti-dilutive.
F-8
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Stock Based Compensation
The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees" to account for its
employee stock option plans. Under APB No. 25, when the
exercise price of the Company's employee stock options equals
or exceeds the fair value price of the underlying stock on the
date of grant, no compensation expense is recognized in the
Company's financial statements.
The Company applies the provisions of SFAS No. 123, for non
employee stock compensation. The shares are valued based upon
the value of the services performed.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Commercial $43,566 $42,723
------- -------
Total $43,566 $42,723
======= =======
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, 1998 and 1997 consisted of the following:
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Fuel and oil $ 1,344 $ 1,344
Parts 680,554 1,340,321
-------- ----------
$681,898 $1,341,665
======== ==========
</TABLE>
The preparation of financial statements in conformity with the
generally accepted accounting principles requires the use of estimates
relating to the amounts of certain assets and liabilities at the date
of the financial statements.
F-9
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
4. INVENTORIES (Continued)
At December 31, 1998, the Company has inventory at cost totaling
$1,248,815. The Company has estimated the net realizable value of the
parts and engines to be $681,898. 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.
5. FIXED ASSETS
Fixed assets at December 31, 1998 and 19976 consisted of the following:
<TABLE>
<CAPTION>
Useful Lives 1998 1997
----------- ----------
<S> <C> <C> <C>
Machinery and equipment 7 $2,693,345 $5,439,417
Furniture and fixtures 7 27,080 68,388
Office equipment 7 47,205 59,444
Computer equipment 5 342,112 333,796
Autos and trucks 5 -- 8,500
Boats 5 -- 27,195
Tooling 3 181,689 564,598
Demonstration equipment 3 261,663 261,663
Construction in process - 25,941 25,941
----------- ----------
3,579,035 6,788,942
Less accumulated depreciation 3,156,340 5,508,148
----------- ----------
$ 422,695 $1,280,794
=========== ==========
6. OTHER ASSETS
Other assets as of December 31, 1998 and 1997 consisted of the
following:
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred issuance cost $233,929 $233,929
Capitalized production cost -- 25,663
Deposits 31,500 6,622
Officers loans 19,420 --
------------------------------------
$284,849 $266,214
======== ========
</TABLE>
F-10
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Provision for loss on contracts $697,821 $697,821
Contract adjustments 62,000 62,000
Professional fees 15,338 15,338
Other 91,556 129,706
-------- --------
$866,715 $904,865
======== ========
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, 1998 and 1997 is payable to the seller as
follows:
<CAPTION>
1998 1997
---------- ----------
<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% (1,087,437) (1,355,951)
Current portion (1,225,000) (725,000)
---------- ----------
Long term portion $2,412,563 $2,644,049
========== ==========
</TABLE>
The Company had not made its required payments through January 31,1999.
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 1998
and 1997.
F-11
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 Corporation a shareholder,
loaned the Company a total of $216,768. The loan was
non-interest bearing. The loan was settled in 1998.
b. Note Payable
In December 1997, the Company issued a $400,000 promissory
note to its landlord in 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, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
$10,000,000 aggregate principal amount
of 10.412% bonds due December 15, 2007 $4,015,925 $3,631,265
New Jersey Economic Development
Authority Bonds -- 274,275
Less current portion -- (274,275)
------------- ------------
$4,015,925 $3,631,265
============= ============
</TABLE>
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. Interest expense
for 1998 amounted to $384,660.
F-12
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. LONG-TERM DEBT (Continued)
As a result of these events, the Company used the proceeds to pay off
$6,465,725 of 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, 1995 and 1996; there are no other
years outstanding. The results of the audits did not have a material
effect on the Company's financial position or results of its
operations. 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 and laboratory space under an annual
operating lease. Rent expense for the years ended December 31, 1998 and
1997 was $103,165 and $551,000, respectively, net of sublease income.
12. RELATED PARTY TRANSACTIONS
Ken Brody, President of the Company, is a minority shareholder of
Abejon Rotary Power Corporation (Abejon). At December 31, 1998 and
1997, the Company has an advance payable to Abejon of $500,000 for
future sales of engines. The advance is recorded in other current
liabilities.
F-13
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998 and 1997.
Furthermore, with the completion of the Company's initial public
offering, neither the Series 1 or Series 2 preferred stock is available
for issuance.
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.
On November 2, 1998, the Company authorized 300,000 shares of Series 3
Non-Voting Convertible Stock, par value $0.01 per share. The shares are
not entitled to dividends and each share is convertible into 4 fully
paid and non-assessable shares of common stock. At December 31, 1998
175,000 Series 3 preferred shares have been issued.
COMMON STOCK:
During 1998, the Company issued 74,339 shares to creditors for
settlement of debt and 70,000 shares to an accounting service provider
for bookkeeping purposes.
On March 13, 1997, the Company issued 150,000 shares as commission for
the sale of FICO strips.
F-14
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
13. SHAREHOLDERS' EQUITY (Continued)
COMMON STOCK: (CONTINUED)
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 $8.00 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 OTC Bulletin Board.
In connection with the initial public offering, the Company sold to the
underwriters, for $800, warrants to purchase from the Company 80,000
shares of common stock at $9.60 per share, which are exercisable for a
period of four years commencing February 9, 1995.
There were 45,000 warrants to purchase common stock outstanding at
December 31, 1998, which are exercisable through 1999 at $4.625.
At December 31, 1998 52,200 shares of common stock were reserved for
exercise of warrants and stock options.
F-15
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
14. STOCK OPTION PLAN
In 1992, the Board of Directors adopted the 1992 Stock Option Plan (the
"Plan"). Under the terms of the Plan, incentive stock options to
purchase up to 400,000 shares of common stock may be granted to key
employees and directors of the Company at the fair market value at the
date of grant (or 110% of the fair market value for grants issued to
holders of more than 10% of the voting stock of the Company). Options
granted under the Plan become exercisable in whole or in part from time
to time as determined by the Board of Directors, provided, however, in
no event shall any option become exercisable earlier than the date six
months following the date on which the option is granted. Options
granted under the Plan shall have a maximum term of ten years from the
date of grant. The option price must be paid in full on the date of
exercise in cash or in common shares of the Company having a fair
market value on the date of exercise equal to the option price. Stock
options outstanding are exercisable commencing one year after grant at
a rate of either 20% or 25% of such shares in each succeeding year.
Option status and activity were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Outstanding, beginning of year 52,000 291,000
Canceled ($.19125 to $5.00 1998 and 1997) (44,800) (239,000)
------ ---------
Outstanding ($3.00 per share)
end of year 7,200 52,000
====== =========
Available for grant 95,000 95,000
====== =========
Exercisable 7,200 31,200
====== =========
</TABLE>
F-16
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 $-0-
and $14,576 of matching contributions and $466 and $1,206 of
administrative expenses related to this plan in 1998 and 1997,
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 1998 and
1997.
16. INCOME TAXES
Deferred tax accounts as of December 31, 1998 and 1997 comprise the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards 6,074,700 $6,371,549
Depreciation (18,000) (24,595)
----------- -----------
Deferred tax assets, net 6,056,700 6,346,954
Valuation allowance (6,056,700) (6,346,954)
---------- -----------
Net deferred tax assets $ -- $ --
========== ===========
</TABLE>
As of December 31, 1998, the Company has federal and state net
operating loss carryforwards available for tax purposes of
approximately $15,437,200 and $13,907,000 expiring through 2013 and
2007, respectively.
F-17
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
17. SUPPLEMENTAL CASH FLOW INFORMATION
During 1998, the Company settled debt of $216,768 in exchange for
inventory.
During 1998, the Company settled accounts payable in exchange for cash
and common stock resulting in forgiveness of debt of $491,303.
During 1998, the Company issued stock for accounting services valued at
$26,600.
The Company recorded $145,536 of accreted interest income on the FICO
Strips during 1997.
During 1997, the Company issued 150,000 shares of common stock at $0.50
per share as commission for the sale of FICO strips.
Additionally, the Company recorded imputed interest expense of $268,513
and $286,906 on its deferred acquisition obligation during December 31,
1998 and 1997, respectively.
18. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
net losses of $1,510,252, $5,032,819 and $4,970,054 during the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, the Company had working capital deficiency of $1,973,333 and its
total liabilities exceeded total assets by $7,540,044. These factors,
as well as the uncertain conditions that the Company faces regarding
obtaining financing or additional capital investment create uncertainty
about the Company's ability to continue as a going concern. 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 accounts payable by approximately $491,000. (See
Note 19). The ability of the Company to continue as a going concern is
dependent upon the company obtaining future financing and marketing 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.
19. SUBSEQUENT EVENT
As of November, 1999, the Company had entered into a series of
agreements with Londonderry Capital Structuring Ltd. of Toronto,
Canada, an investment banking firm. Under these agreements, Londonderry
has signed a stock subscription agreement for the purchase of up to
3,000,000 shares of common stock subject to the Company meeting certain
conditions.
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
The sole director and executive officer of the Company is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Kenneth Leighton Brody 57 President and Chief Executive Officer and Director
</TABLE>
Ken Brody was only 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 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.
There were no filings made by the Company's officers, directors or 10%
beneficial owners required under Section 16(a) during the fiscal year ended
December 31, 1998.
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 $100,000 for services
in all capacities to the Company during the last fiscal year through December
31, 1998.
-23-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- -----------------------------------
NAME OF INDIVIDUAL SECURITIES ALL OTHER
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) UNDERLYING OPTIONS COMPENSATION
- ---------------------- ---- ---------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Kenneth L. Brody, 1998 $104,000 --- --- ---
President and Chief 1997 7,500 --- --- ---
Executive Officer 1996 --- --- --- ---
</TABLE>
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.
At December 31, 1998, there was one stock option for 7,200 shares
outstanding under the stock option plan held by an employee of the Company.
-24-
<PAGE>
EMPLOYMENT AGREEMENTS
The Company had no employment agreements with any of its employees at
December 31, 1998. 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 quarter to outside
directors. There were no outside directors during 1998, therefore, no payments
were made.
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 December 31, 1998. 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>
NAME AND ADDRESS OF NUMBER OF SHARES OF COMMON PERCENTAGE OWNERSHIP OF
BENEFICIAL OWNER STOCK BENEFICIALLY OWNED COMMON STOCK OUTSTANDING
------------------- -------------------------- ------------------------
<S> <C> <C>
PowerCold Corporation
103 Guadalupe Drive 1,935,000 31.1%
Cibolo, Texas 78108
Loeb Investors Co. 104(2) 933,074 15.6%
61 Broadway
New York, New York 10006
Ken Brody(1) 177,084 3.0%
c/o Abejon Rotary Power
Corporation
4960 North Harbor Drive
San Diego, California 92106
All Directors and Executive 177,084(1) 3.0%
Officers as a Group (1 Person)
</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 and Mr. Brody exercises sole voting and investment power
over such shares through resolution of the Board of Directors of Abejon.
Mr. Brody is also the President, Chief Executive
-25-
<PAGE>
Officer and sole Director of the Company.
(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").
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 in effect or
entered into during 1998.
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 of
Preferred Stock of the Company, as amended(1)
3.4 Certificate of Designations, Preferences and Rights of
Preferred Stock of the Company's Series 3 Preferred
Shares
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)
-26-
<PAGE>
10.1 Contract dated August 15, 1989 between the United States
Marine Corps and John Deere Technologies International,
Inc. and novated to the Company, as amended(1)
10.2 Contract dated April 23, 1991 between FMC Corporation
and John Deere Technologies International, Inc. and
novated to the Company, as amended(1)
10.3 Contract dated January 21, 1993 between the National
Aeronautics and Space Administration and the Company, as
amended(1)
10.4 Licensing Agreement dated October 20, 1992 between
Wankel GmbH and the Company(1)
10.5 Teaming Agreement dated May 10, 1993 between Dornier
GmbH and the Company(1)
10.6 Teaming Agreement dated June 30, 1993 between Martin
Marietta Corporation and the Company(1)
10.7 Purchase Agreement dated November 15, 1991 between John
Deere Technologies International, Inc. and the
Company(1)
10.8 Loan Agreement dated June 1, 1992 between New Jersey
Economic Development Authority and the Company(1)
10.9 Asset Purchase Agreement dated August 6, 1992 between
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)
-27-
<PAGE>
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)
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)
-28-
<PAGE>
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)
10.41 Pooling Agreement, dated February 6, 1996, between
Abejon, Hydro Lance Maritime Transport, Inc. 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)
-29-
<PAGE>
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, 1997, 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, 1997
10.53 Asset Purchase Agreement, dated June 4, 1998, with
Rotary Power Marine Corporation , for the sale of Series
65 gasoline engines(10)
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.(10)
11 Calculation of Income (Loss) per Common Share filed
herewith
21 Subsidiaries of the Company
23 Consent of Accountant
27 Financial Data Schedule**
- ------------------------------
* 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
-30-
<PAGE>
(3) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-93836) dated June 22, 1995
(4) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for nine months ended September 30, 1995
(5) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-98584) dated October 26, 1995
(6) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year ending December 31, 1995
(7) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for the three months ended March 31, 1996
(8) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 333-06557) dated June 21, 1996
(9) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year ended December 31, 1996.
(10) Incorporated by reference to exhibit of the same number contained in
the Company's Form 10-KSB for the year ending December 31, 1997.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during
the last quarter of the fiscal year ended December 31, 1998.
-31-
<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.
By: /s/ Kenneth Leighton Brody
----------------------------------------------
Name: Kenneth Leighton Brody
Title:Director, President and Chief Executive
Officer (Principal Executive Officer and
Principal Financial Officer)
Dated: March 15, 2000
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/ Kenneth Leighton Brody Director March 15, 2000
- ---------------------------
Kenneth Leighton Brody
-32-
<PAGE>
Exhibit 3.4
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF PREFERRED STOCK OF
ROTARY POWER INTERNATIONAL, INC.
----------------------------------------------
ROTARY POWER INTERNATIONAL, INC (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware,
DOES HEREBY CERTIFY:
THAT, pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, as amended,
and pursuant to the provisions of Section 151 of Delaware General Corporation
Law, said Board of Directors, by the consent of its Sole Director, filed with
the minutes of the Board of Directors, duly adopted a resolution creating a
class of 300,000 shares of preferred stock designated as "Series 3 (Non-Voting)
Convertible Preferred Stock", as follows:
RESOLVED, that pursuant to the authority expressly granted and
vested in the Board of Directors of the Corporation in accordance with the
provisions of the Corporations's Certificate of Incorporation, as amended, a
class of the preferred stock of the Corporation be, and it hereby is, created,
and that the designation and amount thereof and the voting powers, preferences
and relative, participating, optional and other special rights, qualification,
limitations and restrictions thereof shall be as follows:
1. DESIGNATION AND AMOUNT. The shares of this class
shall be designated as "Series 3 (Non-Voting)
Convertible Preferred Stock", and the number of
shares constituting such class shall be 300,000. The
par value of such class shall be $0.01 per share.
Such class shall be referred to herein as the "Series
3 Stock".
2. DIVIDENDS. No dividends shall be declared or paid on
Series 3 Stock .
3. LIQUIDATION RIGHTS. In the event of voluntary or
involuntary liquidation, dissolution, or winding up
of the Corporation, the holders of Series 3 Stock are
entitled to receive out of assets of the Corporation
available for distribution to stockholders, before
any distribution of assets is made to holders of
Common Stock or any other stock ranking junior to the
Series 3 Stock as to liquidation, a liquidating
distribution in an amount equal to $1.00 per share.
After the payment of all preferential amounts to be
paid to the holders of Series 3 Stock, upon the
dissolution, liquidation or winding up of the
Corporation, the holders of shares of Common Stock
then outstanding shall be entitled to receive the
remaining assets and funds of the Corporation
available for distribution to its stockholders.
<PAGE>
4 VOTING RIGHTS. The holders of Series 3 Stock shall
have no voting rights, or be entitle to notice of any
stockholder meetings, except as may be required by
law.
5. CONVERSION RIGHTS. Holders of Series 3 Stock will be
entitled to convert each share of Series 3 Stock into
four fully paid and non-assessable shares of Common
Stock, subject to adjustments for any stock splits,
stock dividends, reverse stock splits, or
recapitalizations.
6. OPTIONAL CASH REDEMPTION. The Corporation may, from
time to time, offer to redeem outstanding shares of
Series 3 Stock for cash, but will redeem Series 3
Stock only with the concurrence of the holders of
such stock. If offered and accepted, the redemption
price is hereby established as $1.00 per share plus
interest accrued at the annual rate of 25% pro-rated
from the date of subscription to the date of
redemption, but no less than $1.10 per share.
7. MERGER, ETC. In the event of a merger or
consolidation of the Corporation with another
corporation, a reorganization, or sale of all or
substantially all of the Corporation's assets that is
effectuated in such a way that holders of Common
Stock are entitled to receive stock, securities, or
assets (including, without limitation, cash) with
respect to or in exchange for Common Stock, then
holders of the outstanding Series 3 Stock, from such
point thereafter, shall have the right to convert
such Series 3 Stock into the kind and amount of
stock, securities and assets received by a holder of
the equivalent number shares of Common Stock into
which the Series 3 Stock may have been converted
immediately prior to such transaction at the Series 3
Stock conversion rate for conversion to Common
shares, adjusted as per paragraph (5) above.
8. MANDATORY CONVERSION. Each share of Series 3 Stock
shall be automatically converted into four fully paid
and non-assessable shares of Common Stock, subject to
adjustment under paragraph (5) above, immediately
prior to the closing of any underwritten public
offering of the Corporation's Common Stock.
9. FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of Series 3
Stock. In lieu of any fractional share to which the
holder would otherwise be entitled, the Corporation
shall pay to such holder in cash or by check an
amount equal to the value of such fractional share.
10. PROCEDURE UPON OPTIONAL CONVERSION. In order for a
holder of Series 3 Stock to convert shares of Series
3 Stock to Common Stock, such holder shall surrender
the certificate or certificates for such shares of
Series 3 Stock at the principal office of the
Corporation's transfer
<PAGE>
agent, together with written notice that such holder
elects to convert all or any number of shares of the
Series 3 Stock represented by such certificate or
certificates. Such notice shall state such holder's
name or the names of the nominees in which such
holder wishes the certificate or certificates for
shares of Common Stock to be issued. Certificates
surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation,
duly executed by the registered holder or his
attorney duly authorized in writing. The date of
receipt of such certificates by the transfer agent
shall be the conversion date ("Conversion Date"). The
Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver to such holder of
Series 3 Stock, or to his nominees, a certificate for
the number of full shares of Common Stock to which
such holder shall be entitled and a check with
respect to any fractional share of Common Stock. The
holder in whose name the certificate is issued shall
become a holder of record of such Common Stock on the
applicable Conversion Date.
11. PROCEDURE UPON MANDATORY CONVERSION. Upon the
occurrence of a Conversion Event under paragraph (8)
above, the outstanding shares of Series 3 Stock shall
be converted automatically without any further action
by the holders of such shares and regardless of
whether certificates representing such shares are
surrendered to the Corporation or its transfer agent;
provided, however, that the Corporation shall not be
obligated to issue to any such holder certificates
evidencing the shares of Common Stock issuable upon
such conversion unless certficates evidencing such
shares of Series 3 Stock are surrendered to the
Corporation or the transfer agent. As promptly as
possible after the Conversion Date (and after the
surrender of the certificates representing shares of
Series 3 Stock), the Corporation shall deliver to
such holder a certificate for the number of full
shares of Common Stock to which such holder shall be
entitled and a check with respect to any fractional
share of Common Stock. The holder in whose name the
certificate is issued shall become a holder of record
of such Common Stock on the applicable Conversion
Date.
12. EFFECT OF CONVERSION. All shares of Series 3 Stock
which have been surrendered for conversion as herein
provided shall no longer be deemed to be outstanding
and all rights with respect to such shares, including
the right to receive notices, shall immediately cease
on the Conversion Date, except only the right of
holders thereof to receive shares of Common Stock in
exchange therefor. Any shares of Series 3 Stock so
converted shall be retired and canceled.
13. AMENDMENTS. The Corporation may alter or change the
designations, preferences and relative,
participating, optional or other special rights of
the Series 3 Stock with the affirmative vote or
written consent as a class of the holders of at least
a majority of the shares of Series 3 Stock
<PAGE>
then outstanding, unless the consent or approval of a
greater number of shares shall then be required by
law. Notwithstanding the foregoing, the Corporation
may, from time to time, authorize the issuance, or
issue, additional shares of Series 3 Stock or shares
of any series or class of stock ranking senior to, or
on a parity with, the Series 3 Stock as to dividends,
rights upon liquidation or redemption or voting
rights with the consent of at least a majority of the
holders of Series 3 Stock.
FURTHER RESOLVED, that the Corporation hereby reserves, at all
times so long as any shares of Series 3 Stock remain outstanding, free from
preemptive rights, out of its treasury stock or its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series 3 Stock, a sufficient number of shares of Common Stock
to provide for the exchange or conversion of all outstanding shares of Series 3
Stock.
IN WITNESS WHEREOF, Rotary Power International, Inc. has
caused this Certificate to be signed by Ken Brody, its President, Secretary and
Sole Director, as of this 11th day of November, 1998.
ROTARY POWER INTERNATIONAL, INC
By:__________________________________
Ken Brody, President
<PAGE>
Exhibit 10.49
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of December 1, 1997 between Rotary Power
International, Inc., a Delaware corporation having its principal place of
business at 22 Passaic Street, Wood-Ridge, New Jersey 07075 (the "Debtor"), and
Sentinel Trust Company ("Trustee"), as trustee for the holders of $ 10,000,000
aggregate maturing principal amount of 10.403% Bonds due December 15, 2007
("Bonds") issued by Debtor pursuant to an Indenture of Trust dated as of
December 1, 1997 between the Debtor and the Trustee (the "Indenture").
WHEREAS, the Debtor has issued the Bonds to provide funds to, among
other things, optionally redeem outstanding New Jersey Economic Development
Authority Federally Taxable Revenue Bonds, Series 1992 (Rotary Power
International, Inc. Project); and
WHEREAS, the Debtor has agreed to pledge certain of the tangible assets
now owned or hereafter acquired by it to the Trustee as security for the payment
of the Principal or Redemption Price of the Bonds and any other amounts that may
become due and payable under the Indenture.
NOW, THEREFORE, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. (a) For value received, the Debtor
hereby grants to the Trustee for the benefit of the Trustee and the holders from
time to time of the Bonds ("Bondholders") (the Trustee and the Bondholders being
referred to collectively as the "Secured Parties") in order to secure the
payment when due, whether by acceleration or otherwise, of the Secured
Obligations (as that term is defined below) a security interest in and
assignment of, and agrees that the Trustee has and shall continue to have a lien
on and security interest in and assignment of, any and all of the following
property of Debtor, whenever acquired and wherever located (collectively
referred to as the "Collateral"):
(i) Any and all of Debtor's Tangibles (as that term is defined below);
and
(ii) The products, proceeds and accessions of Debtor's Tangibles.
(b) The Debtor agrees that the Trustee has and shall continue to have a
continuing fully perfected first priority lien on and security interest in all
of the Collateral, except any portion of the Collateral which is encumbered by
an existing lien and security interest as of the date hereof, as to which the
Trustee
<PAGE>
shall have a subordinate lien and security interest.
2. DEFINITIONS. (a) The term "Secured Obligations" as used herein shall
mean the following:
(i) Any and all obligations of the Debtor to the Trustee or the
Bondholders pursuant to the Bonds or the Indenture, including, without
limitation, the Debtor's obligations in respect of the payment of the Principal
or Redemption Price of the Bonds and obligations owing to the Trustee under the
Indenture; and
(ii) Any and all other obligations to the Trustee hereunder.
(b) The term "Tangibles" as used herein shall be deemed to mean
"inventory" and "equipment" as defined in the Uniform Commercial Code as in
effect in the State of New Jersey, including, without limitation, all of
Debtor's right, title and interest in and to the equipment, machinery, fixtures,
tools, work in process, inventory, furniture and other articles of personal
property and all goods and tangible property now owned or hereafter acquired by
the Debtor and all replacement or substitutions therefore; provided, however,
that for all purposes of this Security Agreement, "Tangibles" shall not include
(i) the Company's interest in any intellectual property or other intangibles and
(ii) the assets listed in Schedule A attached hereto.
(c) Terms used herein which are not expressly defined herein shall have
the meanings ascribed to them in the Indenture, except that such terms which are
defined in the Uniform Commercial Code as in effect in the State of New Jersey
have the same meanings herein as in said Code.
(d) As used in this Security Agreement and when required by the
context, each number (singular and plural) shall include all numbers, and each
gender shall include all genders; and unless the context otherwise requires, the
word "person" shall include "corporation, firm or association."
3. RELEASE OF SECURITY INTEREST. (a) Upon the payment in full of the
Secured Obligations, the Trustee's security interest in, and assignment of, the
Collateral shall immediately terminate.
(b) Upon the sale of inventory and finished products by the Company in
the ordinary course of business, the lien on and security interest granted to
the Trustee in such Collateral shall terminate.
(c) In addition to the sales of Collateral contemplated by Section 3(b)
hereof, upon the written consent of the Holders of
<PAGE>
at least a majority in Principal of the outstanding Bonds, the Company shall be
permitted to sell all or a portion of the Collateral and use the proceeds from
such sale to mandatorily redeem the Bonds in whole or in part pursuant to the
provisions of the Bonds and the Indenture. Upon any such sale, the lien on and
security interest granted to the Trustee in such Collateral shall immediately
terminate.
4. WARRANTIES, COVENANTS AND AGREEMENTS OF DEBTOR. Debtor warrants,
covenants and agrees that:
(a) Except for the security interests in the Collateral existing on the
date hereof and the security interest granted hereby and except as permitted
hereby and by the agreements under which the Secured Obligations are being
incurred, Debtor is, and as to Collateral acquired after the date hereof Debtor
shall and will be at the time of acquisition, the owner and holder of the
Collateral free from any other adverse claim, security interest, encumbrance,
lien, charge, or other right, title or interest of any person other than the
Trustee and covenant that at all times the Collateral will be and remain free of
all such other adverse claims, security interests, or other liens or
encumbrances; Debtor has full power and lawful authority to sell, assign and
transfer the Collateral to the Trustee and to grant to the Trustee a security
interest therein as herein provided; the execution and delivery and the
performance hereof are not in contravention of any charter or by-law provision
or of any indenture, agreement or undertaking to which Debtor is a party or by
which any Debtor or its property is bound; and Debtor will defend the Collateral
against all claims and demands of all persons (other than those holding a
security interest in the Collateral existing as of the date hereof) at any time
claiming the same or any interest therein. Any officer, agent or representative
acting for or on behalf of Debtor in connection with this Security Agreement or
any aspect thereof, or entering into or executing this Security Agreement or any
financing statement on behalf of Debtor, has been duly authorized so to do, and
is fully empowered to act for and represent Debtor in connection with this
Security Agreement and all matters related thereto or in connection therewith.
(b) (i) Except with respect to security interests in the Collateral
existing on the date hereof, Debtor has not heretofore signed any financing
statement or security agreement which covers any of the Collateral, and no such
financing statement or security agreement is now on file in any public office
(other than any such statements or agreements, if any, that are permitted
hereunder and under the agreements under which the Secured Obligations are
<PAGE>
being incurred)
(ii) As long as any amount remains unpaid on any of the Secured
Obligations, and except as expressly permitted by any such agreements, Debtor
will not enter into or execute any security agreement or any financing statement
covering the Collateral, other than those security agreements and financing
statements existing on the date hereof or in favor of the Trustee hereunder.
(iii) Debtor authorizes the Trustee to file, in jurisdictions where
this authorization will be given effect, a financing statement signed only by
the Trustee covering the Collateral, and hereby appoints the Trustee as Debtor's
attorney-in-fact to sign and file any such financing statements covering the
Collateral. Any such financing statements shall be prepared by the Debtor at its
sole cost and expense. Debtor will join the Trustee in executing such documents
as the Debtor or its counsel may from time to time determine to be necessary or
desirable to obtain or preserve the security interest of the Trustee in the
Collateral under provisions of any applicable Uniform Commercial Code in effect
where the Collateral is located or Debtor conducts business, and the Trustee
shall be entitled to conclusively rely on an opinion of counsel to the Debtor
provided pursuant to this section; without limiting the generality of the
foregoing, Debtor agrees to join the Trustee in executing one or more financing
or continuation statements necessary in order to obtain or preserve the
Trustee's security interest in the Collateral, and to pay the costs of filing or
recording the same, or of filing or recording this Security Agreement, in all
public offices at any time and from time to time, whenever filing or recording
of any such financing or continuation statement or of this Security Agreement is
deemed by the Debtor or its counsel to be necessary or desirable. In connection
with the foregoing, it is agreed and understood between the parties hereto (and
the Trustee is hereby authorized to carry out and implement this agreement and
understanding and Debtor hereby agrees to pay the costs thereof) that the
Trustee may, at any time or times, file as a financing statement any
counterpart, copy, or reproduction of this Security Agreement. Notwithstanding
any other provision of this Security Agreement, the Trustee may, but is not
obligated to, request that the Debtor execute and file any financing or
continuation statement necessary in order to obtain or preserve the Trustee's
security interest in the Collateral.
(iv) On or prior to January 1 in any year in which any amount remains
unpaid on any of the Secured Obligations, the Debtor shall deliver to the
Trustee an Officer's Certificate stating whether any continuation statement is
required to be filed during
<PAGE>
such year in any jurisdiction in which any Collateral is located in order to
maintain the validity of the Trustee's security interest in such Collateral.
(c) Except as otherwise required in the ordinary course of Debtor's
business, Debtor's Tangibles shall remain in Debtor's possession and control at
all times at Debtor's risk of loss, and are now kept and at all times shall be
kept at the Debtor's principal place of business.
(d) Subject to the provision of Section 4(c) above, Debtor will
promptly notify the Trustee of any change in the locations of any Tangibles and
of any new addresses or location where Tangibles are or may be kept, and Debtor
will not remove the Tangibles, or any part thereof, from the addresses and
locations described and specified above without the prior written consent of the
Trustee. Debtor shall also promptly notify the Trustee of any change in Debtor's
principal place of business.
(e) Debtor further covenants and agrees that if any certificates of
title or similar documents are at any time issued with respect to the
Collateral, Debtor will promptly advise the Trustee thereof, and Debtor will
promptly cause the interest of the Trustee to be properly noted thereon, and if
any certificates of title or similar documents are so issued or outstanding at
the time this Security Agreement is executed by or on behalf of Debtor, then
Debtor shall have caused the interest of the Trustee so to have been properly
noted at or before the time of such execution; and Debtor will further promptly
deliver to the Trustee any such certificate of title or similar document.
(f) Except as provided in Section 3 above, Debtor will not sell or
offer to sell or otherwise transfer, encumber or dispose of the Collateral or
any interest therein without the prior written consent of the Trustee.
(g) Notwithstanding anything to the contrary contained herein, it is
understood and agreed that if for any reason Tangibles are at any time kept or
located at addresses or locations other than those specified herein or which may
hereafter be consented to by the Trustee, the Trustee shall nevertheless have
and retain a security interest therein.
5. SPECIAL PROVISIONS - TANGIBLES. (a) Except as the Trustee may
otherwise consent, any of Debtor's Tangibles in possession of persons other than
Debtor must be represented by documents issued by the person in possession
thereof, in form acceptable to the Trustee, which documents must, upon
reasonable request of the
<PAGE>
Trustee, be delivered to the Trustee and must be either negotiable documents
issued in the name of Debtor or non-negotiable documents issued in the name of
the Trustee or on which the security interest of the Trustee has been noted by
the issuer thereof. Debtor warrants that all such documents will be genuine,
valid and in all respects what they purport to be and that the Tangibles
described therein will be identified fungible portions of an identified mass,
and that said documents are and will be subject to no terms or conditions other
than is noted therein or thereon or as otherwise set forth in this agreement.
(b) At any time after any of the Secured Obligations shall become due,
whether by acceleration or otherwise, and after the occurrence of an Event of
Default and so long as such Event of Default shall be continuing, all proceeds
of Debtor's Tangibles, whether cash proceeds or non-cash proceeds, shall be
received and held by Debtor in trust for the Trustee, shall not be commingled
with any other funds, accounts, monies or property of Debtor, and shall be
promptly accounted for, paid over and delivered to the Trustee in the form as
received by Debtor upon receipt thereof by Debtor.
(c) Debtor will promptly report to the Trustee any occurrence or
condition known to or which becomes known to the Debtor having any material
adverse effect upon the value or condition of Debtor's Tangibles taken as a
whole.
6. FURTHER AGREEMENTS BETWEEN THE DEBTOR AND THE TRUSTEE.
(a) Subject to the provisions of the Indenture, the Trustee shall never
be under any obligation to collect, attempt to collect, protect or enforce the
Collateral or any security therefor, which Debtor agrees, and undertakes to do
at Debtor's expense, but the Trustee may do so in its discretion at any time
after any of the Secured Obligations shall become due, whether by acceleration
or otherwise, and after the occurrence of an Event of Default and so long as
such Event of Default shall be continuing, and at such time the Trustee shall
have the right to take any steps by judicial process or otherwise as it may deem
proper to effect the collection of all or any portion of the Collateral or to
protect or to enforce the Collateral or any security therefor. All expenses
(including, without limitation, attorneys' fees and expenses) incurred or paid
by the Trustee in connection with or incident to any such collection or attempt
to collect the Collateral or actions to protect or enforce the Collateral or any
security therefor shall be borne by Debtor or reimbursed by Debtor and any
proceeds received by the Trustee as a result of any such actions in collecting,
enforcing or
<PAGE>
protecting the Collateral shall be held by the Trustee without liability for
interest thereon and may be applied by the Trustee as the Trustee may deem
appropriate toward payment of any of the Secured Obligations secured hereby in
such order or manner as the Trustee may elect.
(b) In the event the Trustee shall pay any such taxes, assessments,
interests, costs, penalties or expenses incident to or in connection with the
collection of the Collateral or protection or enforcement of the rights of the
Trustee hereunder, Debtor shall pay to the Trustee the full amount thereof with
interest at the highest rate permitted by law; and so long as the Trustee shall
be entitled to any such payment, this Security Agreement shall operate as
security therefor as fully and to the same extent as it operates as security for
payment of other Secured Obligation secured hereunder, and for the enforcement
of such repayment the Trustee shall have every right and remedy provided for
enforcement of payment of the Secured Obligations.
(c) In the event that the Collateral or any part thereof shall now or
hereafter become so related to particular real estate that an interest in it may
arise under the real estate laws of the state in which such real estate is
located, then Debtor shall immediately notify the Trustee of such fact and take
all steps and furnish all information, including an opinion of counsel to the
Debtor, as the Debtor or its counsel shall reasonably determine is necessary for
the purpose of creating or extending (as the case may be) a valid and
enforceable lien in such Collateral, including making such additional filings or
recordings, at Debtor's expense, as the Debtor or its counsel shall deem
necessary or appropriate. The Trustee shall be entitled to conclusively rely on
any opinion of counsel to the Debtor provided pursuant to this section.
Notwithstanding any other provision of this Security Agreement, the Trustee may,
but is not obligated to, request that the Debtor execute and file any financing
or continuation statement necessary for the purpose of creating or extending (as
the case may be) a valid and enforceable lien in such Collateral.
7. REMEDIES. (a) After any of the Secured Obligations shall become due
and payable, whether by acceleration or otherwise, in addition to any other
remedies provided for in any of the agreements relating to any of the Secured
Obligations or available under applicable law, the Trustee shall have and may
exercise with reference to the Collateral and Secured Obligations any or all of
the rights and remedies of a secured party under the Uniform Commercial Code in
effect in the State of New Jersey (or in such other jurisdictions as any
Collateral shall then be
<PAGE>
located), and as otherwise granted herein or under any other applicable law or
under any other agreement executed by the Debtor, including, without limitation,
the right and power to sell, at public or private sale or sales, or otherwise
dispose of, lease or otherwise utilize the Collateral and any part or parts
thereof in any manner authorized or permitted under said Uniform Commercial Code
after default by a debtor, and to apply the proceeds thereof toward payment of
any costs and expenses and attorneys' fees and expenses thereby incurred by the
Trustee and toward payment of the Secured Obligations (as between the Trustee
and Debtor, in such order or manner as the Trustee may elect). Specifically, and
without limiting the foregoing, the Trustee, at a place to be designated by the
Trustee, shall have the right to take possession of all or any part of the
Collateral or any security therefor and of all books, records, papers and
documents of Debtor or in Debtor's possession or control relating to the
Collateral which are not already in the Trustee's possession, and for such
purpose may enter upon any premises upon which any of the Collateral or any
security therefor or any of said books, records, papers and documents are
situated and remove the same therefrom without any liability for trespass or
damages thereby occasioned. To the extent permitted by law, Debtor expressly
waives any notice of sale or other disposition of the Collateral and all other
rights or remedies of Debtor or formalities prescribed by law relative to sale
or disposition of the Collateral or exercise of any other right or remedy of the
Trustee existing after default hereunder; and to the extent any such notice is
required and cannot be waived, Debtor agrees that if such notice is given in the
manner provided in Section 9 hereof at least three (3) days before the time of
the sale or disposition, such notice shall be deemed reasonable and shall fully
satisfy any requirement for giving of said notice.
(b) After any of the Secured Obligations shall become due, whether by
acceleration or otherwise, and at any time after the occurrence of an Event of
Default and so long as such Event of Default shall be continuing, the Trustee is
expressly granted the right, at its option, to transfer at any time to itself or
to its nominee, the Collateral, or any part thereof, and to receive the
payments, collections, monies, income, proceeds or benefits attributable or
accruing thereto and to hold the same as security for the Secured Obligations or
to apply it to the principal and interest or other amounts owing on any of the
Secured Obligations (as between Trustee and Debtor, in such order or manner as
Trustee may elect).
(c) All rights to marshalling of assets of Debtor, including any such
right with respect to the Collateral, are hereby waived by
<PAGE>
Debtor to the extent permitted under applicable law.
(d) All recitals in any instrument of assignment or any other
instrument executed by the Trustee incident to the sale, lease, transfer,
assignment or other disposition, lease or utilization of the Collateral or any
part thereof hereunder shall be full proof of the matters stated therein and no
other proof shall be requisite to establish full legal propriety of the sale or
other action taken by the Trustee or of any fact, condition or thing incident
thereto and all prerequisites of such sale or other action or of any fact,
condition or thing incident thereto shall be presumed conclusively to have been
performed or to have occurred.
8. INDEMNIFICATION. The Debtor agrees to pay, and, to the extent
permitted by law, to indemnify and save the Trustee harmless against, any costs,
expenses, losses and liabilities which it may incur in the exercise and
performance of its powers and duties hereunder, including, without limitation,
any liability relating to any environmental contamination or hazardous
discharge, and which are not due to the Trustee's gross negligence or willful
misconduct, except to the extent they have already been paid to the Trustee or
provision for the payment thereof, satisfactory to the Trustee, has already been
made.
9. GENERAL. (a) NO IMPAIRMENT, ETC. The execution and delivery of this
Security Agreement in no manner shall impair or affect any other security (by
endorsement or otherwise) for the payment or performance of the Secured
Obligations and no security taken hereafter as security for payment performance
of the Secured Obligations shall impair in any manner or affect this Security
Agreement, all such present and future additional security to be considered as
cumulative security. Any part of the Collateral may be released from this
Security Agreement without altering, varying or diminishing in any way the
force, effect, lien, security interest, or charge of this Security Agreement as
to the Collateral not expressly released, and this Security Agreement shall
continue as a lien, security interest and charge on all of the Collateral not
expressly released until all the Secured Obligations secured hereby have been
paid or performed in full. Any future assignment of the interest of Debtor in
and to any of the Collateral shall not deprive the Trustee of the right to sell
or otherwise dispose of or utilize all or any part of the Collateral as above
provided or necessitate the sale or disposition thereof in parcels or in
severalty.
(b) LIABILITY FOR DEFICIENCY. This Security Agreement shall not be
construed as relieving Debtor from liability on the Secured
<PAGE>
Obligations and for any deficiency thereon.
(c) POWERS OF THE TRUSTEE. In protecting, exercising or assuring its
interests, rights and remedies under this Security Agreement, the Trustee may,
but shall not be obligated to, receive, open and dispose of mail addressed to
Debtor and execute, sign and endorse negotiable and other instruments for the
payment of money, documents of title and other evidences of payment, shipment or
storage for any form of Collateral or proceeds on behalf of and in the name of
Debtor.
(d) FINANCIAL LIABILITY OF THE TRUSTEE. None of the provisions
contained in this Security Agreement shall require the Trustee or any of its
officers or directors to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers.
(e) SUBROGATION. The Debtor is hereby subrogated to all of Trustee's
interests, rights and remedies in respect to the Collateral and all security now
or hereafter existing with respect thereto and all guaranties and endorsements
thereof and with respect thereto.
(f) INSURANCE. Without limiting Debtor's obligations under any of the
agreements entered into in connection with the Secured Obligations, if any part
of Debtor's Tangibles now or hereafter existing consists of or includes or
affects tangible goods of the type which are customarily insured by persons
situated similarly to Debtor against loss, casualty, fire damage, theft or other
destruction or loss, and if requested by the Trustee, Debtor agrees (at Debtor's
expense) to take out and maintain, or to cause same to be taken out and
maintained, such insurance with respect to such goods as may reasonably be
requested by the Trustee, with the Trustee named as an additional insured and
loss payee under such insurance. The Trustee may, but shall not be obligated to,
act and is hereby authorized to act, as attorney-in-fact for Debtor in
obtaining, adjusting, settling and cancelling such insurance and endorsing any
drafts by insurers of such goods, but the Trustee shall not be obligated by this
provision so to act; and if, at any time or times, Debtor shall fail to take out
or maintain insurance as required under this Security Agreement or under this
Section, the Trustee may (but shall not be obligated to), without waiving such
default by Debtor, take out or maintain such insurance, and all premiums and
other costs paid by the Trustee incident thereto shall be repayable upon demand
by the Trustee to the Debtor, with interest thereon from the date expended by
the Trustee until repaid at the
<PAGE>
rate equal to the highest rate of interest permitted by law, and shall be and
become a part of the Secured Obligations secured hereby.
(g) NOTICES. Any communications, notice or demand to be given hereunder shall be
duly given if in writing (including telecopy communications) and delivered,
mailed or telecopied:
if to Debtor, at:
Rotary Power International, Inc.
22 Passaic Street
Wood-Ridge, New Jersey 07075
Attention: President
if to the Trustee, at:
Sentinel Trust Company
8122 Sawyer Brown Road, Suite 201
Nashville, TN 37221
Attention: Corporate Trust Administration
or, as to any party, to such other address as shall be designated by such party
in a prior written notice to each other party similarly given.
(h) NO DUTY TO PRESERVE COLLATERAL. The Trustee shall not be obligated
to take any steps necessary to preserve any rights in the Collateral or in any
security therefor against any other party, which obligation Debtor hereby
assumes.
(i) NO WAIVER. No delay or omission on the part of the Trustee in
exercising any right hereunder shall operate as a waiver of any such right or
any other right. A waiver on any one or more occasions shall not be construed as
a bar to or waiver of any right or remedy on any future occasion. The remedies
of the Trustee hereunder are cumulative, and the exercise of any one or more of
the remedies provided for herein shall not be construed as an election or as a
waiver of any of the other remedies of the Trustee provided for herein or by law
or otherwise.
(j) ASSIGNMENT. All rights of the Trustee hereunder shall inure to the
benefit of its successors and assigns; and all obligations of Debtor shall bind
its successors and assigns.
<PAGE>
(k) GOVERNING LAW. This Security Agreement shall be governed by
construed in accordance with the laws of the State of New Jersey, except as
required by mandatory provisions of law and except to the extent that the
validity or perfection of any of the security interests hereunder, or remedies
hereunder, are governed by the laws of a jurisdiction other than the State of
New Jersey.
(l) EXECUTION IN COUNTERPARTS. This Security Agreement may be executed
in any number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the Debtor and the Trustee have duly executed and
delivered this Security Agreement this 1st day of December, 1997.
ROTARY POWER INTERNATIONAL, INC.
Attest:
By: /s/ Ken Brody
- -------------------------- ----------------
Name: Ken Brody
Title: President and CEO
SENTINEL TRUST COMPANY
Attest:
By: /s/ D.N. Bates
- -------------------------- ----------------
Name: D.N. Bates
Title: President
<PAGE>
SCHEDULE A
[2] Tombstone Fixtures for K&T "Orion"
Bacharach H.D. Fuel Pump Steel Stand
Trash Compactor
Kearney and Trecker "Orion 2300" 4-Axis CNC Horizontal 3-Pallet Changer
Machining Center, S/N: 9288033
Over 200 Pieces of #50 Taper Tooling
Parlec Parsetter 220 Tool Pre-Setter, S/N: 20060
42" Blanchard Model 22ACD-42 Rotary Surface Grinder, S/N: 15759, (1989)
Zeiss Model UPMC-850 3-Axis CNC Coordinate Measuring Machine, S/N: 78277
Bendix Model CORDAX 803 Coordinate Measuring Machine, S/N: 2-3204-0680
Hoglund Hydraulic Grinder
30" Rank Model 22-2600 Optical, S/N: T892407
14" Jones and Lamson Model FC-14 Optical Comparator, S/N: 25633
15-1/2" x 30" Monarch Geared Head Engine Lathe, S/N: 42632
25-Ton Dake Model 25T-EL-I- Elec-Draulic H-Frame Shop Press
25-Ton Stenhoj Manual-Operated Hydraulic H-Frame Press
Industrial Machine Washing System, S/N: 88-3761
50-HP Sullair Model 12BS-50H Rotary Screw Type Air Compressor, S/N: 003-73152
Yale Tug Motor
20-HP Powerex Model G1-20 Rotary Screw Type Air Compressor, S/N: 1520673JM
15-HP Powerex Model G1-15 Rotary Screw Type Air Compressor, S/N: 1S153552
A-1
<PAGE>
Zeks Therm Air Dyer Unit
7-1/2 HP Piston-Type Tank Mounted Air Compressor
Miller 750-AMP Load Bank, S/N: JK632394
Airton Model K696D16133 Resistive Load Bank, S/N: 445
Miller 10-KW Auxillary Power Load Bank, S/N: KA763651
Avtron Load Banks, [1] Power Analyzer Unit
Horiba Emissions Analyzer Systems
Labconco Work Station and Hood
Puffer Hubbard Refrigeration Unit
Puffer Hubbard Model IUF-4013-A-A-E Freezer Unit
Tenney Jr. Bench-Type Environmental Chamber
Lab-Line Imperial IV Model 3470M Lab-Type Oven, S/N: 1287
4,000 Lbs. Capacity 36" x 64" Electric Scissor Lift Table
Delta Model 52-611 6" Belt and 12" Disc Combination Sander, S/N: 93G19386
6" Black & Decker Double End Grinder
6" Baldor Double End Carbide Grinder
Walker Turner Model 2RDA 2" Radial Arm Drill
#7 Greenard Ratchet-Type Arbor Press
#3-1/2 Famco Ratchet-Type Arbor Press
#3-1/2 Greenard Ratchet-Type Arbor Press
Kohler Model 70R7282 75 KVA "Fast Response II" Generator, S/N: 240472
Black and Decker Model N Super Service Valve Refacer, S/N: 1043812
Phoenix Models 300/PP-11 and 900/7 Dry Rod Electrode Stabilizing Ovens
A-2
<PAGE>
Leco CM-24 Abrasive Cut-Off Saw, S/N: 111 7
Leco BG-200 4" Wide Belt Grinder, S/N: 1871 7
Dow Corning Model LFW-1 friction and Wear Testing Machine
Revolver Portable Hand-Crank Work Holding Units
Tenant Floor Sweeper
Minuteman Floor Scrubber
450-AMP Miller "Delta Weld 450" DC Welder, S/N: JG123671
200-HP General Electric MG Set
Datac Airflow Temperature Control Unit
Brown & Sharpe "Micro-Hite" Digital Height Gauge, S/N: 0766116
Wilson/Rockwell Series 500 Digital Hardness Tester, S/N: 81031511
Fisherscope Type 750C-N2 Coating Thickness Tester, S/N: 129-9554A
Torque Master Model TSD2050 Torque Tester Machine, S/N: 348
Stuhr 12" x 48" Bench Center
INCLUDED, BUT NOT LIMITED TO:
Granite Surface Plates up to 30" x 60" x 10" thick, Wiz gauge, pin gauge sets,
dividing ID micrometers, OD micrometers, gauges, cadillac height gauge, Torison
balancer, Torque wrenches, v-blocks, paralles, reference block calipers, digital
micrometers, thickness gauges, depth micrometers, indi-square, hundreds of
items.
INCLUDED, BUT NOT LIMITED TO:
Miscellaneous Heavy-Duty Adjustable Steel Pallet Racking, die lift trucks,
pedestal fans, engine hoist, chain falls, fire extinguishers, workbenches and
vises, flame-proof storage cabinets, drills, taps, reamers, shelving, roller
conveyor, hose reels, parts bins, material handling carts, hydraulic pallet
jacks, rolling stairs, welding curtains, electric chain hoists, milling vises,
maple-top workbenches, hand tapper, oil pumps, oil rag cans, Starrett Model 500
MM gauge, precision vises, angle
A-
<PAGE>
plates, crane scales, overhead single beam cranes with chain falls, 360 degrees
rotary jib with 2-ton chain fall, plus much more.
Vidmar Stanley Cabinets
[17] Maple-Top Work Benches with Vidmar Cabinet
[2] 16-Drawer Storage Cabinets
9-Drawer Vidmar Storage Cabinets
[21] 11-Drawer Lista Storage Cabinets
[2] 5-Drawer Vidmar Storage Cabinets
Ford Econoline 350 Heavy Duty Van, Vin #: 1FTJE34H1CHA03809
A-
<PAGE>
OFFICE FURNITURE AND RELATED ITEMS
INCLUDED, BUT NOT LIMITED TO:
4-Drawer and 5-Drawer file cabinets, panasonic phone system with centrey
processor, Xerox Model 1065 Copier, graphics plotter, HP Laser Jet Printers,
assorted typewriters, executive chairs and desks, catalog binder, refrigerator,
large quantity of office partitions, lateral files, formica tables, Epson
printer, VCR player, monitors, pull-down view screen, RCA TV, Lectum, conference
table and chairs, Xerox 5052 Copier, Executive Conference Table, hundreds of
chairs, book cases, assorted PC's, credenzas, card files, cafeteria tables,
drafting tables, oak tables, executive chairs and much, much more.
A-
<PAGE>
INDENTURE OF TRUST
BETWEEN
ROTARY POWER INTERNATIONAL, INC.
AND
SENTINEL TRUST COMPANY,
AS TRUSTEE
DATED AS OF DECEMBER 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE ONE
DEFINITIONS AND INCORPORATION
BY REFERENCE
<S> <C> <C>
SECTION 1.01 Definitions........................................................1
SECTION 1.02 Rules of Construction..............................................3
ARTICLE TWO
THE BONDS
SECTION 2.01 Form and Dating....................................................4
SECTION 2.02 Execution and Authentication.......................................4
SECTION 2.03 Registrar and Paying Agent.........................................4
SECTION 2.04 Paying Agent to Hold Money in Trust................................4
SECTION 2.05 Bond Holder Lists..................................................5
SECTION 2.06 Transfer and Exchange..............................................5
SECTION 2.07 Replacement Bonds..................................................5
SECTION 2.08 Outstanding Bonds..................................................5
SECTION 2.09 Cancellation.......................................................6
SECTION 2.10 Uncertified ownership of Bonds.....................................6
ARTICLE THREE
REDEMPTION
SECTION 3.01 Notices to Trustee.................................................6
SECTION 3.02 Selection of Bonds to be Redeemed..................................6
SECTION 3.03 Notice of Redemption...............................................6
SECTION 3.04 Effect of Notice of Redemption.....................................7
SECTION 3.05 Deposit of Redemption Price........................................7
SECTION 3.06 Bonds Redeemed in Part.............................................7
ARTICLE FOUR
ESTABLISHMENT OF FUNDS
AND APPLICATION THEREOF
SECTION 4.01 The Pledge and Lien Effected by the Indenture......................7
SECTION 4.02 Establishment of Funds.............................................7
SECTION 4.03 Payments into the Project Fund; Disbursements......................7
SECTION 4.04 Payments into the Debt Service Fund; Disbursements.................8
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 4.05 Payments into the Bond Reserve Fund; Disbursements.................9
ARTICLE FIVE
COVENANTS
SECTION 5.01 Payment of Bonds...................................................9
SECTION 5.02 SEC Reports........................................................9
SECTION 5.03 Compliance Certificate.............................................9
SECTION 5.04 Insurance..........................................................9
SECTION 5.05 Application of Insurance Proceeds..................................9
SECTION 5.06 Deposit and Pledge of Funds for Certain Payments;
Investment of Funds...............................................10
ARTICLE SIX
SUCCESSOR CORPORATION
SECTION 6.01 When Company may Merge, etc.......................................10
ARTICLE SEVEN
DEFAULTS AND REMEDIES
SECTION 7.01 Events of Default.................................................11
SECTION 7.02 Acceleration......................................................11
SECTION 7.03 Other Remedies....................................................11
SECTION 7.04 Waiver of Past Defaults...........................................11
SECTION 7.05 Control by Majority...............................................12
SECTION 7.06 Limitation on Suits...............................................12
SECTION 7.07 Rights of Holders to Receive Payment..............................12
SECTION 7.08 Collection Suit by Trustee........................................13
SECTION 7.09 Trustee May File Proofs of Claim..................................13
SECTION 7.10 Priorities........................................................13
ARTICLE EIGHT
TRUSTEE
SECTION 8.01 Duties of Trustee.................................................13
SECTION 8.02 Rights of Trustee.................................................14
SECTION 8.03 Individual Rights of Trustee......................................14
SECTION 8.04 Trustee s Disclaimer..............................................15
SECTION 8.05 Notice of Event of Default........................................15
SECTION 8.06 Compensation and Indemnity........................................15
SECTION 8.07 Replacement of Trustee............................................15
SECTION 8.08 Successor Trustee by Merger, etc..................................16
SECTION 8.09 Eligibility, Disqualification.....................................16
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 8.10 Indemnification...................................................16
ARTICLE NINE
DISCHARGE OF INDENTURE
SECTION 9.01 Termination of Company's Obligations..............................16
SECTION 9.02 Application of Trust Money........................................17
SECTION 9.03 Repayment to Company..............................................17
ARTICLE TEN
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.01 Without Consent of Holders........................................17
SECTION 10.02 With Consent of Holders...........................................17
SECTION 10.03 Execution of Supplemental Indentures..............................18
SECTION 10.04 Revocation and Effect of Consents.................................18
SECTION 10.05 Notation on or Exchange of Bonds..................................18
SECTION 10.06 Trustee to Sign Amendments, etc...................................18
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01 Notices...........................................................19
SECTION 11.02 Certificate and Opinion as to Conditions Precedent................19
SECTION 11.03 Statements Required in Certificate or Opinion.....................19
SECTION 11.04 When Treasury Bonds Disregarded...................................20
SECTION 11.05 Rules by Trustee and Agents.......................................20
SECTION 11.06 Legal Holiday.....................................................20
SECTION 11.07 Governing Law.....................................................20
SECTION 11.08 Successors........................................................20
SECTION 11.09 Counterparts......................................................20
</TABLE>
<PAGE>
INDENTURE OF TRUST, dated as of December 1, 1997 (the
"Indenture"), between Rotary Power International, Inc., a Delaware corporation,
having its principal place of business at 22 Passaic Street, Wood-Ridge, New
Jersey 07075 (the "Company"), and Sentinel Trust Company, a Tennessee
corporation, having its principal place of business at 8122 Sawyer Brown Road,
Suite 201, Nashville, Tennessee 37221 (the "Trustee")
W I T N E S S E T H :
WHEREAS, the Company desires to issue its 10.412% Bonds due
December 15, 2007 (the "Bonds") in order to (i) optionally redeem all
outstanding Series 1992 Bonds, (ii) repay certain promissory notes of the
Company, including accrued interest thereon, which were issued to fund the
interest on the Series 1992 Bonds payable on December 1, 1997, (iii) provide
working capital for the Company and (iv) pay certain costs of issuance and
certain costs and expenses associated with the foregoing (collectively, the
"Project"); and
WHEREAS, all acts and things have been done and performed
which are necessary to make the Bonds, when executed and issued by the Company,
authenticated by the Trustee and delivered, the valid and legally binding
obligations of the Company in accordance with their terms;
NOW, THEREFORE, in consideration of the premises, of the
acceptance by the Trustee of the trust hereby created, and of the purchase and
acceptance of the Bonds by the Holders (as hereinafter defined) thereof, and to
fix and declare the terms and conditions upon which the Bonds are to be issued,
authenticated, delivered, secured and accepted by all persons who shall from
time to time be or become Holders thereof, and to secure the payment of all the
Bonds at any time issued and outstanding hereunder according to their tenor,
purport and effect, and to secure the performance and observance of all of the
covenants, agreements and conditions therein and herein contained, the Company
by these presents does grant, bargain, sell, release, convey, assign, transfer
and pledge unto the Trustee the Trust Estate (as hereinafter defined), and any
additional property that may from time to time, by delivery or writing of any
kind, be subjected to the lien hereof by the Company or by anyone on its behalf;
and the Trustee is hereby authorized to receive the same at any time as
additional security hereunder, subject to such permitted encumbrances under the
Indenture as may be superior (by operation of law or otherwise) to the lien
hereof.
To have and hold all of the Trust Estate, whether now owned or
hereafter acquired, unto the Trustee and its successors and assigns forever for
the equal and ratable benefit of the Holders from time to time of all the Bonds
authenticated hereunder and issued by the Company and outstanding without any
priority as to the Trust Estate of any one Bond over any other (except as
expressly provided in or permitted by the Indenture), upon the trusts and
subject to the covenants and conditions hereinafter set forth.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01 DEFINITIONS. Unless the context otherwise
requires, the following terms shall have the meanings set forth below. Certain
other terms are defined elsewhere in this Indenture.
<PAGE>
"AGENT" means any Registrar, Paying Agent or co-Registrar.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company or any committee of that Board duly authorized to act for it hereunder.
"BOND PROCEEDS" means the amount paid to the Company by the
Purchasers as the purchase price of the Bonds.
"BOND RESERVE FUND" means the fund established pursuant to
Section 4.02 hereof.
"BONDS" means the Bonds described in the Recitals above and
issued under this Indenture and "Bond" means any one of such Bonds.
"BUSINESS DAY" means a day that is not a Legal Holiday,
Saturday or Sunday.
"COLLATERAL" shall have the meaning given thereto in the
Security Agreement.
"COMPANY" means the party named as such in this Indenture
until a successor replaces it pursuant to the applicable provision hereof and
thereafter means the successor.
"CONSOLIDATED NET WORTH" means the consolidated stockholders'
equity of the Company and its Subsidiaries, or if the Company merges with, or
transfers all or substantially all of its assets to, another Person in
accordance with Section 6.01 hereof, the consolidated stockholders' equity of
such Person and its subsidiaries, in each case determined in accordance with
generally accepted accounting principles, consistently applied.
"DEBT SERVICE FUND" means the fund established pursuant to
Section 4.02 hereof.
"DEFAULT" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"EVENT OF DEFAULT" shall have the meaning given thereto in
Section 7.01 hereof.
"HOLDER" or "BOND HOLDER" means the person in whose name a
Bond is registered on the Registrar's books.
"INDENTURE" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"OFFICER" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two
Officers, at least one of whom must be the Chairman of the Board, the President
or a Vice President; provided, however, that if there is only one Officer of the
Company, the certificate shall only be signed by such officer.
"OPINION OF COUNSEL" means a written opinion from legal
counsel who may be counsel for the Company or other counsel who is not
unacceptable to the Trustee.
"PERSON" means any individual, corporation, partnership, joint
venture,
<PAGE>
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
"PRINCIPAL" of the Bonds means, as of any date, 100% of the
accredited value thereof as of such date, as determined in accordance with the
procedures described in Exhibit A to the Bonds.
"PROJECT" shall have the meaning given in the recitals hereto.
"PROJECT FUND" means the fund established pursuant to Section
4.02 hereof.
"PURCHASERS" means the purchasers of the Bonds from the
Company.
"REDEMPTION PRICE" means, as of any date of redemption, 100%
of the accredited value of each Bond as of such date of redemption as determined
in accordance with the procedures described in Exhibit A attached to each Bond.
"REQUISITION FORM" means the form of requisition required by
Section 4.03(B) as a condition precedent to the disbursement of moneys from the
Project Fund.
"RESPONSIBLE OFFICER" when used with respect to the Trustee
means any officer of the Trustee assigned by the Trustee to administer its
corporate trust business.
"SEC" means the United States Securities and Exchange
Commission.
"SECURITY AGREEMENT" means the Security Agreement between the
Company, as debtor, and the Trustee, as secured party, dated as of December 1,
1997.
"SERIES 1992 BONDS" means the New Jersey Economic Development
Authority Federally Taxable Revenue Bonds, Series 1992 (Rotary Power
International, Inc. Project) currently outstanding in the aggregate principal
amount of $6,740,000.
"SUBSIDIARY" means each entity of which the Company or another
Subsidiary may now or hereafter control or own more than 50% of the capital or
equity.
"TRUST ESTATE" means, subject only to the provisions of the
Indenture permitting the application thereof for the purposes and on the terms
and conditions set forth in the Indenture (i) the proceeds of the sale of the
Bonds and (ii) all amounts on deposit in the Project Fund, the Bond Reserve Fund
and the Debt Service Fund established by the Indenture including the
investments, if any, thereof, to the extent held by the Trustee.
"TRUSTEE" means the party named as such in this Indenture
until a successor replaces it and thereafter means the successor.
"UNITED STATES" means the United States of America.
SECTION 1.02 RULES OF CONSTRUCTION. Unless the context
otherwise requires:
(1) an accounting term not otherwise defined has the
meaning assigned to it in accordance with generally accepted accounting
principles;
(2) "or" is not exclusive; and
<PAGE>
(3) words in the singular include the plural, and
words in the plural include the singular.
ARTICLE TWO
THE BONDS
SECTION 2.01 FORM AND DATING. The Bonds and the Trustee's
certificate of authentication shall be substantially in the form set forth in
Exhibit A, which is incorporated in and forms a part of this Indenture. The
Bonds are issuable in the denomination of $5,000 aggregate principal payable at
maturity or any integral multiple of $5,000 in excess thereof. The Bonds may
have notations, legends or endorsements required by law or usage. The Company
shall approve the form of the Bonds and any notation, legend or endorsement on
them and its execution shall constitute conclusive evidence of its approval.
Each Bond shall be dated the date of its authentication.
SECTION 2.02 EXECUTION AND AUTHENTICATION. One Officer, who
shall be the President of the Company, shall execute the Bonds for the Company
by manual signature.
If an Officer whose signature is on a Bond no longer holds
that office at the time the Trustee authenticates the Bond, the Bond shall be
valid nevertheless.
A Bond shall not be valid for any purpose until a Responsible
Officer of the Trustee manually signs the certificate of authentication on the
Bond. The signature of such Responsible Officer shall be conclusive evidence
that the Bond has been authenticated under this Indenture.
The Trustee shall authenticate Bonds for original issue in the
aggregate principal payable at maturity of up to $10,000,000 upon a written
order of the Company signed by an Officer, who shall be the President of the
Company. The order shall specify the amount of Bonds to be authenticated and the
date on which the original issue of Bonds is to be authenticated.
SECTION 2.03 REGISTRAR AND PAYING AGENT. The Company shall
maintain an office or agency where Bonds may be presented for registration of
transfer or for exchange ("Registrar") and office or agency where Bonds may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Bonds and of their transfer and exchange and such register shall
conclusively prove and evidence ownership of the Bonds for all purposes. The
Company may have one or more co-Registrars and one or more additional paying
agents, each of whom shall be reasonably acceptable to the Trustee. The term
"Paying Agent" includes any additional paying agent. The Company or any
Subsidiary may act as Paying Agent.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any such Agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such.
The Company initially appoints the Trustee as Registrar and
Paying Agent and the Trustee accepts such appointment in accordance with the
terms of this Indenture.
SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST. Each Paying
Agent
<PAGE>
shall hold in trust for the benefit of the Bond Holders or the Trustee all
moneys held by the Paying Agent for the payment of Principal or Redemption Price
of the Bonds, and shall notify the Trustee immediately of any Default by the
Company in making any such payment. While any such Default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee.
If the Company or a Subsidiary acts as Paying Agent, it shall segregate the
money and hold it as a separate trust fund. The Company at any time may require
a Paying Agent to pay all money held by it to the Trustee. Upon such payment to
the Trustee, the Paying Agent shall have no further liability for the money.
SECTION 2.05 BOND HOLDER LISTS. The Trustee shall preserve in
as current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Bond Holders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee at such times as the Trustee
may request in writing a list in such form and as of such date as the Trustee
may reasonably require, of the names and addresses of Bond Holders.
SECTION 2.06 TRANSFER AND EXCHANGE. Subject to the transfer
restrictions set forth in the Bonds, where a Bond is presented to the Registrar
or a co-Registrar with a request to register a transfer, the Registrar shall
register the transfer as requested if the requirements of the Trustee and/or the
Company for such transaction are met. Where Bonds are presented to the Registrar
or a co-Registrar with a request to exchange them for an equal Principal of
Bonds of other denominations, the Registrar shall make the exchange as requested
if the requirements of the Trustee and/or the Company for such transaction are
met. To permit transfers and exchanges, the Trustee shall authenticate Bonds at
the Registrar's request. Any exchange or transfer shall be without charge to the
Bond Holder, the Registrar, the Paying Agent or the Trustee, except that the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto. The Registrar need
not transfer or exchange any Bond or portion of a Bond selected for redemption,
or transfer or exchange any Bonds for a period of 15 days before a selection of
Bonds to be redeemed. Prior to any transfer or exchange pursuant to this Section
2.06, the Trustee shall receive an Officers' Certificate stating the Company's
requirements for the transfer or exchange of the Bonds and that such
requirements have been satisfied.
SECTION 2.07 REPLACEMENT BONDS. If the Holder of a Bond claims
that the Bond has been lost, mutilated, destroyed or wrongfully taken, the
Company shall issue and the Trustee shall authenticate a replacement Bond if the
requirements of the Company or the Trustee for such transaction are met. The
Bond Holder shall provide indemnity satisfactory to the Trustee (which may
include a surety bond) against any and all claims arising out of or otherwise
related to the issuance of a replacement Bond. Any indemnity bond must be
sufficient in the judgment of the Company and the Trustee to protect the
Company, the Trustee or any Agent from any loss which any of them may suffer if
a Bond is replaced. The Company may charge for its expenses in replacing a Bond.
Every replacement Bond is a substitute obligation of the Company. In the case of
a mutilated Bond, the Bond Holder shall surrender the Bond to the Trustee for
cancellation. In the case of a lost, stolen or destroyed Bond, the Bond Holder
shall provide evidence satisfactory to the Trustee of the ownership of the
affected Bond and the loss, theft or destruction thereof.
SECTION 2.08 OUTSTANDING BONDS. Bonds outstanding at any time
are all Bonds authenticated by the Trustee except for those cancelled by it and
those described in this Section 2.08. A Bond does not cease to be outstanding
because the Company or one of its Subsidiaries holds the Bond.
If a Bond is replaced pursuant to Section 2.07, it ceases to
be outstanding.
<PAGE>
If the Paying Agent holds on a redemption date or maturity
date money sufficient to pay Bonds payable on that date, then, notwithstanding
that any of the Bonds so called for redemption shall not have been surrendered,
on and after that date such Bonds shall be deemed to be no longer outstanding
and there shall be no further accretion of the Principal of the Bonds.
SECTION 2.09 CANCELLATION. The Company at any time may deliver
Bonds to the Trustee for cancellation. The Registrar and Paying Agent shall
forward to the Trustee any Bonds surrendered to them for transfer, exchange,
payment or cancellation. The Trustee and no one else shall cancel and destroy
all Bonds surrendered for transfer, exchange, payment or cancellation and
deliver the cancelled Bonds to the Company. The Company may not issue new Bonds
to replace Bonds that it has paid or delivered to the Trustee for cancellation.
SECTION 2.10. UNCERTIFICATED OWNERSHIP OF BONDS. Any
registered Bond Holder may deliver Bond certificates to the Registrar and have
record ownership held in uncertificated, book-entry form.
ARTICLE THREE
REDEMPTION
SECTION 3.01 NOTICES TO TRUSTEE. If the Company elects to
redeem Bonds pursuant to the provisions of the Bonds, it shall notify the
Trustee of the redemption date, the Principal of Bonds to be redeemed and the
Redemption Price.
The Company shall give the notice provided for in this Section
3.01 at least 60 days before the redemption date, except that the Trustee may
waive such notice period at any time.
SECTION 3.02 SELECTION OF BONDS TO BE REDEEMED. If less than
all the Bonds are to be redeemed, the Trustee shall select the Bonds to be
redeemed by lot. The Trustee shall make the selection from Bonds outstanding and
not previously called for redemption. Provisions of this Indenture that apply to
Bonds called for redemption also apply to portions of Bonds called for
redemption.
SECTION 3.03 NOTICE OF REDEMPTION. At least 30 days but not
more than 60 days before a redemption date, the Company shall mail a notice of
redemption by first-class mail to each Holder of Bonds to be redeemed. Failure
to give notice of redemption or any defect therein shall not affect the validity
of any proceedings for the redemption of Bonds.
The notice shall identify the Bonds to be redeemed and shall
state:
(1) the redemption date;
(2) the Principal of the Bonds to be redeemed;
(3) the Redemption Price;
(4) the name and address of the Paying Agent;
(5) that Bonds called for redemption must be
surrendered to the Paying Agent to collect the Redemption Price;
and
<PAGE>
(6) that the redemption contemplated shall be
conditioned upon immediately available funds to pay the Redemption
Price being on deposit with the Paying Agent.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is mailed, Bonds called for redemption become due and payable on the
redemption date and at the Redemption Price. Upon surrender to the Paying Agent,
such Bonds shall be paid at the Redemption Price.
SECTION 3.05 DEPOSIT OF REDEMPTION PRICE. Before the
redemption date, the Company shall deposit with the Paying Agent money
sufficient to pay the Redemption Price of all Bonds to be redeemed on that date.
SECTION 3.06 BONDS REDEEMED IN PART. Upon surrender of a Bond
that is redeemed in part, the Company shall execute and the Trustee shall
authenticate for the Holder a new Bond equal in Principal to the unredeemed
portion of the Principal of the Bond surrendered.
ARTICLE FOUR
ESTABLISHMENT OF FUNDS
AND APPLICATION THEREOF
SECTION 4.01 THE PLEDGE AND LIEN EFFECTED BY THE INDENTURE.
(a) The Trust Estate is hereby pledged for, and the Company hereby grants the
Trustee a continuing security interest in the Trust Estate for the purpose of
securing the payment of the Principal and Redemption Price of the Bonds in
accordance with their terms and the provisions of the Indenture, subject only to
the provisions of the Indenture permitting the application thereof for the
purposes and on the terms and conditions set forth in the Indenture.
(b) The Trust Estate shall immediately be subject to the lien
of this pledge without any physical delivery thereof or further act, and the
lien of this pledge shall be valid and binding as against all parties having
claims of any kind in tort, contract or otherwise against the Company,
irrespective of whether such parties have notice thereof.
(c) As additional security for the payment of the Principal
and Redemption Price of the Bonds in accordance with their terms and the
provisions of the Indenture, the Company has, pursuant to the Security
Agreement, granted a security interest in the Collateral to the Trustee as
provided in the Security Agreement.
SECTION 4.02 ESTABLISHMENT OF FUNDS. The Company hereby
establishes and creates the Project Fund, the Bond Reserve Fund and the Debt
Service Fund, which shall be special funds held by the Trustee.
SECTION 4.03 PAYMENTS INTO THE PROJECT FUND; DISBURSEMENTS.
(a) At the time of the issuance and delivery of the Bonds, the Bond Proceeds
shall be deposited in the Project Fund.
(b) The Trustee is authorized to make disbursement of Bond
Proceeds from the Project Fund in accordance with the provisions of this Section
4.03(B). Each disbursement shall
<PAGE>
be disbursed only after delivery to the Trustee of the following:
(1) a Requisition Form (attached as Exhibit B) signed
by an Officer. The Requisition Form shall state: (i) the
requisition number; (ii) the name and address of the person to
whom payment is to be made by the Trustee, which may be the
Company in the case of a requisition for working capital; (iii)
the amounts to be paid; (iv) that each obligation for which
payment is sought is unpaid or unreimbursed, and has not been the
basis of any previously paid requisition; (v) that no Event of
Default has occurred under the Indenture or Security Agreement;
and (vi) the Company has received no written notice of any lien,
right to lien or attachment upon, or other claim affecting the
right to receive payment of, any of the moneys payable under such
Requisition Form to any of the persons named therein or, if any of
the foregoing has been received, it has been released or
discharged or will be released or discharged upon payment of the
Requisition Form;
(2) except in the case of a requisition by the Company
for working capital, a copy of each invoice, bill, statement or
pay-off letter for which the requisition is submitted;
(3) such additional documents, affidavits,
certificates and opinions as the Trustee may reasonably require;
but the Trustee shall have no obligation to require any such
additional items; and
(4) if such requisition is for working capital, a
statement from the Company that it intends to use such amount for
working capital.
(c) Nothing contained herein or in any documents and
agreements contemplated hereby shall impose upon the Trustee any obligation to
see to the proper application of such disbursements by the Company or any other
recipient thereof, and, in making such disbursements from the Project Fund, the
Trustee may rely on such Requisition Forms and proof delivered to it. The
Trustee shall be relieved of any liability with respect to making such
disbursements in accordance with the foregoing.
SECTION 4.04 PAYMENTS INTO THE DEBT SERVICE FUND;
DISBURSEMENTS. (a) At least five Business Days prior to any redemption date, the
Company shall deposit into the Debt Service Fund the amount required so that
amounts on deposit in the Debt Service Fund and the Bond Reserve Fund are
sufficient to pay the Redemption Price of the Bonds payable on such date. At
least five Business Days prior to the maturity date of the Bonds, the Company
shall deposit into the Debt Service Fund the amount required so that amounts of
deposit in the Debt Service Fund and the Bond Reserve Fund are sufficient to pay
the Principal of the Bonds payable on such date. In addition, the Trustee shall
deposit in the Debt Service Fund money transferred from the Bond Reserve Fund to
the Debt Service Fund pursuant to Section 4.05 hereof.
(b) The Trustee shall pay out of the Debt Service Fund to the
Paying Agent (i) on or before the maturity date of the Bonds, the amount
required for the payment of the Principal of the Bonds; and (ii) on or before
any redemption date for the Bonds, the amount required for the payment of the
Redemption Price of the Bonds.
(c) Any amounts remaining in the Debt Service Fund after
payment or provision for payment in full of the Bonds, the fees, charges and
expenses of the Trustee and all other amounts required to be paid hereunder
shall be paid to the Company upon the expiration of, or upon the sooner
termination of, this Indenture.
<PAGE>
SECTION 4.05 PAYMENTS INTO THE BOND RESERVE FUND;
DISBURSEMENTS. On or prior to December 31, 2000, the Company shall deposit into
the Bond Reserve Fund an amount equal to at least 50% of the Principal amount of
Bonds outstanding on such date. At least five Business Days prior to the
maturity date of the Bonds or any redemption date of any Bond, the Trustee, at
the direction of the Company, shall transfer moneys in the Bond Reserve Fund to
the Debt Service Fund in such amounts as is necessary to pay the Principal or
Redemption Price of the Bonds due and payable on such maturity date or
redemption date in accordance with the provisions hereof.
ARTICLE FIVE
COVENANTS
SECTION 5.01 PAYMENT OF BONDS. The Company shall pay the
Principal and Redemption Price of the Bonds on the dates and in the manner
provided in the Bonds. The Principal and Redemption Price shall be considered
paid on the date due if the Trustee or Paying Agent (other than the Company or a
Subsidiary) holds on that date immediately available funds designated for and
sufficient to pay such Principal or Redemption Price.
SECTION 5.02 SEC REPORTS. Within 15 days after the Company
files with the SEC copies of its annual reports and other information, documents
and reports (or copies of such portions of any of the foregoing as the SEC may
by rules and regulations prescribe) which it is required to file with the SEC
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
including, without limitation, Form 10-KSB and Form 10-QSB, the Company shall
file the same with the Trustee. Any failure by the Company to file such reports,
information and documents in a timely manner in accordance with the rules and
regulations of the SEC shall not be an Event of Default hereunder.
SECTION 5.03 COMPLIANCE CERTIFICATE. The Company shall deliver
to the Trustee within 120 days after the end of each fiscal year of the Company
an Officers' Certificate stating whether or not the signers know of any Default
or Event of Default by the Company in performing any of its obligations under
this Indenture. If they do know of such a Default or Event of Default, the
Officers' Certificate shall describe such Default or Event of Default and its
status.
SECTION 5.04 INSURANCE. The Company may, in its discretion
when funds become available, carry and maintain such insurance of the types and
in amounts which are customarily carried by other persons operating business of
a similar nature to the Company, including, but not limited to appropriate
insurance on the Collateral. If the Company decides to purchase such insurance,
the Trustee shall be named as loss payee and additional insured under each such
policy of insurance. Such policies shall provide that the Trustee shall receive
not fewer than 30 days written notice prior to any cancellation or termination
thereof. If the Company decides to purchase such insurance, by no later than
June 30 of each year in which any of the Bonds are outstanding, the Company
shall deliver to the Trustee a certificate executed by the President of the
Company stating that the Company is in compliance with the requirements of this
Section 5.04.
SECTION 5.05 APPLICATION OF INSURANCE PROCEEDS. The proceeds
of any insurance payable to the Company, paid on account of the damage or
destruction of any useful portion of any Collateral shall be paid over to the
Trustee and held by the Trustee in the Debt Service Fund. Such proceeds shall be
applied to the payment of the Principal or Redemption Price of the Bonds as
provided in Article Four hereof.
<PAGE>
SECTION 5.06 DEPOSIT AND PLEDGE OF FUNDS FOR CERTAIN PAYMENTS;
INVESTMENT OF FUNDS. (a) Upon the issuance of the Bonds under this Indenture,
the Company will deposit or cause to be deposited with the Trustee irrevocably
as trust moneys in trust, specifically pledged as security for the benefit of
the Holders of the Bonds, the Trust Estate.
(b) Any trust moneys held by the Trustee pursuant to paragraph
(A) of this Section 5.06 shall be invested or reinvested by the Trustee, to the
extent permitted by law, at the request of the Company, in any of the following
qualified investments (referred to herein as "Permitted Investments"):
(i) U.S. Government obligations or bonds, debentures
or notes issued by the Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Bonds,
Federal Land Banks, Federal Financing Bank or any other comparable
federal agency hereafter created;
(ii) Certificates of Deposit or time deposits with any
banking institution having, at the time of such investment, a
combined capital and surplus in excess of $100,000,000;
(iii) prime commercial paper bearing a rating, at the
time of such investment, by Moody's Investors Service, Inc. of
"A-1" or by Standard & Poor's Corporation of "P-1"; or
(iv) any money market fund investing wholly in
Permitted Investments of the character described in (i), (ii) and
(iii) above.
In the event the Company does not request which Permitted
Investments are to be made, the Trustee shall invest any trust moneys held by
the Trustee in the investments specified in Section 5.06(B) (iv) hereof.
Unless otherwise provided in this Indenture, the Trustee shall
sell, or present for redemption, any Permitted Investment so acquired whenever
it shall be requested to do so by the Company. The Trustee shall not be liable
or responsible for making any such investment or sale in the manner provided
above or for any loss resulting from any such investment.
The Trustee may make any and all such Permitted Investments
through its own bond department or the bond department of any bank or trust
company under common control with the Trustee. Such Permitted Investments shall
be made so as to mature or be subject to redemption at the option of the holder
thereof prior to (or in the case of Permitted Investments for which the Trustee
is the obligor) the date or dates on which the Company anticipates that moneys
therefrom will be required. Such Permitted Investments shall be registered in
the name of the Trustee.
The Trustee shall deposit into the Debt Service Fund any
interest or similar distributions paid on such Permitted Investments and such
moneys shall be applied as provided in Article Four hereof.
ARTICLE SIX
SUCCESSOR CORPORATION
SECTION 6.01 WHEN COMPANY MAY MERGE. ETC. The Company shall
not
<PAGE>
consolidate with or merge into, or transfer all or substantially all of its
assets to, any other person unless (i) such other person is a corporation
organized or existing under the laws of the United States or a State thereof,
(ii) such person expressly assumes by supplemental indenture all the obligations
of the Company under the Bonds, this Indenture and the Security Agreement, (iii)
such person has a Consolidated Net Worth immediately after such transaction at
least equal to the Consolidated Net Worth of the Company immediately prior to
such transaction, and (iv) immediately after such transaction no Default or
Event of Default exists. Thereafter all such obligations of the predecessor
corporation shall terminate. Upon any such consolidation, merger or transfer,
the Trustee shall receive an Officers' Certificate certifying that the Company
has complied with this Section 6.01.
ARTICLE SEVEN
DEFAULTS AND REMEDIES
SECTION 7.01 EVENTS OF DEFAULT. An "Event of Default" occurs
if there occurs an event of default as defined in the Bonds.
SECTION 7.02 ACCELERATION. If an Event of Default occurs and
is continuing, the Principal of the Bonds shall automatically be due and payable
or the Trustee by written notice to the Company, or the Holders of a majority in
Principal of the outstanding Bonds by written notice to the Company and the
Trustee, may declare the Principal of all the Bonds to be due and payable
immediately as provided in the Bonds. Upon such automatic acceleration or such
declaration, the Principal shall be due and payable immediately. The Holders of
a majority in Principal of the outstanding Bonds by written notice to the
Trustee may rescind an acceleration and its consequences if all existing Events
of Default have been cured or waived, except nonpayment of Principal that has
become due solely because of the acceleration, and if the rescission would not
conflict with any judgment or decree.
SECTION 7.03 OTHER REMEDIES. If an Event of Default occurs and
is continuing, the Trustee may pursue any available remedy by proceeding at law
or in equity to collect the payment of Principal of the Bonds or to enforce the
performance of any provision of the Bonds or this Indenture. In any such
proceeding brought by the Trustee, the Trustee shall be deemed to represent all
of the Bond Holders and it shall not be necessary to make any Bond Holder a
party to the proceeding.
The Trustee may maintain a proceeding, including a proceeding
involving the interpretation of any provision of this Indenture to which the
Trustee is a party, even if it does not possess any of the Bonds or does not
produce any of them in the proceeding. A delay or omission by the Trustee or any
Bond Holder in exercising any right or remedy accruing upon an Event of Default
shall not impair the right or remedy or constitute a waiver of or acquiescence
in the Event of Default. No remedy is exclusive of any other remedy. All
available remedies are cumulative.
SECTION 7.04 WAIVER OF PAST DEFAULTS. Subject to Section 10.02
hereof, the Holders of a majority in Principal of the outstanding Bonds by
written notice to the Trustee may waive or rescind a past Event of Default and
its consequences provided, however, that there shall not be waived any act of
bankruptcy, insolvency proceedings, liquidation, dissolution, or reorganization,
unless prior to such waiver or rescission, all expenses of the Trustee in
connection with such Event of Default shall have been paid or provided for. In
case of any such waiver or rescission, or if any proceeding taken by the Trustee
on account of any such Event of Default shall have been discontinued or
abandoned or determined adversely, then and in every
<PAGE>
such case the Company, the Trustee and the Holders shall be restored to their
former positions and rights hereunder, respectively, but no such waiver or
rescission shall extend to any subsequent or other Event of Default, or impair
any right consequent thereon. The Trustee shall not have any discretion to waive
any Event of Default hereunder and its consequences except in the manner and
subject to the terms expressed above.
When an Event of Default is waived, it is cured and ceases.
SECTION 7.05 CONTROL BY MAJORITY. The Holders of a majority in
Principal of outstanding Bonds may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; provided, however:
(a) Such direction shall not be in conflict with any rule of
law or with this Indenture;
(b) The Trustee shall not be required to determine whether the
action so directed would be unjustly prejudicial to the rights of any Holder not
taking part in such direction;
(c) The Trustee shall have the right to decline to follow any
such direction if the Trustee, being advised by counsel, determines that the
action so directed may not lawfully be taken or if the Trustee in good faith
shall, by a Responsible Officer, determine that the proceedings so directed
would involve it in personal liability; or
(d) The Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 7.06 LIMITATION ON SUITS. A Bond Holder may not pursue
any remedy with respect to this Indenture or the Bonds unless:
(a) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in Principal of the
outstanding Bonds have made a written request to the Trustee to pursue the
remedy;
(c) such Holder or Holders have provided to the Trustee
indemnity satisfactory to the Trustee against any loss, liability or expense,
including, but not limited to, reasonable legal fees;
(d) the Trustee has declined to comply with the request within
60 days after the receipt of the request and the provision of indemnity; and
(e) during such 60-day period the Holders of a majority in
Principal of the Bonds have not given the Trustee a direction inconsistent with
such request.
No Bond Holder may use this Indenture to prejudice the rights
of another Bond Holder or to obtain a preference or priority over another Bond
Holder.
SECTION 7.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture to the contrary, the right
of any Holder of a Bond to receive payment of Principal of the Bond, on or after
the due date expressed in the Bond, or to bring suit
<PAGE>
for the enforcement of any such payment on or after such date, shall not be
impaired or affected without the consent of the Holder.
SECTION 7.08 COLLECTION SUIT BY TRUSTEE. If an Event of
Default in payment of Principal occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount of Principal remaining unpaid.
SECTION 7.09 TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may
file such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and any predecessor Trustee
and the Bond Holders allowed in any judicial proceedings relative to the
Company, its creditors or its property. Nothing herein contained shall be deemed
to authorize the Trustee to authorize or consent to or accept or adopt on behalf
of any Bond Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Bonds or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Bond Holder in any
such proceedings.
SECTION 7.10 PRIORITIES. If the Trustee collects any money
pursuant to this Article Seven, it shall pay out the money in the following
order:
FIRST: to the Trustee and any predecessor Trustee for amounts
due under Section 8.06 hereof , including, but not limited to the payment of any
reasonable costs and expenses of collection, including legal fees;
SECOND: to Bond Holders for amounts due and unpaid on the
Bonds for Principal , ratably, without preference or priority of any kind,
according to the amounts due and payable on the Bonds for Principal; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any
payment to Bond Holders pursuant to this Section.
ARTICLE EIGHT
TRUSTEE
SECTION 8.01 DUTIES OF TRUSTEE. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture and use the same degree of care and skill
in its exercise as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs.
(b) Prior to the occurrence of an Event of Default, and after
the curing or waiving of all Events of Default which have occurred:
(1) The Trustee undertakes to perform such duties and
only such duties as are expressly and specifically set forth in
this Indenture. There shall be no implied duties or
responsibilities of the Trustee under this Indenture.
(2) In the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed
<PAGE>
therein, upon any Officers' Certificate, resolution, statement,
report, notice, request, consent, order, approval or opinion
furnished to the Trustee and conforming to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own
grossly negligent action, its own grossly negligent failure to act or its own
willful misconduct, except that:
(1) This paragraph does not limit the effect of
paragraph (b) of this Section 8.01.
(2) The Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it
shall be adjudicated that the Trustee was grossly negligent in
ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance
with a direction received by it pursuant to Section 7.05 hereof.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 8.01.
(e) The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) None of the provisions contained in this Indenture shall
require the Trustee or any of its officers or directors to expend or risk its
own funds or otherwise incur financial liability in the performance of any of
its duties hereunder or in the exercise of any of its rights or powers.
(g) Money held in trust by the Trustee pursuant to this
Indenture need not be segregated from other funds except to the extent required
by law.
(h) The Trustee shall have no responsibility for effecting or
maintaining insurance for the Project or the payment of taxes of the Company.
SECTION 8.02 RIGHTS OF TRUSTEE. (a) The Trustee may rely on
any document believed by it to be genuine and to have been signed or presented
by the proper person. The Trustee need not investigate any fact or matter stated
in the document.
(b) In the event the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall
not be liable for any action it takes or omits to take in good faith in reliance
on such certificate or opinion.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or gross negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
(e) All exculpations and immunities provided for the Trustee
in this Indenture shall extend and be applicable to all of its directors,
officers, employees and stockholders.
SECTION 8.03 INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its
individual
<PAGE>
or any other capacity may become the owner or pledgee of Bonds and may otherwise
deal with the Company or its affiliates with the same rights or would have if it
were not Trustee. Any Agent may do the same with like rights. The Trustee,
however, must comply with Section 8.09.
SECTION 8.04 TRUSTEE'S DISCLAIMER. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the Bonds; it
shall not be accountable for the Company's use of the proceeds from the Bonds;
and it shall not be responsible for (a) any statement in the Bonds other than
its certificate of authentication, or (b) any prospectus or other offering
material used in connection with the sale of such Bonds.
SECTION 8.05 NOTICE OF EVENT OF DEFAULT. If an Event of
Default occurs and is continuing and if it is known to the Trustee, the Trustee
shall mail to each Bond Holder notice of the Event of Default within 60 days
after it occurs. The Trustee shall not be deemed to have notice of an Event of
Default, other than a default in the payment of the Principal or Redemption
Price of the Bonds, unless a Responsible Officer of the Trustee has received
from the Company or a Bond Holder written notice of such Event of Default.
SECTION 8.06 COMPENSATION AND INDEMNITY. The Company shall pay
to the Trustee from time to time, and the Trustee shall be entitled to,
reasonable compensation for its services. The Trustee's compensation hereunder
shall not be limited by any law on compensation relating to the trustee of an
express trust. The Company shall reimburse the Trustee upon request for all
reasonable out-of-pocket expenses incurred by it. Such expenses shall include
the reasonable compensation and expenses of the Trustee's agents and counsel.
The Company shall indemnify each of the Trustee and any predecessor Trustee
against any loss or liability, including reasonable expenses, incurred by it in
connection with the acceptance or administration of this trust and the
performance of its duties hereunder. The Company need not reimburse any expense
or indemnify against any loss or liability incurred by the Trustee through the
Trustee's gross negligence or willful misconduct. The obligations of the Company
under this Section 8.06 to compensate the Trustee, to pay or reimburse the
Trustee for expenses, disbursements and advances, and to indemnify and hold
harmless the Trustee, shall survive the satisfaction and discharge of this
Indenture.
To secure the Company's payment obligations under this
Section, the Trustee shall have a lien prior to the Bonds on all money or
property held or collected by the Trustee.
SECTION 8.07 REPLACEMENT OF TRUSTEE. A resignation or removal
of the Trustee and the appointment of a successor Trustee shall become effective
only upon the successor Trustee's acceptance of appointment as provided in this
Section 8.07. The Trustee may resign by so notifying the Company in writing. The
Holders of a majority in Principal of the outstanding Bonds may remove the so
notifying the Trustee and the Company in writing and may appoint a successor
Trustee with the Company's consent. So long as no Event of Default has occurred
and is continuing, the Company may remove the Trustee for any reason.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately thereafter,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee (subject to the lien provided for in Section 8.06 hereof), the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession to
each Bond Holder.
<PAGE>
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in Principal of the outstanding Bonds may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 8.09 hereof, any
Bond Holder may petition any court of competent jurisdiction for the removal of
the Trustee and the appointment of a successor Trustee.
SECTION 8.08 SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee
consolidates with, merges or converts into or transfers all or substantially all
of its corporate trust business to, another corporation, the successor
corporation without any further act shall be the successor Trustee.
SECTION 8.09 ELIGIBILITY. DISQUALIFICATION. The Trustee shall
at all times be a trust company or bank having trust power in good standing and
located within or without the State of New Jersey qualified and experienced in
the administrating corporate trust.
SECTION 8.10 INDEMNIFICATION. The Company agrees to pay, and,
to the extent permitted by law, to indemnify and save the Trustee harmless
against, any costs, expenses, losses and liabilities which it may incur in the
exercise and performance of its powers and duties hereunder, including, without
limitation, any liability relating to any environmental contamination or
hazardous discharge, and which are not due to the Trustee's gross negligence or
willful misconduct, except to the extent they have already been paid to the
Trustee or provision for the payment thereof, satisfactory to the Trustee, has
already been made.
ARTICLE NINE
DISCHARGE OF INDENTURE
SECTION 9.01 TERMINATION OF COMPANY'S OBLIGATIONS. All of the
Company's obligations under the Bonds and this Indenture shall be terminated if
all Bonds previously authenticated and delivered (other than destroyed, lost or
stolen Bonds which have been replaced or paid) have been delivered to the
Trustee for cancellation or if:
(a) The Company has irrevocably deposited in trust with the
Trustee immediately available funds or direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which guarantee or obligation the full faith and credit of the United
States is pledged, sufficient to pay Principal of the outstanding Bonds to
maturity or redemption, as the case may be. Immediately after making the
deposit, the Company or the Trustee on behalf of the Company shall give notice
of such event to the Bond Holders and shall provide the Trustee with an
Officers' Certificate certifying that such deposit is sufficient to pay the
Principal of the Bonds to maturity or redemption, as the case may be; and
(b) The Company has paid or caused to be paid all sums then
payable by the Company to the Trustee hereunder as of the date of such deposit,
including any amounts incurred by the Trustee as a result of its action under
this Article Nine; and
(c) The Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for herein have been complied with.
<PAGE>
The Company's obligations in Sections 2.03, 2.04, 2.05, 2.06,
2.07, 5.01, 8.06, 8.07 and 9.03, however, shall survive until the Bonds are no
longer outstanding. Thereafter, the Company's obligations in Sections 8.06 and
9.03 shall survive.
After a deposit pursuant to this Section 9.01, the Trustee
upon request shall acknowledge in writing the discharge of the Company's
obligations under the Bonds and this Indenture except for those surviving
obligations specified above.
SECTION 9.02 APPLICATION OF TRUST MONEY. The Trustee shall
hold in trust money deposited with it pursuant to Section 9.01 hereof. It shall
apply the deposited money through the Paying Agent and in accordance with this
Indenture to the payment of the Principal or Redemption Price of the Bonds.
SECTION 9.03 REPAYMENT TO COMPANY. The Trustee and the Paying
Agent shall pay to the Company without interest thereon upon request any money
held by them for the payment of Principal or Redemption Price that remains
unclaimed for seven years, or such shorter period as may be required under New
Jersey law, provided, however, that the Trustee or such Paying Agent, before
being required to make any such repayment, shall at the expense of the Company
mail to each such Holder notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such mailing, any unclaimed balance of such money then remaining will be
repaid to the Company. After payment to the Company, Bond Holders entitled to
such money must look to the Company for payment as general creditors unless
applicable abandoned property law designates another person.
ARTICLE TEN
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.01 WITHOUT CONSENT OF HOLDERS. The Company, with
the consent of the Trustee, may amend or supplement this Indenture or the Bonds
without notice to or consent of any Bond Holders:
(1) to cure any ambiguity, omission, defect or
inconsistency;
(2) to comply with Section 6.01 hereof; or
(3) to make any other change that does not materially
adversely affect the rights of any Bond Holder.
SECTION 10.02 WITH CONSENT OF HOLDERS. Subject to the
provisions of Section 10.01 and this Section 10.02, the Company, with the
written consent of the Trustee, may amend or supplement this Indenture or the
Bonds without notice to any Bond Holder but with the written consent of the
Holders of at least a majority in Principal of the outstanding Bonds. The
Holders of a majority in Principal of the outstanding Bonds may waive compliance
by the Company with any provision of this Indenture or the Bonds without notice
to any Bond Holder. Without the consent of each Bond Holder affected, however,
no amendment, supplement or waiver, including a waiver pursuant to Section 7.04
hereof, may:
(1) reduce the Principal of Bonds whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the Principal of or extend the fixed
maturity of any Bond;
<PAGE>
(3) change the amount or time of any payment required
by the Bonds;
(4) waive a default in the payment of the Principal
or Redemption Price of any Bond;
(5) make any Bond payable in money other than that
stated in the Bond; or
(6) make any change in Sections 7.04, 7.07 or 10.02.
After an amendment under this Section becomes effective, the
Company shall mail to the Holders a notice briefly describing the amendment.
It shall not be necessary for the consent of the Holders
under this Section to approve the particular form of any proposed amendment or
supplement, but it shall be sufficient if such consent approves the substance
thereof.
SECTION 10.03 EXECUTION OF SUPPLEMENTAL INDENTURES. In
executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and
(subject to Section 8.01) shall be fully protected in relying upon, an Opinion
of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties, liabilities or immunities under this Indenture or
otherwise.
SECTION 10.04 REVOCATION AND EFFECT OF CONSENTS. Until an
amendment, supplement or waiver becomes effective, a consent to an amendment,
supplement or waiver by a Holder of a Bond is a continuing consent by the Holder
and is binding on every subsequent Holder of a Bond or portion of a Bond that
evidences the same debt as the consenting Holder's Bond, even if notation of the
consent is not made on any Bond. Any such Holder or subsequent Holder, however,
may revoke the consent as to his Bond or portion of a Bond only if the Trustee
receives the notice of revocation before the date the amendment, supplement or
waiver becomes effective. An amendment, supplement or waiver shall become
effective on receipt by the Trustee of written consents from the Holders of the
requisite percentage in Principal of the outstanding Bonds.
After an amendment, supplement or waiver becomes effective, it
shall bind every Bond Holder unless it makes a change described in any of
clauses (a) through (f) of Section 10.02. In that case the amendment, supplement
or waiver shall bind each Holder of a Bond who has consented to it and every
subsequent Holder of a Bond or portion of a Bond that evidences the same debt as
the consenting Holder's Bond.
SECTION 10.05 NOTATION ON OR EXCHANGE OF BONDS. If an
amendment, supplement or waiver changes the terms of a Bond, the Company may
request the Trustee to require the Holder of the Bond to deliver the Bond to the
Trustee. The Trustee may place an appropriate notation on the Bond about the
changed terms and return it to the Holder. Alternatively, if the Company or the
Trustee so determines, the Company in exchange for the Bond shall issue and the
Trustee shall authenticate a new Bond that reflects the changed terms.
SECTION 10.06 TRUSTEE TO SIGN AMENDMENTS. ETC. The Trustee may
but need not sign any amendment, supplement or waiver authorized pursuant to
this Article if the
<PAGE>
amendment, supplement or waiver adversely affects the rights of the Trustee. The
Company may not sign an amendment or supplement until the Board of Directors
approves it.
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01 NOTICES. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail addressed as follows:
IF TO THE COMPANY:
Rotary Power International, Inc.
22 Passaic Street
Wood-Ridge, New Jersey 07075
Attention: President
IF TO THE TRUSTEE:
Sentinel Trust Company
8122 Sawyer Brown Road, Suite 20
Nashville, Tennessee 37221
Attention: Corporate Trust Administration
The Company or the Trustee by notice to the other may designate additional or
different addresses for subsequent notices or communications.
Any notice or communication mailed to a Bond Holder shall be
mailed by first class mail to such Bond Holder at the address which appears on
the registration books of the Registrar and shall be sufficiently given to such
Bond Holder if so mailed within the time prescribed.
Failure to mail a notice or communication to a Bond Holder or
any defect in it shall not affect its sufficiency with respect to other Bond
Holders. If a notice or communication is mailed in the manner provided above, it
is duly given, whether or not the addressee receives it. If the Company mails a
notice or communication to Bond Holders it shall mail a copy of such notice to
the Trustee and each Agent at the same time. All other notices or communications
shall be in writing.
SECTION 11.02 CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT. Upon any request or application by the Company to the Trustee to take
any action under this Indenture, other than pursuant to Article Four hereof, the
Company shall furnish to the Trustee:
(a) An Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with; and
(b) An Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 11.03 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
<PAGE>
(a) A statement that the person making such certificate or
opinion has read such covenant or condition;
(b) A brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(c) A statement that, in the opinion of such person, he has
made such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and
(d) A statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
SECTION 11.04 WHEN TREASURY BONDS DISREGARDED. In determining
whether the Holders of the required Principal of Bonds have concurred in any
direction, waiver or consent, Bonds owned by the Company or by any person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded, except that for the
purpose of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent, only Bonds which the Trustee knows are so
owned shall be so disregarded.
SECTION 11.05 RULES BY TRUSTEE AND AGENTS. The Trustee may
make reasonable rules for action by, or at a meeting of, Bond Holders. The
Registrar or Paying Agent may make reasonable rules for its functions.
SECTION 11.06 LEGAL HOLIDAY. A "Legal Holiday" is a Saturday,
a Sunday or a day on which banking institutions are not required to be open in
The City of New York, in the State of New York or in the city in which the
Trustee administers its corporate trust business. If a payment date is a Legal
Holiday, payment may be made at the place on the next succeeding day that is not
a Legal Holiday, and no accretion of the Principal of the Bonds to be paid shall
occur during the intervening period.
SECTION 11.07 GOVERNING LAW. The laws of the State of New
Jersey, without regard to the principles of conflicts of law, shall govern this
Indenture and the Bonds.
SECTION 11.08 SUCCESSORS. All agreements of the Company in
this Indenture and the Bonds shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 11.09 COUNTERPARTS. This Indenture may be executed in
two or more counterparts, each of which shall be deemed the same document.
<PAGE>
IN WITNESS WHEREOF, the Company and the Trustee have duly
executed and delivered this Indenture this 22nd day of December, 1997.
ROTARY POWER INTERNATIONAL, INC.
By: /s/ Ken Brody
-------------------
Name: Ken Brody
Title: President
Dated as of December 22, 1997
Attest:
/s/ Lois Adzima
- ----------------
SENTINEL TRUST COMPANY
By: /s/ D.N. Bates
-------------------
Name: D.N. Bates
Title: President
Dated as of December 22, 1997
Attest:
/s/ illegible
- ----------------
<PAGE>
EXHIBIT A
FORM OF BOND OF ROTARY POWER INTERNATIONAL. INC.
<PAGE>
ROTARY POWER INTERNATIONAL, INC.
10.412% BOND
CUSIP NO. 77866RAA9
Wood-Ridge, New Jersey
December 22, 1997
THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS
REGISTERED UNDER ALL APPLICABLE SECURITIES LAW OR UNLESS
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS ARE AVAILABLE,
WHICH EXEMPTIONS SHALL BE ESTABLISHED TO THE REASONABLE
SATISFACTION OF THE COMPANY BY OPINION OF COUNSEL OR
OTHERWISE.
FOR VALUE RECEIVED, the undersigned, Rotary Power
International, Inc. ("Company"), promises to pay to the order of
_________________ (the "Bond Holder") at ___________________ or such other place
as may be designated in writing by Bond Holder, the principal sum of
($___________) DOLLARS. The principal amount due hereunder shall be paid to the
Bond Holder in the following manner:
(a) The Company shall pay the Bond Holder in whose name this
Bond is registered upon the registry books maintained by Sentinel Trust Company,
(the "Trustee"), as trustee, the entire unpaid principal sum of this Bond on the
15th day of December, 2007.
(b) This Bond, issuable in the denomination of $5,000
aggregate principal payable at maturity or any integral multiple of $5,000 in
excess thereof, is one in a series of bonds in the aggregate principal amount of
$10,000,000 (collectively, the "Bonds") issued under and pursuant to the
Indenture of Trust, dated as of December 1, 1997 (the "Indenture"), between the
Company and the Trustee.
(c) This Bond is subject to redemption prior to maturity at
any time in whole or in part at the option of the Company at a redemption price
equal to l00% of the accreted value hereof, as determined in accordance with the
procedures described in Exhibit A attached hereto.
(d) This Bond is subject to mandatory redemption prior to
maturity in whole or in part at a redemption price equal to 100% of the accreted
value hereof, as determined in accordance with the provisions described in
Exhibit A attached hereto upon the sale of certain Collateral in accordance with
the provisions of the Security Agreement (as defined herein).
At least 30 days but not more than 60 days before a redemption
date, the Company shall mail a notice of redemption by first-class mail to each
Bond Holder to be redeemed. Failure to give notice of redemption or any defect
therein shall not affect the validity of any proceedings for the redemption of
Bonds.
<PAGE>
The notice shall identify the Bonds to be redeemed and shall
state:
(1) the redemption date;
(2) the Principal of the Bonds to be redeemed;
(3) the Redemption Price;
(4) the name and address of the Paying Agent;
(5) that Bonds called for redemption must be
surrendered to the Paying Agent to collect the Redemption
Price; and
(6) that the redemption contemplated shall be
conditioned upon immediately available funds to pay the
Redemption Price being on deposit with the Paying Agent.
The Company and the Trustee have entered into a security
agreement dated as of December 1, 1997 (the "Security Agreement", and together
with the Indenture, the "Transaction Documents") pursuant to which a continuing
lien on and security interest in certain equipment, machinery, fixtures, tools,
work in progress, inventory, furniture and other personal property now owned or
hereafter acquired by the Company, but excluding therefrom the Company's
interest in certain assets and any intellectual property or other intangibles,
all as more fully described in the Security Agreement, is pledged to the Trustee
to secure the Company's obligations under the Indenture and this Bond.
Capitalized terms used herein and not otherwise defined shall
have the meanings given thereto in the Indenture.
SECTION 1. The Company represents and warrants to the Bond
Holder that:
(a) To the best of the Company's knowledge, the Company is a
corporation duly organized and validly existing under the laws of the state of
its incorporation and has all requisite corporate power and authority to own,
operate and lease its properties, to carry on its business as now being
conducted and to perform its obligations hereunder and under each of the
Indenture and the Security Agreement (collectively, the "Transaction
Documents").
(b) The execution, delivery and performance by the Company of
each of the Transaction Documents has been duly authorized by all requisite
corporate action on the part of the Company. No consent, license, approval,
authorization, registration, filing or similar requirement ("Permit") is
necessary in connection therewith, there are no pending or, to the Company's
knowledge, threatened investigations or legal proceedings ("Actions") which
question the transactions contemplated thereby and none of such transactions
will conflict with or result in any violation of or constitute a breach of or
default under the certificate of incorporation or by-laws of the Company or any
applicable laws, rules, regulations, agreements with governmental authorities
(together, "Laws"), orders, injunctions, judgments, awards or decrees (together,
"Orders") or other agreements, understandings, deeds, notes, mortgages or
licenses (together, "Contracts") by which the Company or its assets are affected
or will result in
<PAGE>
the creation of any lien, charge or encumbrance (together, "Liens") (except the
Liens created by the Security Agreement) upon any of the assets of the Company
pursuant to any Contracts. Each such Transaction Document has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company enforceable in accordance with its terms except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights or by
general equitable principles.
(c) The Security Agreement and the UCC-l financing statements,
each having been presented for filing to the appropriate office in each
jurisdiction in which the Collateral is located on or prior to the date hereof,
will be, upon the acceptance thereof for filing, effective to create in favor of
the Trustee, a legal, valid, enforceable, fully perfected security interest in
the Collateral described therein.
(d) The Company is not an "investment company", or a company
"controlled by an investment company", within the meaning of the Investment
Company Act of 1940, as amended.
(e) To the Company's knowledge, the Transaction Documents, the
Confidential Private Placement Memorandum dated December 22, 1997 and prepared
in connection with the issuance, sale and delivery of the Bonds (the "Private
Placement Memorandum") and the Exhibits thereto do not contain any untrue
statement of a material fact and do not omit to state a material fact necessary
in order to make the statements therein not false or misleading. There is no
additional fact (other than facts generally known to the public) of which the
Company is aware that has not been disclosed in the Private Placement Memorandum
that materially affects adversely or, so far as the Company can reasonably
foresee on the date hereof, will materially affect adversely the Financial
Condition of the Company and its Subsidiaries taken as a whole. As used herein
"Financial Condition" shall mean the business, operations, assets or financial
or other condition of an entity and "Subsidiary" shall mean each entity of which
the Company or another subsidiary may now or hereafter control or own more than
50~ of the capital or equity.
(i) The Indenture is not required to be qualified
under the Trust Indenture Act of 1939, as amended.
SECTION 2. Until the date on which the Bonds have been paid in
full, the Company shall:
(a) Use the proceeds received by it from the sale of the Bonds
substantially as described in the Confidential Private Placement Memorandum;
(b) Cause each Subsidiary to comply with the covenants set
forth in Section 2(a) and Section 2(f) (which covenants shall, for purposes of
this Section 2 (b) apply to each such Subsidiary as if it were the Company
referred to therein);
(c) File as soon as practicable any and all forms, statements,
reports or schedules required to be filed with the SEC pursuant to the
Securities Exchange Act of 1934;
(d) Provide to the Trustee prompt notice of:
(i) any Event of Default, as hereinafter defined;
<PAGE>
(ii) any amendment of the certificate of
incorporation or By-Laws of the Company; or
(iii) (A) any material change since the date of this
Bond in the Financial Condition of the Company and its
Subsidiaries taken as a whole, or (B) the occurrence or
non-occurrence, since such date, of any event of which the
Company has knowledge, in either case, that has had or is
reasonably likely to have a materially adverse effect on the
Financial Condition of the Company and its Subsidiaries taken
as a whole;
SECTION 3. Each of the following shall constitute an Event of
Default under this Bond, whatever the reason for such event and whether it shall
be voluntary or involuntary or be affected by operation of laws or orders:
(a) The Company shall fail to make any payment of Principal or
Redemption Price on this Bond when due; or
(b) Any representation or warranty made hereunder or in any
document delivered to the Bond Holders with respect to this Bond shall at any
time prove to have been incorrect or misleading in any material respect when
made; or
(c) The Company shall cease to maintain its corporate
existence or shall default in any material respect in the performance or
observance of any term, covenant, condition or agreement contained herein, and
such default continues for the period and after the notice specified below; or
(d) The Company or any Subsidiary shall fail to pay, in
accordance with its terms and when due and payable, the principal of or interest
on any liability for borrowed money in excess of $25,000 or any other liability
in excess of $25,000 evidenced by bonds, debentures, bonds or similar
instruments ("Indebtedness") owed to any party or the maturity of any such
Indebtedness shall have been accelerated or been required to be prepaid prior to
the stated maturity thereof or any event shall have occurred and be continuing
which, with the passage of time or the giving of notice or both, would permit
the acceleration of such maturity; or
(e) (i) The Company or any Subsidiary shall, after the date of
issuance of the Bond, (A) commence a voluntary case under Federal bankruptcy
laws, (B) file a petition seeking to take advantage of any other laws relating
to bankruptcy, insolvency, reorganization, winding up or composition or
adjustment of debts ("Bankruptcy"), (C) consent to or fail to contest in a
timely and appropriate manner any petition filed against it in any involuntary
case under such Bankruptcy laws or such other laws, (D) apply for or consent to,
or fail to contest in a timely and appropriate manner, the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator or the
like ("Receiver") of itself or of a substantial part of its property, (E) admit
in writing its inability to pay, or generally not be paying, its debts as they
become due, (F) make a general assignment for the benefit of creditors, or (G)
take any corporate action for the purpose of effecting any of the foregoing; or
(ii) A case or other proceeding shall be commenced against
the Company or any Subsidiary in any court of competent jurisdiction seeking (A)
relief under Federal bankruptcy laws or under any other laws relating to
Bankruptcy, or (B) the appointment of a Receiver of the Company or any
Subsidiary of all or any substantial part of the assets of the Company or any
Subsidiary and such case or proceeding shall continue undismissed or unstayed
<PAGE>
for a period of 60 consecutive calendar days, or an order granting the relief
requested in such case or proceeding against the Company or any Subsidiary
(including, but not limited to, an order for relief under Bankruptcy laws) shall
be entered; or
(f) A judgment or order for the payment of money shall be
entered and become final against the Company or any Subsidiary which, together
with all other outstanding undischarged or unstayed judgments against the
Company and its Subsidiaries, exceeds $50,000 in the aggregate, and such
judgment or order shall continue undischarged or unstayed for 60 days provided
that for the purpose of calculating the $50,000 amount, judgments which are
covered by the Company's insurance shall not be included in such figure to the
extent so covered; or
(g) There shall be an Event of Default under any of the
Transaction Documents, as such term is defined in each of the Transaction
Documents, or the Transaction Documents shall be or become or shall be claimed
to be or to have become in any respect invalid or unenforceable or the Trustee
shall at any time cease to have a valid, fully perfected security interest in
the Collateral referred to in the Security Agreement.
A default under clause (c), (d) or (f) hereof is not an Event
of Default until the Trustee or the Bond Holders of at least a majority in
principal amount of the then outstanding Bonds notify the Company in writing of
the default and the Company does not cure the default within 30 days after
receipt of the notice. The notice must specify the default, demand that it be
remedied and state that the notice is a "Notice of Default". If the Bond Holders
of a majority in principal amount of the outstanding Bonds request the Trustee
to give such written notice on their behalf, the Trustee shall do so.
The Company will deliver to the Trustee within 10 days after
the occurrence thereof written notice of any event which with the giving of
notice and the lapse of time would become an Event of Default under Section
3(g). The Trustee shall not be deemed to have knowledge of any default unless
either any officer of the Trustee assigned by the Trustee to administer its
corporate trust business has actual knowledge of such default or the Trustee
shall have received written notice thereof from the Company or a Bond Holder.
Upon the occurrence of any Event of Default described in
Sections 3 (e) (i) or 3(e) (ii) above, the entire unpaid principal amount of
this Bond (determined as described below) shall automatically be due and
payable. Upon the occurrence and during the continuance of any other Event of
Default, the Trustee by written notice to the Company, or the Bond Holders of a
majority in principal amount of the outstanding Bonds by written notice to the
Company and the Trustee, may declare the principal of all the Bonds (determined
as described below) to be immediately due and payable. No right or remedy herein
conferred is intended to be exclusive of any other rights or remedies and each
and every right or remedy shall be cumulative and shall be in addition to every
other right or remedy given hereunder or now or hereafter existing under the
Transaction Documents, if any, or by law or equity. No delay or omission in the
exercise of any right or power accruing upon the occurrence of any Event of
Default shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein. For the purpose
of receiving payment of the principal of this Bond if the principal is declared
immediately due and payable, the then current accreted value as of the date of
acceleration, as determined in accordance with the procedures described in
Exhibit A attached hereto, shall be deemed to be the principal amount of this
Bond. All amounts advanced by, or on behalf of, the Bond Holder or the Trustee
in exercising its rights hereunder. (including, but not limited to, reasonable
legal expenses and disbursements incurred in connection therewith), together
with interest thereon from the date of such advance, shall be payable by the
Company on demand to the party that advanced such amount.
<PAGE>
The Bond Holder shall not, by any act, delay, omission or
otherwise be deemed to have waived any of his rights or remedies hereunder and
no waiver by the Bond Holder of his rights or remedies hereunder shall be valid
against Bond Holder unless in writing, signed by Bond Holder, and then only to
the extent therein set forth. The waiver by the Bond Holder of any right or
remedy hereunder upon any one occasion shall not be construed as a bar to any
right or remedy which he would otherwise have had on any further occasion.
The Company hereby waives presentment for payment, protest and
notice for non-payment of this Bond.
IN WITNESS WHEREOF, the Company has caused its seal to be
hereunto affixed and attested and these presents to be signed by its Officer
thereunto duly authorized.
ROTARY POWER INTERNATIONAL, INC.
By:
-----------------------------
Name: Ken Brody
Title: President and CEO
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This Bond is one of the $10,000,000 principal amount of
l0.403% Bonds due December 15, 2007 described in the within-mentioned Indenture.
SENTINEL TRUST COMPANY
AS TRUSTEE
By:
-----------------------------
<PAGE>
EXHIBIT A
ACCRETED VALUE TABLE
Valuation Date Accreted Value Per
-------------- $5,000 of Principal
Payable at Maturity
-------------------
Dated Date $1,815.63
6/15/98 1,906.39
12/15/98 2,005.63
6/15/99 2,110.04
12/15/99 2,219.89
6/15/00 2,335.45
12/15/00 2,457.03
6/15/01 2,584.94
12/15/01 2,719.51
6/15/02 2,861.08
12/15/02 3,010.03
6/15/03 3,166.73
12/15/03 3,331.58
6/15/04 3,505.02
12/15/04 3,687.48
6/15/05 3,879.45
12/15/05 4,081.41
6/15/06 4,293.88
12/15/06 4,517.42
6/15/07 4,752.59
12/15/07 5,000.00
As of any date other than a Valuation Date, the Accreted Value
shall be the sum of (a) the Accreted Value on the preceding Valuation Date and
(b) the product of (1) a fraction, the numerator of which is the number of days
having elapsed from the preceding Valuation Date and the denominator of which is
the number of days from such preceding Valuation Date to the next succeeding
Valuation Date, calculated based on the assumption that Accreted Value accrues
during any semi-annual period in equal daily amounts on the basis of a year of
twelve thirty-day months, and (2) the difference between the Accreted Values for
such Valuation Dates.
A-1
<PAGE>
EXHIBIT B
TO: Sentinel Trust Company
8122 Sawyer Brown Road, Suite 201
Nashville, Tennessee 37221
REQUISITION NO.
The undersigned, an Officer of Rotary Power International,
Inc., (the "Company") pursuant to the Indenture of Trust by and between the
Company and dated as of December 1, 1997 (the "Indenture") makes the following
requisition for payment from the Project Fund established pursuant to the
Indenture entered into with regard to the Company's Project.
Payment to:
Amount:
Reason for Payment:
Such amount is based on an obligation properly incurred
pursuant to the provisions of the Indenture and has not been the basis of any
previous withdrawal. The Company is not in default under any provision of the
Indenture or the Security Agreement.
I further certify that no written notice of any lien, right to
lien, attachment upon or claim, affecting the right to receive payment of, any
of the monies payable under this requisition has been received, or if any notice
of any such lien, attachment or claim has been received, such lien, attachment
or claim has been released or discharged or will be released or discharged upon
payment of this requisition.
Capitalized terms used herein and not otherwise defined shall
have the meaning given thereto in the Indenture.
IN WITNESS WHEREOF, I have hereunto set my hand this _____ day
of _______________.
ROTARY POWER INTERNATIONAL, INC.
By:
------------------------------
Officer
B-1
<PAGE>
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of December 22, 1997, between
ROTARY POWER INTERNATIONAL, INC., a Delaware corporation (the "Debtor"), and
CURTISS-WRIGHT FLIGHT SYSTEMS/SHELBY, INC., an Ohio corporation (the "Secured
Party").
WITNESSETH:
WHEREAS, on the date hereof, the Debtor has issued its 4.0%
Promissory Note dated December 22, 1997 to the Secured Party in the principal
amount of $400,000 (the "Note"); and
WHEREAS, the Debtor has agreed to deliver this Security
Agreement to secure the due and punctual payment of the principal of and
interest on the Note when due and its other obligations to the Secured Party
under the Note.
NOW THEREFORE, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. (a) For value received, the
Debtor hereby grants to the Secured Party in order to secure the payment when
due of the Secured Obligations (as that term is defined below) a security
interest in and assignment of, and agrees and acknowledges that the Secured
Party has and shall continue to have a security interest in and assignment of,
any and all of the following property of the Debtor, whenever acquired and
wherever located (collectively referred to as the "Collateral"):
(i) Any and all of the Debtor's Tangibles (as that term is
defined below); and
(ii) The products, proceeds and accessions of any and all of
the foregoing.
(b) The lien on and security interest in the Collateral
granted to the Secured Party pursuant to Section 1(a) above is subject and
subordinate to, and junior in all respects, to the lien on and security interest
in the Collateral (the "Bondholders' Security Interest") created by the Debtor
pursuant to the Security Agreement, dated as of December 1, 1997 (the
"Bondholders' Security Agreement"), between the Debtor and Sentinel Trust
Company, as Trustee, in order to secure the Debtor's obligations under its
10.412% Bonds due December 15, 2007 (the "Bonds").
2. DEFINITIONS. (a) The term "Secured Obligations" as used
herein shall mean the following:
<PAGE>
(i) Any and all obligations of the Debtor to the Secured Party
pursuant to the Note, including, without limitation, the Debtor's obligations in
respect of the payment of the principal of and interest on the Note when due;
and
(ii) Any and all other obligations of the Debtor to the
Secured Party hereunder.
(b) The term "Tangibles" as used herein includes and shall be
deemed to mean "equipment" as defined in the Uniform Commercial Code as in
effect in the State of New Jersey, including, without limitation, all of the
Debtor's right, title and interest in and to the equipment, machinery, fixtures,
tools, work in process, furniture and other articles of personal property and
all goods and tangible personal property now owned or hereafter acquired by the
Debtor and all replacements and substitutions therefor; provide, however, that
for all purposes of this Security Agreement, "Tangibles" shall not include (i)
the Debtor's interest in any intellectual property or other intangibles, and
(ii) the assets listed on Schedule A attached hereto.
(c) Terms used herein which are not expressly defined herein
shall have the meanings ascribed to them in the Note, except that such terms
which are defined in the Uniform Commercial Code as in effect in the State of
New Jersey shall have the same meanings herein as in said Code.
(d) As used in this Security Agreement and when required by
the context, each number (singular and plural) shall include all numbers, and
each gender shall include all genders; and unless the context otherwise
requires, the word "person" shall include "corporation, firm or association."
3. RELEASE OF SECURITY INTEREST. The Secured Party's security
interest in, and assignment of, all or a part of the Collateral created by this
Security Agreement shall immediately terminate and become null and void upon the
occurrence of the following:
(a) The payment in full of the Secured Obligations;
(b) The sale by the Debtor of inventory and finished products
in the ordinary course of business, in which case the lien on and security
interest granted to the Secured Party in the Collateral so sold shall
immediately terminate and become null and void; and
(c) The sale by the Debtor of all or a portion of the
Collateral as permitted under the Bondholders' Security Agreement and the use of
the proceeds thereof by the Debtor to mandatorily redeem all or a portion of the
Bonds, in which case the lien on and security interest granted to the Secured
Party in the Collateral so sold shall immediately terminate and become null and
void.
4. WARRANTIES, COVENANTS AND AGREEMENTS OF THE DEBTOR. The
Debtor
<PAGE>
warrants, covenants and agrees that:
(a) Except for the Bondholders' Security Interest, other
security interest in the Collateral existing on the date hereof and the security
interest granted hereby and except as permitted by the agreements under which
the Secured Obligations are being incurred, the Debtor is, and as to Collateral
acquired after the date hereof the Debtor shall and will be at the time of
acquisition the owner and holder of the Collateral free from any other adverse
claim, security interest, encumbrance, lien, charge, or other right, title or
interest of any person other than the Secured Party and covenants that at all
times the Collateral will be and remain free of all such other adverse claims,
security interests, or other liens or encumbrances; the Debtor has full power
and lawful authority to sell, assign and transfer the Collateral to the Secured
Party and to grant to the Secured Party a security interest therein as herein
provided; the execution and delivery and the performance hereof are not in
contravention of any charter or by-law provision or of any indenture, agreement
or undertaking to which the Debtor is a party or by which the Debtor or its
property are bound; and the Debtor will defend the Collateral against all claims
and demands of all persons (other than those holding security interests in the
Collateral existing as of the date hereof) at any time claiming the same or any
interest therein. Any officer, agent or representative acting for or on behalf
of the Debtor in connection with this Security Agreement or any aspect thereof,
or entering into or executing this Security Agreement or any financing statement
on behalf of the Debtor, has been duly authorized so to do, and is fully
empowered to act for and represent the Debtor in connection with this Security
Agreement and all matters related thereto or in connection therewith.
(b) (i) Except with respect to security interest in the
Collateral existing as of the date hereof, the Debtor has not heretofore signed
any financing statement or security agreement which covers any of the
Collateral, and no such financing statement or security agreement is now on file
in any public office (other than any such statements or agreements, if any, that
are permitted hereunder and under the agreements under which the Secured
Obligations are being incurred).
(ii) As long as any amount remains unpaid on any of the
Secured Obligations the Debtor will not enter into or execute any security
agreement or any financing statement covering the Collateral, other than those
security agreements and financing statements existing on the date hereof or in
favor of the Secured Party hereunder.
(iii) the Debtor authorizes the Secured Party to file, in
jurisdictions where this authorization will be given effect, a financing
statement signed only by the Secured Party covering the Collateral, and hereby
appoints the Secured Party as the Debtor's attorney-in-fact to sign and file any
such financing statements covering the Collateral. At the request of the Secured
Party, the Debtor will join the Secured Party in executing such documents as the
Secured Party may determine, from time to time to be reasonably necessary or
desirable under provisions of any applicable Uniform Commercial Code in effect
where the Collateral is located or where the Debtor conducts business; without
limiting the generality of the foregoing, the Debtor agrees to join the Secured
Party, at the Secured Party's request, in
<PAGE>
executing one or more financing statements in form satisfactory to the Secured
Party, and the Debtor will pay the costs of filing or recording the same, or of
filing or recording this Security Agreement, in all public offices at any time
and from time to time, whenever filing or recording of any such financing
statement or of this Security Agreement is deemed by the Secured Party to be
necessary or desirable. In connection with the foregoing, it is agreed and
understood between the parties hereto (and the Secured Party is hereby
authorized to carry out and implement this agreement and understanding and the
Debtor hereby agrees to pay the costs thereof) that the Secured Party may, at
any time or times, file as a financing statement any counterpart, copy, or
reproduction of this Security Agreement.
(c) Except as required in the ordinary course of the Debtor's
business or as specifically otherwise permitted or provided herein, the Debtor's
Tangibles shall remain in the Debtor's possession and control at all times at
the Debtor's risk of loss, and are now kept and at all times shall be kept at
the Debtor's principal place of business.
(d) Subject to the provisions of Section 4(c) above, the
Debtor will promptly notify the Secured Party of any change in the location of
any Tangibles other than in the ordinary course of business and of any new
addresses or locations where Tangibles are or may be kept.
(e) The Debtor further covenants and agrees that, if any
certificates of title or similar documents are at any time issued or outstanding
with respect to any of the Collateral, the Debtor will promptly advise the
Secured Party thereof, and the Debtor will promptly cause the interest of the
Secured Party to be properly noted thereon, and if any certificates of title or
similar documents are so issued or outstanding at the time this Security
Agreement is executed by or on behalf of the Debtor, then the Debtor shall have
caused the interest of the Secured Party so to have been properly noted at or
before the time of such execution; and the Debtor will further promptly deliver
to the Secured Party any such certificate of title or similar document.
(f) Except as provided in Section 3 above, the Debtor will not
sell or offer to sell or otherwise transfer or encumber or dispose of the
Collateral or any interest therein without the prior written consent of the
Secured Party.
(g) Notwithstanding anything to the contrary contained herein,
it is understood and agreed that if for any reason Tangibles are at any time
kept or located at locations other than those specified or which may hereafter
be consented to by the Secured Party, the Secured Party shall nevertheless have
and retain a security interest therein.
5. SPECIAL PROVISIONS - TANGIBLES. (a) At any time after any
of the Secured Obligations shall become due, all proceeds of the Debtor's
Tangibles, whether cash proceeds or non-cash proceeds, shall be received and
held by the Debtor in trust for the Secured Party, shall not be commingled with
any other funds, accounts, monies or property of the Debtor,
<PAGE>
and shall be promptly accounted for, paid over and delivered to the Secured
Party in the form as received by the Debtor upon receipt thereof by the Debtor.
(b) The Debtor will promptly report to the Secured Party any
occurrence or condition known to or which becomes known to the Debtor having any
material adverse effect upon the value and condition of the tangibles taken as a
whole.
6. FURTHER AGREEMENTS BETWEEN THE DEBTOR AND THE SECURED
PARTY. (a) The Secured Party shall never be under any obligation to collect,
attempt to collect, protect or enforce the Collateral or any security therefor,
which the Debtor agrees, and undertakes to do at the Debtor's expense, but the
Secured Party may do so in its discretion at any time after any of the Secured
Obligations shall become due and at such time the Secured Party shall have the
right to take any steps by judicial process or otherwise it may deem proper to
effect the collection of all or any portion of the Collateral or to protect or
to enforce the Collateral or any security therefor. All expenses (including,
without limitation, attorneys' fees and expenses) incurred or paid by the
Secured Party in connection with or incident to any such collection or attempt
to collect the Collateral or actions to protect or enforce the Collateral or any
security therefor shall be borne by the Debtor or reimbursed by the Debtor to
the Secured Party upon demand. The proceeds of collection as a result of any
such actions in collecting or enforcing or protecting the Collateral shall be
held by the Secured Party without liability for interest thereon and may be
applied by the Secured Party as the Secured Party may deem appropriate toward
payment of any of the Secured Obligations secured hereby in such order or manner
as the Secured Party may elect.
(b) In the event the Secured Party shall pay any such taxes,
assessments, interests, costs, penalties or expenses incident to or in
connection with the collection of the Collateral or protection or enforcement of
the Collateral or any security therefor, the Debtor, upon demand of the Secured
Party, shall pay to the Secured Party the full amount thereof with interest at a
rate per annum equal to 4.0% per annum; and so long as the Secured Party shall
be entitled to any such payment, this Security Agreement shall operate as
security therefor as fully and to the same extent as it operates as security for
payment of the other Secured Obligations secured hereunder, and for the
enforcement of such repayment the Secured Party shall have every right and
remedy provided for enforcement of payment of the Secured Obligations.
(c) In the event that the Collateral or any part thereof shall
now or hereafter become so related to particular real estate that an interest in
it may arise under the real estate laws of the state in which such real estate
is located, then the Debtor shall immediately notify the Secured Party of such
fact and take all steps and furnish all information as the Secured Party shall
reasonably request for the purpose of creating or extending (as the case may be)
a valid and enforceable lien in such Collateral, including making such
additional filings or recordings, at the Debtor's expense, as the Secured Party
shall deem necessary or appropriate.
7. REMEDIES. (a) After any of the Secured Obligations shall
become due, in
<PAGE>
addition to any other remedies provided for in any of the agreements relating to
any of the Secured Obligations or available under applicable law, the Secured
Party shall have and may exercise with reference to the Collateral and Secured
Obligations any or all of the rights and remedies of a secured party under the
Uniform Commercial Code in effect in the State of New Jersey, and as otherwise
granted herein or under any other applicable law or under any other agreement
executed by the Debtor, including, without limitation, the right and power to
sell, at public or private sale or sales, or otherwise dispose of, lease or
otherwise utilize the Collateral and any part or parts thereof in any manner
authorized or permitted under said Uniform Commercial Code after default by a
debtor, and to apply the proceeds thereof toward payment of any costs and
expenses and attorneys' fees and expenses thereby incurred by the Secured Party
and toward payment of the Secured Obligations (as between the Secured Party and
the Debtor, in such order or manner as the Secured Party may elect).
Specifically and without limiting the foregoing, the Secured Party may require
the Debtor to assemble the Collateral or any security therefor and make it
available to the Secured Party at a place to be designated by the Secured Party;
and the Secured Party shall have the right to take possession of all or any part
of the Collateral or any security therefor and of all books, records, papers and
documents of the Debtor or in the Debtor's possession or control relating to the
Collateral which are not already in the Secured Party's possession, and for such
purpose may enter upon any premises upon which any of the Collateral or any
security therefor or any of said books, records, papers and documents are
situated and remove the same therefrom without any liability for trespass or
damages thereby occasioned. To the extent permitted by law, the Debtor expressly
waives any notice of sale or other disposition of the Collateral and all other
rights or remedies of the Debtor or formalities prescribed by law relative to
sale or disposition of the Collateral or exercise of any other right or remedy
of the Secured Party existing after default hereunder; and to the extent any
such notice is required and cannot be waived, the Debtor agrees that if such
notice is given in the manner provided in Section 8 hereof at least three (3)
days before the time of the sale or disposition, such notice shall be deemed
reasonable and shall fully satisfy any requirement for giving of said notice.
(b) After any of the Secured Obligations shall become due, the
Secured Party is expressly granted the right, at its option, to transfer at any
time to itself or to its nominee the Collateral, or any part thereof, and to
receive the payments, collections, monies, income, proceeds or benefits
attributable or accruing thereto and to hold the same as security for the
Secured Obligations or to apply it on the principal and interest or other
amounts owing on any of the Secured Obligations (as between the Secured Party
and the Debtor, in such order or manner as the Secured Party may elect).
(c) All rights to marshalling of assets of the Debtor,
including any such right with respect to the Collateral, are hereby waived by
the Debtor to the extent permitted under applicable law.
(d) All recitals in any instrument of assignment or any other
instrument executed by the Secured Party incident to sale, lease, transfer,
assignment or other disposition,
<PAGE>
lease or utilization of the Collateral or any part thereof hereunder shall be
full proof of the matters stated therein and no other proof shall be requisite
to establish full legal propriety of the sale or other action taken by the
Secured Party or of any fact, condition or thing incident thereto and all
prerequisites of such sale or other action or of any fact, condition or thing
incident thereto shall be presumed conclusively to have been performed or to
have occurred.
8. GENERAL. (a) NO IMPAIRMENT, ETC. The execution and delivery
of this Security Agreement in no manner shall impair or affect any other
security (by endorsement or otherwise) for the payment or performance of the
Secured Obligations and no security taken hereafter as security for payment or
performance of the Secured Obligations shall impair in any manner or affect this
Security Agreement, all such present and future additional security to be
considered as cumulative security. Any of the Collateral may be released from
this Security Agreement without altering, varying or diminishing in any way the
force, effect, lien, security interest, or charge of this Security Agreement as
to the Collateral not expressly released, and this Security Agreement shall
continue as a lien, security interest and charge on all of the Collateral not
expressly released until all the Secured Obligations secured hereby have been
paid or performed in full. Any future assignment of the interest of the Debtor
in and to any of the Collateral shall not deprive the Secured Party of the right
to sell or otherwise dispose of or utilize all or any part of the Collateral as
above provided or necessitate the sale or disposition thereof in parcels or in
severalty.
(b) LIABILITY FOR DEFICIENCY. This Security Agreement shall
not be construed as relieving the Debtor from full liability on the Secured
Obligations and any and all future and other indebtedness secured hereby and for
any deficiency thereon.
(c) POWERS OF THE SECURED PARTY. In protecting, exercising or
assuring its interests, rights and remedies under this Security Agreement, the
Secured Party may receive, open and dispose of mail addressed to the Debtor and
execute, sign and endorse negotiable and other instruments for the payment of
money, documents of title and other evidences of payment, shipment or storage
for any form of Collateral or proceeds on behalf of and in the name of the
Debtor.
(d) SUBROGATION. The Secured Party is hereby subrogated to all
of the Debtor's interests, rights and remedies in respect to the Collateral and
all security now or hereafter existing with respect thereto and all guaranties
and endorsements thereof and with respect thereto.
(e) NOTICES. Any communications, notice or demand to be given
hereunder shall be duly given if in writing (including telecopy communications)
and delivered, mailed or telecopied:
IF TO THE DEBTOR, AT:
<PAGE>
Rotary Power International, Inc.
22 Passaic Street
P.O. Box 128
Wood-Ridge, New Jersey 07075-0128
Attention: President
Tel: (973) 470-7000
Fax: (973) 779-5595
IF TO THE SECURED PARTY, AT:
Curtiss-Wright Flight Systems/Shelby, Inc.
c/o Curtiss-Wright Corporation
One Passaic Street
Wood-Ridge, New Jersey 07075
Attention: Real Estate Department
Tel: (973) 777-4588
Fax: (973) 777-6901
or, as to any party, to such other address as shall be designated by such party
in a prior written notice to each other party similarly given.
(f) NO DUTY TO PRESERVE COLLATERAL. The Secured Party shall
not be obligated to take any steps necessary to preserve any rights in the
Collateral or in any security therefor against any other party, which obligation
the Debtor hereby assumes.
(g) NO WAIVER. No delay or omission on the part of the Secured
Party in exercising any right hereunder shall operate as a waiver of any such
right or any other right. A waiver on any one or more occasions shall not be
construed as a bar to or waiver of any right or remedy on any future occasion.
The remedies of the Secured Party hereunder are cumulative, and the exercise of
any one or more of the remedies provided for herein shall not be construed as an
election or as a waiver of any of the other remedies of the Secured Party
provided for herein or existing by law or otherwise.
(h) ASSIGNMENT. All rights of the Secured Party hereunder
shall inure to the benefit of its successors and assigns; and all obligations of
the Debtor shall bind its successors and assigns.
(i) GOVERNING LAW. This Security Agreement shall be governed
by and construed in accordance with the laws of the State of New Jersey, except
as required by mandatory provisions of law and except to the extent that the
validity or perfection of any of the security interests hereunder, or remedies
hereunder, are governed by the laws of a jurisdiction other than the State of
New Jersey.
(j) EXECUTION IN COUNTERPARTS. This Security Agreement may be
executed in any number of counterparts, each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Debtor and the Secured Party have duly
executed and delivered this Security Agreement as of the date first above
written.
ROTARY POWER INTERNATIONAL, INC.
By /s/ Ken Brody
--------------------
Name: Ken Brody
Title: President
CURTISS-WRIGHT FLIGHT
SYSTEMS/SHELBY, INC.,
ACTING BY AND THROUGH
CURTISS-WRIGHT CORPORATION
By /s/ Kent H. Garson
--------------------
Name: Kent H. Garson
Title: Director - Corporate Real Estate
<PAGE>
SCHEDULE A
List of equipment and machinery to be sold at
auction sale on January 27, 1997
<PAGE>
Curtiss-Wright Flight Systems/Shelby, Inc.
December 22, 1997
Page 1
ROTARY POWER INTERNATIONAL, INC.
22 PASSAIC STREET
P.O. BOX 128
WOOD-RIDGE, NJ 07075-0128
December 22, 1997
Curtiss-Wright Flight Systems/Shelby, Inc.
c/o Curtiss-Wright Corporation
One Passaic Street
Wood-Ridge, New Jersey 07075
Attn: Real Estate Department
RE: SETTLEMENT OF CLAIMS WITH RPI
Gentlemen:
The purpose of this letter is to memorialize and confirm the
agreement and understanding that has been reached between Rotary Power
International, Inc. ("RPI") and Curtiss-Wright Flight Systems/Shelby, Inc.
("Curtiss-Wright") with respect to the settlement of all claims, including
all monetary claims, that Curtiss-Wright has or may have against RPI relating
to RPI's breach of, and default under, the Lease Agreement, dated as of June
1, 1992, as amended (the "Lease") relating to certain premises located at 22
Passaic Street, Wood-Ridge, New Jersey.
RPI has heretofore defaulted in several of its obligations
under the Lease, including, without limitation, its obligation to make several
payments to Curtiss-Wright which were required to be paid by RPI in accordance
with the Lease. As of the date hereof, RPI owes Curtiss-Wright an aggregate
amount of approximately $591,000 in connection with its failure to make such
payments. As a result of these past defaults by RPI, Curtiss-Wright has
heretofore terminated the Lease.
For good and valuable consideration the receipt of which is
hereby acknowledged by RPI and Curtiss-Wright and in settlement of all claims
RPI and Curtiss-Wright may now have against each other relating to the Lease and
RPI's default thereunder, RPI and Curtiss-Wright agree as follows:
1. RPI shall pay $10,000 to Curtiss-Wright on or before
December 23, 1997. Such payment shall be made by check or wire transfer as
requested by Curtiss-Wright.
2. RPI is currently scheduled to sell a portion of its
equipment, machinery, furniture and other assets at an auction sale to be held
on January 27, 1997. Within three (3) days after the completion of such auction
sale, RPI shall make a payment of $115,000 to Curtiss-Wright. Such payment shall
be made by check or wire transfer as requested by Curtiss-Wright.
3. As soon as practicable after the date hereof, RPI shall
issue its promissory note to Curtiss-Wright in the principal amount of $400,000.
Such promissory note shall be dated the date hereof, shall mature on January 1,
2003 and shall bear interest from its date at a rate of 4.0% per annum. Interest
on the promissory note shall be payable on January 1 in each of the years of
1999, 2000, 2001, 2002 and at maturity on January 1, 2003. RPI shall have the
right to prepay such promissory note in whole or in part at any time without
penalty. Such promissory note shall be secured by a lien on and security
interest in certain equipment, machinery, fixtures, tools, work in progress,
inventory, furniture and other personal property now owned or hereafter acquired
by RPI (but not including RPI's interest in any intellectual property and other
intangibles), subject and subordinate in all respects to the lien on and
security in such property and assets in favor of the holders of RPI's bonds due
December 15,
<PAGE>
Curtiss-Wright Flight Systems/Shelby, Inc.
December 22, 1997
Page 2
2007 which are being issued on the date hereof.
4. RPI shall remove all equipment, machinery and other assets
and completely vacate the premises which were the subject of the Lease by no
later than March 1, 1998. RPI shall leave such premises in "broom swept" clean
condition when vacated. Between the date hereof and February 28, 1998, RPI shall
have the peaceable and quiet enjoyment and possession of the premises, without
the obligation to make any additional rent or other payments to Curtiss-Wright
other than the payments required by the terms of this letter.
5. The real estate taxes which have been paid on the premises
are currently being appealed by Curtiss-Wright and RPI hereby waives its right
to receive a refund form Curtiss-Wright in the event that such appeal is
successful.
6. RPI and Curtiss-Wright hereby release, remise and forever
discharge each other and any and all of their respective officers, directors,
employees, consultants, accountants, attorneys and agents and any and all of
their respective heirs, successors or assigns from any and all demands, debts,
liabilities, claims, rights, actions, causes of action, suits and proceedings
whatsoever of every kind and nature whether known or unknown, foreseen or
unforeseen, whether in law or in equity, which they ever had, now have or may
have against each other and any and all of their respective officers, directors,
employees, consultants, accountants, attorneys and agents and any and all of
their respective heirs, successors or assigns for, upon or by reason of any
matter or cause whatsoever form the beginning of the world to the date of this
letter. Furthermore, Curtiss-Wright hereby specifically releases, remises and
forever discharges any and all liens or security interests it may have, by
statute or otherwise, on any property or other assets whatsoever of RPI.
Please acknowledge your agreement to the terms and conditions
described above by signing a copy of this letter where indicated below and
returning a signed copy to the undersigned. Upon your execution of this letter,
this letter shall become a binding agreement between RPI and Curtiss-Wright.
Very truly yours,
ROTARY POWER INTERNATIONAL, INC.
<PAGE>
Curtiss-Wright Flight Systems/Shelby, Inc.
December 22, 1997
Page 3
By: /s/ Ken Brody
--------------------
Name: Ken Brody
Title: President
Acknowledged and agreed this 22nd day of December, 1997:
CURTISS-WRIGHT FLIGHT SYSTEMS/SHELBY, INC.,
acting by and through CURTISS-WRIGHT CORPORATION
By: /s/ Kent H. Gardon
-----------------------------
Name: Kent H. Garson
Title: Director - Corporate Real Estate
<PAGE>
EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
BASIC 1998 1997
----- ---- ----
<S> <C> <C>
Shares outstanding, beginning of period 5,968,516 6,641,432
Weighted average number of shares issued,
retired and issuable share equivalents 72,170 (522,552)
Weighted average number of common and
common equivalent shares outstanding 6,040,686 6,118,880
============ ============
Net loss $(1,510,252) $(5,032,819)
============ ============
Net loss per common share $( 0.25) $( 0.82)
============ ============
DILUTED
Weighted average number of common and common
equivalent shares outstanding as adjusted to full
dilution 6,047,886 6,118,880
============ ============
Net loss $(1,510,252) $(5,032,819)
============ ============
Net loss per common share $( 0.25) $( 0.82)*
============ ============
</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
<PAGE>
EXHIBIT 21
ROTARY POWER INTERNATIONAL, INC.
LIST OF SUBSIDIARIES
E-DRIVE SYSTEMS CORPORATION IS A WHOLLY-OWNED SUBSIDIARY OF THE
COMPANY.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-KSB of our
report dated March 6, 2000, on our audits of the consolidated financial
statements of Rotary Power International, Inc. We also consent to the
references to our firm under the caption "Experts".
/s/ Demetrius & Company, L.L.C.
DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
March 15, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
(ANNUAL SEC REPORT FINANCIAL SUMMARY)
</LEGEND>
<CIK> 0000914539
<NAME> ROTARY POWER INTERNATIONAL, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 485
<SECURITIES> 0
<RECEIVABLES> 73,566
<ALLOWANCES> 0
<INVENTORY> 681,898
<CURRENT-ASSETS> 756,385
<PP&E> 1,261,777
<DEPRECIATION> 435,660
<TOTAL-ASSETS> 2,018,162
<CURRENT-LIABILITIES> 2,729,718
<BONDS> 4,015,925
0
1,750
<COMMON> 61,129
<OTHER-SE> (7,602,923)
<TOTAL-LIABILITY-AND-EQUITY> 2,018,162
<SALES> 72,848
<TOTAL-REVENUES> 72,848
<CGS> 627,695
<TOTAL-COSTS> 1,403,376
<OTHER-EXPENSES> 466,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 653,173
<INCOME-PRETAX> (1,510,252)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,510,252)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
