AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997
REGISTRATION NO. 333-30361
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
RODI POWER SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
WASHINGTON 3402 91-1387866
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Number) Number)
7503 SOUTH 228TH STREET, KENT, WASHINGTON 98032 (253) 850-1490
(Address and telephone number of principal executive offices)
BYRON R. SPAIN, CHIEF EXECUTIVE OFFICER
RODI POWER SYSTEMS, INC.
P.O. BOX 769, MAPLE VALLEY, WA 98038 (253) 850-1490
(Name, address and telephone number of agent for service)
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COPIES TO:
SAMUEL S. GUZIK, ESQ. LAW OFFICES OF RICK MORSE
R. JOSEPH DECKER, ESQ. 2450 Broadway, Suite 550
MICHAEL SCHILLER, ESQ. Santa Monica, CA 90404
Prindle, Decker & Amaro, LLP (310) 315-6325
310 Golden Shore, Fourth Floor, Long Beach, CA 90802
(562) 436-3946
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE
Units, each Unit consisting of One Share of Common
Stock, $.01 par value, and One Common Stock
Purchase Warrant(3)............................. 5,000,000 $4.25 $21,250,000 $6,060.61
Common Stock, par value $.01 per share(3)......... 5,000,000
Common Stock Purchase Warrants(3)................. 5,000,000
Common Stock issuable upon exercise of
Warrants(3)..................................... 5,000,000 $5.00 $25,000,000 $7,575.76
Underwriter's Warrants............................ 100,000 $0.01 $1,000 $0.30
Common Stock issuable upon exercise of
Underwriter's Warrants(4)....................... 100,000 $5.00 $500,000 $151.52
Total Fee......................................... $46,751,000 $13,788.19(5)
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of shares
of Common Stock and Warrants as may be issued by reason of adjustments in
the number of shares of Common Stock and Warrants pursuant to anti-dilution
provisions contained in the Warrants. Because such additional shares of
Common Stock and Warrants will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Estimated solely for calculating the registration fee pursuant to Rule 457.
(3) The Common Stock and Warrants are being offered and sold in units, each unit
consisting of one share of Common Stock and one Common Stock Purchase
Warrant exercisable at $5.00 per share. The units are being offered and sold
at $4.25 per unit. The proposed maximum offering price per Warrant and share
of Common Stock comprising a unit has been estimated pursuant to Rule 457.
(4) The Underwriter's warrants are exercisable at $5.00 per share.
(5) Previously paid on June 30, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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[LOGO]
RODI POWER SYSTEMS, INC.
800,000 TO 5,000,000 UNITS
EACH CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
RODI Power Systems, Inc. (the "Company") is offering (the "Offering") for
sale between 800,000 and 5,000,000 Units, each Unit consisting of one share of
its Common Stock, $0.01 par value ("Common Stock"), and one redeemable Common
Stock purchase warrant ("Warrant"), at $4.25 per Unit. The Common Stock and the
Warrants are separately transferable and will trade separately immediately upon
issuance. Each Warrant entitles the registered holder thereof to purchase during
the four year period commencing one year after the date of this Prospectus one
share of Common Stock at a price of $5.00 per share. The Warrant exercise price
is subject to adjustment under certain circumstances. Commencing 12 months from
the date of this Prospectus, the Warrants are subject to redemption by the
Company at $0.05 per Warrant on 30 days prior written notice provided that the
average closing bid price of the Common Stock as reported on the Nasdaq Stock
Market ("NASDAQ") equals or exceeds $7.50 per share for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. See "Description of the Units".
The Units are being offered by the Underwriter on a "best efforts, all or
none" basis with respect to the minimum number of Units (800,000 Units) (the
"Minimum Amount") being offered hereby, and on a "best efforts" basis with
respect to sales of additional Units up to the maximum number of Units
(5,000,000 Units) (the "Maximum Amount"). The proceeds of this Offering will be
deposited in an escrow account maintained at First Trust National Association,
pending completion or termination of the Offering. The Underwriter, with the
consent of the Company, may elect to complete the Offering at any time after the
Underwriter shall have received and accepted the Minimum Amount and at any time
prior to the date which is 90 days from the date of this Prospectus, subject to
the right of the Underwriter to extend such date by an additional 90 days (such
date being referred to as the "Termination Date"). If subscriptions for the
Minimum Amount have not been received and accepted by the Underwriter by the
Termination Date, no Units will be sold and all funds held in escrow will be
promptly returned to investors. Officers, Directors and shareholders of the
Company are entitled to purchase an unlimited number of Units in the Offering,
including the entire Minimum Amount. All Units are being offered subject to
prior sale, withdrawal or cancellation of the Offering at any time. The minimum
subscription amount is 100 Units ($425). See "Description of Capital Stock" and
"Underwriting".
There has been no public market for any securities of the Company prior to
this Offering and there can be no assurance that a public market will develop
after the completion of this Offering. Should such a market develop, there is no
assurance that it will be sustained, or that it will develop into a market
greater than a limited market. The initial public offering price for the Units
has been determined by the Company and the Underwriter, and does not bear any
relationship to the Company's assets, operations, book or any other established
criterion of value. See "Risk Factors" and "Dilution". The Company is applying
for listing of the Common Stock and the Warrants on the Nasdaq Stock Market.
--------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE OFFERING PRICE AND SHOULD NOT
BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" AT PAGE 8 AND "DILUTION".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3)
Per Unit................................................. $4.25 $0.30 $3.95
Total Minimum............................................ $3,400,000 $240,000 $3,160,000
Total Maximum............................................ $21,250,000 $1,500,000 $19,750,000
(see following page for footnotes)
The Units are offered on a "best efforts" basis by the Underwriter, when, as
and if delivered to and accepted by the Underwriter, subject to receipt of
proceeds from the Offering of not less than the Minimum Amount. The proceeds
from the sale of Units will be deposited into a non-interest bearing escrow
account with First Trust National Association. During the escrow period,
subscribers will not have the right to the return of their subscriptions. Unless
at least the Minimum Amount of Units are sold within a period of ninety (90)
days after the date of this Prospectus (which period may be extended up to an
additional ninety (90) days by the Underwriter with the consent of the Company),
all proceeds will be promptly returned to subscribers without deduction for
commissions or expenses, and without interest thereon. See "Underwriting".
--------------------------
INTREPID SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
[ARTWORK]
INSIDE FRONT COVER
Photographic montage depicting the evolution of the HT1-450 diesel engine. The
designer enters the concept into a computer; the worker builds it; the driver
tests it on the highway.
FOLD-OUT
UPPER LEFT
Test engineer collecting data from an engine test. An HT1-450 equipped truck is
shown in the background
LOWER LEFT
Photo of Class 8 heavy duty truck with hood open showing RODI HT1-450 engine
installed.
CENTER TOP
Computer generated 3/4 front view of the HT1-450 preproduction engine
illustrates the form factor and general arrangement of accessories. The
registered trademark is clearly visible.
CENTER BOTTOM
Fuel tanker truck represents a target market for the HT1-450 diesel engine.
RIGHT TOP
A section view taken through the center line of a two cylinder power module
illustrates the functionality of the reverse uniflow engine cycle. One can see
the intake valves, piston and exhaust ports arranged as they are in a working
engine.
RIGHT BOTTOM
Front view and 3/4 rear views of the preproduction HT1-450 illustrating the
placement of components and accessories.
INSIDE REAR COVER
Photographic montage of class 8 heavy duty trucks representing the variety of
possible applications for the HT1-450 diesel engine.
AS OF THE DATE OF THIS PROSPECTUS, THE COMPANY WILL BECOME SUBJECT TO THE
REPORTING REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AND IN ACCORDANCE
THEREWITH WILL FILE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE COMPANY INTENDS TO DELIVER ANNUAL
REPORTS TO THE HOLDERS OF ITS SECURITIES, WHICH WILL CONTAIN FINANCIAL
INFORMATION THAT HAS BEEN EXAMINED AND REPORTED UPON BY AN INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANT AND SUCH OTHER PERIODIC REPORTS AS THE COMPANY DEEMS
APPROPRIATE. THE COMPANY'S FISCAL YEAR ENDS DECEMBER 31.
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES THE INCENTIVE STOCK OPTIONS, WARRANTS AND THE UNDERWRITER'S
WARRANTS ARE NOT EXERCISED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATION," "DESCRIPTION OF SECURITIES,"
"UNDERWRITING" AND NOTES TO FINANCIAL STATEMENTS.
THE COMPANY
RODI Power Systems, Inc. ("RODI" or the "Company") is a development stage
company which is engaged in the design and development of the Company's initial
product, the HT1-450 diesel engine. To date, the Company has not engaged in any
production, manufacturing or sales of the HT1-450 diesel engine, and the Company
has an accumulated net loss of $3,925,017 through June 30, 1997. The HT1-450,
which has been under development since 1993, is a V-4 cylinder rod-crank turbo
diesel engine designed to generate 300 to 500 horsepower for use in Class 8
heavy duty trucks, boats and stationary power applications. A marketable version
of the Company's HT1-450 diesel engine has not yet been successfully developed.
If development of the HT1-450 is successfully completed, the Company intends to
manufacture, market and sell the HT1-450 engine and to develop, commercialize,
and sell other high horsepower engines utilizing this engine design for trucks,
boats and stationary power applications. The Company has also recently commenced
distribution of a third party's engines to a joint venture in formation,
Alternate Power Equipment, Inc.
RODI believes its initial entry into the heavy diesel truck market will be
enhanced by the unique product features inherent in the HT1-450 engine:
- With its unique reverse uniflow two-stroke cycle, V-4 configuration, and
two point microprocessor engine control, the HT1-450 is designed to be
significantly lighter in weight and smaller in size than competitive
engines without using any exotic materials, resulting in an increase in
payload for any truck using it.
- The HT1-450 design has the unique capability of permitting the power head
to be separated from the accessory drive unit and removed from the vehicle
without breaking any connections to the power steering pump, air
conditioning compressor, alternator or air brake compressor. This will
allow the engine to be removed from the truck and replaced with another
engine, thus minimizing repair time and without any loss of hydraulic
fluid or refrigerant.
- The HT1-450 is designed to operate on two of its four cylinders when
lightly loaded or when idling to improve operating efficiencies.
- The HT1-450, with its reverse uniflow two-stroke cycle design, is
constructed with approximately 40% fewer parts than its competitors'
engines. This design is expected to reduce costs associated with
manufacturing and servicing the engine.
- The HT1-450 is designed to be used with synthetic oil (polyalphaolefin)
for both lubrication and cooling. Using synthetic oil as a coolant
eliminates the risk of freeze damage to the cylinder block and head and
permits the engine to safely operate at up to 240 degrees Fahrenheit.
- The two point microcompressor engine control will permit both the
initiation and termination of fuel injection to be independently adjusted
on each cylinder. This is expected to result in quick starts, smooth
operation and minimal exhaust emissions.
3
The Company is also developing the natural gas fueled HT2-300G, which is
designed to use the conventional four-stroke engine cycle with spark ignition
while retaining most of the other innovations under development on the HT1-450.
The HT2-300G uses approximately 80% of the HT1-450's engine components, and is
designed to be a low cost product specifically intended for electrical power
generation and water pumping. The HT2-300G four-stroke engine is based on fully
proven design principles currently in the marketplace. The Company believes that
the primary competitive advantage of this engine will be its simplicity, low
cost and rugged packaging approach for application in the stationary power
market.
THE DEVELOPMENT PROGRAM
CURRENT STATUS OF HT1-450 ENGINE. RODI has fabricated and tested three
prototype HT1-450 diesel engines. These engines have satisfactorily completed
the following design and performance parameters: validation of the reverse
uniflow cycle, dynamic balancing, structural adequacy, and piston and piston
ring configuration. These three engines have accumulated many hours of test
operation on the Company's dynamometer test stand and limited road testing in
the Company's class 8 heavy truck.
Further development of the HT1-450 will be required before this product can
be commercialized. Tests are planned to enhance performance and increase maximum
power output of the HT1-450 by greatly increasing air flow through the engine by
optimizing air cycle components such as intake valves, exhaust port geometry,
supercharger volume ratio and turbocharger matching. Variables to be tested
include various exhaust system geometry changes; the use of four intake valves
per cylinder and using several types and combinations of supercharger and
turbocharger. Optimizing the air cycle of a two-stroke engine is a complex
trade-off of many characteristics that are interrelated. Recently completed
cylinder liner and piston design changes are expected to resolve past problems
associated with oil cooling and will be verified by testing during the first
phase of the pre-production engine development program. However, until these
design changes are tested, there are no assurances that they will be successful.
A technical status report on the HT1-450 program by David T. Marks, an
independent engine expert, is contained in Appendix A to the Prospectus. For
further information regarding development of the HT1-450 engine, see
"Business--The Development Program."
HT1-450 DEVELOPMENT PROGRAM PLAN. If the Maximum Amount is raised, RODI
intends to fabricate 25 pre-production HT1-450 engines for use in completing the
development program. These engines will be divided into four groups; five
engines for component integration verification testing, five engines for
dynamometer endurance testing, five engines for manufacturing engineering
development and ten engines for in-truck highway testing. RODI will also
fabricate several two-cylinder test modules to facilitate development testing.
If the Minimum Amount is raised, RODI intends to fabricate 10 HT1-450 pre-
production engines, with two engines each for component integration, dynamometer
endurance and manufacturing engineering, and four engines for in-truck highway
testing.
HT2-300G DEVELOPMENT PROGRAM. RODI intends to fabricate 10 HT2-300G engines
for the development program. The engines will be divided into two groups; four
will be used in-house for dynamometer and direct generator drive testing and six
will be provided to Alternate Power Equipment, Inc. for a cooperative test
program.
PROPOSED JOINT VENTURE
In 1997 the Company reached a non-binding agreement in principle to form a
joint venture, to be known as Alternate Power Equipment, Inc. ("APE"), with two
other parties. The Company and the other two parties to the agreement in
principle propose to form the joint venture to manufacture and sell stationary
power systems under the Alternate Power Equipment brand name. As presently
proposed, the Company will be the exclusive supplier of engines to APE and has
been granted Original Equipment Manufacturer status with Deere Power Systems to
provide the Company access to John Deere's complete 80 to 500 horsepower line of
PowerTech diesel engines. The parties are in the process of assembling the
4
initial diesel electric stationary power system utilizing the PowerTech engine.
It is contemplated that RODI manufactured engines will be integrated into the
product line as they become available. Formation of the joint venture remains
subject to the parties entering into a definitive joint venture agreement. There
are no assurances that the joint venture will be formed or will commence
operations. See "Business--APE Joint Venture". For further information regarding
development of the HT2-300G engine, see "Business--The Development Program."
HISTORY OF THE COMPANY
The Company was founded by Byron R. Spain in 1985 as a sole proprietorship,
incorporated as a Delaware corporation in 1987 under the name Rotary Diesels,
Inc. (RODI) and reincorporated in Washington in 1991. Until 1993, the Company
was engaged in the development of a rotary diesel engine. In 1993 the Company
elected to discontinue its development of a rotary diesel engine, due to the
projected cost and timing to develop a marketable product and management's
belief that the trucking industry had a general distrust of rotary engines, and
commenced development of the current reverse uniflow design. In 1993 the Company
was renamed RODI Power Systems, Inc. to more accurately reflect RODI's business
goals. The Company's principal executive offices are located at 7503 South 228th
Street, Kent, Washington 98032, telephone (253) 850-1490, and its mailing
address is P.O. Box 769, Maple Valley, WA 98038.
THE OFFERING
Securities Offered by the Company:
Minimum Amount............................. 800,000 Units(1)
Maximum Amount............................. 5,000,000 Units(1)(3)
Exercise Price of Warrants................... Each Warrant entitles the registered holder
thereof to purchase one share of Common Stock
at an exercise price of $5.00 per share,
for four years commencing one year from the
date the Offering commences. The Warrant
exercise price is subject to adjustment
under certain circumstances.
Redemption of Warrants....................... Commencing 12 months from the date of this
Prospectus, the Warrants are subject to
redemption by the Company at $0.05 per
Warrant on 30 days prior written notice
provided that the average closing bid price
of the Common Stock as reported on the
Nasdaq Stock Market ("NASDAQ") equals or
exceeds $7.50 per share for any 20 trading
days within a period of 30 consecutive
trading days ending on the fifth trading
day prior to the date of the notice of
redemption. See "Description of Capital
Stock".
Common Stock Outstanding prior to the
Offering(2)................................ 13,083,235 shares
Common Stock Outstanding after the
Offering(2):
Minimum Amount............................. 13,883,235 shares (2)
Maximum Amount............................. 18,083,235 shares (2)(3)
5
Use of proceeds.............................. To complete development of the HT1-450 diesel
and HT2-300G natural gas engines and
initiate production.
NASDAQ Market Symbols(3):
Common Stock............................... RODI
Warrants................................... RODIW
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(1) The Company is offering a minimum of 800,000 Units and a maximum of
5,000,000 Units, each Unit consisting of one share of Common Stock and one
Warrant. See "Underwriting", "Description of Units" and "Description of
Capital Stock".
(2) Does not include 6,000,000 shares of Common Stock reserved under the
Company's Incentive Stock Option Plan, of which options to purchase
4,474,559 shares of common stock are outstanding as of the date of this
Prospectus, or shares issuable upon exercise of Warrants. See
"Management--1992 Incentive Stock Option Plan."
(3) Listing on NASDAQ will occur only after all exchange requirements have been
fulfilled. The Company anticipates meeting the listing requirements for the
NASDAQ Stock Market if the Minimum Amount is raised in the Offering. The
Company does not intend to apply for listing of the Units. However, the
Common Stock and the Warrants will be separately tradeable upon completion
of the Offering.
6
SUMMARY FINANCIAL DATA
PERIOD FROM PERIOD FROM
JULY 20, JULY 20,
1987 YEAR ENDED DECEMBER 31 1987 SIX MONTH PERIOD ENDED
(INCEPTION) (AUDITED) (INCEPTION) (UNAUDITED)
THRU -------------------------- THRU --------------------------
12/31/94 1995 1996 12/31/96 6/30/96 6/30/97
------------ ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
Revenues........................... 0 0 0 0 0 0
Net Income (Loss).................. (1,447,066) (1,121,224) (849,783) (3,429,421) (364,928) (495,596)
Net Income (Loss) per Share........ (0.19) (0.10) (0.07) (0.41) (0.03) (0.04)
Shares used in Calculation of Net
Loss per Share................... 7,523,927 11,574,386 12,050,450 8,400,320 12,198,398 12,599,257
6/30/97
-------------------------
AS ADJUSTED AS ADJUSTED
1995 1996 6/30/96 6/30/97 MINIMUM MAXIMUM
ACTUAL ACTUAL ACTUAL ACTUAL OFFERING(2) OFFERING(3)
--------- --------- --------- ---------- ----------- ------------
BALANCE SHEET
Working Capital................................. 120,482 5,446 66,499 18,555 2,523,660 18,965,410
Total Assets.................................... 431,131 206,998 298,793 239,934 3,097,934 19,539,684
Notes Payable to Officers/Directors............. 0 262,895 0 352,895 352,895 352,895
Stockholder's Equity (Deficit).................. 338,106 (97,611) 256,137 (200,123) 2,657,877 19,099,627
- ------------------------
(1) See Note 1 of Notes to Financial Statements of the Company concerning net
loss per share information, which Financial Statements are included
elsewhere in this Prospectus.
(2) As adjusted to reflect the sale by the Company of 800,000 Units at an
initial public offering price of $4.25 per Unit, and the estimated net
proceeds to the Company without giving effect to the exercise of the
Warrants. See "Use of Proceeds" and "Certain Relationships and Related
Transactions".
(3) As adjusted to reflect the sale by the Company of 5,000,000 Units at an
initial public offering price of $4.25 per Unit and the estimated net
proceeds to the Company without giving effect to the exercise of the
Warrants. See "Use of Proceeds" and "Certain Relationships and Related
Transactions".
7
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE UNITS
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IS NOT AN APPROPRIATE
INVESTMENT FOR PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
PROSPECTIVE INVESTORS SHOULD BE AWARE OF THE FOLLOWING RISK FACTORS AND SHOULD
REVIEW CAREFULLY THE FINANCIAL AND OTHER INFORMATION PROVIDED BY THE COMPANY.
DEVELOPMENT STAGE ENTERPRISE; LIMITED OPERATING HISTORY; ABSENCE OF REVENUES
AND PROFITS; NEGATIVE NET WORTH; SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT
The Company is a development stage enterprise and is subject to all of the
attendant business risks associated with a development stage enterprise,
including constraints on financial and personnel resources, lack of established
credit facilities, and uncertainties regarding product development and future
revenues. The Company will continue to be subject to all the risks attendant to
a development stage enterprise for the foreseeable future, including
competition, complications and setbacks in the development program, and the need
for additional capital.
The Company has reported losses in each year since its inception. At June
30, 1997, the Company had an accumulated deficit of ($3,925,017) and a
stockholders' deficit of $(200,123). The Company's history consists almost
entirely of development of its products funded entirely from the sale of its
Common Stock in the absence of revenues. The Company anticipates that it will
continue to incur substantial additional operating losses for at least the next
12 months and expects cumulative losses to increase as the Company's development
efforts expand. Since 1993 the Company has focused on developing and testing the
HT1-450 reverse uniflow two-stroke cycle turbo diesel engine which the Company
believes has long term potential.
Although the Company anticipates receiving future revenues from the sales of
engines to a proposed joint venture, Alternate Power Equipment, Inc., which
engines are built by a third party and will not utilize the Company's engine
design until the current development program is completed, there are no
assurances that significant revenues will be derived from this activity in the
future. The Company has received no revenues from sales of any of the products
under development. There can be no assurance as to when or if the Company will
be able to develop significant sources of revenue or whether its operations will
become profitable, even if it is able to commercialize any product. See
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation," "Business--APE Joint Venture" and Notes to Financial Statements.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT OR COMMERCIALIZATION
Although substantial progress has been made by the Company in developing the
HT1-450 and HT2-300G engines, substantial additional development will be
necessary in order for the Company to fully develop these products. There can be
no assurance that the engines will be developed or that they will be
commercialized by the Company in a timely manner or at all. Although development
efforts to date have validated the feasibility of the reverse uniflow design,
there are significant developmental milestones which the Company has not yet
achieved, such as sustained power operation in a Class 8 truck. Although the
Company believes that these milestones can be met, or alternative designs or
techniques employed if necessary, there are no assurances that these milestones
can be met or that these alternatives can be successfully implemented. This will
require further development related to the engine's extensive laboratory and
field testing, regulatory approval, and substantial additional investment by the
Company. This process could take two years or longer. There can be no assurance
that the products utilizing the reverse uniflow design will ultimately be
successfully developed, prove to be reliable in laboratory and field testings,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be successfully marketed or achieve market
acceptance. Accordingly, any product
8
development program undertaken by the Company may be curtailed, redirected or
eliminated at any time, which could have a material adverse effect on the
Company. See "Business-The Development Program"
NEED FOR ADDITIONAL FINANCING
The Company anticipates that, if the Maximum Amount is raised, the net
proceeds from this Offering will enable it to meet its capital and operational
requirements for at least 16 months following completion of the Offering.
Thereafter, additional funds will be required unless the Company is able to
generate revenues internally. Although the Company believes that it may be able
to generate such funds internally from revenues derived from the proposed joint
venture with APE, there are no assurances that such funds will be available, or
in amounts required to fund ongoing capital needs. If the Company generates the
Minimum Amount, the Company believes that it will have sufficient funds to
complete development of the HT1-450 engine, but at a much slower pace
(approximately 30 months) due to continued use of part time personnel and
without the benefit of additional facilities and equipment. Therefore, if the
Minimum Amount is raised, the Company intends to seek additional financing
following the completion of this Offering.
The Company's expectations as to the amount of funds needed for development
and the timing of the need for these funds is based on the Company's current
operating plan, which can change as a result of many factors, and the Company
could require additional funding sooner than anticipated. The Company's cash
needs may vary materially from those now planned because of results of
development or changes in the focus and direction of the Company's development
program, competitive and technological advances, results of laboratory and field
testing, requirements of regulatory agencies and other factors.
The Company has no credit facility or other committed sources of capital. To
the extent capital resources are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue
development and operations of the Company. There can be no assurance that such
funds will be available on favorable terms, or at all. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds on unattractive
terms. The Company's inability to raise capital would have a material adverse
effect on the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operation."
GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITOR'S REPORT
The report of the Company's independent auditors with respect to the
Company's financial statements included in this Prospectus includes a "going
concern" qualification, indicating that the Company's losses and deficits in
working capital and shareholders' equity raise substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition and Plan of Operation", "Change in
Accountants" and Notes to Financial Statements.
LACK OF EXPERIENCE TO MANUFACTURE OR MARKET PRODUCT
Assuming RODI is successful in developing HT1-450 and HT2-300G engines, the
Company presently has no proven ability either to manufacture or market the
engine. There is no assurance that the Company will be able to profitably
manufacture and market engines.
COMPETITION
The diesel and natural gas engine market is extremely competitive. The
Company expects competition in the diesel and natural gas engine market to
continue, if not intensify, as the demand for more efficient and reliable
engines increases and new technologies and systems are developed to deliver such
engines in a cost-effective and convenient manner. The primary suppliers of
heavy duty diesel engines (Caterpillar,
9
Detroit Diesel and Cummins Engine) and natural gas engines (Caterpillar, Cummins
and Waukesha Dresser) are major national businesses with long established
operating histories and significant market shares. These companies possess
greater technical resources and market recognition than RODI, and have
management, financial and other resources not yet available to the Company.
Existing engines are likely to be perceived by many customers as superior or
more reliable than any new product until it has been in the marketplace for a
period of time. There is no assurance that the Company will be able to compete
effectively with these companies.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon the timing of new
product introductions by the Company. The Company's quarterly operating results
may also fluctuate significantly depending on other factors, including the
introduction of new products by the Company's competitors, regulatory actions,
market acceptance of the Company's products, adoption of new technologies, and
manufacturing costs and capabilities. See "Management's Discussion and Analysis
of Financial Condition and Plan of Operation."
TECHNOLOGICAL CHANGE
The HT1-450 engine, if successfully developed, is designed to have features
superior to truck engines presently on the market, particularly in the
power-to-weight-ratio. However, new technology or refinement of existing
technology could render the HT1-450 less attractive or obsolete. The Company's
success depends in part upon its ability to anticipate changes in technology and
industry standards and to successfully develop and introduce new and improved
engines on a timely basis. There is no assurance that the Company will be able
to do so.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends on the abilities and continued
participation of Byron Spain, Donavan Garman and other key personnel who have
been instrumental in bringing the HT1-450 engine to its present state of
development. The Company does not presently have employment agreements with key
personnel. The loss of any of these key individuals could hamper the successful
development of the engine. The Company does not have "key man" life insurance on
such officers and currently has no plans to obtain such insurance. See
"Management". The Company's success also depends on its ability to attract and
retain additional skilled employees.
GOVERNMENT REGULATION
Engines are subject to government regulation in the areas of emissions and
product safety. Truck companies and carriers are informally monitored by a
variety of state and local regulatory agencies. The HT1-450 and HT2-300G must
comply with state and federal anti-pollution and safety laws. There is no
assurance that the engines being developed will be capable of complying with all
such laws and regulations. See "Business--Government Regulation."
PRODUCT LIABILITY; RISK OF UNINSURED CLAIMS
The HT1-450 engine is designed to power truck combinations weighing up to
120,000 pounds. As a key element of engine development, the Company is
addressing product safety and will document failure mode and effects analysis.
Despite the steps being taken, there is no assurance the HT1-450 will meet
adequate safety standards. This is often not known until after extensive field
trials are completed. The Company intends to purchase product liability
insurance during the highway test phase of development as well as during
production. The Company may become subject to strict liability for damages or
injuries
10
caused by its products. Although the Company plans to carry product liability
insurance, there can be no assurance that adequate insurance will be available
or economically feasible.
MANUFACTURING RISKS; DEPENDENCE ON OUTSIDE VENDORS
If the Company successfully completes development and begins production, it
intends to rely to a large extent on outside vendors to manufacture its engine
components. There can be no assurance of timely availability of products to
satisfy the Company's volume and quality requirements.
WARRANTY CLAIMS
RODI has designed the HT1-450 to be a highly reliable engine that should
perform as well as competing products. The significantly lower number of parts
is anticipated to result in less part failures than standard six cylinder
engines. However, extended testing and actual in-service performance must occur
before this reliability is proven, and there is no assurance that this
reliability will actually result. See "Business--Warranties."
NEED TO ESTABLISH SERVICE CENTERS
There are presently no service centers for the HT1-450 or the HT2-300G. In
order to successfully compete with other products, particularly diesel engines
used in class 8 heavy trucks, the Company will need to maintain service centers
for its products in the geographic markets where it will compete. The Company is
currently considering a number of options in this regard, including joint
ventures with more established companies or establishing relationships with
existing independent service centers. See "Business--Marketing Plan."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company relies on trade secrets and proprietary know-how which it seeks
to protect, in part, through confidentiality agreements with employees,
consultants, and others. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any such
breach or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors, or obtained by competitors through
reverse engineering. Although consultants are not given access to proprietary
trade secrets and know-how of the Company until they have executed
confidentiality agreements, these agreements may be breached by the other party
thereto or may otherwise be of limited effectiveness or enforceability.
The Company has applied for patent protection on certain aspects of the
HT1-450 engine. However, many aspects of engine technology, including the
reverse uniflow engine cycle, are not believed to be patentable. No assurance
can be given that the Company's patent applications will be approved or that any
issued patents will provide competitive advantages for the Company's products,
or will not be challenged or circumvented by competitors. See "Business--Patent
and Proprietary Rights."
ENVIRONMENTAL REGULATIONS AND CONCERNS
Although the HT1-450 is designed to meet the new 1998 emissions regulations,
additional testing and development is required to verify RODI's expectations.
Future environmental legislation and resulting regulations may adversely affect
RODI's ability to manufacture and deliver engines and related products. See
"Business--Governmental Regulation."
DETERMINATION OF OFFERING PRICE
The offering price of $4.25 per Unit has been arbitrarily determined by the
Company based on several factors including but not limited to: funds required by
the Company to complete development of the
11
HT1-450 and HT2-300G engines, the percentage of ownership of the Company to be
held by investors in this Offering, the experience of the Company's management
and the current conditions in the securities markets. Accordingly, there is no
relationship whatsoever between the offering price and the assets, earnings or
book value of the Company, or any other recognized valuation criteria of value.
See "Underwriting".
NO DIVIDENDS ANTICIPATED
The Company has never paid dividends on its Common Stock and does not
anticipate payment of dividends in the foreseeable future. In this regard, the
Company intends to retain earnings for the foreseeable future for use in the
operation and expansion of its business. See "Dividend Policy".
IMMEDIATE SUBSTANTIAL DILUTION
The current shareholders of the Company acquired their shares of Common
Stock of the Company in exchange for nominal consideration or for consideration
which is substantially less than the amount of consideration the purchasers in
this Offering will pay for their shares. As a result, new investors in this
Offering will bear a substantially greater share of the risks inherent in an
investment in the Company. The Company's net tangible book value as of June 30,
1997 was ($200,123) or ($.02) per share and will increase to approximately
$2,657,877 or $.19 per share, if the minimum number of Units are sold, and
$19,099,627 or $1.07 per share, if the maximum number of Units are sold. The
result will be an immediate and substantial dilution of the net tangible book
value of the shares of Common Stock acquired by the public investor of ($4.06)
or 96% per share if the minimum number of Units offered hereby are sold and
($3.18) or 75% per share if the maximum number of Units are sold. See
"Dilution."
PRICE VOLATILITY
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded development stage companies have in the past been, and can in
the future be expected to be, especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning patents or proprietary rights, publicity
regarding actual or potential results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and foreign countries, delays in the Company's testing and development
schedules, and other external factors, as well as period to-period fluctuations
in the Company's financial results, may have a significant impact on the market
price of the Common Stock.
POTENTIAL ADVERSE EFFECT OF UNDERWRITER'S WARRANTS
At the consummation of the Offering, the Company will sell to the
Underwriter for nominal consideration the Underwriter's Warrants to purchase up
to 100,000 shares of Common Stock. The Underwriter's Warrants will be
exercisable for a period of four years commencing one year after the effective
date of this Offering, at an exercise price of $5.00 per share. For the term of
the Underwriter's Warrants, the holders thereof will have, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the Underwriter's Warrants remain
unexercised, the Company's ability to obtain additional capital may be adversely
affected. Moreover, the Underwriter may be expected to exercise the
Underwriter's Warrants at a time when the Company would, in all likelihood, be
able to obtain any needed capital through a new offering of its securities on
terms more favorable to the Company than those provided by the Underwriter's
Warrants. See "Underwriting."
12
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF STOCKHOLDER WARRANTS
Commencing , 1998 [12 months after the date of this Prospectus], the
Warrants are subject to redemption at $0.05 per Warrant on 30 days' prior
written notice to the Warrant holders if the average closing sales price of the
Common Stock as reported on NASDAQ equals or exceeds $7.50 per share for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption. If the Warrants are
redeemed, holders of the Warrants will lose their rights to exercise the
Warrants after the expiration of the 30 day notice of redemption period. Upon
receipt of a notice of redemption, holders would be required to: (i) exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
for them to do so, (ii) sell the Warrants at the current market price, if any,
when they might otherwise wish to hold the Warrants or (iii) accept the
redemption price, which is likely to be substantially less than the market value
of the Warrants at the time of redemption. See "Description of Units."
COMMON STOCK OPTIONS
The Company has reserved 6,000,000 shares of its Common Stock under the
Company's Incentive Stock Option Plan, of which options to purchase 4,755,309
shares have been granted at exercise prices ranging from $0.15 to $1.10 per
share. If all such options were exercised upon completion of this Offering, the
Company's net tangible book value would increase from ($200,123) or ($0.02) per
share on June 30, 1997, to approximately $6,827,367 or $0.37 per share if the
minimum number of Units are sold and $23,269,117 or $1.03 per share if the
maximum number of Units are sold. Of the total, 4,755,309 shares granted,
2,158,000 shares are held by Officers, Directors and 5% shareholders of the
Company, which will be restricted from exercise for a period of one year from
the date of the Offering under the Officers and Directors Lock-Up agreement. In
addition, the Company will not grant any additional options or Warrants to its
Officers, Directors and 5% shareholders for a period of one year from the date
of the Offering. For the term of the options, the holders thereof will have, at
nominal cost, the opportunity to profit from a rise in the market price of the
Common Stock without assuming the risk of ownership, with a resulting dilution
in the interest of other security holders. As long as the options remain
unexercised, the Company's ability to obtain additional capital may be adversely
affected. Moreover, the optionees may be expected to exercise the options at a
time when the Company would, in all likelihood, be able to obtain any needed
capital through a new offering of its securities on terms more favorable to the
Company than those provided by the options. See "Management--1992 Incentive
Stock Option Plan", and "Dilution".
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
The Articles of Incorporation of the Company currently authorize the Board
of Directors to issue up to 30,000,000 shares of Common Stock. The power of the
Board of Directors to issue shares of Common Stock or warrants to purchase
shares of Common Stock is not subject to shareholder approval under Washington
state law. Accordingly, any additional issuance of the Company's Common Stock
may have the effect of further diluting the equity interest of shareholders. See
"Description of Capital Stock."
ISSUANCE OF SHARES OF PREFERRED STOCK
The Company's Board of Directors also has the authority to issue up to
30,000,000 shares of non-voting Preferred Stock convertible into Common Stock,
and to determine the price, and the other rights, preferences, privileges and
restrictions, without any further vote or action by the Company's stockholders.
Under Washington state law, even though RODI's Articles of Incorporation
designate the preferred shares as non-voting, such preferred shares would
nonetheless be entitled under Washington law to vote on certain matters as a
class, such as the merger of the Company into another corporation. Also, the
preferred shares are convertible into Common Stock. Therefore, the provisions in
the Articles of Incorporation authorizing preferred stock could have the effect
of delaying, deferring or preventing a change of control of the Company. The
rights of the holders of Common Stock will be subject to, and may be adversely
13
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire control of the Company. The Company has no current plans to issue shares
of Preferred Stock.
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
Following completion of this Offering, the Company's present shareholders
will own more than fifty percent of the Company's issued and outstanding stock
if the Minimum Amount is sold, and will likely own a controlling interest in the
Company if the Maximum Amount is sold. Even though all holders of Common Stock
are entitled to cumulate their shares when voting for directors, the present
shareholders may control sufficient shares to elect most or all members of the
Board of Directors and thereby control the management of the Company. See
"Management," "Principal Shareholders" and "Description of Capital Stock."
ESCROW OF INVESTORS' FUNDS;--MINIMUM - MAXIMUM BEST EFFORTS OFFERING
Under the terms of this Offering, the Company is offering the Units on a
"800,000 Units, all or none, best efforts" basis, and if the minimum number of
Units offered hereby are sold, the remaining 4,200,000 Units will be offered on
a "best efforts" basis until all of the Units are sold or the offering period
ends, whichever first occurs, unless the offering is terminated earlier by the
Company. No commitment exists by anyone to purchase all or any part of the
Units. Consequently, there is no assurance that the minimum number of Units
being offered will be sold, and subscribers' funds may be escrowed for as long
as 190 days (the 90 day offering period, which may be extended by an additional
90 days, plus an additional 10 business days to permit clearance of funds in
escrow) and then returned without interest thereon, in the event the minimum
number of Units offered hereby are not sold within the offering period.
Accordingly, investors will not have the use of their subscription funds during
this period. In the event the Company is unable to sell the minimum number of
Units offered hereby within the Offering period, the Offering will be
terminated. See "Underwriting".
DIRECTORS' AND OFFICERS' LIABILITY LIMITED
Under Washington law, the Company is required to indemnify its officers and
directors against liability to the Company or its stockholders in any proceeding
in which the officer or director wholly prevails on the merits. Generally, the
Company may indemnify its officers and directors against such liability if the
officer or director acted in good faith believing his or her actions to be in
the best interests of the Company, unless the director or officer is adjudged
liable to the Company. See "Management-- Limitation on the Liability of
Directors".
SHARES AVAILABLE FOR RESALE
As of August 31, 1997, there were 13,083,235 shares of Common Stock
outstanding. Such shares of Common Stock have not been registered under the
Securities Act, and are "restricted securities" under Rule 144 of the Securities
Act. In general, under Rule 144, a person (or persons who agree to act in
concert) who owns "restricted securities" or who is an "affiliate" of the
Company, after holding such securities for a period of one year, will be able to
sell within any three-month period an amount of shares of Common Stock equal to
the greater of (i) 1% of the number of outstanding shares of Common Stock of the
Company, or (ii) the average weekly reported trading volume of the shares of
Common Stock for the four weeks preceding such sale. A person who is not an
affiliate for three months prior to the sale may, after holding "restricted
securities" for two years, sell such securities without being subject to the
foregoing volume limitation. Of these 13,083,235 shares outstanding as of August
31, 1997, 12,105,423 shares have been owned for between one and two years and
will be eligible for resale upon compliance with the volume limitations of Rule
144; 11,488,646 of these outstanding shares have been owned for more than two
years
14
and will be eligible for resale without restriction upon completion of the
Offering, subject only to the Rule 144 volume limitations for shares held by
affiliates. Of the 13,083,235 shares outstanding, 6,645,978 are owned by
affiliates and will be subject to Lock-Up Agreements upon completion of the
Offering. These affiliates have entered into Lock-Up Agreements with the
Underwriter which prohibit these affiliates for a period of 12 months from the
effective date of the Offering from the trading in the Company's securities
owned by them without the prior written consent of the Underwriter. The eventual
sale of a substantial number of such shares of the Company's Common Stock
pursuant to Rule 144 could have an adverse effect on the market for or market
price of the Common Stock should such public market develop. See "Principal
Shareholders," "Shares Eligible for Future Sale" and "Underwriting."
CURRENT PROSPECTUS AND STATE BLUE SKY REQUIREMENTS REQUIRED TO EXERCISE WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to do so.
The value of the Warrants may be greatly reduced if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the states in which the holders of the Warrants reside. Until completion of
this Offering, the Common Stock and the Warrants may only be purchased together
on the basis of one share of Common Stock and one Warrant, but the Warrants will
be separately tradeable immediately after this Offering. Although the Securities
will not knowingly be sold to purchasers in jurisdictions in which the
Securities are not registered or otherwise qualified for sale, investors may
purchase the Warrants in the secondary market or move to a jurisdiction in which
the shares underlying the Warrants are not registered or qualified during the
period that the Warrants are exercisable. The Company will be unable to issue
shares to those persons desiring to exercise their Warrants unless and until the
shares are qualified for sale in jurisdictions in which such purchasers reside,
or an exemption from such qualification exists in such jurisdictions, and
holders of the Warrants would have no choice but to attempt to sell the Warrants
in a jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities--Warrants.
FAILURE TO MEET CONTINUED LISTING REQUIREMENTS ON NASDAQ; RISK OF LOW PRICED
SECURITIES; SMALLCAP MARKET; PENNY STOCK
The Company anticipates that the Common Stock and the Warrants will be
listed on the NASDAQ SmallCap Market (the "SmallCap Market") if the Minimum
Amount is raised. The Company intends to apply for listing on the NASDAQ
National Market. However, the Company will not be eligible to apply for the
National Market listing until the Common Stock trades at $5.00 and the Company's
net tangible assets exceed $18 million. The SmallCap Market may be significantly
less liquid than the NASDAQ National Market.
The National Association of Securities Dealers, Inc. has established certain
standards for the initial listing and continued listing of a security on the
SmallCap and National Market. For continued listing on the SmallCap Market, an
issuer must, among other things, maintain at least $2,000,000 in tangible net
assets, a market capitalization of $35 million or net income of $500,000 in the
most recently completed fiscal year or in two of the last three most recent
years. In addition, continued listing requires a minimum of two market makers
and a minimum bid price of $1.00 per share. There are no assurances that the
Company will be able to meet the maintenance requirements in the future.
If the Company's securities were excluded from NASDAQ, it would adversely
affect the prices of such securities and the ability of the holders to sell
them. Delisting may restrict investors' interest in the
15
Company's securities and materially adversely affect the trading market and
prices for such securities and the Company's ability to issue additional
securities or to secure additional financing. It is anticipated that if the
Company's securities are delisted, trading, if any, in such securities would be
conducted in the over-the-counter market on the National Association of
Securities Dealers, Inc. OTC Electronic Bulletin Board established for
securities that do not meet the NASDAQ listing requirements or quoted in what
are commonly referred to as the "pink sheets." As a result, an investor may find
it more difficult to dispose of, or to obtain accurate price quotations and
volume information concerning the Common Stock and the Warrants.
Moreover, if the Common Stock and Warrants are delisted from the SmallCap
Market and the trading price of the Common Stock is less than $5.00 per share,
such securities would likely be subject to the low priced security or so-called
"penny stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. For any transaction involving a penny stock,
unless exempt, the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the Securities and Exchange
Commission relating to the penny stock market. Such rules also require that the
broker determine, based upon information obtained from the investor, that
transactions in penny stocks are suitable for the investor, and require the
broker to obtain the written consent of the investor prior to effecting the
penny stock transaction. The broker-dealer must also disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Although the Company believes
that the Common Stock will not be defined as a penny stock due to its
anticipated listing on the SmallCap Market, in the event such securities
subsequently become characterized as a penny stock, the market liquidity for
such securities could be severely affected. In such an event, the regulations
relating to penny stocks could limit the ability of broker-dealers to sell such
securities and, thus, the ability of purchasers in the Offering to sell their
shares in the secondary market.
ABSENCE OF PUBLIC MARKET
Prior to this Offering, there has been no public market for the Company's
Common Stock and Warrants, and there can be no assurance that a trading market
for the Company's Common Stock or Warrants will develop after this Offering, or
if developed, that it will be developed into something greater than a limited
market.
16
USE OF PROCEEDS
The estimated net proceeds to the Company from the sale of Units, after
deducting underwriting commissions and Offering expenses, will be $2,858,000 if
the Minimum Amount of Units are sold (800,000) and $19,299,750 if the Maximum
Amount of Units are sold (5,000,000). The following table sets forth the
estimated application by the Company of the proceeds of this Offering.
MAXIMUM
OFFERING
MINIMUM AMOUNT,
OFFERING AMOUNT PERCENTAGE OF (5,000,000 PERCENTAGE OF
USE OF PROCEEDS (800,000 UNITS) NET PROCEEDS UNITS) NET PROCEEDS
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Advertising and marketing (1).................... $ 40,000 1.4% $ 300,000 1.6%
Research and development (2)..................... 2,545,000 89.1% 11,460,000 59.4%
General and administrative....................... 215,840 7.5% 2,441,110 12.7%
Working capital.................................. 57,160 2.0% 385,995 2.0%
Retirement of Debt (3)........................... 0 0 512,895 2.6%
Production Facility (4).......................... 0 0 4,199,750 21.7%
TOTAL PROCEEDS................................... 2,858,000 100% 19,299,750 100%
- --------------------------
(1) Approximately $300,000 will be used to advertise and market the Company's
products through the use of mediums such as printing, video, formal
presentations and other promotional and professional activities. See
"Business--Marketing".
(2) For further information regarding proposed research and development
expenditures and the application of proceeds from the Offering, see
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation--Plan of Operation" and "Business--The Development Program."
(3) Of this amount, $262,895 represents monies advanced by the directors of the
Company in September 1996 to fund an offer by the Company to rescind the
sale of its Common Stock, and the remaining $90,000 represents loans by
three directors in February and April 1997 of $30,000 and $60,000,
respectively, for working capital. These loans bear interest at the rate of
9% per annum and are payable 24 months from the respective dates of their
maturity. In July 1997, Byron Spain, the Company's Chief Executive Officer
and a director, loaned $50,000 to the Company for working capital, which
loan bears interest at the rate of 18% and is due and payable in January
1999. In August 1997, Messrs. Spain, Bennett, Donavan Garman and Steven E.
Garman loaned a total of $110,000 to the Company for working capital, which
loans bear interest at the rate of 9% and are due and payable in August
1999. Unless at least $6 million of gross proceeds are raised in the
Offering, no Offering proceeds will be used to repay these loans. If less
than $6 million of proceeds are raised in the Offering, the loans will be
repaid from available cash flow from future operations, if any, or proceeds
from future financings, if any such financings occur. Each of these lenders
has agreed to defer repayment of the loans beyond the stated maturity date
if the Company does not have adequate working capital at the respective
maturity date of the loans. For additional information regarding these
loans, see "Certain Transactions" and "Business--Legal Proceedings."
(4) If the Maximum Amount is raised in the Offering, the Company intends to
lease and equip an assembly facility for its engine products. See
"Business--Research and Development."
Management projects that the net proceeds from the sale of the Maximum
Amount will be sufficient to fund completion of development of the HT1-450 and
HT2-300G engines and provide working capital requirements for approximately 16
months following completion of the Offering. After such 16 month period, the
Company believes that it may be able to finance its operations from internally
generated revenues, assuming the successful completion of development. However,
unless the Company can internally generate sufficient funds, additional
financing will be required to enable the Company to maintain its activities. If
the Minimum Amount of Units are sold, the Company believes that it will have
sufficient funds to complete the HT1-450 engine development, but at a much
slower pace (30 months) due to continued use of part time personnel, fewer test
engines, and without the benefit of additional facilities and test equipment.
Therefore, if the Minimum Amount is raised, the Company intends to seek
additional financing following completion of this Offering. There are no
assurances that internally generated funds will be sufficient, or that
additional capital, if needed, will be available, or if available, will be on
terms favorable to the Company. See "Risk Factors--Need for Additional
Financing" and "Management's Discussion and Analysis of Financial Condition and
Plan of Operation."
17
Pending the expenditure of the proceeds of this Offering, the Company may
make temporary investments in certificates of deposit, short term
interest-bearing deposits or United States Government obligations.
DIVIDEND POLICY
The Company has never declared any cash dividends on its Common Stock and
does not intend to declare dividends on its Common Stock in the foreseeable
future. The Company presently expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its Common Stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors. See
"Description of Capital Stock."
DILUTION
At June 30, 1997, there were 12,886,885 shares of the Company's Common Stock
outstanding having a net tangible book value of ($200,123) or approximately
($0.02) per share. Net tangible book value per share is the net tangible assets
of the Company (total assets less total liabilities and intangible assets)
divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of a minimum of 800,000 Units (the minimum
number of Units offered hereby) and a maximum of 5,000,000 Units (the maximum
number of Units offered hereby) at a price of $4.25 per Unit and the application
of net proceeds therefrom (after deduction of estimated offering expenses), the
pro forma net tangible book value of the Company's outstanding Common Stock
would be approximately $0.19 per share if the Minimum Amount of Units are sold
and approximately $1.07 per share if the Maximum Amount of Units are sold.
This represents an immediate increase in the net tangible book value of the
Company's issued and outstanding Common Stock for existing shareholders of
approximately $0.21 per share if the minimum number of Units are sold, and
approximately $1.09 per share if the maximum number of Units are sold and an
immediate dilution to investors purchasing of approximately ($4.06) or 96% per
share if the minimum number of Units are sold, and approximately ($3.18) or 75%
per share if the maximum number of Units are sold.
Dilution represents the difference between the Offering price of the Units
and the pro forma net tangible book value per share of outstanding shares of
Common Stock of the Company immediately after the completion of this Offering.
Dilution arises mainly from (1) the arbitrary determination of the offering
price by the Company and the Underwriter at a level significantly higher than
the present book value of the Common Stock, and (2) payment of expenses incurred
in connection with the Offering.
The following table illustrates the per share dilution in net tangible book
value as described above if the minimum and the maximum number of Units offered
hereby are sold:
MINIMUM MAXIMUM
AMOUNT AMOUNT
(800,000 UNITS) (5,000,000 UNITS)
----------------- -----------------
Public offering price per Unit (1)......................... $ 4.25 $ 4.25
Net tangible book value per share at June 30, 1997......... $ (0.02) (0.02)
Increase per share attributable to payment by investors in
this Offering............................................ $ 0.21 $ 1.09
Pro forma net tangible book value per share, after
offering................................................. $ 0.19 $ 1.07
Dilution to investors in this offering per share........... $ (4.06) $ (3.18)
- ------------------------
(1) Before deduction of Underwriter commissions and underwriting expenses
payable by the Company.
18
The Company has reserved an aggregate of 6,000,000 shares of its Common
Stock for its employees pursuant to its Stock Option Plan. As of June 30, 1997,
the Company has issued 205,750 shares pursuant to the terms of its Stock Option
Plan. The above table does not give effect to the possible issuance of up to
4,549,559 additional shares of the Company's Common Stock upon exercise of
options which have been granted under the Stock Option Plan. The issuance of
shares of the Company's Common Stock upon the exercise of options which are
granted under the Stock Option Plan would result in further dilution in the
interests of stockholders if at the time of exercise the Company's net tangible
book value per share is greater than the exercise price of any such options. See
"Management--1992 Incentive Stock Option Plan".
In addition, the Company has agreed to sell to the Underwriter warrants to
purchase the Company's Common Stock in an amount equal to two percent (2%) of
the Common Stock sold by the Underwriter (or participating underwriters or
broker-dealers) in the Offering, which Warrants may be exercised during a four
(4) year period commencing on that date which is twelve (12) months after the
date of this Prospectus. The exercise price of such shares is $5.00 per share.
Issuance of the shares subject to such warrants would result in further dilution
of stockholders' interests if at the time of exercise the net tangible book
value of the Company's Common Stock exceeds $5.00 per share. The above table
does not give effect to issuance of any shares upon exercise of such warrants.
The following tables summarize, on a pro forma basis as of August 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors (before deducting the estimated
Underwriting commissions and offering expenses payable by the Company) if the
minimum and maximum number of Units are sold. The table assumes a hypothetical
purchase price of $4.00 for each share of Common Stock in a Unit, and $.25 for
each Warrant in a Unit.
ASSUMES MINIMUM AMOUNT OF UNITS SOLD
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
------------ ----------- ------------ ----------- ---------------
Existing Stockholders.............................. 13,083,235 94% $ 3,827,857 54% $ 0.29
New Investors...................................... 800,000 6% $ 3,200,000 46% $ 4.00
------------ --- ------------ --- -----
TOTAL.......................................... 13,883,235 100% $ 7,027,857 100% $ 0.51
------------ --- ------------ --- -----
------------ --- ------------ --- -----
ASSUMES MAXIMUM AMOUNT OF UNITS SOLD
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
------------ ----------- ------------- ----------- ---------------
Existing Stockholders............................ 13,083,235 72% $ 3,827,857 16% $ 0.29
New Investors.................................... 5,000,000 28% $ 20,000,000 84% $ 4.00
------------ --- ------------- --- -----
TOTAL........................................ 18,083,235 100% $ 23,827,857 100% $ 1.32
------------ --- ------------- --- -----
------------ --- ------------- --- -----
19
CAPITALIZATION
The following tables set forth at June 30, 1997 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization as adjusted
to reflect the sale of the Minimum Amount and the Maximum Amount of Units at the
offering price of $4.25 per Unit and the application of the net proceeds
therefrom. The tables should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
ASSUMES MINIMUM AMOUNT OF UNITS SOLD
JUNE 30, 1997
---------------------------
ACTUAL(1) AS ADJUSTED(2)
----------- --------------
Short term debt..................................................................... 87,162 87,162
Long term debt(3)................................................................... 352,895 352,895
Stockholders' Equity................................................................ 3,724,894 6,582,894
Common Stock $0.01 par value, 30,000,000 shares authorized; 12,886,885 shares
outstanding; 13,686,885 outstanding as adjusted pro forma(4)
Accumulated deficit................................................................. (3,925,017) (3,925,017)
Total Stockholders' Equity...................................................... (200,123) 2,657,877
Total Capitalization............................................................ 152,772 3,010,772
ASSUMES MAXIMUM AMOUNT OF UNITS SOLD
JUNE 30, 1997
---------------------------
ACTUAL(1) AS ADJUSTED(2)
----------- --------------
Short term debt..................................................................... 87,162 87,162
Long term debt(3)................................................................... 352,895 0
Stockholders' Equity................................................................ 3,724,894 23,024,644
Common Stock $0.01 par value, 30,000,000 shares authorized; 12,886,885 shares
outstanding; 17,886,885 outstanding as adjusted pro forma(4)
Accumulated deficit................................................................. (3,925,017) (3,925,017)
Total Stockholders' Equity...................................................... (200,123) 19,099,627
Total Capitalization............................................................ 152,772 19,452,522
- ------------------------
(1) Derived from the Financial Statements of the Company included elsewhere in
this Prospectus.
(2) As adjusted to reflect the sale of the Minimum Amount and Maximum Amount of
Units and the application of the net proceeds set forth in "Use of
Proceeds".
(3) Includes notes payable to affiliated persons in the total aggregate
principal amount of $352,895. See "Certain Relationships and Related
Transactions." If the Minimum Amount is raised, the long term debt will not
be retired from the proceeds of the Offering.
(4) Does not include shares of Common Stock reserved for issuance upon the
exercise of the Underwriter Warrants, the Warrants issued and sold in the
Offering, or the 4,549,559 shares of Common Stock reserved for issuance for
outstanding stock options under the Company's Stock Option Plan. See
"Management--1992 Incentive Stock Option Plan".
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
The following discussion should be read in conjunction with the consolidated
financial statements and related notes and "Summary Financial Data" included
elsewhere in this Prospectus.
GENERAL
The Company was formed in 1987 and is in the development stage. The
Company's principal business is to design, develop and market a family of new
heavy duty diesel and natural gas engines with potential applications in
trucking, marine and stationary power. Since inception, the Company has been
engaged in development of its products and raising capital. The Company has not
initiated any production, manufacturing or sales of its products at this point,
which has resulted in the accumulation of net losses characteristic of a
development stage enterprise.
Although the Company has generated minimal revenues from the sale to APE of
engines purchased from a third party in the first quarter of 1997 and
anticipates that such revenues will increase, the Company has not generated any
revenues to date from the sale of its own products and does not expect to
recognize revenue from the sale of the HT1-450 or HT2-300G any sooner than the
end of 1998. See "Business--APE Joint Venture".
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's capital resources have been limited.
Management believes that the limited availability of capital resources has
adversely affected the Company's results of operations or prevented the Company
from taking advantage of certain opportunities. For example, the Company has
been required to take actions such as using more expensive but readily available
components, shipping materials and components by more expensive transit, and
procuring monies on terms less favorable than those that may be available
following this Offering.
Management projects that the net proceeds from the sale of the Maximum
Amount will be sufficient to fund completion of development of the HT1-450 and
HT2-300G engines and provide working capital requirements for approximately
sixteen (16) months. After such 16 month period, the Company believes that it
may be able to finance its operations from internally generated revenues,
assuming the successful completion of development. However, unless the Company
can internally generate sufficient funds, additional financing will be required
to enable the Company to maintain its activities. If the Minimum Amount of Units
are sold, the Company believes that it will have sufficient funds to complete
the HT1-450 and HT2-300G engine development, but at a much slower pace (30
months) due to continued use of part time personnel, fewer test engines, and
without the benefit of additional facilities and test equipment. There are no
assurances that internally generated funds will be sufficient, or that
additional capital, if needed, will be available, or if available, will be on
terms favorable to the Company. The Company presently has no credit facilities
or any other commitments to provide capital. See "Risk Factors--Need for
Additional Financing."
Over the next twelve (12) months, the Company's operations will be focused
primarily on completing the development program previously defined for the
HT1-450 diesel engine and the HT2-300G natural gas engine. In addition to funds
obtained from the Offering, the Company intends to seek funding from the Natural
Gas Institute, the U.S. Department of Energy and from several major natural gas
suppliers through Alternate Power Equipment, Inc. in risk sharing
engine/generator development programs. However, there are no assurances that
such funding will be available.
In addition to completion of the development of the HT1-450 and HT2-300G
engines, new research and development activities planned for the next 12 months
include:
1. An electro-hydraulic engine valve actuation system that eliminates wear
related adjustment.
21
2. A high pressure natural gas fuel injection system.
3. Further work on polyalphaolefin based engine lubricant/coolants.
The Company does not anticipate that significant funds will be required to
pursue these three activities during the next 12 months.
PROPOSED PLAN OF OPERATION
Following is a discussion of the Company's proposed plan of operation during
the 12 months following completion of the Offering and through the time
presently estimated for completion of the development of the HT1-450 and
HT2-300G engines. The amount of proceeds raised in the Offering will have a
material impact on the specific allocations of proceeds as well as the rate of
the Company's development efforts undertaken over the next 16-30 months with
respect to the HT1-450 and HT2-300G engines. The Company's plan of operation as
well of the use of proceeds is within the discretion of the Company and is
subject to change.
PERSONNEL. The Company currently employs seven full time employees and
relies extensively on part-time employees and consultants due to limited
funding. If the Minimum Amount is raised, the Company intends to increase the
number of full time employees from seven to 11. However, if only the Minimum
Amount is raised, it will still have to rely on the use of part-time personnel,
resulting in a slower development effort. If the Maximum Amount is raised, the
Company anticipates increasing the number of full time employees from seven to
16, including a senior executive from the automotive industry to head
manufacturing operations and a senior engineer from an engine competitor to
complete engine development.
EQUIPMENT. The Company's existing facilities and equipment are limited. As
a result, the Company has relied extensively on outside vendors to supply key
components. If the Minimum Amount is raised, the Company presently intends to
expend approximately $150,000 for three machines to be utilized for producing
certain engine components and will continue to rely extensively on outside
vendors for key components. The use of outside vendors necessarily results in
longer lead times to obtain critical parts and slows the development process. If
the Maximum Amount is raised, the Company intends to expend approximately $6
million for equipment, which will allow the Company the ability to produce key
components in-house to support the development and production startup efforts.
These funds will also allow for additional test stations for its engines. If the
Maximum Amount is raised, the current business plan calls for the Company to
purchase CNC machining equipment, dynomometers, one forklift truck, and two
testing trucks. If the Minimum Amount is raised, the equipment purchased will be
limited to three manual machine tools.
TEST ENGINES. The amount of capital available will affect the number of
test engines which the Company will be able to fabricate for testing. If the
Minimum Amount is raised, the Company anticipates producing 10 HT1-450 engines
and two HT2-300G engines for testing, at an estimated cost of $600,000. If the
Maximum Amount is raised, the Company anticipates producing 25 HT1-450 engines
and 10 HT2-300G engines for testing, at an estimated cost of $1,750,000. The
greater the number of test engines available, the faster the development effort
is able to proceed.
FACILITIES. The amount of proceeds available from the Offering will have an
impact on the amount of leased facilities which the Company will utilize
following the Offering. If the Minimum Amount is raised, the Company intends to
lease an additional 10,000 square feet for its operations. If the Maximum Amount
is raised, the Company intends to expand its existing facility with the addition
of 50,000 square feet of leased space to accommodate the increased amount of
machinery and testing facilities.
If the Company raises more than the Minimum Amount but less than the Maximum
Amount of proceeds from the Offering, the use of the proceeds will be determined
by the Company's management.
22
Based upon information currently available, the Company intends to allocate
proceeds in excess of the Minimum Amount to the following categories in the
following priorities if proceeds in excess of the Minimum Amount are raised: (1)
additional personnel; (2) additional leased facilities; (3) additional
equipment; (4) additional test engines; and (5) additional marketing activities.
If the Company raises the Maximum Amount in the Offering, it believes it
will have sufficient capital to complete the development of the HT1-450 and
HT2-300G engines in the 16 months following completion of the Offering. If the
Company raises only the Minimum Amount, the period of development is estimated
to occur at a pace that will not allow completion of development for at least 30
months due to less personnel, fewer test engines, and reduced facilities and
test equipment. Further, the availability of fewer test units and less test
equipment could increase delays from unforeseen technical issues which normally
accompany any development effort. The slower rate of development exposes the
Company to an increased risk of competition from other manufacturers.
Therefore, although the Company anticipates having adequate capital to
sustain its operations for at least the next 12 months if only the Minimum
Amount is raised in the Offering, the Company intends in such event to seek
additional financing to facilitate a faster pace of development for the HT1-450
and HT2-300G engines. If more than the Minimum Amount, but less than the Maximum
Amount, is raised in the Offering, the Company may also seek additional
financing. However, there are no assurances that such funds will be available,
or if available, on terms which are attractive to the Company.
For further information regarding the Company's proposed plan of operation
see "Business" herein.
23
BUSINESS
GENERAL
RODI Power Systems, Inc. is a development stage company whose first product,
the HT1-450 turbo diesel engine, is in the development stage. If the HT1-450 is
successfully developed, the Company intends to manufacture, market, and sell
this engine, as well as derivative engines based on this technology and related
components and accessories world wide. The Company also intends to manufacture,
market and sell the HT2-300G four-stroke cycle natural gas fueled engine
currently under development, regardless of the success of the HT1-450 engine.
There are no assurances, however, that development of these products will be
successfully completed. The Company is an equal partner in a three way joint
venture, Alternate Power Equipment, Inc., which recently commenced manufacturing
diesel/electric stationary power systems using Deere PowerTech engines.
PRODUCT DESCRIPTION
RODI is developing a two cylinder turbocharged power module which can be
packaged into a variety of forms; I-2, V-4, I-4, I-6, V-8 and V-12. The first
engine, the HT1-450 turbo diesel engine, is a V-4 engine which is substantially
lighter in weight and shorter in length than its competitors when constructed
from identical materials. It is designed to be a replacement for the I-6
cylinder CAT 3406, Detroit S60 and Cummins N14 series of engines which produce
350 to 500 hp and weigh approximately 2700 lbs with no accessories, coolant or
oil. These engines, intended primarily for the class 8 heavy truck market, are
also used extensively in stationary and marine applications, such as power
generation, pumping and refrigeration. The HT1-450 is expected to have an
advantage in each competitive category: lower fuel consumption (approximately 40
hp less internal friction at 1800 rpm), higher low speed torque, lower weight
and lower structural loading for longer life. A tabulation of the physical
attributes of each engine is shown in the section below entitled "Competition."
The turbocharged two cylinder power module is based on two enabling
technologies currently under development by RODI, the reverse uniflow two-stroke
engine cycle and the two point microprocessor engine control and its associated
interactive software. Patents are currently pending on two technologies: a
unique piston design and a valve train mechanism which has application to all
internal combustion engines. See "Business--Patents and Proprietary Rights."
In the reverse uniflow two-stroke cycle, pressurized air is admitted via
intake valves located in the cylinder head and exhaust is discharged through
ports machined into the lower extremity of each cylinder liner. This eliminates
the need for exhaust valves while still achieving efficient scavenging of the
exhaust within the cylinders.
The two point microprocessor engine control under development is designed to
permit initiation and termination of fuel delivery to be programmed
independently for each individual cylinder. The control system computer is
designed to continuously monitor and control all engine functions to optimize
operating efficiency. An integral cellular telephone/modem capability will be
designed into the control system to enable the engine's operator to receive
diagnostic or repair assistance from a factory service specialist at any time.
The service specialist will be able to operate/adjust the engine by remote
control.
The benefit of a V-4 over an I-6 configuration includes reducing the number
of main bearings from seven to three and the length of the crankshaft by 45%. A
proportional reduction in component count is reflected throughout the engine
resulting in approximately 40% fewer parts and hence significantly lowering the
cost of production. Another significant difference between the HT1-450 and its
four-stroke competitors is the absence of exhaust valves and related heating of
the head. The single greatest failure mechanism of diesel engines is exhaust
valve induced failure of the head. The heat normally lost to the head's coolant
in competing engines is harnessed by two turbochargers in the HT1-450. Each
turbocharger
24
is connected to a pair of cylinders on one bank of the V, allowing either half
of the engine to operate independently of the other, improving fuel consumption
when lightly loaded as during an empty backhaul.
If development is successful, the fuel delivered to each cylinder will be
individually controlled by the two-point microprocessor. Combustion research has
established a definite relationship between piston speed (engine rpm) and
initiation of fuel delivery for optimum performance. By adjusting the initiation
point and period of fuel delivery to engine speed, smoother operation is
possible as are reduced exhaust emissions. The control system can be programmed
to run the engine on either bank of the V, resulting in a 15% reduction in fuel
consumption during that portion of operation. This operating feature is not
presently available on any of the competing engines. The microprocessor also
provides cruise control, vehicle speed limiting, dynamic braking, emergency
shutdown, automatic ether start in cold weather, progressive shifting prompts
and diagnostic outputs.
Synthetic oil (polyalphaolefin) is used for both lubrication and cooling. In
competing water cooled engines, coolant seal leakage resulting in oil
contamination is a common cause of premature engine failure. In addition,
synthetic oil can safely be used at temperatures in excess of 240 degrees
Fahrenheit whereas water/glycol mixtures are limited to 215 degrees. Higher
coolant temperatures permit the use of a relatively smaller heat exchanger
(radiator) and improved fuel economy. Using synthetic oil as a coolant also
eliminates the risk of freeze damage to the cylinder block and head. Disposal of
contaminated water/glycol coolant is also eliminated since synthetic oil can be
recycled and reused at minimal cost. Engine braking is provided by a hydraulic
retarder feature integral with the oil pump. Additional braking is provided by
the engine fan whose clutch is automatically engaged when the truck brakes are
activated. The combined braking capacity is approximately 100 horsepower with
reduced noise levels.
The HT1-450 has a cylinder bore and stroke (6.25 x 6.82) which is slightly
larger than that used by its four-stroke cycle competitors. Since each piston
has a power stroke on each revolution of the crankshaft, the 4 cylinder engine
has an effective volumetric displacement of 587 cubic inches. The four-stroke 6
cylinder competitors have a power stroke on alternate revolutions of the
crankshaft and have an effective volumetric displacement of 385 to 447 cubic
inches. The two-stroke cycle also creates a flatter torque curve which
significantly increases high rpm pulling capacity, permitting the replacement of
standard 9 and 12 speed transmissions with a lighter, lower cost 7 speed unit or
enabling the use of a higher speed rear axle. The cylinder block, cylinder head,
crankshaft and connecting rods currently under development are designed to
withstand increased output power to as much as 650 hp. The production HT1-450 is
expected to weigh less than 2,000 lbs which is significantly less than the
competing engines.
The HT2-300G uses approximately 80% of the HT1-450's components; differing
primarily in the cylinder head, cylinder liners, pistons, fuel control and
simplified accessory drive system. The four-stroke engine cycle limits the
effective volumetric displacement to 418 cubic inches but permits the use of
natural aspiration air induction. By using the rugged diesel engine moving parts
and cooling system in combination with natural aspiration air induction and a
10.5:1 compression ratio, the engine is expected to provide trouble free
operation for long periods of time. The production HT2-300G is expected to weigh
less than 2,000 lbs.
INDUSTRY ANALYSIS
MARKET SIZE. The class 8 truck market is relatively stable and very well
documented with 2.3 million trucks registered in 1995. (As reported in THE WALL
STREET JOURNAL and DIESEL PROGRESS MAGAZINE). New truck sales over the last 10
years have varied from 160,000 to 210,000 annually with 1995 production at
205,000 units. The class 8 engine has an average life of 9 years, based on
100,000 miles per year and includes at least one major overhaul. A new engine
may be substituted for an engine rebuild if the added productivity justifies the
additional cost, particularly on trucks with expensive chassis such as concrete
mixers. The market for engines in this power class for alternate applications
(military, marine and stationary) is less well documented but averages
approximately 40,000 annually. The international market for class 8 engines
25
has been small mainly due to the lack of an adequate road infrastructure and the
cost of fuel. This is changing as countries such as Saudi Arabia and Australia
expand their highway systems which created a demand for 28,000 engines in 1995.
These combined markets are conservatively estimated at 373,000 engines in the
350 to 500 hp power class annually with a value of more than $6 billion.
After-market service and spare parts represent a significant and growing portion
of the class 8 engine market, with estimated annual sales of more than $1
billion.
As a result of the deregulation of both the natural gas and electrical power
industries, the demand for both diesel and natural gas fueled electrical power
generation systems is expected to grow dramatically. (As reported to the INGAA
Foundation in 1996 by STONE & WEBSTER MANAGEMENT CONSULTANTS, INC). The use of
remote electrical power generation is particularly important in those regions
where a significant percentage of electrical power consumption is the result of
air conditioning or refrigeration. Sites such as office buildings, shopping
malls, supermarkets and high schools are large consumers of refrigeration and
air conditioning. A high percentage of these sites require from 200 to 600
kilowatts of electrical power during peak consumption periods. In a typical
Southern site where electricity costs $0.07 per Kwh and natural gas costs $3.00
per MCF, savings of up to 40% can be achieved using a natural gas fueled
electrical generator system. The HT2-300G is designed to provide continuous duty
and optimum fuel efficiency at minimum capital cost.
COMPETITION. The Cummins N14 series, the Cat 3406 series and the Detroit
S60 series of six cylinder in-line diesels are the engines of choice for the
North American class 8 heavy duty truck market. Cummins and Detroit currently
have 35% market shares each and Cat has 30%. No foreign manufacturer has a class
8 engine available in North America that meets customer expectations. Below is a
brief comparison of the competing engines.
CUMMINS DETROIT CAT RODI
FEATURE N14E S60 3406E HT1-450
- -------------------------------------- ---------- ---------- ---------- ----------------
Fuel.................................. diesel diesel diesel diesel
Bore (in)............................. 5.5 5.1 5.4 6.25
Stroke (in)........................... 6.0 6.3 6.5 6.82
Cylinders............................. 6 6 6 4
Vol/rev (cu in)....................... 428 387 447 587
Rated Power (hp)...................... 450 450 450 450*
Rated Speed (rpm)..................... 2100 2100 2100 1800
Max Power (hp)........................ 500 500 550 500*
Dry Weight (lbs)...................... 2805 2630 2867 less than 2000*
Size (in)............................. 58x34x52 57x34x50 62x38x54 43x48x42
Intake Valves......................... 12 12 12 up to 16
Exhaust Valves........................ 12 12 12 0
Main Bearings......................... 7 7 7 3
Friction (hp)......................... 71 71 75 38*
2 Cyl Cruise.......................... no no no yes
Hydraulic brake....................... no no yes yes
- ------------------------
* These are internal goals which have not yet been realized and are subject to
final development.
26
This competitive comparison illustrates the unique advantages that the fully
developed HT1-450 is expected to have:
1. The production HT1-450 is designed to weigh significantly less than its
lightest competitor when manufactured from the same materials and is ready
to run. This potentially translates into an average annual profit increase
of $5,000 or more for trucks operating at maximum gross weight with payloads
such as fuel, concrete and new automobiles.
2. The HT1-450 is designed to have less internal friction than its best
competitor which should result in a fuel economy advantage of up to 7.5%
regardless of application.
3. The HT1-450 is designed to automatically operate on two cylinders during
periods of low power demand such as a dump truck returning home. This can
result in significantly less fuel being consumed during that portion of
operation and may reduce engine wear.
4. Both the HT1-450 and HT2-300G are designed to have 40% fewer parts to
manufacture, break or wear out. The initial cost of the engines and
overhauls, when necessary, are expected to be much less expensive than the
big three competitors' engines.
5. The HT1-450 power head is designed to be removed from a class 8 truck and
replaced in about 4 hours. This will permit most major repairs to be made
more efficiently out of the truck rather than the "in-frame" repairs
normally performed on the competitor's engines. The loss of an additional 16
to 20 hours of hauling time, when comparing a RODI repair with competitors,
costs the operator up to 12,000 ton miles in lost revenues. In 1994 the
average freight rate was $1.84 per ton mile and the average payload was 12
tons, at an average highway speed of 50 mph, this would result in a revenue
differential penalty of $17,664 for a single engine breakdown that kept the
truck from moving for 16 hours more than the HT1-450 equipped vehicle.
Aftermarket parts suppliers and local overhaul specialists have captured a
significant percentage of the North American class 8 engine non-warranty service
and parts business. These companies are aided in their market penetration by the
warranties and speed of service of the engine manufacturer's local dealers. RODI
has crafted a warranty and service plan intended to capture a significant
portion of the aftermarket parts and service business for the HT1-450. Engine
power head removal/replacement has been designed to be a simple process which
can be accomplished in about 4 hours. Because the HT1-450 power head is lighter
in weight, less expensive service trucks and handling systems may be employed
for roadside repairs. By making engine replacement a viable option and
remanufactured engines affordable, RODI expects to retain more control of
aftermarket parts and service.
MARKETING PLAN
RODI's marketing strategy is based on customer demand "pull through" with
the truck and generator set manufacturers. RODI has been working directly with
selected customers and a truck and generator set manufacturer to integrate their
requirements into the basic engine design. Because of its small size, the
HT1-450 can be installed in most currently available heavy duty trucks. Newly
designed trucks may take full advantage of the lighter weight and more compact
size of the HT1-450. If sufficient funding is available and the development
program is successful, the first RODI engine for testing in the generator set
application is expected to be delivered in 1998.
RODI intends to develop replacement engine retrofit kits for the most
popular class 8 trucks. By offering the hardware required to upgrade trucks with
worn engines that are otherwise sound, the customer has a choice of repowering
rather than replacing the entire truck. The typical 5 year old class 8 truck has
accumulated 500,000 miles and requires either a full "in frame" engine rebuild
or a replacement engine to continue reliable service. Trucks in this condition
are generally fully amortized but retain a resale value of approximately $25,000
plus the value of the payload system. By substituting a RODI HT1-450 for the old
engine and replacing wear items such as brakes and universal joints, the value
of the truck is significantly increased at a much lower cost than that
associated with conventional engines.
27
Many of the larger carriers prefer to trade in their used trucks and
purchase new ones before major repairs are required. RODI has identified and has
been working directly with several such carriers in the Pacific Northwest as
well as a limited number in other areas of North America
Upon successful development of the HT1-450 engine, the primary thrust of
RODI's marketing effort will initially be directed at capturing a significant
market share in the Pacific Northwest, and then in the Gulf Coast regions. The
initial emphasis for truck engine sales is on Washington, Oregon, Idaho and
British Columbia whose proximity to RODI simplifies communications and sales and
service support while the program is being perfected. Kenworth, Freightliner and
Western Star have truck assembly plants within 200 miles of RODI's headquarters
in Kent, Washington. Due to the relative prosperity of the Pacific Northwest,
market predictions for the local area are more favorable than North America as a
whole. With the exception of logging trucks, all segments of the local market
are expanding; resulting in a minimum predicted market of 12,000 new trucks
annually and a similar quantity of remanufactured engines. A conservative
estimate for total 1997 engine sales for class 8 trucks in the Pacific Northwest
is $575 million based on the reported plans of Freightliner and Kenworth.
Two key customer types have been targeted for initial truck engine sales
efforts, the high gross weight haulers and the medium size regional general
freight lines. In this expanding economic area, the transport of fuel, gravel,
concrete and new cars represent the fastest growing market segments with more
than 8000 units sold in 1995 based on license applications to Washington
Department of Motor Vehicles. Since these vehicles typically go out at maximum
gross weight and return empty, they are prime candidates for the HT1-450's added
payload and low cost back haul capability.
The ports of Seattle/Tacoma, Portland and Vancouver, B.C. handle a major
portion of the Pacific rim shipping which is then trucked throughout the Western
states by more than 200 regional truck lines. (SOURCE: WESTERN WASHINGTON YELLOW
PAGES) Freight carriers such as Oak Harbor Freight and Okanagan Seattle
Transport operate a significant number of trucks exclusively within the Pacific
Northwest, many of which operate at maximum gross weight most of the time. These
200 carriers presently own and operate nearly 28,000 trucks and are expected to
continue growing.
The Gulf Coast was chosen due to the presence of the Peterbilt and Marman
truck plants near Dallas and the large U.S./Mexico truck fleet operations
resulting from NAFTA; the location of Alternate Power Equipment, Inc. in Alvin,
Texas; and the large number of marine operators in the area.
RODI recently began to study the market for a natural gas fueled derivative
engine-generator system specifically for interruptible electrical load
management in heavy commercial and light industrial applications. The primary
customers for this system would be the major natural gas distribution companies
who intend to provide an alternate source of electrical power to their customers
during peak electrical usage periods. This period is generally during the summer
months when air conditioning greatly increases demand for electrical power and
natural gas demand, used primarily for space heating, is at its lowest point.
The customer is expected to reduce the cost of peak demand electrical power by
up to 40% and the gas utilities are expected to increase summer revenues by up
to 50%. Preliminary market studies by RODI indicate that there are more than
300,000 sites where this system would be economically viable with each site
requiring 2 to 6 engine-generator sets. This market is conservatively estimated
by RODI at $14 billion over 10 years. In addition to the 300 kw HT2-300G, the
Company expects to market a 7.6 liter 150 kw Deere natural gas engine being
developed for the same application. The first 7.6 liter Deere natural gas
engines are expected to be available in the fourth quarter of 1997.
APE JOINT VENTURE
In 1997 the Company reached a non-binding agreement in principle with two
other parties to form a joint venture, to be known as Alternate Power Equipment,
Inc. ("APE"). The parties to the proposed joint venture are Alternate Power
Technology, Inc. and N.R. Broussard Landing, Inc. APE is proposed to be formed
to design, fabricate and market diesel/electric, natural gas/electric and line
shaft stationary power
28
systems with prime ratings from 40 to 400 kw. These heavy duty systems are
intended primarily for applications such as petroleum drilling and continuous
duty lighting at remote sites. Under the terms of the joint venture as currently
proposed, RODI is responsible for furnishing to APE internal combustion engines
and controls, and engineering and manufacturing support. Initially, engines
supplied by RODI will be obtained from John Deere on an OEM basis. It is
contemplated that RODI manufactured engines will be integrated into the product
line as they become available. The other venture partners are responsible for
the assembly of the products, and marketing and distribution. Under the terms of
the proposed joint venture agreement RODI is entitled to a 15% markup on
equipment supplied to APE, and the other venture partners are required to
furnish certain services to APE at a 15% markup. Under the terms of the joint
venture as presently proposed, net profits of the venture would be shared
equally by the venture partners.
As of the date of this Prospectus RODI had sold five John Deere engines to
one of the other partners on behalf of the proposed joint venture. The parties
are presently in the process of assembling the initial diesel electric
stationary power system utilizing the John Deere PowerTech engine. Although one
potential customer has advised APE that it intends to order 49 units upon
successful completion of testing, none of the generator units have yet been sold
by APE.
Formation of the APE joint venture remains subject to the parties entering
into a definitive joint venture agreement, which is being negotiated among the
parties. There are no assurances that the joint venture will be formed, either
on the terms as presently proposed or otherwise, or that it will commence
operations. Further, none of the parties has any obligation to make any material
financial contributions to APE, either in the form of loans or capital
contributions. Moreover, the Company has no financial information regarding its
proposed partners. Therefore, it has no assurances that such persons will have
the ability to provide financing to the venture or pledge their credit to obtain
third party financing. Presently, it is contemplated that financing will be
obtained from third parties. However, APE does not yet have any commitments to
obtain additional capital from any source. Therefore, there are no assurances
that APE will be able to finance its activities.
THE DEVELOPMENT PROGRAM
CURRENT STATUS OF HTI-450 ENGINE
RODI has fabricated and extensively tested three prototype models of the
HT1-450 diesel engine. These engines have satisfactorily completed the following
design and performance parameters: validation of the reverse uniflow cycle,
dynamic balancing, structural adequacy, fuel injection, intake valve timing and
piston and piston ring configuration. These three engines have accumulated many
hours of test operation on the Company's dynamometer test stand and limited road
testing in the Company's class 8 heavy truck. Prototype engine fuel efficiency
has been adequate for the power levels tested to date. Further development and
testing will be required to (i) improve cooling capacity, (ii) sustain valve
train operation at 1800 rpm, and (iii) synchronize the exhaust system and the
turbocharger.
Currently tests are planned to enhance performance and increase maximum
power output of the HT1-450 by greatly increasing air flow through the engine by
optimizing air cycle components such as intake valves, exhaust port geometry,
supercharger volume ratio and turbocharger matching. Variables to be tested
include various exhaust system geometry changes; the use of four intake valves
per cylinder and using several types and combinations of supercharger and
turbocharger. Optimizing the air cycle of a two-stroke engine is a complex
trade-off of many characteristics that are interrelated. Recently completed
cylinder liner and piston design changes are believed to have resolved past
problems associated with oil cooling and will be verified by test during the
first phase of the pre-production engine development program.
29
REPORT OF DAVID T. MARKS
A technical status report on the HT1-450 program prepared by David T. Marks,
an independent engine expert, in January 1997 is attached as Appendix A to this
Prospectus. Mr. Marks was retained by the Company in 1996 in order to obtain an
independent valuation of the HT1-450 engine design. Since the date the report
was issued, the HT1-450 engine has undergone extensive redesign, based in part
upon the suggestions of Mr. Marks. RODI continues to retain Mr. Marks as an
outside consultant.
HT1-450 DEVELOPMENT PROGRAM PLAN
If the Maximum Amount is raised, RODI intends to fabricate 25 preproduction
HT1-450 engines for use in completing the development program. These engines
will be divided into four groups; five engines for component integration
verification testing, five engines for dynamometer endurance testing, five
engines for manufacturing engineering development and ten engines for in-truck
highway testing. If the Minimum Amount is raised RODI intends to fabricate 10
preproduction HT1-450 engines with two engines each for component integration,
dynamometer endurance and manufacturing engineering, and four engines for
in-truck highway testing. These tests will address the following
characteristics:
1. Component Integration Testing
a. Valve train performance
b. Oil pumping and oil cooling system
c. Cylinder liner/Piston/Rings performance
d. Crankshaft/Rod/Bearing performance
e. Air cycle performance including supercharger and turbocharger
selection
f. Fuel injection system performance
g. Build 2-cylinder test modules to facilitate development testing
2. Dynamometer Endurance Testing
a. Continuous maximum power rating (air flow and cooling)
b. Fuel efficiency certification
c. Exhaust emissions certification
d. Low temperature starting
e. Two cylinder on/off mapping
3. Manufacturing Engineering Development
a. Integrated liner/head system
b. Superinsulation installation and durability
c. Aluminum gear box development
4. In-Truck Highway Testing
a. Freightliner, Navistar, Western Star and Kenworth engine installation
b. Manual 7 and 9 speed transmission versus automatic transmissions
c. On-engine diagnostic and telemetry systems performance
30
HT2-300G DEVELOPMENT PROGRAM
The Company believes that the primary competitive advantage of this engine
will be its simplicity, low cost and rugged packaging approach for application
in the stationary power market. The HT2-300G four-stroke engine is based on
fully proven design principals currently in the marketplace.
Although the HT2-300G engine has not yet been fabricated by RODI,
approximately 85% of the engine design is similar to the HT1-450 engine; most of
the remaining details relate to the proven four stroke cycle engine. Design
details remaining to be completed relate to the cylinder head, spark ignition
system, gas control valve and accessory drive. If the Maximum Amount is raised,
RODI intends to fabricate 10 HT2-300G engines for the development program. The
engines will be divided into two groups; four will be used in-house for
dynamometer and direct generator drive testing and six will subsequently have
any design improvements added and then be provided to Alternate Power Equipment,
Inc. for a cooperative test program. If the Minimum Amount is raised, the
HT2-300G development program would assume lower priority to the HT1-450, but
RODI would fabricate two HT2-300G engines for the development program, with one
for in-house testing and one for an APE cooperative test program. These tests
will address the following characteristics:
1. Component Integration Testing
a. Exhaust Valve endurance
b. Gas control valve performance
c. Spark ignition system optimization
2. Dynamometer Endurance Testing
a. Continuous maximum power rating
b. Fuel efficiency
c. Exhaust emissions
d. Low temperature starting
e. Compatibility with unrefined (wellhead) gas
3. Manufacturing Engineering Development
a. Cylinder block and crankshaft development
b. Cylinder head development
c. Valve train development
4. Customer Cooperative Testing
a. Generation system installation
b. Synchronous and induction generator matching
c. On-engine diagnostic and telemetry systems performance
GROWTH STRATEGY
The Company believes its principal strengths include (i) its reservoir of
technical talent, (ii) a unique engine cycle and fuel control design, and (iii)
an expanding worldwide demand for similar products.
The Company's growth strategy includes the following key elements:
31
DEVELOP AND MARKET A COMPLETE PRODUCT LINE OF HEAVY DUTY DIESEL ENGINES. In
addition to RODI designed and developed engines, the Company currently has OEM
(Original Equipment Manufacturer) rights from John Deere to high quality engines
from 80 hp to 500 hp that will currently be complimented by internally
manufactured products. Assuming successful completion of development, RODI
intends to manufacture engines having from 300 to 2000 horsepower which will
create a full engine product line from 80 to 2000 horsepower.
INITIATE PRODUCTION USING ESTABLISHED SUBCONTRACTOR RESOURCES. The Company
believes that the most cost effective method of reaching volume production
capacity quickly is to utilize qualified subcontractors, selected through a
process of teaming to produce most engine components. RODI is currently
investigating a number of sites for its initial assembly plant.
NORTH AMERICAN MARKET PENETRATION. Upon successful development of the
HT1-450 and HT2-300G engines, the Company intends to focus marketing efforts in
North America using field representatives responsible for developing a
Distributor/Dealer sales and service network, a working relationship with the
major users in their region and maintain cooperative relations with the major
truck, stationary power and yacht manufacturers. The Company is presently
seeking other joint venture partners in addition to Alternate Power Equipment,
Inc. to participate in the development and marketing of products to the
industrial power and marine power businesses in the Pacific Rim and European
Economic Community.
INTERNATIONAL EXPANSION. The Company is seeking strategic alliances or
production licensees in the Pacific Rim and European Economic Community. The
Company presently has an agreement with Japan Transaction Partners in Tokyo,
Japan to represent its interests in that region.
OPERATIONS
Presently the high value components of the HT1-450 prototypes are planned to
be wholly subcontracted to qualified suppliers. RODI presently has the in-house
capability of machining several key proprietary components associated with the
reverse uniflow cycle and fuel control system. For the production program, the
high value iron components such as the cylinder block are intended to be cast by
a third party at a foundry located in Mexico in conjunction with several other
heavy duty diesel engine manufacturers to take advantage of the economic
benefits of the NAFTA treaty. These components would then to be shipped into the
United States via the Laredo, Texas port of entry and machined either by
subcontractors or by RODI. The aluminum components are intended to be cast at a
foundry in Texas and machined at an adjacent facility.
32
RODI POWER SYSTEMS, INC.
MANUFACTURING ACTIVITY FLOW
RECEIVING
1. Raw materials, unmachined castings and finished components are delivered
to a RECEIVING CELL where they are logged into the on-line data base.
2. Empty KanBans (tubs on wheels) are retrieved from the Receiving Pending
KanBan holding area, transported to the RECEIVING CELL and loaded with
materials. Each KanBan's bar code is scanned and its contents recorded.
3. KanBans containing finished components are moved to the BUY STORES CELL,
KanBans containing raw materials and unmachined castings are moved to the RAW
MATERIAL/MFG. STORES CELL. The KanBan's bar code is scanned as it is deposited
in the appropriate holding area.
MANUFACTURING/MACHINING
1. MANUFACTURING CELLS are supplied with the appropriate raw material or
unmachined casting as required by the schedule. Each KanBan enters the
manufacturing area via a Staging Area where the part to be machined is mounted
on a bar coded pallet. The material hand-off from KanBan to pallet is entered
into the on-line data base.
2. As the MANUFACTURING CELL demands, the appropriate bar coded pallet is
mounted on the machine tool feed and machined with the correct CNC code.
3. The completed component is returned to the correct KanBan and either
forwarded to MANUFACTURING STORES CELL or delivered to the Spares Staging area
for delivery to a customer as a spare part. As the KanBan's bar code is scanned,
the computer provides a visual and itemized list of its required contents to
assist the machine operator in assuring correct component assignment.
ENGINE ASSEMBLY/TEST
1. Bar coded Engine Carts (batter powered jitneys) are used to transport
all required components to assemble a single engine from MANUFACTURING and BUY
STORES CELLS. The contents of several KanBans are scanned and linked to the
Engine Cart to form a "train".
2. The Engine Cart "trains" are transported to an ASSEMBLY CELL staging
area.
3. As the ASSEMBLY CELLS demand, the Engine Cart "trains" are moved to an
ASSEMBLY CELL where the engine is fully assembled. As the components of each
KanBan are consumed, the empty KanBans are returned to the Receiving Pending
KanBan holding area near the RECEIVING CELL by a returning Engine Cart.
4. The complete engines are marked with a bar code data plate wherein its
entire component pedigree is entered into the computer. The engine is then
attached to a moving overhead transport chain and taken to an engine TEST CELL.
5. The engine is attached to a dynamometer, its bar code scanned, started
and tested at various power output loads for 20 minutes. This test data is added
to the engine pedigree.
6. Those engines that successfully pass the test program are reattached to
the overhead transport chain and moved through the paint booth and then to the
Pack/Ship staging area. Those engines that fail the test program are moved to an
adjacent REPAIR CELL where the problem detected is repaired. The engine is then
returned to the Test Cell where a complete test sequence is performed.
PACK/SHIP
1. In the PACK/SHIP CELL tested engines are removed from the overhead
transport chain, their bar code scanned and mounted in a shipping container.
2. The containerized engines are logged out of the on-line data base and
appropriate ownership and shipping documents generated by the computer.
3. The containerized engines are loaded onto a vehicle for delivery.
33
For the production program, RODI intends to use a Flexible Manufacturing
System (FMS) based on the production cell and kanban inventory control process
for engine assembly. The FMS implementation provides a physical assembly cell
containing all required functions for each team. FMS cells have an assembly
capacity of 4 engines per shift each. Each cell will be staffed by 3 employees.
Thus 3 employees will be capable of completing 4 engines daily. The cells will
be put on line in increments matching order bookings. The FMS approach also
enables a rapid training program since one experienced individual can train two
persons at once. By using the latest in high efficiency tooling and equipment,
including robotics where appropriate, RODI intends to maintain production
efficiencies superior to its larger competitors who are saddled with a transfer
line assembly process which cannot easily adjust to volume variations. The
proven advantages of the FMS team approach include process ownership by the
employees which encourages innovation, bottleneck elimination and, most
important, elimination of the expensive and inflexible transfer line which
requires a fixed number of employees and equipment regardless of demand. The
primary benefit to RODI is that it enables incremental increases in production
with a minimum investment.
If the Offering generates sufficient funds, the Company intends to purchase
state-of-the-art Computer Numerical Controlled (CNC) machine tools to fully
manufacture in-house as many of the high cost components as possible. This
facility could be co-located with the assembly plant to minimize transportation
costs.
RODI is developing a computerized network of software modules which will
provide order processing, procurement, inventory control, production control,
engine pedigree documentation, statistical quality information and cost
accumulation and control from a single data base. The system will be expanded to
include on-line service assistance and trouble shooting capability for the
distributor network when required.
FACILITIES
The Company's current principal place of business is a 10,000 square foot
combination office, test laboratory and machine shop located at 7503 South 228th
St., Kent, Washington. The Company leases this property on a yearly basis
pursuant to a lease agreement that expires in October 1997. The Company intends
to rent an additional 50,000 square feet of space, either in the same building
complex or nearby, with a portion of the funds received from this Offering to
expand test capability and house a small specialty engine assembly facility. If
the Maximum Amount is sold, the Company is considering a number of potential
sites for its initial assembly facility, including the lease of a 130,000 square
foot military warehouse located on Kelly AFB in San Antonio, Texas, which could
be utilized as a plant capable of assembling up to 100 HT1-450 size engines per
8 hour shift when fully operational.
PATENTS AND PROPRIETARY RIGHTS
The Company has filed applications to register the following names and marks
with the U.S. Patent and Trademark Office: (1) "RODI", Serial No. 74/678555,
filed May 22, 1995; (2) "A Formula for Success", Serial No. 74/67852, filed May
22, 1995; and (3) "Power by RODI" and the logo design, Serial No. 74/680390,
filed May 26, 1995. All of the applications have been allowed.
The Company relies on trade secrets and proprietary know-how which it seeks
to protect, in part, through confidentiality agreements with employees,
consultants, and others. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any such
breach or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors, or obtained by competitors through
reverse engineering. Although consultants are not given access to proprietary
trade secrets and know-how of the Company until they have executed
confidentiality agreements, these agreements may be breached by the other party
thereto or may otherwise be of limited effectiveness or enforceability.
34
No patents have yet been issued on any of the technology used in the HT1-450
engine. The Company currently has an application pending with the U.S. Patent &
Trademark Office.
EMPLOYEES
As of May 31, 1997, the Company had 7 full time employees, 16 part time
employees and was utilizing the services of 6 consultants. Of the 23 full and
part time employees, 3 are managers, 2 are machinists and 18 are engineers or
other technical specialists. If the Maximum Amount is raised, the Company
intends to increase headquarters full time employment to 16 including a senior
technical specialist from the heavy duty diesel engine industry. If the Maximum
Amount is sold, the Company intends to employ a senior executive from the
automotive/heavy engine industry to develop and implement a comprehensive
manufacturing plan. If the Minimum Amount is raised, the Company intends to
increase full time employment to 11, including the senior technical specialist,
and continue the use of part time employees. The Company has no collective
bargaining agreements with any of its employees. Most professional and
management employees have stock options as part of their compensation. Company
headquarters is located in close proximity to both The Boeing Co. and Microsoft
and utilizes some of their experts as off hour consultants. The Company believes
that its labor relations are satisfactory and, that its employees are its single
greatest asset.
GOVERNMENT REGULATION
Diesel and gas engines are subject to extensive regulatory requirements.
Specific emissions standards for engines are imposed by the U.S. Environmental
Protection Agency ("EPA") and by other regulatory agencies, such as the
California Air Resources Board ("CARB"). These requirements are continually
undergoing changes. The Company's ability to maintain compliance with current
and future emissions requirements is a critical element in commercializing its
engines and establishing the Company's position in the engine marketplace.
Substantial capital and operating expenses may be required to comply with these
emissions requirements and, if the Company is not able to comply, this would
have a material adverse impact on the Company's business and prospects.
The EPA also has an emissions defect reporting program, and may require a
recall if defects are found in emissions-related components on 25 or more
engines. CARB regulations require the Company to report failures of
emissions-related components through the monitoring of warranty claims. When the
failure rate reaches a specified level (the greater of 25 component failures or
one percent of engines built), reports are required to be filed with CARB, and a
recall may be required if the failure rate reaches a higher level (the greater
of 50 component failures or two percent of engines built).
LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings. In August,
1996, RODI tendered an offer to rescind the investment of its shareholders
(except for officers, directors, their immediate families and certain accredited
individuals investing through private placements). The rescission tender offer
was qualified with the SEC under Regulation A and in most states which required
a filing. The purpose of the offer was to limit or eliminate potential
securities claims that might be asserted against the Company based on possible
violations of state and federal securities laws by reason of non-registration of
shares or possible misstatements or omissions to persons investing in the
Company's stock.
The rescission tender offer was made to 896 shareholders which beneficially
owned approximately 4,977,364 shares of the Company's Common Stock for which
approximately $2,379,048 had been paid. Under the terms of the rescission offer,
each of the eligible shareholders was offered the right to receive the return of
their investment plus interest at the rate required by the applicable law of the
state of the shareholder's residence, which ranged between 5-15%, in exchange
for the surrender of their shares of Common Stock. 104 shareholders elected to
rescind their investment in the Company and were paid an
35
aggregate price of $232,153 including interest as prescribed by state law. The
subject $232,153 was paid from a loan by certain of RODI's directors to the
Company. See "Certain Relationships and Related Transactions.
The rescission offer was made to most non-affiliated shareholders of the
Company who purchased shares of Common Stock between March 1992 and February
1996. Excluded from the rescission offer upon advice of the Company's counsel
were immediate family members of affiliates and six accredited investors who
purchased shares in a private placement between December 1995 and April 1996. To
the extent that the Company may have violated provisions of federal or state law
regarding registration of these shares or information required to be furnished
to these investors prior to the time of their investment, the Company does not
believe that any material liability exists as a result of the possible violation
of federal and state securities laws.
In this regard, although federal law does not expressly provide for
eliminating liability for violations through a rescission offer, the Company
believes that any action by an investor who invested on or before February 1996
would be barred by the applicable statutes of limitation, which are either one
year from the date the violation occurred, or one year from the date the
investor should have discovered the violation for failure to make proper
disclosure. As to applicable state laws, as a result of the legal effect of the
rescission offer and the applicable statutes of limitation under state laws, the
Company does not believe that it has any material risk of liability for possible
violations of state securities laws regarding those shares covered by the
rescission offer.
WARRANTIES
The RODI engine warranty which it plans to offer to its customers is
intended to minimize the customer's down time. If in the first 300,000 miles or
6000 hours of service an engine cannot be repaired within 8 hours, the engine
will be replaced at no charge with a time adjusted warranty. If between 300,000
and 400,000 miles or 6000 and 7000 hours of service an engine cannot be repaired
within 8 hours, the engine will be replaced for a charge equal to 70 percent of
the original purchase price. If an engine is traded in on a new engine before it
has accumulated 400,000 miles or 7000 hours, the owner will be granted a 35%
discount off the purchase price. No estimates can be given as to what future
warranty claim levels will be.
CHANGE IN ACCOUNTANTS
The Company formerly engaged the services of Arthur Andersen LLP
("Accountant") to perform required audits for a 1996 Regulation A securities
filing. The Accountant declined to stand for re-election on August 26, 1996. The
Accountant's report, dated January 17, 1996 was modified as to uncertainty about
the Company's ability to continue as a going concern due to lack of working
capital and the outcome of the Company's Rescission Offer. See "Business--Legal
Proceedings".
There were no disagreements with the Accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. The Company has authorized the Accountant to respond fully to
inquiries of a successor accountant.
A new accountant, Kenneth E. Walsh, was engaged by the Company on November
1, 1996, and has audited and expressed an opinion on the Company's financial
statements for the Offering.
36
MANAGEMENT
The names of the directors and executive officers of the Company and their
respective ages and positions are as follows:
NAME AGE POSITION
- ------------------------------------- ----------- --------------------------------------------------------
Byron R. Spain....................... 58 Chairman of the Board/Chief Executive Officer
Donavan E. Garman.................... 62 Director and President
Winston D. Bennett................... 56 Treasurer and Chief Financial Officer
Gwendolyn S. Spain................... 57 Secretary and Vice President of Investor Relations
Marilyn D. Mays...................... 57 Director
Steven E. Garman..................... 40 Director and Vice President--Customer Systems
David Teo............................ 47 Director
BYRON R. SPAIN is the founder of RODI and has served as its Chairman, Chief
Executive and Chief of Technology since its formation in 1987. Mr. Spain is the
inventor of the reverse uniflow engine cycle, which the Company's HT1-450 engine
is based upon. Mr. Spain has devoted full time to the Company since he retired
from The Boeing Co. in 1995. Mr. Spain was employed by Boeing for 23 years,
where he served as a mechanical systems engineer and engineering manager in both
the Commercial and Military aircraft divisions. During his career at Boeing, Mr.
Spain was named Inventor of the Year three times, and was credited with the
invention by Mr. Spain of the solid state digital flight data recorder. From
1974 to 1979, Mr. Spain was the owner/manager of Tres Amigo's, Inc. a cattle
feeding and meat packing business. Mr. Spain is a director of Alternate Power
Equipment, Inc. Mr. Spain holds a B.S. in Physics from Lamar University and a
M.S. in Mechanical Engineering from The University of Florida. Mr. Spain was a
registered professional engineer in Texas.
DONAVAN E. GARMAN has been employed by RODI since 1988. He was promoted from
Vice President-- Hardware Operations to President and voted a Director in 1992.
Mr. Garman is responsible for RODI's day-to-day operation and is the designated
point of contact for the OEM relationship with Deere Power Systems. Prior to
joining RODI, Mr. Garman was employed by Boeing for more than 35 years as a
senior principal engineer responsible for the management of subcontracts in the
Defense and Space division. Mr. Garman was employed on a part time basis by RODI
until 1994, when he retired from Boeing and has since devoted substantially full
time to RODI. Mr. Garman is also a director of Alternate Power Equipment, Inc.
Mr. Garman holds a B.S. in Electrical Engineering from the University of
Washington.
WINSTON D. BENNETT has been employed by RODI since its founding in 1987 as
Treasurer and a Director. Mr. Bennett was promoted to Chief Financial Officer in
1996. As CFO and office manager, Mr. Bennett plays a key role in day-to-day
operations. Mr. Bennett is a director of Alternate Power Equipment, Inc. Prior
to joining RODI, Mr. Bennett was Treasurer of Flow Industries, Inc., a
manufacturer of water jet cutting, tunneling and drilling equipment, for 5
years. Mr. Bennett has an extensive background in financial management and
finance in the electronics and heavy equipment industries. Mr. Bennett holds a
B.S. in Business Administration from Oregon State University and a M.B.A. in
Accounting from the University of California-Berkeley.
GWENDOLYN S. SPAIN has been employed by RODI since its founding in 1987 as
Secretary and Vice President--Investor Relations. Ms. Spain is the designated
point of contact for the Transfer Agent and is responsible for all shareholder
records. Prior to joining RODI, Ms. Spain was Secretary and Vice
President--Business Management for Tres Amigo's, Inc. Previously, Ms. Spain was
employed by Boeing
37
working for the manager of manufacturing liaison engineering where she was
responsible for the coordination of design processes and operating procedures.
MARILYN D. MAYS has served as a Director of RODI since 1992. Ms. Mays is a
mortgage banking officer with a Texas regional bank. Previously, Ms. Mays was
Chief Financial Officer of Dial One of Southern Texas, Inc., a home services
franchise sales business. Ms. Mays holds a B.S. in Business Administration from
Sam Houston University.
STEVEN E. GARMAN has been employed on a part time basis by RODI since its
founding in 1987 as an engineer. He was promoted to Vice President--Customer
Systems and voted a Director in 1991. As Vice President--Customer Systems, Mr.
Garman is responsible for marketing, sales, service and applications
engineering. Prior to joining RODI, Mr. Garman was employed by Boeing as a
design engineer in the Defense and Space division. Mr. Garman holds a B.S. in
Electrical Engineering from the University of Nevada.
DAVID TEO has served as a Director of RODI since its founding in 1987. Mr.
Teo is a professional engineer with 24 years of experience, specializing in
complex structural and mechanical analysis. Since 1996, Mr. Teo has been a
manager at The Boeing Co. in the commercial airplane division. Prior thereto,
Mr. Teo has been in private practice for 18 years. Mr. Teo has also served as
Director--Finance and an engineering manager with the Paton Corp., a
manufacturer of rail car and automotive suspension systems. Mr. Teo holds a B.S.
and M.S. in Mechanical Engineering from Northrop Institute of Technology and a
M.B.A. in Finance from the University of Washington. Mr. Teo is a registered
professional engineer in Washington.
There are family relationships on the Board of Directors; Byron Spain and
Gwendolyn Spain are husband and wife, Donavan and Steven Garman are father and
son, and Marilyn Mays is Gwendolyn Spain's sister-in-law.
The Directors of the Company are presently elected for a period of one year
at the annual meeting of RODI's shareholders.
COMPENSATION OF DIRECTORS
Directors who are also employees receive no additional compensation for
their services. Outside Directors receive $1,000 payable in RODI common stock or
cash as compensation for each meeting attended. The Company's directors are
entitled to participate in the Company's 1992 Incentive Stock Option Plan.
Directors may be reimbursed for certain expenses in connection with attendance
at Board and committee meetings.
LIMITATION ON THE LIABILITY OF DIRECTORS
Under Washington law, the Company is required to indemnify its directors
against liability to the Company or its shareholders in any proceeding in which
the director wholly prevails on the merits. Generally, the Company may indemnify
its directors against such liability if the director acted in good faith,
believing his or her actions to be in the best interests of the Company. The
Company may not indemnify a director's liability for (a) any breach of the
director's duty of loyalty to the Company or its stockholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) in respect of certain unlawful distractions, or (d) any
transaction from which the director derived an improper personal benefit.
38
SUMMARY COMPENSATION TABLE
1996
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY(1) OTHER
- ------------------------------------------------------------------- --------- ---------
Byron R. Spain
Chairman of the Board and CEO.................................... $ 69,115
Donavan E. Garman
President and Chief Operating Officer............................ $ 41,755
Winston D. Bennett
Treasurer and Chief Financial Officer............................ $ 54,720 935(2)
- ------------------------
(1) Salaries are determined by the Board of Directors, and are subject to
periodic review. None of these individuals has a formal employment contract
with the Company. Amounts shown for 1996 are actual gross salaries paid in
1996.
(2) Consists of medical insurance premiums paid on behalf of Winston Bennett.
Byron Spain and Donavan Garman receive medical insurance through the Boeing
Co.'s retirement program.
1992 INCENTIVE STOCK OPTION PLAN
On April 30, 1992 the Company's Board of Directors adopted and a majority of
its shareholders approved, an Incentive Stock Option Plan ("ISOP") for the
benefit of the Company's officers, directors and key employees.
Under the ISOP, options granted are intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). The ISOP authorizes the granting to key employees of options to
purchase an aggregate of 6,000,000 shares of the Company's common stock. Unless
terminated earlier by the Board of Directors, the ISOP will terminate on
November 11, 1997.
The ISOP provides for administration of the plan by the Board of Directors
or by a committee thereof. Subject to the limitations set forth in the ISOP, the
Board has the authority to select the persons to whom grants are to be made, to
designate the number of shares to be covered by each option, to establish
vesting schedules, to specify the type of consideration to be paid to the
Company upon exercise, and to specify certain other terms of the options.
Currently, the full Board of Directors administers the ISOP.
The exercise price of stock options granted under the ISOP must at least
equal the fair market value of the common stock on the date of grant. The
exercise price of incentive stock options granted under the ISOP to stockholders
possessing more than 10% of the total combined voting power of all classes of
stock of the Company must be not less and 110% of the fair market value of the
Company's Common Stock on the date of grant, and such options must not be
exercisable after the expiration of ten years from the date the incentive stock
option is granted.
Options granted under the ISOP must be exercised within ten years from the
date the ISOP is adopted or the date the ISOP is approved by shareholders,
whichever is earlier. Incentive stock options generally are nontransferable and
expire immediately upon termination of any optionee's service with the Company.
However, options granted under the ISOP may be exercised within 12 months after
the date of an optionee's termination of service with the Company by reason of
death or disability, or within three months after the date of termination by
reason of retirement or voluntary termination approved by the Board of
Directors.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the rescission offer conducted by the Company in 1996,
certain of the directors loaned funds to the Company for payment of the
rescission price. Promissory notes in the aggregate amount of $262,895 and
bearing interest at 9% APR, evidencing the Company's indebtedness were issued to
the following directors: Byron R. Spain, Donavan E. Garman, Winston D. Bennett,
Gwendolyn S. Spain, David Teo, Marilyn D. Mays, Steven E. Garman and Gary A.
McLean. The notes are dated September 20, 1996 and are payable on the maturity
date, September 20, 1998. The Company anticipates that proceeds from the
Offering will be used to repay the loans. See "Use of Proceeds" and
"Business--Legal Proceedings".
On July 15, 1995, the Company and Byron R. Spain entered into that certain
Intellectual Property Assignment and Release Agreement ("Assignment"). Under the
Assignment, Mr. Spain assigned all of his right, title and interest in and to
the intellectual property related to the internal combustion engines, including
without limitation, the Reverse Uniflow Technology, design rights to the HT1-450
turbo diesel engine and all related components, the registered trademarks RODI,
Power by RODI, A FORMULA FOR SUCCESS, and the pictorial representation of these
trademarks as registered.
On February 19, 1997 and April 23, 1997, Byron R. Spain, Donavan E. Garman
and Steven E. Garman loaned a total of $30,000 and $60,000 respectively to the
Company for working capital. The loans bear interest at the rate of 9% per annum
and are payable 24 months from the respective loan dates. The Company
anticipates that proceeds from the Offering will be used to repay the loans. See
"Use of Proceeds."
On July 18, 1997, Byron R. Spain loaned $50,000 to the Company for working
capital. The loan bears interest at the rate of 18% per annum and is due and
payable 18 months from the loan date.
On August 28, 1997, Byron R. Spain, Donavan E. Garman, Steven E. Garman and
Winston D. Bennett loaned a total of $110,000 to the Company for working
capital. The loans bear interest at the rate of 9% per annum and are due and
payable 24 months from the loan date.
Each of the foregoing transactions were ratified by a majority of the
Company's two or more independent directors, which did not have an interest in
the transactions and who had access to legal counsel. Any and all future
transactions with the Company's Officers, Directors and 5% shareholders will
continue to be on terms no less favorable to the Company than could be obtained
from independent third parties and will continue to be approved by a majority of
the Company's independent directors, who do not have an interest in the
transactions and who have access, at the Company's expense, to the Company's or
independent legal counsel.
40
PRINCIPAL SHAREHOLDERS
The following table presents certain information as of August 31, 1997 and
after giving effect to the Offering made hereby, regarding the beneficial
ownership of Common Stock by (i) each of the directors and executive officers of
the Company individually, (ii) all persons known by the Company to be beneficial
owners of five percent or more of the Common Stock, and (iii) all directors and
executive officers of the Company as a group. Unless otherwise noted, the
persons listed below have sole voting and investment power and beneficial
ownership with respect to such shares.
PERCENT BENEFICIALLY OWNED
NUMBER OF ---------------------------------------
SHARES AFTER THE
BENEFICIALLY OFFERING(2)
OWNED ------------------------
-------------- MINIMUM MAXIMUM
NAME AND ADDRESS(1)(11) AMOUNT AMOUNT
- ----------------------------------------------- BEFORE THE ----------- -----------
OFFERING(2)
-------------
Byron R. Spain(3).............................. 4,933,679 36.8% 34.7% 26.8%
Donavan E. Garman(4)........................... 1,138,443 8.7% 8.2% 6.3%
Winston D. Bennett(5).......................... 364,500 2.8% 2.6% 2.0%
Steven E. Garman(6)............................ 863,209 6.7% 6.3% 4.8%
Gwendolyn S. Spain(7).......................... 760,000 5.7% 5.5% 4.1%
Marilyn D. Mays(8)............................. 110,056 * * *
David Teo(9)................................... 624,247 4.7% 4.6% 3.4%
All Directors and Officers
as a Group (7 persons)(10)................... 8,794,134 59.3% 56.3% 44.4%
- ------------------------
* Less than 1%
(1) See "Management" for offices and directorships held by the persons listed
above.
(2) Does not give effect to the potential dilutive effect that the exercise of
the Warrants may have.
(3) Includes 750,000 options exercisable by October 31, 1997.
(4) Includes 490,000 options exercisable by October 31, 1997.
(5) Includes 348,000 options exercisable by October 31, 1997.
(6) Includes 250,000 options exercisable by October 31, 1997.
(7) Includes 250,000 options exercisable by October 31, 1997.
(8) Includes 60,000 options exercisable by October 31, 1997.
(9) Includes 10,000 options exercisable by October 31, 1997.
(10) Includes 2,158,000 options exercisable by October 31, 1997.
(11) All addresses are c/o RODI Power Systems, Inc., P.O. Box 769, Maple Valley,
WA 98038
41
DESCRIPTION OF THE UNITS
Each Unit being offered by the Company consists of one share of Common
Stock, $.01 par value, and one redeemable Common Stock purchase Warrant. Each
purchaser of Units in the Offering will receive separate certificates for the
Warrants and Common Stock upon completion of the Offering and the Common Stock
and Warrant comprising each Unit will be separately transferable upon issuance.
See "Description of Capital Stock" for a description of the Common Stock and the
Warrants.
The basis of the Warrant and the Common Stock purchased by the holder as
part of a Unit or upon exercise of a Warrant will be determined by allocating
the cost of each Unit between the Common Stock and the Warrant in accordance
with the relative fair market values of those elements at the time of
acquisition.
No gain or loss will be recognized by a holder upon the exercise of a
Warrant. The sale of a Warrant by a holder or the redemption of a Warrant by a
holder will result in the recognition of gain or loss in an amount equal to the
difference between the amount realized by the holder and the Warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer in
the Warrants and that the Common Stock would have been a capital asset in the
hands of the holder had the Warrant been exercised, gain or loss from the sale
or redemption of a Warrant will be long-term or short-term capital gain or loss
to the holder. Loss on the expiration of a Warrant, equal to the Warrant's
adjusted basis in the hands of the holder, will be a long-term or short-term
capital loss, depending on whether the Warrant had been held for more than one
year.
THE ABOVE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSIDERATIONS THAT MAY
BE RELEVANT TO A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS
ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
THE WARRANTS AND THE COMMON STOCK.
42
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 30,000,000
shares of Common Stock, par value $0.01, of which 13,083,235 shares were
outstanding as of August 31, 1997 and (ii) 30,000,000 shares of preferred stock,
no par value, none of which is outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders. The Articles of Incorporation do
not limit cumulative voting rights. Accordingly all holders of common stock are
entitled to cumulate their shares when voting for directors of the Company.
Upon the liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after payment of all debts and other liabilities and payment in full
to holders of Preferred Stock then outstanding, if any, of any amount required
to be paid under the terms of such Preferred Stock. The outstanding shares of
Common Stock are, and the shares offered by the Company in this offering will
be, when issued and paid for, validly issued, fully paid and nonassessable. Of
the total authorized shares of Common Stock, 6,000,000 shares have been reserved
for grant under the Company's 1992 Stock Option Plan and 100,000 shares have
been reserved for purchase under the Underwriter Warrants.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors
is authorized to issue from time to time up to 30,000,000 shares of Preferred
Stock, in one or more series, and the Board of Directors is authorized to fix
the dividend rates, any conversion rights or right of exchange, any voting
right, any rights and terms of redemption (including sinking fund provisions),
the redemption price or prices, the liquidation preferences and any other
rights, preferences, privileges and restrictions of any series of Preferred
Stock and the number of shares constituting such series and the designation
thereof. There are no shares of Preferred Stock outstanding.
Depending upon the rights of such Preferred Stock, the issuance of Preferred
Stock could have an adverse effect on holders of Common Stock by delaying or
preventing a change in control of the Company, diluting the voting rights of
holders of Common Stock, making removal of the present management of the Company
more difficult or resulting in restrictions upon the payment of dividends and
other distributions to the holders of Common Stock, including, without
limitation, any liquidation preferences which may relate to such Preferred
Stock.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, and
U.S. Stock Transfer Corporation (the "Warrant Agent"), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1998 [12 months after the
date of this Prospectus], until , 2002 [5 years after the date of this
Prospectus], one share of Common Stock at a price of $5.00 per share, subject to
adjustment in accordance with the anti-dilution provisions referred to below.
The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the subscription
form thereon properly completed and executed, together with payment of the
exercise price. The Warrants may be exercised at any time in whole or in part at
the applicable exercise price until the expiration of the Warrants. No
fractional shares will be issued upon the exercise of the
43
Warrants. The exercise price of the Warrants bears no relationship to any
objective criteria and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment, upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or for a period of two
years from the date of this Prospectus, the sale by the Company of shares of its
Common Stock or other securities convertible into Common Stock at a price below
the initial public offering price of the Common Stock, excluding shares of
Common Stock issued in connection with incentive or benefit plans of the Company
and strategic alliances. Additionally, an adjustment will be made in the case of
a reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation (other than a consolidation or merger
in which the Company is the surviving corporation) or sale of all or
substantially all of the assets of the Company, in order to enable
warrantholders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might have been purchased upon the exercise of the
Warrant.
REDEMPTION PROVISIONS. Commencing , 1998 [12 months after the
date of this Prospectus], the Warrants are subject to redemption at $.05 per
Warrant on 30 days' prior written notice provided that the average closing sales
price of the Common Stock as reported on the NASDAQ equals or exceeds $7.50 per
share (subject to adjustment for stock dividends, stock splits, combinations or
reclassifications of the Common Stock), for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. In the event the Company exercises the right to
redeem the Warrants, such Warrants will be exercisable until the close of
business on the business day immediately preceding the date for redemption fixed
in such notice. If any Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop, or if it develops, that it will continue.
WARRANTHOLDERS NOT SHAREHOLDERS. The Warrants do not confer upon holders
any voting, dividend or other rights as shareholders of the Company.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than thirty (30) days' prior written notice to the
warrantholders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
44
The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket or may move to jurisdictions in
which the shares underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. In this event, the Company
would be unable to issue shares to those persons desiring to exercise their
Warrants and holders of Warrants would have no choice but to attempt to sell the
Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised.
MARKET INFORMATION
Prior to this Offering, there has been no established public trading market
for the Common Stock or the Warrants. The Company anticipates that upon
completion of this Offering, the Common Stock will be listed on the Nasdaq Stock
Market under the symbol "RODI" and the Warrants will be listed under the symbol
"RODIW."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock and Warrants is U.S.
Stock Transfer Corporation located at 1745 Gardena Avenue, Glendale, California
91204-2991.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices.
Upon completion of this Offering, if the Maximum Amount is raised the
Company will have 18,083,235 shares of Common Stock outstanding (assuming none
of the Warrants are exercised), of which the 5,000,000 shares offered hereby
(and the 5,000,000 shares issuable upon exercise of the Warrants) will be
transferable without restriction under the Securities Act. If the Minimum Amount
is raised, 13,883,235 shares will be outstanding.
The other 13,083,235 outstanding shares of Common Stock are "restricted
securities" (as that term is defined in Rule 144 promulgated under the
Securities Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under the revised holding period
requirements of Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales) within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or, if the Common Stock is quoted on the Nasdaq Stock Market or another
national securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements, and the availability of
current public information regarding the Company. A person who has not been an
affiliate of the Company for at least three months, and who has beneficially
owned restricted securities for at least two years, is entitled to sell such
restricted shares under Rule 144(k) ("Rule 144(k) Shares") without regard to any
of the limitations described above.
Options granted under the 1992 Incentive Stock Option Plan to purchase a
total of 4,474,559 shares of Common Stock were outstanding at August 31, 1997,
and options to purchase an additional 1,244,691 shares of Common Stock are
reserved for future issuance under the Stock Plan. Of the options granted under
the Stock Plan, 4,137,559 of such options were currently exercisable as of May
31, 1997, with the remaining outstanding options to become exercisable at the
rate of 171,000 options in 1997, and 166,000 in 1998. Shares of Common Stock
issued upon the exercise of outstanding options will be "restricted securities"
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available. Potential exemptions include
those available under Rule 144.
45
In addition, the Company intends to register on Form S-8 under the
Securities Act, as soon as possible after the completion of the Offering, shares
of Common Stock issuable under options granted under the Incentive Stock Option
Plan. Such registration becomes effective immediately upon its filing with the
Securities and Exchange Commission.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will have
on the market prices of the Common Stock and Warrants prevailing from time to
time. As of August 31, 1997, 13,083,235 shares of Common Stock outstanding were
owned by 841 holders of record, of which 6,636,134 shares are owned by
"affiliates" and 6,447,101 shares are owned by non-affiliates. Of the 6,447,101
shares owned by non-affiliates, 5,519,289 of these shares would be immediately
eligible for sale upon completion of the Offering, and 4,889,408 of such shares
are Rule 144(k) Shares which may be sold without regard to the volume
limitations of Rule 144.
6,635,978 of the shares of Common Stock owned by affiliates would be
saleable under Rule 144 upon completion of the Offering, subject to the volume
limitations of Rule 144. However, pursuant to the Lock-Up Agreements, all
officers and directors of the Company have agreed not to, directly or
indirectly, agree or offer to sell, transfer, assign, distribute, grant an
option for purchase or sale of, pledge, hypothecate or otherwise encumber or
dispose of any beneficial interest in Common Stock beneficially owned (including
Common Stock acquired upon exercise of Incentive Stock Options) for a period of
12 months following the date of this Prospectus without the prior written
consent of the Underwriter. Assuming that the Underwriter does not release the
officers and directors from the Lock-Up Agreements, after the Lock-Up period all
of the shares will be eligible for sale in the public market.
The sale or issuance, or the potential for sale or issuance, of Common Stock
by non-affiliates upon completion of the Offering and by officers and directors
after such 12-month lock-up period could have an adverse impact on the market
prices of the Common Stock and/or the Warrants. Sales of substantial amounts of
Common Stock or the perception that such sales could occur could adversely
affect prevailing market prices for the Common Stock and/or the Warrants. See
"Underwriting."
In addition, Rule 144A as currently in effect, in general, permits unlimited
resales of certain restricted securities of any issuer provided that the
purchaser is an institution that owns and invests on a discretionary basis at
least $100 million in securities or is a registered broker-dealer that owns and
invests $10 million in securities. Rule 144A allows the existing stockholders of
the Company to sell their shares of Common Stock to such institutions and
registered broker-dealers without regard to any volume or other restrictions.
Unlike under Rule 144, restricted securities sold under Rule 144A to
non-affiliates do not lose their status as restricted securities.
46
UNDERWRITING
The Company has entered into an Underwriting Agreement with Intrepid
Securities, Inc. (the "Underwriter"). Pursuant to the terms of the Underwriting
Agreement, the Underwriter has agreed to use its best efforts to sell the Units,
as exclusive agent for the Company.
The Units will be offered for a period of ninety (90) days from the date of
this Prospectus, which period may be extended for an additional ninety (90) days
upon mutual agreement between the Company and the Underwriter (the "Offering
Period"). The Company intends to extend the Offering beyond 90 days if the
Minimum Amount is not raised during the initial 90 days. If the Underwriter is
unable to sell the Minimum Amount of Units within the Offering Period, this
Offering will terminate and all funds will be returned to subscribers in full,
without interest or deduction for commissions or other expenses relating to the
Offering. All funds received by the Underwriter will be transmitted promptly to
an escrow account maintained by First Trust National Association, pursuant to
the terms of an escrow agreement. Purchasers of the Units will not receive Units
unless and until the funds are released from escrow pursuant to the terms of the
escrow agreement. Officers and directors of the Company may purchase Units in
the Offering. However, officers and directors who acquire Units will not be
allowed to transfer such securities for one year without the consent of the
Underwriter.
Subject to the sale of the Minimum Amount of Units, the Company has agreed
to pay the Underwriter a sales commission of seven percent (7%) of the aggregate
offering price of the Units (the "Underwriter Sales Commission"), and a
nonaccountable expense allowance of 3% of the gross proceeds of the Offering,
not to exceed $250,250 (3% ($102,000) if the Minimum Amount is raised, and no
more than $250,250 if the Maximum Amount is raised). The Company has also agreed
to sell to the Underwriter warrants to purchase the Company's Common Stock in an
amount equal to two percent (2%) of the Common Stock sold by the Underwriter (or
participating underwriters or broker-dealers) in the Offering, which Warrants
may be exercised during a four (4) year period commencing on that date which is
twelve (12) months after the date of this Prospectus.
The Underwriter has the right to engage other broker-dealers which are
members of the National Association of Securities Dealers, Inc. (the
"Participating Dealers") to assist in the offer and sale of the Units, and may
allow such Participating Dealers up to 100% of the Underwriter Sales Commission
and the nonaccountable expense allowance. In this regard, the Underwriter will
enter into a Participating Dealer Agreement with each Participating Dealer (a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part). The Underwriter may purchase Units for accounts over
which it has discretionary authority; however, at this time the Underwriter has
no intention to do so.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the federal
securities laws, or to contribute to payments which the Underwriter may be
required to make in respect thereof. The Company has been advised by the U.S.
Securities and Exchange Commission that, in the opinion of the Commission, such
indemnification for liabilities arising under the federal securities laws is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable.
Prior to the Offering, there has been no public market for the Common Stock
or Warrants. The initial public offering price of the Units has been determined
by negotiation between the Company and the Underwriter. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, are the history of the
industry in which the Company principally competes, the historical results of
operations of the Company, the experience of the Company's management, the
Company's earnings prospects and other relevant factors. There can be no
assurance, however, that the price at which the Common Stock or Warrants will
sell in the public market after this Offering will not be lower than the price
at which it is sold by the Underwriter.
47
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Prindle, Decker & Amaro, LLP, Long Beach, California. The Law Offices
of Rick Morse, Santa Monica, California has acted as counsel to the Underwriter
in connection with the Offering.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the two years in the period ended December 31, 1996, have been
included in this Prospectus in reliance upon the report appearing elsewhere
herein, of Kenneth E. Walsh, independent certified public accountant, and upon
the authority of said independent certified public accountant as an expert in
accounting and auditing.
The Technical Assessment of David T. Marks, independent consulting engineer,
appearing in Appendix A has been included in this Prospectus upon the authority
of said consulting engineer as an expert in diesel engine technology.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
(the "Registration Statement") with respect to the shares of Common Stock and
Warrants offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock and
Warrants, reference is made to the Registration Statement and to the exhibits
and schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contracts or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
of the Registration Statement may be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of certain fees prescribed by the Commission. The Commission maintains an
Internet World Wide Web site that contains reports, proxy and information
reports and other materials that are filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval System. The site can be accessed at
http://www.sec.gov. Copies may also be inspected or obtained at RODI's principal
offices at 7503 South 228th Street, Kent, Washington 98032, or upon written
request addressed to RODI Power Systems, Inc., P.O. Box 769, Maple Valley,
Washington 98038.
48
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
------------
Report of Independent Public Accountant............................................................. F-2
Balance sheets as of December 31, 1996 and 1995..................................................... F-3
Statements of Operations for the year ended December 31, 1995, the year ended December 31, 1996 and
the period from July 20, 1987 (inception) through December 31, 1996............................... F-4
Statements of stockholders' Deficit for the period from July 20, 1987 (inception) through December
31, 1995 and the year ended December 31, 1996..................................................... F-5
Statements of cash flows for the period from July 20, 1987 (inception) through December 31, 1995,
the year ended December 31, 1996 and the period from July 20, 1987 (inception) through December
31, 1996.......................................................................................... F-6
Notes to Annual Financial Statements................................................................ F-7 - F-11
Interim Balance Sheets as of June 30, 1997 and 1996 (Unaudited)..................................... F-12
Interim Statements of Operations for the six months ended June 30, 1997 and 1996 (Unaudited)........ F-13
Interim Statements of Stockholder's Equity for the six months ended June 30, 1997 and 1996
(Unaudited)....................................................................................... F-14
Interim Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (Unaudited)........ F-15
Notes to Interim Financial Statements............................................................... F-16
F-1
INDEPENDENT AUDITORS REPORT
To the Board of Directors
RODI Power Systems, Inc.
I have audited the accompanying Balance Sheets of RODI Power Systems, Inc.
(a Washington corporation in the development stage) as of December 31, 1996 and
1995 and the related Statements of operations, Stockholders' deficit and Cash
Flows for the year ended December 31, 1995, the year ended December 31, 1996,
and for the period from July 20, 1987 (inception) through December 31, 1996.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these statements based on my
audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RODI Power Systems, Inc. as of
December 31, 1996 and 1995, and the results of their operations and cash flows
for the year ended December 31, 1995, the year ended December 31, 1996, and for
the period from July 20, 1987 (inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company, with limited
capital resources, and has incurred accumulated losses of $3,429,421 as of
December 31, 1996. This raises substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to this matter is
described in Note 2.
Kenneth E. Walsh
Certified Public Accountant
January 12, 1997
Torrance, California
F-2
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
ASSETS
CURRENT ASSETS
Cash (Note 1)..................................................................... $ 209,098 $ 24,402
Loans Receivable.................................................................. 0 10,000
Prepaid Expenses.................................................................. 5,257 12,757
------------- -------------
Total current assets.......................................................... 214,355 47,159
PROPERTY AND EQUIPMENT, at cost: (Note 1)
Machinery and equipment........................................................... 178,101 175,843
Computer equipment................................................................ 99,161 99,161
Leasehold improvements............................................................ 49,326 49,672
------------- -------------
326,588 324,676
Less accumulated depreciation....................................................... (113,715) (168,740)
------------- -------------
Total Property and Equipment.................................................. 212,873 155,936
DEPOSITS............................................................................ 3,903 3,903
------------- -------------
TOTAL ASSETS........................................................................ $ 431,131 $ 206,998
------------- -------------
------------- -------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................. $ 51,590 $ 23,345
Accrued Expense................................................................... 42,283 18,368
------------- -------------
Total current liabilities..................................................... 93,873 41,713
LONG-TERM DEBT
Notes payable-Officers (Note 11).................................................. 0 262,896
COMMON STOCK SUBJECT TO RESCISSION, (Note 3)
4,977,364 and 0 shares outstanding at 12/31/1995 and 12/31/1996 respectively...... 2,379,896 0
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value; 30,000,000 shares authorized, none outstanding..... 0 0
Common stock, par value $.01; 30,000,000 shares authorized, 11,800,998 and
12,371,154 shares issued and outstanding........................................ 70,693 123,709
Common stock subscribed........................................................... 12,847 1,500
Common stock warrants (Note 5).................................................... 35,555 35,555
Additional paid-in capital........................................................ 407,405 3,171,046
Deficit accumulated--development stage............................................ (2,568,290) (3,429,421)
------------- -------------
Total Stockholders' Deficit................................................... (2,041,790) (97,611)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT......................................... $ 431,131 $ 206,998
------------- -------------
------------- -------------
See Notes to Financial Statements, pages F-7 through F-11
F-3
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM
JULY 20, 1987
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
------------- ------------- -------------
INCOME............................................................... $ 0 $ 11,347 $ 11,347
EXPENSES:
Research and development........................................... 591,142 279,174 $ 1,856,027
Marketing & Sales.................................................. 0 14,993 14,993
General and administrative......................................... 530,082 566,963 1,569,748
------------- ------------- -------------
TOTAL EXPENSES................................................. 1,121,224 861,130 3,440,768
------------- ------------- -------------
------------- ------------- -------------
NET LOSS............................................................. $ (1,121,224) $ (849,783) $ (3,429,421)
------------- ------------- -------------
NET LOSS PER SHARE................................................... $ (.10) $ (.07) $ (.41)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING........................ 11,574,386 12,050,450 8,400,320
See Notes to Financial Statements, pages F-7 through F-11
F-4
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
DEVELOPMENT
COMMON STOCK COMMON ADDITIONAL STAGE
------------------------ STOCK COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNTS SUBSCRIBED WARRANTS CAPITAL (DEFICIT)
------------ ---------- ----------- -------------- ------------ -------------
Balance July 20, 1987.................... 0 $ 0 $ 0 $ 0 $ 0 $ 0
Shares issued for Cash................... 4,040,400 40,404 0 0 1,514,077
Shares issued for non-cash
consideration.......................... 6,835,829 68,358 128,638
Stock Subscribed for cash................ 13,562
Stock Subscribed for non-cash
consideration.......................... 9,888
Warrants issued for non-cash
consideration.......................... 58,550
Warrants exercised....................... 2,667 27 (2,000) 1,973
Net Loss-1994............................ (1,458,414)
------------ ---------- ----------- -------------- ------------ -------------
Balance, 12-31-1994...................... 10,878,896 $ 108,789 $ 23,450 $ 56,550 $ 1,644,688 $ (1,458,414)
Shares issued for cash................... 800,913 8,009 790,904
Shares issues for non-cash
Consideration.......................... 63,693 637 62,006
shares issued by stock subscribed........ 26,501 265 (21,950) 21,685
Stock subscribed by non-cash
Consideration.......................... 11,347
Warrants issued for non-cash
consideration.......................... 3,000
Warrants exercise........................ 30,995 310 (23,995) 23,685
net loss--1995........................... (1,121,224)
------------ ---------- ----------- -------------- ------------ -------------
Balance, 12/31/1995...................... 11,800,998 $ 118,007 $ 12,847 $ 35,555 $ 2,542,968 $ (2,579,638)
Shares issued for cash................... 479,898 4,799 562,292
Shares issued for non-cash
consideration.......................... 90,258 903 (11,347) 65,786
Net loss--1996........................... (849,783)
------------ ---------- ----------- -------------- ------------ -------------
Balance 12/31/1996....................... 12,371,154 $ 123,709 $ 1,500 $ 35,555 $ 3,171,046 $ (3,429,421)
See Notes to Financial Statements, pages F-7 through F-11
F-5
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM
JULY 20, 1987
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
------------- ------------ -------------
OPERATING ACTIVITIES:
Net Loss........................................................... $ (1,121,224) $ (849,783) $ (3,429,421)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation..................................................... 55,610 55,025 168,740
Stock and Warrants issued for non-cash consideration............. 76,990 44,098 440,523
Changes in operating assets and liabilities:
Receivables...................................................... 5,356 (10,000) (10,000)
Prepaid expenses................................................. (240) (7,500) (12,757)
Other assets..................................................... 0 0 (3,903)
Accounts payable................................................. 21,458 (28,245) 23,345
Accrued liabilities.............................................. 7,667 (23,915) 18,368
------------- ------------ -------------
166,841 29,463 624,316
------------- ------------ -------------
Net cash used in operating activities.......................... (954,383) (820,320) (2,805,105)
------------- ------------ -------------
INVESTING ACTIVITIES:
Acquisition of property and equipment.............................. (25,014) 1,912 (324,676)
------------- ------------ -------------
Net cash used in Investing activities.......................... (25,014) 1,912 (324,676)
------------- ------------ -------------
FINANCING ACTIVITIES:
Proceeds from borrowings........................................... 0 262,896 262,896
Payment for rescission shares...................................... 0 (196,275) (196,275)
Proceeds issuance of Stock......................................... 798,913 567,091 3,087,562
------------- ------------ -------------
Net cash from financing activities............................. 798,913 633,712 3,154,183
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH...................................... (180,484) (184,696) 24,402
CASH AT BEGINNING OF PERIOD.......................................... 389,582 209,098 0
------------- ------------ -------------
CASH AT END OF PERIOD................................................ $ 209,098 $ 24,402 $ 24,402
------------- ------------ -------------
See Notes to Financial Statements, pages F-7 through F-11
F-6
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT POLICIES:
Rodi Power Systems, Inc. (the Company), a Washington corporation in the
development stage, is engaged in designing and developing a new heavy-duty
diesel engine with potential applications in the trucking industry, as well as
other potential commercial markets.
Since inception, the Company's efforts have been devoted to the development
of its product and raising capital. To date, the Company has not engaged in any
production, manufacturing or sales activities and has an accumulated net loss of
$3,429,421. Accordingly, the Company is in the development stage and the
accompanying financial statements represent those of a development stage
enterprise.
The Company is subject to risks inherent in any new business enterprise.
These risks include, but are not limited to, the Company's limited operating
history and lack of profitability; the need for additional financing to fund
future research and development activities; the need to successfully design,
develop, manufacture and market the Company's product; competition from
established companies with greater resources; and the Company's dependence on
its founder and other key management personnel. There can be no assurance that
the Company will be successful in managing these risks.
On July 20, 1987, the Company incorporated in Delaware as Rotary Diesels,
Incorporated. On October 4, 1991 the Company changed its corporate domicile by
Incorporating in Washington state. The Company's articles of incorporation were
amended on May 24, 1993 to effect a name change to RODI Power Systems, Inc.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Maintenance, repairs and minor
renewals are expensed as incurred. When assets are retired, or otherwise
disposed of, the related costs and accumulated depreciation are removed from the
respective accounts and any gain or loss on disposition is reflected in the
statement of operations. Depreciation is calculated using the straight-line
method, after effecting a 10% salvage value, over the following estimated useful
lives;
Machinery and equipment........................... 3-7 years
Computer equipment................................ 5 years
Leasehold Improvements............................ 5-7 years
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March of 1995, the Financial Accounting Standards Board issued standard
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-lived
Assets to be disposed of". The Company has adopted standard No. 121 as of
January 1, 1996. The effect on the financial statements of adopting standard No.
121 was not material.
In October 1995, the Financial Accounting Standards Board issued standard
No. 123. "Accounting for Stock-Based Compensation". The accounting or disclosure
requirements of this statement are effective for
F-7
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT POLICIES: (CONTINUED)
the Company's fiscal year-end 1996 financial statements. The Company has adopted
standard No 123 as of January 1, 1996. The effect on the financial statements of
adopting standard No. 123 was not material.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares
outstanding during the periods presented.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The presentation 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 the
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 those estimates.
2. ABILITY TO CONTINUE AS A GOING CONCERN:
As described in Note 1, the Company is a development stage enterprise. A
marketable version of the Company's diesel engine has not yet been successfully
developed. As of December 31, 1996, the Company has accumulated operating losses
of $3,429,421 and has limited capital resources. Future research and development
activities are necessary and are dependent upon the Company's ability to raise
additional capital. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in this regard are to
raise additional capital in 1997 by offering additional shares of the Company's
common stock under Regulation SB-2 of the Securities Act of 1993. There can be
no assurance that the Company will be successful in raising additional capital
in a public offering of its stock. In addition, until the public offering
becomes Qualified management is actively seeking to raise additional capital in
isolated private sales of the Company's stock to accredited investors.
Management believes that there is adequate investor interest to continue to fund
the Company's operations in the foreseeable future.
3. RESCISSION OFFER:
The Company has sold common stock to investors without registering the
securities for sale with the appropriate federal and state regulatory agencies
and was in violation of federal and state security laws. To limit the potential
liability from the sale of these unregistered securities, the Company issued a
Rescission Offer to Certain Stockholders, whereby the Company offered to refund
certain stockholder investments in the Company, plus interest from the date of
investment, in return for shares of the Company's common stock. As of December
31, 1996 250,040 shares of stock have been rescinded by the stock holders. This
rescission money was paid for by a loan from eight different members of the
Board of Directors of the corporation. The Rescission offer date had expired as
of December 31, 1996 and no future contingent liabilities exist as a result of
the rescission.
F-8
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES:
Deferred taxes relate to differences between the basis of assets and
liabilities for financial and tax reporting purposes. Deferred tax assets and
liabilities represent the future tax consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for net operating
losses that are available to offset future taxable income. Deferred tax assets
are reduced by a valuation allowance if it is more likely than not that some or
all of the deferred tax assets will not be realized.
At December 31, 1995 and 1996, the Company had net operating loss
carryforwards totaling approximately $2,608,000 and $3,429,421, respectively,
that may be offset against future taxable income. The Company's net operating
losses begin to expire in the year 2003. Details regarding the Company's
deferred taxes are presented below:
DECEMBER 31,
----------------------
1995 1996
---------- ----------
Accelerated depreciation.............................................. $ (15,000) $ (18,500)
Net operating loss carryforwards...................................... 913,000 955,000
---------- ----------
898,000 937,000
Less valuation allowance.............................................. 898,000 937,000
---------- ----------
Net deferred tax asset................................................ $ 0 $ 0
---------- ----------
---------- ----------
5. STOCK WARRANTS:
Since inception the Company has issued warrants to purchase 77,060 shares of
common stock. These warrants must be exercised within 60 to 72 months of the
date of issuance, except for one warrant for the purchase of 29,833 shares of
common stock, which has no expiration date. Shares issued from exercise of
warrants since inception totaled 33,600. At December 31, 1996, warrants to
purchase 43,400 shares were outstanding. All warrants were issued for services
provided to the Company and were valued at their fair market value of the
Company's common stock at the date the warrants were issued.
6. STOCK OPTION PLAN:
The Company has an incentive Stock option plan, under which employees and
directors may be granted options to purchase common stock. The Company has
reserved 6,000,000 shares of common stock for issuance pursuant to the Plan,
upon the exercise of outstanding options and upon the exercise of options
granted in the future. Option vesting periods range from immediate to a
three-year period and expire within 60 to 72 months from the date of grant. The
options are exercisable at prices determined at the discretion of the Board of
Directors. All options have been granted at fair market value on the date of the
grant. No options have been exercised as of December 31, 1996.
F-9
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLAN: (CONTINUED)
Details of the Company's stock option activity are presented below:
1994 1995 1996
------------ ------------ ------------
Options outstanding 1/1............................ 0 1,615,625 4,755,309
Options granted.................................... 1,615,625 3,506,684 0
Options exercised.................................. 0 0 0
Options forfeited.................................. 0 (367,000) 0
------------ ------------ ------------
Options outstanding 12/31.......................... 1,615,625 4,755,309 4,755,309
------------ ------------ ------------
------------ ------------ ------------
Options exerciseable at 12/31 ..................... 0 0 130,750
Option prices per common share
Exercised during the year........................ 0 0 0
Outstanding at year end.......................... .95 to 1.00 .15 to 1.00 .15 to 1.10
7. PROFIT SHARING/401 (K) PLAN:
The Company sponsors a profit sharing/401(k) plan (the Plan) covering
substantially all of its employees. To participate in the Plan, an employee must
be 18 years of age and have worked a minimum of 1,000 hours on the plan year.
Under the Plan, the Company may contribute, at the sole discretion of the Board
of Directors, up to the maximum limit set by the Internal Revenue Code. The
effective date of the Plan was January 1, 1994. There were no Company
contributions to the Plan for the Years ended December 31, 1994, 1995 or 1996.
8. LEASES:
The Company Leases office and shop space in Kent, Washington. The lease term
is one year, with an annual renewal option for one-year periods. Prior to
occupying the present location on September 10, 1993, the Company leased office
and shop space from one of its stockholders. Since inception, the Company has
issued 14,000 shares of common stock in payment of rent. Rent paid through
issuance of common stock and reflected as an expense in the accompanying
financial statements totals $8,100 from July 20, 1987 (inception) through
December 31, 1996.
Rent expense was $43,544 and $39,751 for the period from July 20, 1987
(inception) through December 31, 1994 and the year ended December 31, 1995,
respectively. Future minimum rental payments through September 30, 1997,
expiration of the lease, will be $32,011.
10. RELATED PARTY TRANSACTIONS:
From time to time, certain members of the Board of Directors have
contributed services to the company and have paid certain expenses on the
Company's behalf. Since inception, the Company has issued 4,954,783 shares of
common stock to these individuals in payment of the services performed and
expenditures paid.
Since inception, the Company has granted 2,453,500 stock options to certain
members of the board of Directors. These options were granted at fair market
value on the date of the grant and are exercisable at $0.15 to $1.10 per share.
None of these stock options have been exercised as of December 31, 1996.
F-10
RODI POWER SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. PROMISSORY NOTES PAYABLE:
The Company borrowed a total of $262,895 from eight different members of the
Board of Directors. This money was used to fund the Rescission offers during
1996. These Promissory Notes are unsecured and bear interest at nine percent
(9%). Principle and accrued interest are due and payable on September 20, 1998.
12. STOCK ISSUED FOR NON-CASH CONSIDERATION
The Company has issued both stock and stock warrants in exchange for
services. These services were usually engineering and consulting services. This
was done in order to help conserve the Company's cash reserves. As of December
31, 1996, 6,989,780 shares of stock have been issued in exchange for services.
The total dollar value of the stock exchanged varied from $.01 in 1987 to $1.25
in 1996.
F-11
RODI POWER SYSTEMS, INC.
INTERIM FINANCIAL STATEMENTS
BALANCE SHEET
JUNE 30, 1996 - JUNE 30, 1997
30-JUN-96 30-JUN-97
----------- -----------
(UNAUDITED)
ASSETS
Current Assets
Cash................................................................................. 103,898 32,890
Accounts Receivable.................................................................. 0 28,820
Loans Receivable..................................................................... 0 11,250
Prepaid Expenses..................................................................... 5,257 32,757
----------- -----------
Total Current Assets............................................................... 109,155 105,717
----------- -----------
----------- -----------
Property and Equipment, at cost
Machinery and equipment.............................................................. 179,964 175,843
Computer Equipment................................................................... 99,161 100,852
Leasehold Improvements............................................................... 49,672 49,672
----------- -----------
328,797 326,367
Less Accumulated Depreciation........................................................ (143,109) (196,252)
----------- -----------
185,688 130,115
Other.................................................................................. 3,950 4,102
----------- -----------
298,793 239,934
----------- -----------
----------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable..................................................................... 38,870 75,644
Accrued Liabilities.................................................................. 3,786 11,518
----------- -----------
Total Current Liabilities.......................................................... 42,656 87,162
----------- -----------
Long Term Debt
Notes Payable to Officers............................................................ 0 352,895
Common Stock Subject to Rescission
4,977,364 and 0 shares outstanding at 6/30/96 and 6/30/97 respectively............... 2,403,422 0
Stockholders' Equity
Preferred Stock, no par value, 30,000,000 shares authorized, none outstanding........ 0 0
Common Stock, par value $.01, 30,000,000 shares authorized, 7,353,910 and 12,886,885
issued and outstanding............................................................. 73,539 128,867
Common Stock Subscribed.............................................................. 12,847 1,500
Common Stock Warrants................................................................ 35,555 35,555
Additional Paid-In Capital........................................................... 963,992 3,558,972
Accumulated Deficit During Development............................................... (2,933,218) (3,925,017)
(2,147,285) (200,123)
----------- -----------
298,793 239,934
----------- -----------
----------- -----------
See Notes to Interim Financial Statements at page F-16
F-12
RODI POWER SYSTEMS, INC.
INTERIM FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997
AND JULY 20, 1987 (INCEPTION) THROUGH JUNE 30, 1997
(UNAUDITED)
PERIOD FROM
JULY 20, 1987
SIX MONTHS ENDED (INCEPTION)
-------------------------- THROUGH
30-JUN-96 30-JUN-97 JUNE 30, 1997
------------ ------------ -------------
SALES.................................................................. 0 0 11,347
EXPENSES
Cost of Sales........................................................ 0 0 0
Research and Development............................................. 199,036 205,310 2,061,337
Marketing and Sales.................................................. 4,000 2,317 17,310
General and Administrative........................................... 161,892 287,969 1,857,717
Net Loss............................................................... (364,928) (495,596) (3,925,017)
Net Loss Per Share..................................................... (0.03) (0.04) (0.38)
Weighted Average Number of Shares Outstanding.......................... 12,198,398 12,599,257 10,360,076
See Notes to Interim Financial Statements at page F-16
F-13
RODI POWER SYSTEMS, INC.
INTERIM FINANCIAL STATEMENTS
STATEMENT OF COMMON STOCK AND STOCKHOLDER'S EQUITY
AS OF JUNE 30, 1997
(UNAUDITED)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
SHARES AMOUNT SUBSCRIBED WARRANTS P.I.C. DEVELOPEMENT DEFICIT
------------ --------- ----------- ----------- ---------- ------------------ -----------------
Balance, December 31,
1996.................... 12,371,154 123,709 1,500 35,555 3,171,046 (3,429,421) (97,611)
Shares Issued for Cash.... 454,350 4,544 0 0 327,159
Shares Issued for Non-
Cash.................... 61,381 614 0 0 60,767
Net Loss 6/30/97.......... (495,596)
Balance 6/30/97........... 12,886,885 128,867 1,500 35,555 3,558,972 (3,925,017) (200,123)
See Notes to Interim Financial Statements at page F-16
F-14
RODI POWER SYSTEMS, INC.
INTERIM FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997
AND JULY 20, 1987 (INCEPTION) THROUGH JUNE 30, 1997
(UNAUDITED)
PERIOD FROM
JULY 20, 1987
SIX MONTHS ENDED (INCEPTION)
---------------------- THROUGH
30-JUN-96 30-JUN-97 JUNE 30, 1997
---------- ---------- -------------
OPERATING ACTIVITIES
Net Loss................................................................. (364,928) (495,596) (3,925,017)
Reconciliation of Net Loss to Net Cash used in operating activities
Depreciation & Amortization............................................ 29,394 27,512 196,252
Stock and Warrants issued for Noncash.................................. 57,896 61,381 501,904
Changes in Operating Assets & Liabilities
Receivables............................................................ 0 (30,070) (40,070)
Prepaid Expenses....................................................... 0 (20,000) (32,757)
Other Assets........................................................... (47) (199) (4,102)
Accounts Payable....................................................... (12,720) 52,299 75,644
Accrued Liabilities.................................................... (38,497) (6,850) 11,518
Net Cash Used in Operating Activities................................ (328,902) (411,523) $(3,216,628)
INVESTING ACTIVITIES
Aquisition of Property and Equipment..................................... (2,209) (1,692) (326,367)
Net Cash Used in Investing Activities................................ (2,209) (1,692) (326,367)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock................................... 225,911 331,703 3,419,265
Proceeds from Borrowings................................................. 0 90,000 352,895
Payment of rescission shares............................................. 0 0 (196,275)
Net Cash provided from Financing..................................... 225,911 421,703 3,575,885
NET (DECREASE) INCREASE IN CASH............................................ (105,200) 8,488 32,890
CASH AT BEGINNING OF PERIOD................................................ 209,098 24,402 0
CASH AT END OF PERIOD...................................................... 103,898 32,890 32,890
See Notes to Interim Financial Statements at page F-16
F-15
RODI POWER SYSTEMS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1. STOCK OPTION PLAN
Activity in the Company's Incentive Stock Option Plan during the first six
months of 1997 is as follows:
OPTIONS PRICE
ACTIVITY PER SHARE
---------- -------------
Options Outstanding January 01, 1997............................ 5,244,309 $ 0.05--1.10
Options Exercised............................................... (205,750) $ 0.15--0.75
Options Expired................................................. (489,000) $ 0.05--1.00
Balance, June 30, 1997.......................................... 4,549,559 $ 0.15--1.10
NOTE 2. PROFIT SHARING/401 (K) PLAN
There were no Company contributions to the Plan during the first six months
of 1997.
NOTE 3. RELATED PARTY TRANSACTIONS
As of June 30, 1997, 45,500 shares of the stock options granted to certain
members of the Board of Directors had been exercised at the exercise price of
$0.15 per share.
NOTE 4. RESCISSION OFFER
As of June 30, 1996, the Company's Rescission Offer had not been completed.
On September 26, 1996, the Rescission Offer was closed with 250,040 shares
rescinded by the Shareholders removing the requirement to carry the contingent
liability. See "Notes to Financial Statements", Note 3, at page F-8."
NOTE 5. PROMISSORY NOTES PAYABLE
During the first six months of 1997, the Company borrowed a total of $90,000
from three of the Board of Directors to fund operations. Unsecured promissory
notes were issued bearing interest at nine percent (9%). Principle of $30,000
and $60,000 plus accrued interest are due and payable on February 19, 1999 and
April 23, 1999 respectively.
NOTE 6. SALES
During the first six months of 1997, the Company recorded sales of $74,112
consisting of 5 Deere Power Systems industrial engines under the Company's OEM
agreement. These engines are intended for electrical power generation and
pumping systems sold through the Company's proposed joint venture, Alternate
Power Equipment, Inc. According to paragraph 19(a) of APB 18, the Company
eliminated these intercompany revenues as they were made to an investee of the
proposed joint venture. The effect of the elimination on the Financial
Statements was insignificant as no profits were realized on these sales.
F-16
APPENDIX A
TECHNICAL ASSESSMENT
RODI DIESEL ENGINE
This is a brief report of the technical assessment of the Rodi HT1-450 Turbo
Diesel Engine submitted 13 January 1997.
I. INTRODUCTION
The Rodi HT1-450 Diesel Engine is a four cylinder vee two-cycle engine
designed for application in a heavy duty highway truck. This engine utilizes two
unique enabling technologies; a reverse uniflow two-stroke scavenging cycle and
a two point microprocessor fuel system control and its associated software.
The reverse uniflow scavenging feature is unique since it is a departure
from current production two-cycle engine design which have air inlet ports at
the bottom of the cylinder and exhaust valves in the cylinder head.
In the reverse uniflow two-stroke cycle, pressurized air is admitted via
intake valves located in the cylinder head and exhaust is discharged through
ports machined into the lower extremity of each cylinder liner. This eliminates
the requirement for exhaust valves while achieving efficient scavenging of the
exhaust gases within the cylinders. The pressurized scavenging air is supplied
by a positive displacement supercharger directly connected to the crankshaft.
The two point microprocessor engine control permits initiation and
termination of fuel delivery to be programmed independently. This system also
monitors and controls all engine functions to optimize operating efficiency.
A mechanically driven unit fuel injector is utilized to produce high
injection pressures (up to 25,000 pounds per square inch) for improved
combustion efficiency and emissions.
The V-4 with 90 degree banks provides a compact short overall length and
light weight engine for improved truck application. The two cycle firing
sequence gives the same cyclic torque impulse as an eight cylinder V-8 four
cycle engine. This eliminates transmission and drive line problems from cyclic
torque variations.
The benefits of a V-4 over an in line 6 configuration include reducing the
number of main bearings from 7 to 3 and reducing the length of the crankshaft by
45%. There is a proportional reduction in components throughout the engine
resulting in 40% fewer components and hence significantly lowering the cost of
production. A major difference between four-stroke engines and reverse uniflow
two-stroke engines is the absence of exhaust valves and exhaust heated passages
in the cylinder head. This results in a significant reduction in exhaust heat
loss to the coolant and greatly improves head and valve life. Most of the heat
normally lost to the coolant is harnessed by two turbochargers which increases
the amount of combustion air available. By using individual turbochargers on
each bank of the V engine, either half of the engine can be operated independent
of the other; allowing two cylinder operation during periods of idling or light
loading.
The selection of the two-cycle diesel combustion process for application in
a highway truck deserves some serious consideration. The four-cycle diesel
combustion process has been predominately utilized for on-highway truck engine
applications except for truck engines produced by Detroit Diesel Corporation.
The difference between these cycles has the following effect on the basic
engine components and engine performance. In the two-cycle engine, the
combustion and power stroke occurs every revolution of the crankshaft. In the
four-cycle engine, combustion and power strokes occur on alternate revolutions
of the crankshaft. The two-cycle engine fires every revolution so theoretically
the same power could be
A-1
produced with half the displacement of a four-cycle engine. This cannot be
achieved in actual practice for the follow reasons:
1. The two-cycle engine has only a few crank angle degrees at the
bottom of its stroke to complete its exhaust blow-down, scavenging and
recharge of intake air as compared to a complete revolution of the
four-cycle engine for this process.
2. The hot components in the two-cycle engine are subjected to high
temperature and pressure every revolution as compared to every other
revolution in the four-cycle engine. The four-cycle engine components can
rest and be cooled with inlet air in the idle scavenge and intake cycles.
3. The short crank angle time in the two-cycle for scavenging exhaust
gases and recharging with fresh air results in problems in controlling
exhaust emissions (smoke, unburned hydrocarbons and Nitrous Oxides). The
exhaust emission problem in the four-cycle engine is easier to control since
the cylinder is completely purged in the extra cylinder strokes for exhaust
and intake of air. The two-cycle engine does however, typically operate at
lower combustion temperatures which tends to reduce the formation of Nitrous
Oxides.
4. The two-cycle engine requires the use of an external source of low
pressure air such as a roots blower to aid in the scavenging process. This
creates an additional source of accessory power loss and contribution to the
exhaust emission problem.
In consideration of the above factors, the two-cycle engine in practice is
limited to approximately one half the BMEP (Brake Mean Effective Pressure) of
the four-cycle engine in high specific power supercharged engines.
II. REVERSE UNIFLOW SCAVENGING
The unique feature of the Rodi HT1-450 engine is the design of a two-cycle
engine using the concept of reverse uniflow scavenging for the flow of gases
through the cylinder. Air is admitted to the cylinder through an intake valve
system in the cylinder head and exhausted through ports at the bottom of the
cylinder.
The reverse uniflow scavenge concept has the potential for basic
improvements in engine efficiency and packaging, but also has inherent problems.
Advantages:
1. The cylinder head design can be simplified with the elimination of
the hot exhaust gases. Cooling can be either eliminated or greatly
simplified. Complex cored passages and gasket sealing problems are thus
eliminated. A simple single cylinder head with lower profile for reduced
engine bulk and weight becomes possible.
2. Vee engines have problems with overall width in highway vehicles.
The more compact cylinder head will be very favorable with this design.
3. Valve and valve seat life will be improved from cooling effects of
inlet air.
4. The ports at the bottom of the cylinder will provide increased area
for less exhaust flow restriction and a better blow-down feature through
rapid rate of area opening. This should result in efficient gas flow and
improved scavenging and better fuel consumption.
A-2
Disadvantages:
1. The high temperature components of the cylinder are buried in the
cylinder block. This will create problems with the design of the cooling
system and its seals. This will also create problems with the design for
access to the hot elements and seals for maintenance and repair. RODI's
proposed use of Min-K super insulation may mitigate this problem.
2. There will be new problems with the heat concentrated at the lower
end of the cylinder liner and piston.
A new piston, piston ring set and cylinder liner combination will need to be
developed. Extra cooling to the underside of the piston with cooling jets will
be required. Thermal distortion within the cylinder block structure and lower
end of the liner will be a problem. It may be necessary to cool the liner in the
exhaust port area.
III. TECHNICAL ASSESSMENT OF THE GENERAL PROGRAM
The design of the Rodi HT1-450 engine adheres to sound engineering
principals and thus has the potential to be a successful competitor in the heavy
duty highway truck market.
The general arrangement of the Series III preproduction engine is
substantially improved over the Series I and Series II prototype engine designs.
A completely new mechanical design of the engine hardware is proposed to
bring it up to production standards for good foundry and machine shop practice
and present day tooling.
The 90 degree V-4 arrangement could present installation problems in
existing on-highway trucks because of its width in this horsepower range. A
four-cylinder in-line engine might be more compatible. The present design was
selected to produce a short overall length and light weight package. A new truck
could easily be designed to accept the V-block design.
The use of synthetic lube oil (polyalphaolefin) as coolant should be
reviewed. The concept eliminates one fluid (water) which can be a problem should
an internal seal fail and in cold climates with anti-freeze maintenance. The
specific heat transfer of oil is about one half that of water. This creates the
need for higher coolant flow, radiator sizing and related costs. There is also a
risk to the engine's lubricated elements from coolant loss through leaks in
external plumbing.
It is suggested that the coolant system be designed to use either oil or
water in the development stage to reduce the number of unknowns at this stage.
The use of the lube oil pump as a retarder will be of limited functional
benefit because of the problem of heat rejection. The power absorbed in the
retarder mode turns to heat in the lube oil. This can only be rejected in the
engine coolant radiator which has limits in total rejection.
The power head feature where the cylinder block and head assembly can be
separated from the accessory drive and flywheel assembly without disturbing the
accessories' plumbing or wiring and replaced with a new or remanufactured power
head will result in substantial savings in truck down time and cost.
IV. TECHNICAL ASSESSMENT OF ENGINE COMPONENTS
The cylinder block is well designed for present day tooling. Some effort to
improve internal cooling should be considered. High strength cast iron is the
preferred material.
The design of the piston and cylinder liner is considered consistent with
good production practice. Since the exhaust outlet is at the bottom of the
cylinder, this area will operate at higher temperatures. It will require some
development of piston cooling and piston ring details. Some consideration for
cooling the liner in the exhaust port area may be required.
A-3
The upper connecting rod and piston pin bushing will operate at higher
temperatures. They may require additional development. The piston pin and upper
end of the connecting rod appear to be complex and may be expensive in
production. Other designs should be considered. The retainer screws do not seem
adequate to hold the piston pin in the event of a scuffed piston skirt.
The new cylinder head with four intake valves per cylinder is an improvement
over the Series I design.
The cylinder head is taller than necessary. The coring and flange connection
for air inlet should be reviewed. The flanges for cylinder head cover are too
thin.
The valve train (cam follower, push rods, rocker arms and bridges) does not
appear adequate in proportion as compared to other heavy duty engines.
The exhaust collector design is improved over the Series I design. It may be
necessary to provide cooling to this component for high power outputs.
The accessory layout and drive arrangement are good.
The crankshaft is considered to be consistent with good design practice. It
is suggested that the material be changed to a steel forging for durability.
The mounting of the heat exchangers to the engine is a good feature. This
can reduce problems of plumbing leaks and potential for engine failure.
V. CONCLUSIONS AND RECOMMENDATIONS
The Rodi HT1-450 turbo diesel engine should easily produce up to 450
horsepower at 1800 revolutions per minute with good fuel economy and durability.
The advantages of the reverse uniflow two-cycle scavenge concept in the V-4
configuration should produce a very attractive and competitive engine for the
heavy duty highway truck market.
The planned production type redesign program will overcome the present
development problems.
The engine is conservatively designed in terms of displacement, average
piston speed and Brake Mean Effective Pressure at the 450 horsepower rating so
there should be adequate reserve for future power growth.
The use of the removable power head will be unique to this engine and will
give it a great competitive advantage.
The use of the unit injectors in combination with the two point
microprocessor fuel control will result in a wide range of flexibility for power
and economy settings along with improved exhaust emissions.
A-4
RESUME
DAVID T. MARKS
PO Box 214 6840 E. 2nd St. #16
Glen Arbor, MI 49636 Scottsdale, AZ 85251
Tel (616) 334-3528
- --------------------------------------------------------------------------------
GENERAL
Thoroughly seasoned, top administrative engineer experienced in
organizing, training and supervision of engineering personnel
and coordinating activities with production, sales, finance and
long-range planning departments. More than fifty years of
experience in the design, development and field application of
internal combustion engines (gasoline, diesel and turbine
engines), both commercial and military.
EXPERIENCE
September 1978 Owner of private consulting business in the design and
development field with the
to present following clients:
Detroit Diesel Corporation, Detroit, Michigan
Cummins Engine Company, Inc., Columbus, Indiana
Mechanical Technology, Inc., Albany, New York
Michigan Automotive Consultants, Troy, Michigan
Cadillac Gauge, Detroit, Michigan
Creative Industries, Detroit, Michigan
Holset Engineering Co., Farmington Hills, Michigan
Sven Kronograd and Associates, Malmoe, Sweden
Concept Analysis, Inc., Plymouth, Michigan
American Motors, Detroit, Michigan
Komatsu, Japan
EMI, Taiwan
Inst. Gas Technology, Chicago, Illinois
Chrysler Corporation, Detroit, Michigan
Pei Inc., Beloit, Wisconsin
BKM, Inc., San Diego, California
PROGRAMS EITHER COMPLETED OR IN CURRENT PROGRESS ARE AS FOLLOWS:
Design and application of Stirling Engine for use in American Motors Spirit
passenger car.
Upgrade the Cummins V8 diesel engine (V-903) from 450 to 1000 horsepower for
military applications. I am currently designing two new engines with ceramic
linings for super fuel economy through recovery of heat normally lost to the
cooling water.
Survey of the automotive diesel engine market for Turkish manufacturer for the
World Bank.
Air conditioning and heating study for combat vehicle personnel carrier.
Design of a comfort cab for a Massey Ferguson farm tractor.
Feasibility study of a hybrid fuel cell battery powered electric car
application.
Preliminary studies for a small KW wind generator energy conversion system.
Design of a maintenance facility for combat vehicles for a foreign country. This
facility is capable of complete rebuild of tracked vehicles.
A-5
Design and build a single cylinder test engine.
Design replacement torque convertor for retrofit in overseas transmission.
New air-to-air charge air cooling system for a highway heavy duty truck.
Chassis layout for new refuse hauling vehicle.
Design of a new military ambulance.
Various design layouts and feasibility studies for adiabatic engine concepts.
Includes coordination of new material development.
Redesign for cost reduction on several new engine prototypes.
Designed turbo compound versions for three series engines for major heavy duty
diesel engine manufacturer.
July 1968 to TELEDYNE CONTINENTAL MOTORS COMPANY
September 1978 Muskegon, Michigan
Vice President Engineering reporting to the President and responsible for an
engineering staff of three hundred people.
As a member of the executive committee for the General Products Division of
Teledyne, I was responsible for new product planning, development and
introduction into production. The main product of this division is diesel tank
engines sold to the US Government and to foreign countries.
June 1967 to STANADYNE
July 1968 Windsor, Connecticut
Director of Advanced Products & Engineering reporting to the
Executive Vice President and General Manager. Responsible for
all new products and the development of a mature engineering
organization. New $2,000,000 laboratory was carried through the
design stage and approved by the Board of Directors. It was
completed in 1969 and is now operational.
1949 to CUMMINS ENGINE COMPANY, INC.
June 1967 Columbus, Indiana
Last position with Cummins was Director of Research reporting
to the Vice President of Research. Responsible for the
administration of all phases of research and development
activities on all new products involving a staff of 150 people.
Specific responsibilities included direction of feasibility
design and development and prototype evaluation of all new
products as a central corporate function.
Major programs of importance were:
New Cummins JBS Diesel Truck Engine
New Cummins horizontal diesel coach engine
New Cummins PT diesel fuel pump and system
1950 Cummins race car and engine
Cummins race car and turbocharged diesel
Turbocharger design and development on all engines
Two completely new V-8 engines
Conceived and developed the new over-square line of
Cummins compact Vee engines in fourteen basic models
New power shift transmission and controls
A-6
1948-1949 PACKARD MOTOR COMPANY, AIRCRAFT DIVISION
Toledo, Ohio
During this period, I was in charge of an advanced design group
engaged in preliminary analysis and design of a radically new
guided missile engine. The aircraft division of Packard was
closed as the result of the US Air Force contract cancellation
during the 1949 cutback of defense spending.
1944-1948 CHRYSLER CORPORATION
Detroit, Michigan
In 1944 I was employed by the Chrysler Corporation as a design engineer in their
internal combustion research design department working on the
X1-2220 inverted Vee aircraft engine and was responsible for
much of the heavy design work on the engine and its installation
in a P-47 aircraft.
After the war, I was selected by Mr. A.R. White to make a complete study of the
design of a completely new line of passenger car engines. The
result of the program was the well known fire-power series of
Chrysler automotive engines.
1941-1944 FAIRBANKS--MORSE & COMPANY
Beloit, Wisconsin
After graduation from the University of Michigan, I accepted employment at
Fairbanks--Morse and held various positions in the Research,
Design and Experimental Development Departments.
PERSONAL DATA: Birthdate: February 9, 1919
Height: 5' 10", Weight 160 pounds
Married, excellent health
EDUCATION: University of Michigan, BS in Aeronautical Engineering,
Mechanical option, 1941.
A-7
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- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
----
The Company............................................................... 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Dilution.................................................................. 18
Capitalization............................................................ 20
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Plan of
Operation............................................................... 21
Business.................................................................. 24
Change in Accountants..................................................... 36
Management................................................................ 37
Certain Relationships and Related Transactions............................ 40
Principal Shareholders.................................................... 41
Description of the Units.................................................. 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 45
Underwriter............................................................... 47
Legal Matters............................................................. 48
Experts................................................................... 48
Available Information..................................................... 48
Index to Financial Statements............................................. F-1
Technical Assessment Rodi Diesel Engine................................... A-1
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS.
[LOGO]
RODI POWER SYSTEMS, INC.
UNITS
---------------------
PROSPECTUS
---------------------
INTREPID SECURITIES, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has the power to indemnify its directors and officers against
liability for certain acts pursuant to the Washington Business Corporations Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the Common Stock being registered. All amounts are estimated
except the Commission Registration Fee and the Nasdaq Stock Exchange Application
Fee.
SEC Registration Fee........................................... $13,788.19
NASD Filing Fee................................................ $ 3,000.00
Nasdaq Stock Exchange Application Fee.......................... $10,000.00
Blue Sky Qualification Fees and Expenses....................... $24,000.00
Accounting Fees and Expenses................................... $ 1,000.00
Legal Fees and Expenses........................................ $90,000.00
Transfer Agent and Registrar Fees.............................. $ 5,000.00
Printing and Engraving......................................... $50,000.00
Miscellaneous.................................................. $ 3,000.00
Total........................................................ $199,788.19
----------
----------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
1. Between March 1992 and February 1996 the Registrant issued and sold
unregistered Common Stock to approximately 850 shareholders without the payment
of any brokerage fees or commissions. These shares were issued to investors for
cash as well as individuals providing services, materials and supplies to the
Company. Cash investors paid an aggregate of $2,504,949 for 4,354,971 shares and
an additional 609,493 shares were issued in consideration of services, materials
and supplies. Of these 4,354,971 shares, 786,090 shares were issued by the
Company between June 30, 1994 and May 31, 1995, on a continuous basis to 520
investors at $1.00 per share. The majority of the purchasers were neither
accredited investors nor sophisticated investors. In February 1996 the Company
issued an aggregate of 67,296 shares to seven persons in consideration of
welding, consulting and machining services furnished to the Company. The
purchase price for these shares was : $.15 in 1992; $.75 in 1993-94; and $1.00
in 1995 and 1996. Because of the large number of purchasers of the Registrant's
Common Stock over an extended period of time (i.e. 850 purchasers over four
years) the Registrant was advised by its legal counsel that an exemption from
the registration requirements of Section 5 of the Securities Act of 1933 might
not be available with respect to these sales. Therefore, in August 1996 the
Company commenced a rescission offer for the foregoing shares, which was
registered under Regulation A of the Securities Act of 1933 (the "1933 Act").
The rescission offer was completed in September 1996. See "Business--Legal
Proceedings."
2. Between December 1995 and April 1996 the Company sold 339,000 shares to
six accredited investors for a total consideration of $339,000 in reliance on
Section 4(2) of the 1933 Act. The Registrant believed that these investors were
accredited based upon written representations from the investors that they had a
net worth in excess of $1 million or current gross income in excess of $200,000
per year. The
II-1
Registrant believes that each of these investors was afforded access to
information regarding the Registrant comparable to that available through
registration and had the ability to fend for themselves in connection with their
investment in the Registrant.
3. Between September 1996 and May 1997 the Company sold 482,774 shares to
16 investors (nine of whom are from a single family) for a total consideration
of $603,467. All of the investors are believed to be accredited investors and
most of the investors were shareholders of the Company at the time of the
investment. The Registrant believed that these investors were accredited based
upon written representations from the investors that they had a net worth in
excess of $1 million or current gross income in excess of $200,000 per year. The
sales were made without payment of any commissions and in reliance on Section
4(2) of the 1933 Act. The Registrant believes that each of these investors was
afforded access to information regarding the Registrant comparable to that
available through registration and had the ability to fend for themselves in
connection with their investment in the Registrant.
4. Between September 1996 and May 1997 the Company issued 39,126 shares to
13 individuals in consideration for services furnished to the Company, valued at
$1.25 per share. Eleven of the 13 investors are shareholders of the Company; all
of these individuals had a pre-existing relationship with the Company or one or
more of its directors. The Registrant believes that each of these investors was
afforded access to information regarding the Registrant comparable to that
available through registration and had the ability to fend for themselves in
connection with their investment in the Registrant. The sales were made without
payment of any commissions and in reliance on Section 4(2) of the 1933 Act.
5. Between March 1997 and May 1997 the Company issued 130,750 shares to
four employees upon exercise of previously issued employee stock options under
the Company's 1992 Incentive Stock Option Plan. The options were exercisable at
between $.15-$.75 per share. The Registrant believes that each of these
investors are sophisticated investors who were afforded access by the Registrant
to information regarding the Registrant sufficient to make an informed
investment decision. The sales were made without payment of any commissions and
in reliance on Section 4(2) of the 1933 Act.
6. In July 1997 the Registrant issued 190,850 shares of its Common Stock to
eight investors at $1.25 per share. The Registrant believed that these investors
were accredited based upon written representations from the investors that they
had a net worth in excess of $1 million or current gross income in excess of
$200,000 per year. The Registrant believes that each of these investors are
sophisticated investors who were afforded access by the Registrant to
information regarding the Registrant sufficient to make an informed investment
decision. The sales were made without payment of any commissions in reliance on
Section 4(2) of the 1933 Act.
7. In July 1997 the Registrant issued 2,200 shares of its Common Stock to
three persons in exchange for services valued at $1.25 per share. Two of these
persons are directors of the Registrant and the third individual is a
shareholder. The Registrant believes that each of these investors are
sophisticated investors who were afforded access by the Registrant to
information regarding the Registrant sufficient to make an informed investment
decision. The sales were made without payment of any commissions in reliance on
Section 4(2) of the 1933 Act.
8. In July 1997 the Registrant issued 150,000 shares of its Common Stock to
two employees upon the exercise of options previously granted under the 1992
Incentive Stock Option Plan. The options were exercised at $.15 per share. The
Registrant believes that each of these investors are sophisticated investors who
were afforded access by the Registrant to information regarding the Registrant
sufficient to make an informed investment decision.
II-2
ITEM 27. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
+1.1 Form of Underwriting Agreement..................................................................
+1.2 Form of Escrow Agreement........................................................................
+1.3 Form of Participating Dealer Agreement..........................................................
+3.1 Articles of Incorporation.......................................................................
+3.2 First Amendment to Articles of Incorporation....................................................
+3.3 Second Amendment to Articles of Incorporation...................................................
+3.4 Third Amendment to Articles of Incorporation....................................................
+3.5 Bylaws..........................................................................................
+4.1 Specimen Common Stock Certificate...............................................................
+4.2 Specimen Warrant Certificate (included in Exhibit 4.3)..........................................
+4.3 Form of Warrant Agreement.......................................................................
+5.1 Opinion of Prindle, Decker & Amaro, LLP.........................................................
+10.1 1992 Incentive Stock Option Plan................................................................
+10.2 Lease Agreement re facility located at 7503 S. 228th Street, Kent, Washington...................
+10.3 Amendment to Lease Agreement re facility located at 7503 S. 228th Street, Kent, Washington
+11.1 Statement re: computation of net loss per share.................................................
+16.1 Letter of Arthur Andersen & Co..................................................................
23.1 Consent of Kenneth Walsh, Independent Certified Public Accountant...............................
+23.2 Consent of Prindle, Decker & Amaro, LLP (included in Exhibit 5.1)...............................
+23.3 Consent of David Marks..........................................................................
+24.1 Power of Attorney...............................................................................
+27.1 Financial Data Schedule.........................................................................
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 28. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
II-3
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of each issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as of
the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Kent, Washington on October 7, 1997.
RODI POWER SYSTEMS, INC.
By: /s/ BYRON R. SPAIN
-----------------------------------------
Byron R. Spain
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed by the following persons in
the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- ----------------------
/s/ BYRON R. SPAIN Chairman of the Board and
- ------------------------------ Chief Executive Officer, October 7, 1997
Byron R. Spain Director
*
- ------------------------------ President, Director October 7, 1997
Donavan E. Garman
* Secretary and Vice
- ------------------------------ President-Investor October 7, 1997
Gwendolyn S. Spain Relations, Director
/s/ WINSTON D. BENNETT
- ------------------------------ Chief Financial Officer, October 7, 1997
Winston D. Bennett Director
*
- ------------------------------ Director October 7, 1997
Marilyn D. Mays
*
- ------------------------------ Vice President-Customer October 7, 1997
Steven E.Garman Systems, Director
*
- ------------------------------ Director October 7, 1997
David Teo
*By: /s/ WINSTON D. BENNETT
-------------------------
Winston D. Bennett
ATTORNEY-IN-FACT
II-5
EXHIBIT INDEX
EXHIBIT
NO.
- -----------
+1.1 Form of Underwriting Agreement..................................................................
+1.2 Form of Escrow Agreement........................................................................
+1.3 Form of Participating Dealer Agreement..........................................................
+3.1 Articles of Incorporation.......................................................................
+3.2 First Amendment to Articles of Incorporation....................................................
+3.3 Second Amendment to Articles of Incorporation...................................................
+3.4 Third Amendment to Articles of Incorporation....................................................
+3.5 Bylaws..........................................................................................
+4.1 Specimen Common Stock Certificate...............................................................
+4.2 Specimen Warrant Certificate (included in Exhibit 4.3)..........................................
+4.3 Form of Warrant Agreement.......................................................................
+5.1 Opinion of Prindle, Decker & Amaro, LLP.........................................................
+10.1 1992 Incentive Stock Option Plan................................................................
+10.2 Lease Agreement re facility located at 7503 S. 228th Street, Kent, Washington...................
+10.3 Amendment to Lease Agreement re facility located at 7503 S. 228th Street, Kent, Washington
+11.1 Statement re: computation of net loss per share.................................................
+16.1 Letter of Arthur Andersen & Co..................................................................
23.1 Consent of Kenneth Walsh, Independent Certified Public Accountant...............................
+23.2 Consent of Prindle, Decker & Amaro, LLP (included in Exhibit 5.1)...............................
+23.3 Consent of David Marks..........................................................................
+24.1 Power of Attorney...............................................................................
+27.1 Financial Data Schedule.........................................................................
- ------------------------
* To be filed by amendment.
+ Previously filed.