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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, 1999
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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
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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 X No ____
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $65,607.
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $2,423,972, which is based on the closing price of
$.406 on April 5, 2000.
The number of shares of Common Stock outstanding on April 6, 2000 was 6,212,855.
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................14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........15
Item 6. Management's Discussion and Analysis or Plan of Operation..........16
Item 7. Financial Statements...............................................19
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................20
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................20
Item 10. Executive Compensation.............................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management.....22
Item 12. Certain Relationships and Related Transactions.....................23
PART III
Item 13. Exhibits and Reports on Form 8-K...................................23
Signatures......................................................................29
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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 along with its
wholly-owned subsidiary, E-Drive Systems Corporation ("E-Drive"). 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 in
commercial build quantities, after a pilot production run, accelerated
reliability testing, and selected 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. During the fourth quarter of 1999, the Company entered into a series of
agreements with Londonderry Capital Structuring Limited of Toronto, Ontario,
Canada ("Londonderry"), with the intent to arrange financing for the
construction of a new high volume engine production facility and to raise
sufficient capital to position the Company as the major supplier of rotary
engines. These agreements include an investor-relations agreement, a consulting
agreement, a facilitation fee agreement and an agreement providing for
Londonderry's purchase of up to three million shares of the Company's common
stock, subject to certain requirements.
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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 rotary engines. JDTI purchased its rotary
engine division from the Curtiss-Wright Corporation ("Curtiss-Wright") in 1984,
becoming the sole owner of all of the rotary engine assets of JDTI and
Curtiss-Wright, including the proprietary technology and currently enforceable
patent rights.
In October 1992, the Company entered into an 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 terminated the
Agreement 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 and developed a natural gas version of the Mazda rotary 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") 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"), which was transferred to General Dynamics Land
Systems Inc. ("GDLS"), a wholly-owned subsidiary of General Dynamics Corporation
in 1996, and terminated 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 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
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with Abejon on October 5, 1995. The area of responsibility of Abejon was
initially the states and provinces bordering the Pacific coast of Mexico and
Canada, including Hawaii, and was increased to the whole United States. 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, of which $850,000 of the loan plus
interest was repaid and no further amounts were paid. As a result of this
default, certificates for 822,916 shares of the Company's common stock issued to
Abejon were recently 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 signed a Plan and Agreement of Merger on March 21,
1997. This Plan and Agreement was never completed and was terminated in August,
1997. PowerCold still held 1,935,000 shares of the Company's Common Stock at
December 31, 1999.
In January, 1998, 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.
As part of the restructuring and pursuant to an agreement dated June 4,
1998, RPM sold a portion of its assets, consisting of the name and logo for
Rotary Power Marine Corporation, 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 renamed Rotary Power Marine "E-Drive Systems
Corporation."
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 NGRE
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, assigned a contract with Hussman to sell
refrigeration components containing those engines, and 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 250,000
shares of Series 3 Preferred Convertible Stock at $1.00 per share from November,
1998 through September, 1999. Each share is convertible into four shares of
common stock upon the request of the shareholder. All of the shares sold are
restricted shares ineligible for resale unless they are registered or exempt
from registration under applicable federal and state securities regulations.
Certain of the Preferred Shareholders converted their shares into 100,000 shares
of common stock during May, 1999.
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New Jersey enacted its Technology Transfer Tax Program effective in
1999. Under this program, certain qualified technology corporations with
accumulated New Jersey tax credits for losses carried forward may submit
applications to sell those losses, at a discount, to other qualified New Jersey
corporations. The Company submitted its application on July 28, 1999, and was
one of the few approved to sell its tax losses. Tax credits of $586,153, from
fiscal years 1992 to 1996, were approved for sale and were sold to
Curtiss-Wright in December, 1999. In addition, Curtiss-Wright contracted to
purchase the remaining approved credits in the amount of $625,532 as the New
Jersey tax department allocates them for sale over the next year or so.
As part of this transaction, the Company paid $50,000 of the
outstanding $400,000 note due Curtiss-Wright, leaving a balance of $350,000
due January 1, 2003, and bearing 4% annual interest.
In October and November, 1999, the Company entered into several
agreements with Londonderry, including a consulting agreement, an
investor-relations agreement, a facilitation fee agreement and a subscription
agreement to purchase up to 3,000,000 of the Company's shares of common stock at
$.18 per share, subject to certain conditions, including among others, the
completion of due diligence satisfactory to Londonderry, the execution of
lock-up agreements of certain shareholders and the Company becoming current in
its reporting requirements under the Securities and Exchange Act of 1934. Under
the terms of the consulting agreement, Londonderry will advise the Company on
financial, operational and managerial issues, including capital-raising and
marketing strategies, in consideration of a monthly fee of $10,000. The
consulting agreement, effective on November 1, 1999, is on a month-to-month
basis, renewable automatically unless terminated by either party upon thirty
(30) days written notice.
The investor-relations agreement provides that Londonderry will provide
shareholder services for the Company for a term through December 31, 2000 and
renewable upon the written consent of both parties. Under the terms of the
investor-relations agreement, the Company must pay Londonderry a $2,000 fee for
November and December, 1999, and a $5,000 fee for every month thereafter through
December 31, 2000. The Company has paid all of the monthly fees due under the
agreements through December 31, 1999.
The Company also has a facilitation fee agreement with Londonderry
under which it is required to pay a fee equal to ten percent (10%) of the
aggregate amount of any financing proposal funded through Londonderry and two
percent (2%) of any merger, acquisition or other source of funding, payable upon
the closing of the transaction. The facilitation fee agreement is effective
through December 31, 2000.
The agreements with Londonderry will allow the Company sufficient
capital to position it as the major supplier of rotary engines through the
construction of a facility possibly to be located in New Brunswick, Canada. The
Company has been in discussion with representatives of the Province of New
Brunswick concerning its possible participation.
On November 17, 1999, the Company formed a new wholly-owned subsidiary,
Pegasus Technologies Incorporated, under the laws of New Brunswick, Canada.
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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. 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 licensing 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.
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.
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
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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.
<TABLE>
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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
The heavy fuel (Diesel) 580 Series is the Company's primary product
focus. 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, as well as 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 since it
was shelved.
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
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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
At December 31, 1999, all research and development contracts with the
U.S. Government were closed out in accordance with applicable government
property regulations and the Company did not have any contracts with private
companies.
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 that 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.
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.
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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 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. Benefits attributable to the use of these engines
include the fact that 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, can be installed on rooftops where conventional units would require
major structural reinforcement and 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.
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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 resulted in the Company's
receipt of 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 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.
MILITARY MARKETS
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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
discussion with the U.S. Army and Navy concerning the possible development of
the Heavy Fuel Engine for this Tactical UAV. There is no assurance that the
Company will be awarded a Heavy Fuel Engine contract for its 40 Series
multi-fuel rotary engine.
AUXILIARY POWER UNITS
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
10
<PAGE>
expected in 2001 but will only apply to outboards and personal watercraft.
Emission regulations on inboard, inboard/outboard and stern drives are not
expected before 2005. Proposed regulations, however, require reduced NO(x)
emissions, which favor the Company's SCORE(TM) technology engines.
The generators, chillers and co-generation products for which the
Company supplies engines 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
comply 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.
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 assembled 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 are required to 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 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-
11
<PAGE>
Ridge Ordinance.
The Company had NJDEP stack permits for control apparatus and equipment
at December 31, 1999.
The Company had no underground storage tanks at December 31, 1999.
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,
1999.
MANUFACTURING AND ASSEMBLY
The Company had sufficient capital equipment and manufacturing space
available to support its minimal operations at December 31, 1999, and 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, including SeaBank and Marubeni, continue to be serviced
by the Company at December 31, 1999. 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. The Company is in
discussions with SeaBank to be a supplier of propulsion and power generation
engines for a fleet of fishing vessels. While the expected value of these orders
could be worth $100 million over the next three years, no definitive agreement
has been reached between the parties and no orders have been made.
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
12
<PAGE>
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 1999, the Company had one Master
Engine Distributor, and the Company anticipates expansion of their Master Engine
Distributor network in 2000.
In 1999, PowerCold and its subsidiaries continue to market certain of
the Company's products.
INTELLECTUAL PROPERTY
The Company believes that it owns or has license and patent protection
for certain elements of the technology necessary to develop and produce its
rotary engine. The Company owns approximately 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,
13
<PAGE>
however, there are currently no competitive products with the weight, size,
vibration or fuel range advantages of the Company's rotary engine.
EMPLOYEES
In the fourth quarter of 1999, the Company contracted through Employee
Solutions, Inc. ("ESI") for five (5) additional contractual employees, ending
the year with a total of seven employees, including its President, Chief
Executive Officer and Director. ESI provides insurance and benefits to the
Company's contractual employees.
None of the Company's employees at December 31, 1999 is represented by
a labor union and the Company considers relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTY
The Company leases manufacturing inventory and test cell space from
Curtiss-Wright at a monthly rent of $8,200 per month.
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 2000. In
addition, the Company occupies 10,000 square feet of office space on a
month-to-month rental basis at a monthly rent of $1,300.
In accordance with a previous settlement between the Company and
Curtiss-Wright for space previously occupied by the Company, 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. As part of the tax credit sales
transaction between the Company and Curtiss-Wright, the Company paid $50,000 of
the outstanding $400,000 note due Curtiss-Wright, leaving a balance of $350,000
due January 1, 2003, and bearing 4% annual interest.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1999, 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.
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, 1998 or
1999. No vote was made by the shareholders of the Company during the fiscal year
ended December 31, 1999.
On November 23, 1999, Mr. Douglas M. Drew of Toronto accepted his
appointment by the
14
<PAGE>
Board to become a member of the Board of Directors of the Company. Mr. Drew also
accepted the appointment by the Board to the position of Vice President,
Finance. Mr. Drew is an investment banker in Canada.
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 OTC Bulletin Board 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.
COMMON STOCK
<TABLE>
<CAPTION>
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 .950 .40
Fourth Quarter .563 .125 .625 .15
</TABLE>
COMMON STOCK
<TABLE>
<CAPTION>
BID ASK
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED 12/31/99
First Quarter .266 .094 .30 .10
Second Quarter .375 .45 .425 .50
Third Quarter .125 .094 .15 .12
Fourth Quarter 1.25 .109 1.30 .15
</TABLE>
15
<PAGE>
The Company has never paid any dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Board of
Directors of the Company currently anticipates retaining any available earnings
for the growth and expansion of the Company's business. The declaration and
payment of future cash dividends, if any, generally would depend upon the
Company's earnings, financial condition, results of operations, current and
anticipated capital requirements, plans for expansion, if any, future prospects,
restrictions under then existing credit and other debt instruments and
arrangements and other factors deemed relevant by the Board of Directors.
On April 7, 2000, there were approximately 111 common stockholders of
record.
The Company sold an aggregate of 75,000 shares of its Series 3
Preferred Stock during the fiscal year ending December 31, 1999 that were not
registered under the Securities Act. The unregistered sales were made to certain
investors at $1.00 per share in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 for offerings that do not
constitute a public offering. All of the purchasers acquired the Preferred Stock
for investment, and there was no general advertising or general solicitation in
connection with the offer and sale of the Preferred 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1999 VS. TWELVE MONTHS ENDED
DECEMBER 31, 1998
Fiscal year 1999 was the second year of the Company's efforts to
restructure. The Company's efforts were directed toward the objective of
creating a commercial engine production facility, funding that facility, and
securing relationships with potential customers for those engines. There was no
engine production in 1999, and all revenues derived from sales of inventory in
the amount $65,607, sale of the Company's Series 3 preferred stock of $75,000,
and sales of the New Jersey Net Operating Loss ("NOL") credits of $1,095,401.
Costs of revenues, which includes depreciation and other fixed charges,
was $629,225, nearly at the same level as the prior year.
Reduction of $493,707, or 64%, in General and Administrative charges
reflects cost-cutting measures implemented by the Company and personnel
reductions during the second and third quarters of 1999. The loss from
operations accordingly was reduced by $484,936, or 36%, from the same period of
the previous year.
Interest expense on the Company's long-term debts and notes payable
increased $41,220, or 6%, from the same period of the previous year.
The reduction of other income from $466,989 in 1998 to $59,798 in 1999
reflects minimal one-time gains on the sale of property in contrast to the
larger gains from the same during 1998.
16
<PAGE>
After the sale of the New Jersey NOLs, the Company's net loss was
reduced dramatically from $1,510,252 to $378,326, or 75%, from the same period
of 1998. This is reflected in a reduction in the per share loss from $.25 per
share in 1998 to $.06 per share in 1999.
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 $72,848, 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current monthly cash expenditures of roughly $60,000 are
being met, in part, by continued income from sales of inventory, collection of
receivables and other sources, but these sources are not deemed adequate. In the
current fiscal year, receipts from the remaining unsold portion of the New
Jersey NOL credits will be sufficient to meet these expenses, but will be
inadequate to fund any expansion. The Company anticipates possible future
financing assistance through its agreements with Londonderry.
17
<PAGE>
Operating activities absorbed $48,090 in chase during 1999, including
adjustments of $625,532 and $50,000, which are, respectively, the receivable for
the New Jersey NOL credit, a negotiated one-time reduction of the rent expense,
and a loss of $21,136 on the sale of fixed assets.
Proceeds from investing activities of $25,900 in 1999 were from the
sale of tooling associated with the discontinued Mazda engine lines.
Aggregate proceeds from the sale of the Company's Series 3 Preferred
Stock amounted to $75,000 during 1999. There were no capital expenditures in
1999.
During the fourth quarter of 1999, the Company entered into a series of
agreements with Londonderry Capital Structuring Limited of Toronto, Ontario,
Canada, to assist the Company in finding financing for the construction of a new
high volume engine production facility and to raise sufficient capital to
position the Company as the major supplier of rotary engines. These agreements
include Londonderry's purchase of up to three million shares of the Company's
common stock, subject to certain due diligence and disclosure requirements and
also subject to lock-up agreements with certain major shareholders.
The Company has been in discussions with the Province of New Brunswick
regarding their possible participation in funding of a major manufacturing
facility in New Brunswick, Canada. This facility would produce Series 580 NGRE,
RPE and SCORE(TM) engines as well as Series 70 HF engines and machined castings
for generators.
Under the Technology Transfer Tax Program, certain qualified technology
corporations with accumulated New Jersey tax credits for losses carried forward
may submit applications to sell those losses, at a discount, to other qualified
New Jersey corporations. The Company submitted its application on July 28, 1999
and tax credits of $586,153, from fiscal years 1992 to 1996, were approved for
sale and were sold to Curtiss-Wright in December, 1999. In addition,
Curtiss-Wright contracted to purchase the remaining approved credits in the
amount of $625,532 as the New Jersey tax department allocates them for sale over
the next year.
As part of the NOL sales transaction, the Company paid $50,000 of the
outstanding $400,000 note due Curtiss-Wright, leaving a balance of $350,000 due
January 1, 2003, and bearing 4% annual interest.
"SAFE HARBOR" STATEMENT
Certain 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.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants............................................... F-1
Consolidated Balance Sheets - December 31, 1999 and 1998........................ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998...................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
for the Years Ended December 31, 1999 and 1998.................................. F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998................................................ F-5
Notes to Financial Statements...................................................F-6 - F-18
</TABLE>
19
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
With Independent Auditors' Report
DECEMBER 31, 1999
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors Report F-1
Consolidated Balance Sheets December 31, 1999 and 1998 F-2
Consolidated Statements of Operations December 31, 1999 and 1998 F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows December 31, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-18
</TABLE>
<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, 1999 and
1998, 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, 1999 and 1998 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 19 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
April 5, 2000
F-1
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,295 $ 485
Accounts receivable 695,988 43,566
Other receivables 30,000 30,000
Inventories 674,576 681,898
Other current assets 1,152 436
------------ ------------
Total Current Assets 1,455,011 756,385
Fixed assets -- 422,695
Patents 492,649 554,233
Other assets 266,467 284,849
------------ ------------
$ 2,214,127 $ 2,018,162
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 140,543 $ 138,003
Accrued liabilities 749,760 866,715
Other current liabilities 500,000 500,000
Deferred acquistion obligation - current 1,725,000 1,225,000
------------ ------------
Total Current Liabilities 3,115,303 2,729,718
Long-term liabilities:
Deferred acquisition obligation 2,179,309 2,412,563
Long-term debt 4,412,885 4,015,925
Note Payable 350,000 400,000
------------ ------------
Total Liabilities 10,057,497 9,558,206
------------ ------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, 300,000 par value $.01 shares authorized;
225,000 for 1999 and 175,000 for 1998 shares issued and outstanding 2,250 1,750
Common stock, par value $.01; 10,000,000 shares authorized ;
6,212,855 for 1999 and 6,112,855 for 1998 shares issued and outstanding 62,129 61,129
Paid-in capital 11,685,657 11,612,157
Accumulated deficit (19,593,406) (19,215,080)
------------ ------------
Total Stockholders' Deficiency (7,843,370) (7,540,044)
------------ ------------
$ 2,214,127 $ 2,018,162
------------ ------------
------------ ------------
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 65,607 $ 72,848
----------- -----------
Costs and expenses:
Cost of revenues 629,225 627,695
General and administrative 281,974 775,681
----------- -----------
Total Cost and Expenses 911,199 1,403,376
----------- -----------
Loss From Operations (845,592) (1,330,528)
----------- -----------
Other income (expense):
Interest expense (687,933) (653,173)
Interest income -- 6,460
Other, net 59,798 466,989
----------- -----------
Total Other Expense (628,135) (179,724)
----------- -----------
Loss before Credit for Taxes (1,473,727) (1,510,252)
Credit for state taxes - sale of net operating losses (1,095,401) --
----------- -----------
Net Loss $ (378,326) $(1,510,252)
----------- -----------
----------- -----------
Net loss per common share -basic: $ (0.06) $ (0.25)
Weighted average common shares outstanding: 6,179,522 6,040,686
</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, 1999 AND 1998
<TABLE>
<CAPTION>
Series 3 Convertible
Preferred Stock Common Stock Stockholders'
-------------------- -------------------- Paid-In Accumulated Equity
Shares Value Shares Par Value Capital Deficit (Deficiency)
-------------------- -------------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- -- 5,968,516 $59,685 $11,336,367 $(17,704,828) $(6,308,776)
Issuance of common stock -- -- 144,339 1,444 102,540 -- 103,984
Issuance of preferred stock 175,000 $ 1,750 -- -- 173,250 -- 175,000
Net loss -- -- -- -- -- (1,510,252) (1,510,252)
-------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1998 175,000 1,750 6,112,855 61,129 11,612,157 (19,215,080) (7,540,044)
Issuance of preferred stock 75,000 750 -- -- 74,250 -- 75,000
Issuance of common stock (25,000) (250) 100,000 1,000 (750) -- --
Net loss -- -- -- -- -- (378,326) (378,326)
-------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1999 225,000 $ 2,250 6,212,855 $62,129 $11,685,657 $(19,593,406) $(7,843,370)
-------- ------- --------- ------- ----------- ------------ -----------
-------- ------- --------- ------- ----------- ------------ -----------
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(378,326) $(1,510,252)
Adjustments to reconcile to net cash used in operating activities:
Depreciation 376,301 435,660
Amortization 61,584 61,584
Interest, net 663,706 653,174
Reduction in sale of net operating loss for rent expense (50,000) --
(Gain) loss on disposals of fixed assets 21,136 (106,280)
Settlement of accounts payable -- (413,920)
Common stock issued for professional services -- 26,600
Changes in assets and liabilities:
Accounts receivable (652,422) (843)
Other receivables -- (15,000)
Inventories 7,322 442,999
Other current assets (716) 64
Other assets 17,740 (18,635)
Accounts payable 2,540 (309,968)
Accrued liabilities (116,955) (38,150)
Other current liabilities -- (7,000)
--------- -----------
Net Cash Used in Operating Activities (48,090) (799,967)
--------- -----------
Cash flows from investing activities:
Proceeds from the sale of fixed assets 25,900 528,720
--------- -----------
Net Cash Provided by Investing Activities 25,900 528,720
--------- -----------
Cash flows from financing activities:
Repayment of long-term debt -- (274,275)
Issuance of preferred stock 75,000 175,000
--------- -----------
Net Cash Used in Financing Activities 75,000 (99,275)
--------- -----------
Net Decrease in Cash 52,810 (370,522)
Cash and cash equivalents at beginning of year 485 371,007
--------- -----------
Cash and Cash Held in Escrow at End of Year $ 53,295 $ 485
--------- -----------
--------- -----------
Supplemental disclosures of cash flow information:
Interest paid during the year $ 16,000 $ --
Income taxes paid during the year -- --
</TABLE>
See Note 18 for supplemental cash flow information
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, 1999
1. GENERAL
Rotary Power International, Inc. ("RPI" or the "Company") and its
wholly-owned subsidiary, E-Drive Systems Corporation ("E-Drive), 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 Corporation, 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.
On November 17, 1999, the Company established a wholly-owned
subsidiary, Pegasus Technologies Incorporated ("Pegasus") of New
Brunswick, Canada, for the purpose of establishing a manufacturing
facility for the Company's Series 580 and Series 70 engines, and to
attract incentives from the provincial governments. As of December 31,
1999, Pegasus had no material transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries E-Drive and
Pegasus. 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, 1999
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.
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.
F-7
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Patents
Purchased patents are amortized on a straight-line basis over
their useful lives, generally seventeen years. Amortization
expense was $61,584 for each of the years ended December 31,
1999 and 1998. Accumulated amortization was $492,658 and
$431,074 for the years ended December 31, 1999 and 1998,
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 diluted net loss per common share is based on the
net loss divided by the weighted average number of common
shares outstanding during the period. The exercise of stock
options and warrants was not assumed as their effect would be
anti-dilutive.
j. Stock Based Compensation
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.
F-8
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Commercial $ 70,456 $43,566
NJ net operating loss (NOL)
carryforwards 625,532 --
-------- -------
Total $695,988 $43,566
-------- -------
-------- -------
</TABLE>
4. INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Fuel and oil $ 1,344 $ 1,344
Parts 673,231 680,554
-------- --------
$674,575 $681,898
-------- --------
-------- --------
</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.
At December 31, 1999, the Company has inventory at cost totaling
$1,240,271. The Company has estimated the net realizable value of the
parts and engines to be $673,232. While the ultimate outcome of the net
realizable value may differ, management believes that any additional
loss will not have a material impact on the Company's financial
position.
F-9
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
5. FIXED ASSETS
Fixed assets at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
Useful Lives 1999 1998
----------- -----------
<S> <C> <C> <C>
Machinery and equipment 7 $2,719,008 $2,693,345
Furniture and fixtures 7 27,080 27,080
Office equipment 7 46,305 47,205
Computer equipment 5 342,112 342,112
Tooling 3 156,689 181,689
Demonstration equipment 3 261,663 261,663
Construction in process -- 25,941 25,941
---------- ----------
3,578,798 3,579,035
Less accumulated depreciation 3,578,798 3,156,340
----------- -----------
$ -- $ 422,695
----------- -----------
----------- -----------
</TABLE>
6. IMPAIRMENT OF LONG LIVED ASSETS
Long lived assets consist of intangible assets and certain capital
assets. The carrying value of these assets is regularly reviewed to
verify that they are valued properly. If the facts and circumstances
suggest that the value has been impaired, the carrying value of the
assets will be reduced appropriately. The Company has identified no
such impairment losses.
F-10
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. OTHER ASSETS
Other assets as of December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred issuance cost $233,929 $233,929
Deposits 32,538 31,500
Officers loans -- 19,420
-------- --------
$266,467 $284,849
-------- --------
-------- --------
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Provision for loss on contracts $693,047 $697,821
Contract adjustments -- 62,000
Professional fees -- 15,338
Other 56,713 91,556
-------- --------
$749,760 $866,715
-------- --------
-------- --------
</TABLE>
9. 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, 1999 and 1998 is payable to the seller as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<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% (820,691) (1,087,437)
Current portion (1,725,000) (1,225,000)
----------- -----------
Long term portion $ 2,179,309 $ 2,412,563
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
9. DEFERRED ACQUISITION OBLIGATION (Continued)
The Company had not made its required payments through January 31,
2000.
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 1999
and 1998.
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.
10. 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. In
December 1999, the Company repaid $50,000 of this note. 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.
11. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
$10,000,000 aggregate principal amount
of 10.412% bonds due December 15, 2007 $4,412,885 $4,015,925
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
11. LONG-TERM DEBT (Continued)
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 1999 amounted to $396,960.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a month-to-month agreement and
test cells and manufacturing space under an annual operating lease.
Rent expense for the years ended December 31, 1999 and 1998 was $87,300
and $103,165 respectively.
13. RELATED PARTY TRANSACTIONS
Ken Brody, President of the Company, is a minority shareholder of
Abejon Rotary Power Corporation (Abejon). At December 31, 1999 and
1998, the Company has an advance payable to Abejon of $500,000 for
future sales of engines. The advance is recorded in other current
liabilities.
14. 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.
F-13
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
14. SHAREHOLDERS' EQUITY
PREFERRED STOCK: (CONTINUED)
The Company has designated Series 1 convertible preferred stock and
Series 2 (non-voting) preferred stock. 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 Preferred 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,
1999, 225,000 Series 3 preferred shares are outstanding. During the
year a preferred shareholder converted 25, 000 shares of Series 3
Preferred Stock into 100,000 shares of Common Stock. The Company also
issued 75,000 shares of the preferred at $1.00 per share.
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 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. An event of 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. These shares were cancelled. In its
notice, the Company also reserved any and all of its rights and
remedies with respect to other shares of the Company's common stock
owned by Abejon.
F-14
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
14. SHAREHOLDERS' EQUITY (Continued)
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. These warrants were
not exercised during 1999.
There were 45,000 warrants to purchase common stock outstanding at
December 31, 1998, which are exercisable through 1999 at $4.625. These
warrants were not exercised during 1999.
At December 31, 1999 52,200 shares of common stock were reserved for
exercise of warrants and stock options.
15. STOCK OPTION PLAN
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued for 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.
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.
F-15
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
15. STOCK OPTION PLAN (Continued)
Option status and activity were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Outstanding, beginning of year 7,200 52,000
Cancelled ($.19125 to $5.00 1998 and 1997) (7,200) (44,800)
------ -------
Outstanding ($3.00 per share)
end of year -- 7,200
------ -------
------ -------
Available for grant 52,200 95,000
------ -------
------ -------
Exercisable -- 7,200
------ -------
------ -------
</TABLE>
16. 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. There were no matching
contributions for 1999 and 1998 and administrative expense of $466 for
only 1998.
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 1999 and
1998.
F-16
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
17. INCOME TAXES
Deferred tax accounts as of December 31, 1999 and 1998 comprise the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards ("NOL") $5,305,000 6,074,700
Depreciation (18,000) (18,000)
---------- ----------
Deferred tax assets, net 5,287,000 6,056,700
Valuation allowance 5,287,000 (6,056,700)
---------- ----------
Net deferred tax assets $ -- $ --
---------- ----------
---------- ----------
</TABLE>
As of December 31, 1999, the Company has federal and state NOLs
available for tax purposes of approximately $15,600,000 and $92,000
expiring from 2011 to 2019.
The NOL tax asset was reduced by $769,700 due primarily to the sale of
New Jersey NOL tax credits thus reducing the valuation allowance by the
same amount.
Under a program sponsored by the State of New Jersey during 1999, the
Company arranged to sell the tax benefits relating to its NOL
approximating $13,500,000. The resultant revenue from the sale amounted
to $1,211,685.
18. 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.
Additionally, the Company recorded imputed interest expense of $266,746
and $268,513 on its deferred acquisition obligation during December 31,
1999 and 1998, respectively.
F-17
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
19. GOING CONCERN
The Company incurred net losses of $11,891,451 for the four (4) years
ended December 31, 1999. At December 31, 1999, the Company had a
working capital deficiency of $1,660,292 and its total liabilities
exceeded total assets by $7,843,370. 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 18). 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.
20. OTHER
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 the Company's 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 directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Kenneth Leighton Brody 57 President and Chief Executive Officer and Director
Douglas M. Drew 65 Vice President - Finance and Director
</TABLE>
Ken Brody was solely a director of the Company from February, 1996
until March, 1997. From 1995, he was President of Abejon Rotary Power
Corporation, a marine engine and electronics distributor. 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.
Douglas M. Drew is an investment banker and Canadian citizen resident
in Toronto. He is a Director of Med-Tech Environmental Limited, a subsidiary of
Stericycle, Inc. and a former Vice President of Smith, Barney and Company. His
career has involved him in a variety of turnarounds and reorganizations. Mr.
Drew is a graduate of the University of Western Ontario, School of Business.
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, 1999.
20
<PAGE>
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 $100,000 for services
in all capacities to the Company during the last fiscal year through December
31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- --------------------------------
NAME OF INDIVIDUAL SECURITIES ALL OTHER
AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS COMPENSATION
- ---------------------- ---- --------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Kenneth L. Brody, 1999 $113,750 -- -- --
President and Chief 1998 104,000 -- -- --
Executive Officer 1997 7,500 -- -- --
</TABLE>
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLAN
The Company had a stock option plan, but no options were issued under
the plan in 1999 and the sole option remaining expired in the first quarter of
1999.
EMPLOYMENT AGREEMENTS
The Company had no employment agreements with any of its employees at
December 31, 1999.
COMPENSATION OF DIRECTORS
Until November, 1999, it was the policy of the Company to pay $750 per
quarter to outside directors. Thereafter, the Board approved a raise of such
compensation up to $1,000 per month. There were no outside directors during
1999, therefore, no payments were made.
Mr. Drew has a consulting agreement with the Company through April 30,
2000, pursuant to which he receives compensation for his time spent providing
advisory services to the Company and for his services as a Director of the
Company, which includes attendance of Board meetings, up to $2,000 per month.
Mr. Drew also receives reimbursement for any out-of-pocket expenses subject to
the Company's prior approval for any amount over $100.
21
<PAGE>
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 April 7, 2000. 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 1,935,000 31.15%
103 Guadalupe Drive
Cibolo, Texas 78108
Loeb Investors Co. 104(2) 933,074 15.02%
61 Broadway
New York, New York 10006
Ken Brody(1) 177,084 2.85%
c/o Abejon Rotary Power
Corporation
4960 North Harbor Drive
San Diego, California 92106
Douglas M. Drew 0 0.00%
All Directors and Executive 177,084(1) 2.85%
Officers as a Group (2 Persons)
</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 Officer and Director of
the Company.
(2) Includes (i) 435,325 shares of Common Stock owned by Loeb Investors Co.
104; (ii) 214,731 Common Shares owned by Loeb Partners Corporation; (iii)
198,918 Common Shares owned by Warren D. Bagatelle, Managing Director of
Loeb Partners Corporation; (iv) 28,221 Common Shares owned by Loeb Holdings
Corp.; (v) 13,566 Common Shares owned by HSB Capital; (vi) 14,104 Common
Shares owned by Loeb Investors Co. 105; (vii) 24,686 Common Shares owned by
Pinpoint Partners 1; and (viii) 3,523 Common Shares owned by the
Kempner/Perlmuth Trust (collectively, "Loeb Affiliates").
22
<PAGE>
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 1999.
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS TO 10-KSB
<TABLE>
<S> <C>
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)
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)
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
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)
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 Rotary Power International, Inc.
dated as of October 31, 1996(9)
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
10.47 Mar-Trans Affiliates LLC: Operating Agreement between
Abejon and Rotary Power International, Inc. dated as of
October 31, 1996(9)
10.48 Agreement of Merger between International Cryogenic
Systems Corporation and Rotary Power International, Inc.
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(11)
10.50 Indenture of Trust between Sentinel Trust Company and
Rotary Power International, Inc, dated December 1,
1997(11)
10.51 Curtiss-Wright Security Agreement, dated December 22,
1997(11)
10.52 Curtiss-Wright Settlement of Claims with RPI, dated
December 22, 1997(11)
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)
10.55 Subscription Agreement between Rotary Power
International, Inc. and Londonderry Capital Structuring
Ltd. dated October 27, 1999
10.56 Agreement for Investor-Relations Services between Rotary
Power International, Inc. and Londonderry Capital
Structuring Ltd. dated November 1, 1999
10.57 Consulting Agreement between Rotary Power International,
Inc. and Londonderry dated November 1, 1999
10.58 Facilitation Fee Letter Agreement between Rotary Power
International, Inc. and Londonderry dated November 6,
1999
11 Calculation of Income (Loss) per Common Share filed
herewith
21 Subsidiaries of the Company
27 Financial Data Schedule**
</TABLE>
- ----------
* 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.
27
<PAGE>
(2) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for year ending December 31, 1994.
(3) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-93836) dated June 22, 1995.
(4) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for nine months ended September 30, 1995.
(5) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 33-98584) dated October 26, 1995.
(6) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year ending December 31, 1995.
(7) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-QSB for the three months ended March 31, 1996.
(8) Incorporated by reference to exhibit of the same number contained in the
Company's Form S-8 (File No. 333-06557) dated June 21, 1996.
(9) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year 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.
(11) Incorporated by reference to exhibit of the same number contained in the
Company's Form 10-KSB for the year ending December 31, 1998.
(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, 1999.
28
<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: President, Chief Executive Officer
and Director (Principal Executive
Officer and Principal Financial
Officer)
Dated: April 12, 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 April 12, 2000
- --------------------------
Kenneth Leighton Brody
/s/ Douglas M. Drew Director April 12, 2000
- --------------------------
Douglas M. Drew
29
<PAGE>
Exhibit 10.55
LONDONDERRY RR#4, 22 International Parkway
CAPITAL STRUCTURING LTD. Stouffville, Ontario L4A 7X5
Tel: (905) 888-0500 Fax: (905) 888-0497
email: [email protected]
October 27, 1999
Rotary Power International, Inc.
One Passaic Street
P.O. Box 128
Wood-Ridge, New Jersey 07075-0128
Attention: Mr. Ken Brody, President
Dear Mr. Brody;
RE: SUBSCRIPTION AGREEMENT
Attached is an executed subscription agreement for the 3,000,000 common share
offering of Rotary Power International, Inc. executed by Londonderry Capital
Structuring Ltd. which is being sent to you subject to the following conditions
in accordance with the confidential term sheet dated October 27, 1999.
Conditions of Londonderry Capital Structuring Ltd. are as follows:
1. Lock-up agreement to have been executed by shareholders or effective
equivalent representing at least 33% of the currently outstanding common shares
2. Issuance of the audited financial statements of the Company for the
year ended December 31, 1998 and unaudited financial statements for the year
ended December 31, 1999
3. Completion of due diligence on the Company, the results of which must
be to the reasonable satisfaction of Londonderry Capital Structuring Ltd. at its
sole and unfettered discretion
4. Rotary Power International, Inc. shall bring U.S. Securities Exchange
Commission filings up to date
5. Mutually satisfactory Business Plan
6. Rotary Power International, Inc. to appoint two mutually acceptable
outside directors to its Board of Directors
Yours truly;
/s/ Ronald G. McKeown
- -----------------------------
Ronald G. McKeown, President
<PAGE>
ROTARY POWER INTERNATIONAL, INC.
SUBSCRIPTION AGREEMENT
October 27, 1999
Rotary Power International, Inc.
One Passaic Street
P.O. Box 128
Wood-Ridge. New Jersey 07075-0128
Gentlemen:
1. SUBSCRIPTION. The undersigned (the "Purchaser"), intending to be
legally bound, hereby irrevocably agrees, on the terms and conditions set forth
herein, to purchase from Rotary Power International, Inc., a Delaware
corporation (the "Company"), that number of shares (the "Shares") of the
Company's Common Stock, par value $0.01 per share (the `Common Stock"), set
forth on the signature page hereof. The terms and provisions of the Common Stock
are more fully described in the Company's Term Sheet (the "Term Sheet"). The
Company intends to use the proceeds from the sale of the Shares to the Purchaser
for its general business and working capital purposes.
2. CLOSING AND PAYMENT. On the Date of Closing (as defined below), the
Purchaser shall deliver, by check, electronic transfer or otherwise, as payment
of the purchase price for the Shares an amount equal to $0.18 US for every Share
which the Purchaser has agreed to purchase (as set forth on the signature page
hereto) and the Company shall deliver the Shares to the Purchaser simultaneously
therewith. The Shares which are delivered to the Purchaser on the Date of
Closing (i) have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or the securities laws of any state and said
Shares may not be sold, transferred, pledged or hypothecated to any person or
entity unless they have been so registered or the Company shall have received an
opinion of counsel satisfactory to the Company to the effect that registration
thereof for purposes of transfer is not required under the Securities Act, (ii)
shall contain a legend stating that the Shares have not been registered under
the Securities Act or the securities laws of any state and the restrictions on
transferability set forth in Section 2 (i) hereof, and (iii) shall be registered
in the name of the Purchaser. The "Date of Closing" for all purposes of this
Subscription Agreement shall mean February 15, 2000, or any other date mutually
agreed upon in writing by the Purchaser and the Company. Notwithstanding
anything contained herein to the contrary, if the Company cannot deliver the
Shares to the Purchaser on the Date of Closing in conformity with the provisions
of this paragraph, the Purchaser shall have no obligation to purchase the Shares
or deliver to the Company the amount required by the first sentence of this
paragraph.
1
<PAGE>
3. ACCEPTANCE OF SUBSCRIPTION. The Purchaser understands and agrees that
the Company in its sole discretion reserves the right to accept or reject this
subscription for the Shares, and further, that the total of shares issued under
this Agreement, together with the aggregate of shares currently issued and
outstanding if fully diluted, must not exceed the Company's authorized limit of
10,000,000 common shares. The Company shall have no obligation hereunder until
the Company shall execute and deliver to the Purchaser an executed copy of this
Subscription Agreement. If this subscription is rejected by the Company, this
Subscription Agreement shall thereafter be of no further force or effect.
4. ACKNOWLEDGEMENT OF PURCHASER. The Purchaser hereby acknowledges and
understands as follows:
(a) The Shares are not registered under the Securities Act or any state
securities laws and the offering and sale of the Shares by the Company pursuant
to this Subscription Agreement is intended to be exempt from registration under
the Securities Act by virtue of Section 4(2) of the Securities Act and the
provisions of Regulation D promulgated thereunder, based, in part, upon the
representations, warranties and agreements of the Purchaser contained in this
Subscription Agreement;
(b) Neither the United States Securities and Exchange Commission (the
"Securities and Exchange Commission") nor any state securities commission has
approved the Shares or passed upon or endorsed the merits of the offering and
sale of the Shares;
(c) All pertinent documents, records, books and other information in the
Company's possession or which the Company could reasonably acquire pertaining to
the Company or an investment in the Shares have been made available for
inspection by the Purchaser; and
(d) The Shares may not be sold, assigned or otherwise transferred by the
Purchaser unless they are registered under the Securities Act or unless an
exemption from registration is available.
5. REPRESENTATIONS. WARRANTIES AND AGREEMENTS OF PURCHASER. The Purchaser
hereby represents, warrants and agrees as follows:
(a) The Purchaser has received all documents and other information regarding the
Company or an investment in the Shares as has been requested by the Purchaser
(including, but not limited to, the Term Sheet) has carefully reviewed all such
documents and understands the information contained therein, and the Purchaser
has had access to sufficient information to determine the value of its
investment;
(b) The Purchaser has had a reasonable opportunity to ask questions of and
receive answers from a person or persons acting on behalf of the Company
concerning the offering of the Shares and all such questions have been answered
to the full satisfaction of the Purchaser;
(c) In evaluating the suitability of an investment in the Company, the Purchaser
is relying upon its own investigation and is not relying upon any representation
made by the Company or any other party (either oral or written) other than those
contained in this Subscription Agreement and in the Company's annual reports and
published financial data, Form 10-KSB for the fiscal year ended December 31,
1997 and the Company's quarterly reports on Form l0-QSB for the periods
2
<PAGE>
ended March 31, 1998 and June 30, 1998, respectively;
(d) The Purchaser is unaware of, and in subscribing for the Shares is in no way
relying on, and did not become aware of the offering of the Shares through or as
a result of, any form of general solicitation or general advertising including,
without limitation, any article, notice, advertisement or other communication
published in any newspaper, magazine or similar media, or broadcast over
television or radio, in connection with the offering and sale of the Shares and
is not subscribing for Shares and did not become aware of the offering of the
Shares through or as a result of any seminar or meeting to which the Purchaser
was invited by, or any solicitation of a subscription by, a person not
previously known to the Purchaser in connection with investments in securities
generally;
(e) The Purchaser has taken no action which would give rise to any claim by any
person for brokerage commissions for which RPI would be liable, finders' fees or
the like relating to this Subscription Agreement or the transactions
contemplated hereby;
(f) The Purchaser has such knowledge and experience in financial, tax, and
business matters, in general, and investments in securities, in particular, so
as to enable him to utilize the information made available to him in connection
with the offering of the Shares to evaluate the merits and risks of an
investment in the Shares and to make an informed investment decision with
respect thereto;
(g) The Purchaser is not relying on the Company, or any of its employees or
agents with respect to the legal, tax, economic and related considerations of an
investment in the Shares, and the Purchaser has relied on the advice of, or has
consulted with, only his own counsel or other advisors;
(h) The Purchaser is acquiring the Shares solely for his own account for
investment and not with a view to the resale or distribution thereof, in whole
or in part. The Purchaser has no agreement or arrangement, formal or informal,
with any person to sell or transfer all or any part of the Shares and the
Purchaser has no plans to enter into any such agreement or arrangement;
(i) The Purchaser has adequate means of providing for the Purchaser's current
financial needs and foreseeable contingencies and has no need for liquidity of
the Purchaser's investment in the Shares for an indefinite period of time;
(j) The Purchaser is aware that an investment in the Shares involves a number of
very significant risks;
(k) The Purchaser has received the annual report of the Company on Form l0-KSB
for the fiscal year ended December 31, 1997, the Company's quarterly reports on
Form 10-QSB for the periods ended March 31, 1998 and June 30, 1998,
respectively;
(1) The execution and delivery of this Subscription Agreement will not violate
or be in conflict with any order, judgment, injunction, agreement or controlling
document to which the Purchaser is a party or by which he is bound; and this
Subscription Agreement has been duly executed and delivered on behalf of the
Purchaser and is a legal, valid and binding obligation of the Purchaser;
3
<PAGE>
(m) Any information which the Purchaser has heretofore furnished or furnishes
herewith to the Company is complete and accurate and may be relied upon by the
Company in determining the availability of an exemption from registration under
Federal and state securities laws in connection with the offering of the Shares
and the Purchaser shall notify and supply corrective information to the Company
immediately upon the occurrence of any change therein occurring prior to the
Company's issuance of the Shares;
(n) The Purchaser has significant prior investment experience and is
knowledgeable about investment considerations in companies similarly situated as
the Company. The Purchaser has a sufficient net worth to sustain a loss of its
entire investment in the Company in the event such a loss should occur. The
Purchaser's overall commitment to investments which are not readily marketable
is nor excessive in view of its net worth and financial circumstances and the
purchase of the Shares will not cause such commitment to become excessive. The
investment in the Shares is a suitable one for the Purchaser; and
(o) The Purchaser is satisfied that he has received adequate information with
respect to all matters which he considers material to its decision to make this
investment; and
6. IRREVOCABILITY: BINDING EFFECT. The Purchaser hereby acknowledges and
agrees that the subscription hereunder is irrevocable by the Purchaser, except
as required by applicable law. This Subscription Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
7. MODIFICATION. This Subscription Agreement shall not be modified or
waived except by an instrument in writing signed by the party against whom any
such modification or waiver is sought
8. NOTICES. All notices and other communications hereunder shall be in
writing and shall be personally delivered or mailed by certified mail, return
receipt requested, postage prepaid. addressed (i) if to the Purchaser, to the
address shown under the Purchaser's signature at the end of this Subscription
Agreement, or (ii) if to the Company, to Rotary Power International, Inc., One
Passaic Street. P.O. Box 128, Wood-Ridge, New Jersey 07075-0128, Attention:
President, or at such other address as either party hereto shall have furnished
to the other party. Notices hereunder shall be deemed to have been duly given
when personally delivered, mailed by registered or certified mail to the party
entitled to receive the same.
9. ASSIGNABILITY: This Subscription Agreement and the rights, interests
and obligations hereunder are not transferable or assignable by the Purchaser
and the transfer or assignment of the Shares shall be made only in accordance
with the restrictions contained herein and all applicable laws.
10. APPLICABLE LAW. This Subscription Agreement shall be governed by and
construed in accordance with the internal laws of the State of New Jersey
without regard to its conflicts of laws or principles.
4
<PAGE>
11. BLUE SKY QUALIFICATION. The purchase of Shares under this Subscription
Agreement is expressly conditioned upon the exemption from qualification of the
offer and sale of the Shares from applicable Federal and state securities laws.
The Company shall not be required to qualify this transaction under the
securities laws of any jurisdiction and, should qualification be necessary, the
Company shall be released from any and all obligations to maintain its offer,
and may rescind any sale contracted, in such jurisdiction.
12. USE OF PRONOUNS. All pronouns and any variations thereof used herein
shall be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or persons referred to may require.
13. CONFIDENTIALITY. The Purchaser acknowledges and agrees that any
information or data the Purchaser has acquired from or about the Company, not
otherwise properly in the public domain, was received in confidence. The
Purchaser agrees not to divulge, communicate or disclose, except as may be
required by law or for the performance of this Subscription Agreement, or use to
the detriment of the Company or for the benefit of any other person or persons,
or misuse in any way, any confidential information of the Company, including any
scientific, technical, trade or business secrets of the Company and any
scientific, technical, trade or business materials that are treated by the
Company as confidential or proprietary, including, but not limited to, ideas,
discoveries, inventions, developments and improvements belonging to the Company
and confidential information obtained by or given to the Company about or
belonging to third parties.
14. MISCELLANEOUS.
(a) This Subscription Agreement constitutes the entire agreement between the
Purchaser and the Company with respect to the subject matter hereof and
supersedes all prior oral or written agreements and understandings, if any,
relating to the subject matter hereof. The terms and provisions of this
Subscription Agreement may be waived, or consent for the departure therefrom
granted, only by a written document executed by the party entitled to the
benefits of such terms or provisions.
(b) The provisions of Sections 4, 5, and 13 of this Subscription Agreement shall
survive the execution and delivery hereof and delivery of the Shares.
(c) Each of the parties hereto shall pay its own fees and expenses (including
the fees of any attorneys, accountants, appraisers or others engaged by such
party) in connection with this Subscription Agreement and the transactions
contemplated hereby whether or not the transactions contemplated hereby are
consummated.
(d) This Subscription Agreement may be executed in one or more counterparts each
of which shall be deemed an original, but all of which shall together constitute
one and the same instrument.
5
<PAGE>
(e) Each provision of this Subscription Agreement shall be considered separable
and if for any reason any provision hereof is determined to be invalid or
contrary to applicable law, such invalidity or illegality shall not impair the
operation of or affect the remaining portions of this Subscription Agreement.
(f) Section titles are for descriptive purposes only and shall not control or
alter the meaning of this Subscription Agreement as set forth in the text.
IN WITNESS WHEREOF, the Purchaser has executed this Subscription Agreement this
27 day of October, 1999.
Number of Shares Purchased:
______________ Shares Purchaser: ___________________________.
Price per Share: $0.18 US
by: ________________________________
Name:
Title:
Total Purchase Price for
Shares Purchased : $__________
Purchaser's Address and Tax I.D. Number:
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
Tax I.D. Number
Agreed and accepted as of this
27 of October, 1999
ROTARY POWER INTERNATIONAL, INC.
BY: /s/ Ken Brody
-----------------------------
Name: Ken Brody
Title: President
<PAGE>
Exhibit 10.56
ROTARY POWER INTERNATIONAL, INC.
P.O. BOX 128
WOOD-RIDGE, NJ 07075
November 1, 1999
Mr. Ronald G. McKeown
Londonderry Capital Structuring Ltd.
22 International Parkway
Stouffville, Ontario L4A 7X5
Dear Mr. McKeown:
RE: AGREEMENT FOR INVESTOR RELATIONS SERVICES
This letter will confirm that Rotary Power International, Inc. (the
"Corporation") wishes to retain your services as an investor relations
consultant on the following terms: This agreement is effective on the date
accepted by Londonderry Capital Structuring Ltd.
1. SERVICES Londonderry Capital Structuring Ltd. (the "Consultant")
will perform services for the Corporation in areas of
shareholder communications, investor relations and such
other matters as agreed on from time to time between the
Corporation and the Consultant as more specifically set
out in the description of Londonderry Capital
Structuring Ltd. Process, attached as Schedule A,
(collectively the "Services") and herein incorporated by
reference. The Consultant agrees to perform the Services
with the normal standard of care, skill and diligence
provided by a professional similar to that hereunder and
acknowledges that the Corporation will be relying on the
accuracy, competence and completeness of the Services as
so performed.
2. TERM This Agreement shall be effective from the date of
signing by both parties until December 31, 2000 and
shall be renewable upon written agreement by both
parties within 60 days prior to termination date.
3. FEE Two Thousand Dollars ($2,000 U.S.) for November and
December, 1999 and thereafter, Five Thousand Dollars
($5,000 U.S.) per month such Fee amounts, subject to any
necessary regulatory approvals, shall be payable
monthly, on the last day of each month.
4. CONFIDENTIALITY The Consultant agrees that it will not disclose to any
third party, without the prior written consent of the
Corporation, and consistent with confidentiality
obligations, any information obtained by the Consultant
in connection with performing the Services regarding the
Corporation or its affairs, provided that the Consultant
may disclose such information as reasonably necessary in
performing the Services hereunder, provided that such
disclosure be in accordance with the continuous
disclosure requirements of the securities regulatory
authorities applicable to the Corporation.
1
<PAGE>
PAGE 2
5. CONFLICTS OF The Consultant agrees to be bound by all rules, policies
INTEREST and procedures as adopted from time to time by the
Corporation regarding conflicts of interest among the
Corporation and its directors and officers and agrees to
execute such other documents and do such other things as
may be necessary in accordance with such rules, policies
and procedures of the Corporation.
6. TERMINATION Services shall be terminable by the Corporation at any
time with a thirty (30) day period of notice in writing
to the Consultant. Excepting that termination may not be
exercised during any period during which the consultant
or any affiliate thereof has been retained by the
corporation to search for new investment funds except
for cause.
7. TAXES Londonderry Capital Structuring Ltd. shall be solely
responsible for all taxes and government fees relating
to Fees paid under this Agreement.
8. DISPUTE RESOLUTION This Agreement shall be, in all respects, subject to and
interpreted, construed, and enforced in accordance with
the laws of New Jersey. Any disputes arising under this
Agreement shall be negotiated in good faith by the
parties and failing resolution through such direct
negotiations by the parties, both parties hereby agree
to submit their dispute to arbitration through a
competent, mutually agreed upon arbitrator.
9. ENTIRETY The terms and provisions herein contained constitute the
entire agreement relating to the subject matter of this
Agreement between the parties and shall supersede all
previous and or written communications.
We sincerely look forward to your acceptance of the above-noted terms and to the
development of a long and successful relationship.
Yours very truly,
ROTARY POWER INTERNATIONAL, INC.
/s/Ken Brody
- -----------------
Ken Brody
President
2
<PAGE>
The above terms and conditions of the AGREEMENT FOR INVESTOR RELATIONS SERVICES
are accepted and agreed to as of this ___ day of November, 1999.
LONDONDERRY CAPITAL STRUCTURING LTD.
Per:/s/Ronald G. McKeown
--------------------------------
Ronald G. McKeown
President
3
<PAGE>
SCHEDULE "A"
AGREEMENT FOR INVESTOR RELATIONS SERVICES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LONDONDERRY CAPITAL STRUCTURING LTD. PROCESS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LONDONDERRY CAPITAL STRUCTURING LTD. THREE-TIER PROCESS
Londonderry Capital Structuring Ltd. Three-Tier Process consists of the Primary
IR, the ongoing investors' communication group, in charge of positioning
funding, writing press releases and distributing them to the appropriate wire
sources. Primary IR will manage the Secondary and Tertiary IR, ensuring that
potential investors have all the information they require. The Secondary IR are
consultants that Londonderry Capital Structuring Ltd. is affiliated with that
will assist in positioning financings and supply Rotary Power International,
Inc. with qualified potential investors. The Tertiary IR is an electronic client
database of potential investors that Londonderry Capital Structuring Ltd. has
access to. The Secondary and Tertiary IR assist Londonderry Capital Structuring
Ltd. in expanding Rotary Power International, Inc.'s potential investor client
base.
I. PRIMARY INVESTOR RELATIONS
The IR team will be continually in contact with both present and potential
investors and receive all new leads and follow them up. Londonderry Capital
Structuring Ltd. will manage the Secondary and Tertiary IR.
Londonderry Capital Structuring Ltd. will provide the following services and
products:
A. Investment Community Contact
1. Regular calls, throughout each month, to analysts, brokers, fund
managers, and key investors
2. Conference calls
3. Investment conferences
4. Coordination of presentations by Rotary Power International, Inc.
to analysts, brokers and fund managers
B. Reporting to Management
1. Written guidelines and performance expectations / reporting
2. Regular meetings with management to maintain I.R. course and
information flow to investment community
C. Disclosure and Publicity
1. News Releases
a. Financial
b. New products, contracts, corporate development
c. Acquisitions
d. Executive and Capital changes
Initials: RMc RMc KB KB
--- --
4
<PAGE>
PAGE 2
2. Story Placement
a. Newsletters
b. Wire services
c. Industry & financial media
D. Setting Rotary Power International, Inc.'s Strategy
1. Defining key messages (investor hot buttons)
2. Defining goals
3. Analyzing peer group
4. Analyzing industry
E. Corporate Communications Tools - design, writing, editing
1. Investor Kits
a. Fact Sheet
b. Folder or Cover
c. Company Profile
d. Annual Report
e. Product / Service brochures
2. Slide Shows, Presentations
3. Web Site design and maintenance subject to periodic Rotary Power
International, Inc. approval and coordination.
II. SECONDARY INVESTOR RELATIONS
The Secondary Investor Relation Groups are primarily consultants with loyal
client bases of varied investment experience. They control an important asset in
their large databases of potential investors that have previously profited from
their advice and judgement. Londonderry Capital Structuring Ltd. will coordinate
the movement of Rotary Power International, Inc.'s information to the IR
consultants and they in turn present Rotary Power International, Inc. to their
database of potential investors.
III. TERTIARY INVESTOR RELATIONS
The Tertiary Investor Relations is Londonderry Capital Structuring Ltd.'s access
to external electronic databases and also additional IR groups, promoters,
market makers and broker/dealers. Like the Secondary Investor Relations
Londonderry Capital Structuring Ltd. uses this to extend Rotary Power
International, Inc.'s investor base and to reinforce a higher trading level when
acquisitions or financings are imminent.
Initials: /s/ RMc /s/ KB
------ -----
5
<PAGE>
Exhibit 10.57
CONSULTING AGREEMENT
THIS AGREEMENT made as of the 1st (first) day of November, 1999, and executed on
the 6th (sixth) day of November, 1999
AMONG
Rotary Power International, Inc. ("RPI")
of the first part
and
Londonderry Capital Structuring Ltd. ("Londonderry")
of the second part
WHEREAS:
A. RPI is desirous of securing the advisory and consulting services of
Londonderry on the terms and conditions contained herein, and
B. Londonderry is desirous of contributing its expertise toward the mutual
goals of the parties
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT RPI and Londonderry hereby agree as
follows:
1. Londonderry agrees to provide RPI advisory and consulting services
including the following:
a) review and advise RPI the status of the company from financial,
operational and management perspectives,
b) review and advise on RPI's documentation from a due diligence
perspective, assemble and maintain a due diligence package for
RPI.
c) assist in the development of RPI's business plan including
strategies for financing, operating and managing the company,
d) advise on the corporate and share structure and their
restructuring if required,
e) advise on the financing structure of RPI and their restructuring
or refinancing if required,
f) assist in the development of a marketing strategy,
g) review and advise on RPI's cash flow management plan; and
h) review and advise on contingent liabilities.
<PAGE>
CONSULTING AGREEMENT PAGE 2
- --------------------------------------------------------------------------------
i) Prepare "Work for Hire"draft documents and submit to RPI Board of
Directors for approval:
- Business Plan which will include Marketing Plan,
- Schedule of Private Placements and Offerings.
j) Prepare, present and coordinate the following or equivalent to the
Canadian Province of New Brunswick or other government agencies as
may be jointly determined by the parties:
- Prepare Atlantic Canada Opportunities Agency (ACOA) and Human
Resources Development Canada (HRDC) application packages for:
- forgivable loans
- R&D grants
- Tax relief
- employment grants
- debt funding based on public revenue backed debt.
2. FEES
i) Term: Month to month, automatically renewed unless
Agreement is cancelled in accordance with 2 iii).
ii) Fee: U.S. $10,000 per month paid in advance on the first
day of each month, except for November 1999 which
shall be paid upon availability of funds.
iii) Cancellation: On 30 days written notice by either party.
iv) Costs: All reasonable out-of-pocket costs as pre-approved
by RPI to be reimbursed by RPI.
3. Commencement date is November 1, 1999.
4. Londonderry will pay any applicable taxes including goods and services
tax that may result from this Agreement.
5. Upon notification RPI and Londonderry shall take reasonable steps to
refute or mitigate any claims and shall each indemnify the other,
including its officers, directors, agents, subcontractors, affiliates
from any and all claims arising from the intentional or negligent acts
or omissions of the indemnifying party, including its officers,
directors, agents, subcontractors, and affiliates, that may be brought
against the other.
<PAGE>
CONSULTING AGREEMENT PAGE 3
- --------------------------------------------------------------------------------
6. a) RPI represents warrants and covenants with Londonderry as follows:
i) RPI has the requisite power, capacity and authority to enter
into this Agreement and to perform its obligations under this
Agreement.
ii) RPI has not and will not enter into any other agreements that
will conflict with the terms or performance of this
Agreement.
b) Londonderry represents warrants and covenants with RPI as follows:
i) Londonderry has the requisite power, capacity and authority
to enter into this Agreement and to perform its obligations
under this Agreement.
ii) Londonderry has not and will not enter into any other
agreements that will conflict with the terms or performance
of this Agreement.
7. NOTICES
All notices hereunder shall be in writing and shall be deemed to have
been duly given if delivered by courier or by telecommunications as
follows:
to RPI:
Ken Brody
Rotary Power International, Inc.
P.O. Box 128
Wood-Ridge, NJ 07075
Fax: 973-779-5595
to Londonderry:
Ronald G. McKeown
Londonderry Capital Structuring Ltd.
22 International Parkway
Stouffville, Ontario
L4A 7X5
Fax: 905-888-0497
8. This Agreement shall not be assigned by either party.
9. This Agreement shall inure to the benefit of and shall be binding upon
RPI's successors and Londonderry's successors.
10. This Agreement shall be, in all respects, subject to and interpreted,
construed, and enforced in accordance with the laws of New Jersey. Any
disputes arising under this Agreement shall be negotiated in good faith
by the parties and failing resolution through such direct negotiations
by the parties, both parties hereby
<PAGE>
CONSULTING AGREEMENT PAGE 4
- --------------------------------------------------------------------------------
agree to submit their dispute to arbitration through a competent,
mutually agreed upon arbitrator.
11. The terms and provisions herein contained constitute the entire
agreement relating to the subject matter of this Agreement between the
parties and shall supersede all previous and or written communications.
IN WITNESS whereof authorized representatives of the parties hereto have
executed this Agreement to be effective as of the commencement date above
written.
ROTARY POWER INTERNATIONAL, INC.
per: /s/Kenneth Leighton Porody
--------------------------------
LONDONDERRY CAPITAL STRUCTURING LTD.
per: /s/Ronald G. McKeown
---------------------------------
<PAGE>
Exhibit 10.58
ROTARY POWER INTERNATIONAL, INC.
P.O. Box 128
Wood-Ridge, NJ 07075 November 6, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER AGREEMENT RE: FACILITATION FEE
Rotary Power International, Inc. agrees to grant Londonderry Capital Structuring
Ltd. an exclusive financing agreement for a period comprising from the date of
this letter being signed by both parties through December 31, 2000, under the
following terms and conditions:
a) Londonderry Capital Structuring Ltd. or its nominee will be paid by
Rotary Power International, Inc. a 10% facilitation fee on any
financing proposal funded through Londonderry Capital Structuring Ltd.
to Rotary Power International, Inc. that has been approved by Rotary
Power International, Inc.
b) Londonderry Capital Structuring Ltd. or its nominee will be paid by
Rotary Power International, Inc. a 2% facilitation fee on all other
sources of funding, including loans, grants, exercising of options and
warrants, etc.
c) Londonderry Capital Structuring Ltd. or its nominee will be paid by
Rotary Power International, Inc. a 2% facilitation fee for any mergers
or acquisitions that may occur. Said Fee will be based on the value of
the consideration given by Rotary Power International, Inc. at closing.
d) Londonderry Capital Structuring Ltd. or its nominee will receive
payment of the applicable facilitation fee on closing of any funding.
e) Londonderry Capital Structuring Ltd. or its nominee will present to
Rotary Power International, Inc., approximately nine months from the
effective date of this agreement, a proposal for a new Facilitation Fee
Agreement, for the year 2001.
f) Londonderry Capital Structuring Ltd. shall be solely responsible for
all taxes and government fees relating to Fees paid under this
Agreement
g) This Agreement shall be, in all respects, subject to and interpreted,
construed, and enforced in accordance with the laws of New Jersey. Any
disputes arising under this Agreement shall be negotiated in good faith
by the parties and failing resolution through such direct negotiations
by the parties, both parties hereby agree to submit their dispute to
arbitration through a competent, mutually agreed upon arbitrator.
<PAGE>
h) Upon written mutual agreement of the parties, within 60 days of
termination, this Agreement may be renewed for the calendar year
following the term of this contract.
i) The terms and provisions herein contained constitute the entire
agreement relating to the subject matter of this Agreement between the
parties and shall supersede all previous and or written communications.
In witness whereof the parties hereto, through their authorized representatives,
have executed this Letter Agreement as of the date first above written.
ROTARY POWER INTERNATIONAL, INC. LONDONDERRY CAPITAL STRUCTURING LTD.
per: /s/Ken Brody per: /s/Ronald G. McKeown
-------------------------------- ---------------------------------
Ken Brody Ronald G. McKeown
<PAGE>
EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------
BASIC 1999 1998
----------- -----------
<S> <C> <C>
Shares outstanding, beginning of period 6,112,855 5,968,516
Weighted average number of shares issued, retired
and issuable share equivalents 66,667 (72,170)
Weighted average number of common and common
equivalent shares outstanding 6,179,522 6,040,686
----------- -----------
----------- -----------
Net loss $ (378,326) $(1,510,252)
----------- -----------
----------- -----------
Net loss per common share $ (0.06) $ (0.25)
----------- -----------
----------- -----------
DILUTED
Weighted average number of common and
common equivalent shares outstanding as
adjusted to full dilution 6,987,855 6,047,886
----------- -----------
----------- -----------
Net loss $ (378,326) $(1,510,252)
----------- -----------
----------- -----------
Net loss per common share $ (0.05)* $ (0.25)*
----------- -----------
----------- -----------
</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
WHOLLY-OWNED SUBSIDIARIES OF THE COMPANY:
E-Drive Systems Corporation
Pegasus Technologies Incorporated, a New Brunswick, Canada corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Annual
SEC Report Financial Summary and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000914539
<NAME> ROTARY POWER INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 53,295
<SECURITIES> 0
<RECEIVABLES> 725,988
<ALLOWANCES> 0
<INVENTORY> 674,576
<CURRENT-ASSETS> 1,455,011
<PP&E> 759,116
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,214,127
<CURRENT-LIABILITIES> 3,115,303
<BONDS> 4,412,885
0
2,250
<COMMON> 62,129
<OTHER-SE> (7,907,749)
<TOTAL-LIABILITY-AND-EQUITY> 2,214,127
<SALES> 65,607
<TOTAL-REVENUES> 65,607
<CGS> 629,225
<TOTAL-COSTS> 911,199
<OTHER-EXPENSES> (59,798)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687,933
<INCOME-PRETAX> (628,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 1,095,401
<CHANGES> 0
<NET-INCOME> (378,326)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.05)
</TABLE>
