Company Updates

Lawsuits Against Encompass and AquaXtremes Dismissed
10-29-08
 

The History:

The past C.E.O. of Encompass Holdings, Arthur Robins (Robins), had a long history with Sandy Leavitt of Leavitt Industries that included several business relationships and friendship for many years prior to Robins becoming C.E.O. of Encompass Holdings.

According to Sandy Leavitt of Leavitt Industries, he and his company is either a partner with Sumeeko (a Chinese manufacturer of fasteners) or their exclusive U.S. or possibly worldwide sales distributor.

Even though Sumeeko had no known experience in manufacturing engines or watercraft, Robins attempted to give Sumeeko worldwide manufacturing rights to Encompass products, allow a person chosen by Sumeeko on the Encompass Board of Directors and issue Sumeeko a large number of Encompass shares.  In addition, he attempted to give Leavitt a consulting contract as sales manager for all Encompass products.

As the above stated conflict was being played out, Encompass was receiving samples of various items from Sumeeko for use in producing our XBoard and 407cc rotary engine.  Virtually every item was rejected due to poor quality.

Despite the quality issues and conflict of interest, Sumeeko was about to be given sensitive technological information and proprietary drawings of engine parts still in development prior to Encompass obtaining patent protection.  Numerous attempts were made to mitigate the situation in order to protect our intellectual property and return our attention to product development.

When it became clear that no resolution was possible, a new C.E.O. and “Board of Directors” were elected at the July 2007 Annual Shareholders Meeting.  Needless to say, the new Encompass Directors felt the Sumeeko/Leavitt situation was not only poor decision making but also a glaring conflict of interest that, if implemented, would have a disastrous effect for the future of Encompass and its shareholders.

About October 2007, we were notified that a website had been brought online that contained pictures of our Aqua Xtremes XBoard claiming they’d have boards available to sell in the near future.  The site stated that the individuals involved with this operation were Sandy Leavitt and Neil Roth.  Neil Roth was a past executive of Tahiti Petey Inc., a company that had been negotiating with Art Robins in order to have Encompass Holdings manufacture a Tahiti Petey private label XBoard.

Once notified of this website, Scott Webber, the new C.E.O. of Encompass contacted Peter Ortmann, the originator of the Tahiti Petey brand, asking for an explanation.  Mr. Ortmann claimed he had no knowledge of the new website and that Neil Roth was no longer affiliated with Tahiti Petey.  Shortly thereafter, the website was removed from the internet.

In mid December 2007, Encompass was sued by Sumeeko and Leavitt for the above stated amounts.  Encompass countered with some very serious claims of its own that we intended to pursue during trial.  The cases were to go to trial in early 2009.

Around October 20, 2008 Encompass was notified by our attorney that both Sumeeko and Leavitt no longer wanted to pursue the matter and were asking to have the cases dismissed.  Encompass agreed to accept the offer to dismiss with prejudice.  Sumeeko and Leavitt have dropped all claims against Encompass and Aqua Xtremes with Encompass retaining all rights to litigate any other matters with either party if needed.
 

Why report these matters on our company website?

We appreciate the many calls and emails with questions about our situation or progress.  While we would like to address some of these issues publicly, it is not always permitted while these actions were still in litigation.  We will report as much as we can as soon as possible so that everyone has a clear understanding of where we are and where we intend to go.  Maybe it’s clearer now why some company actions took place.  Our intent has always been to develop and protect company technology so all shareholders see a positive return on their investment.
 

Encompass SEC Filings and NACIO Systems:

Encompass has been forced to trade on the pink sheets because of its delinquent public filings.  Encompass has not been able to file its reports because we have been unable to get financial information from one of our wholly owned subsidiaries; NACIO Systems.

On January 18, 2008, the NACIO Directors, Carey Daly and Randall Lanham filed for bankruptcy protection without notifying or getting the consent of the Encompass Board of Directors.  Despite numerous requests from Encompass and the Encompass corporate attorney, NACIO has refused to provide any financial information to Encompass since early 2007.  The Bankruptcy Court has required NACIO to provide the court with previous financial statements and monthly “Current Operating Reports”.  Several meetings have taken place with our company C.P.A. Tim Steers in Portland, Oregon that have enabled us to file our 2007 Annual Report.  More meetings are scheduled in order to use the court ordered NACIO financials to bring all reports up to date.

Contrary to the NACIO Systems’ website, Encompass has never relinquished its 100% ownership position in NACIO Systems. Repeat: No legal change in NACIO ownership has ever taken place.  A full report on NACIO Systems will be posted on our website as soon as possible.
 

Summation:

There is no question that over the past few years, Encompass has experienced some roadblocks to its progress.  Too many negative, ineffectual, time-consuming, costly and sometimes downright dishonest actions taken by insiders and outsiders alike have caused numerous delays in our development and productivity. The current members of the Encompass “Board of Directors” and Officers are doing everything possible to clean up our company and advance the technology that all of us have put our time, money and hearts into.

The NACIO situation is one of the few remaining problems we face.  As we clear ourselves from these negative actions, we can make this company the productive entity we all strive for.

We should also have significant news on our rotary engine development very soon.

New Apex Seals  for Xtreme Engines'
407cc Rotary Engine Have Arrived

Encompass Holdings’ Xtreme Engines, Inc. has finally received the apex seals for its 407cc rotary engine (our Xboard power plant) to be submitted for E.P.A. and C.A.R.B. (California) engine testing and certification.

Assembly of the engine has begun.  Several machining operations and final E.C.U. modifications will need to be completed. We will then need to run a short test to confirm emissions and performance before shipping the engine to Olsen Ecological Laboratories for independent testing and certification.

We expected our apex seals to arrive much sooner but due to their special material formulation; our seal manufacturer was delayed in getting his base material in the small quantity needed for our prototype seals.  We’ve been assured that once the 407cc engine is ready for production the seals can be produced in quantity with normal delivery times to meet production schedules without a problem.

It is virtually impossible to state a definite timeline for shipping our engine to Olsen Labs. Delays happen on a regular basis, especially when producing prototype parts.  This R&D process would be much quicker if we could simply purchase existing parts off the shelf.  Unfortunately that is not the case. Our shareholders can be sure that nothing is more important to us than getting this engine into CARB and EPA testing and passing those required standards. Now that the all-important seals are here, everyone working on this project has promised us priority status to complete this new engine as quickly as possible.

We receive many questions from the public and our shareholders asking about company direction, share price, our technology and the time needed for research and development (R&D).  Our direction and goals have always been the same; build a superior rotary engine; apply it to viable products for worldwide distribution.

Our focus has been to complete design changes and the fuel management system of our rotary engines to make their potential advantages over existing piston engines a reality.  We have finally accomplished that goal with our 407cc engine soon to be submitted for EPA approval.  When our engine passes EPA standards (and there is every reason to believe that it will), these accomplishments will also go directly into our larger engines with various fuels and fuel combinations (hybrid fuels).

The company share price is a product of our technology and the public perception of that technology’s viability.  We are looking for steady share price gains by concentrating on proving our technology through the EPA testing process.

Of course we feel our share price is undervalued and will continue to be until more investors know about our technology, see independent test results and we receive engine certification. Once we accomplish this, our company’s value will be more readily recognized. Then the share price will take care of itself. We all know that long term value depends on us actually producing products and generating revenue. This is the outcome we are all striving for.

The time needed for our R&D has always been a product of funding.  R&D is a very costly process; especially in the combustion engine industry.  Most would be shocked to hear how much time and money has been spent to get us to where we are today.  We know our investors would like things to move much faster.  So would we!  We are working hard to make that happen.

I’d like to give a special thanks to D-3 Technologies and its owner Bill Tomol.  Bill has worked with us for many years, fueled by his belief in our technology.  He has gone way beyond what you could expect from any vendor.  Every Encompass Shareholder has been helped by the D-3 team’s efforts.

They are completing all of the most recent fuel management drawings for the 407cc engine and as soon as practical will spend needed time in our Florida facility to complete the 3D modeling package for the Xboard.  This will enable us to isolate any portion or part on the Xboard so we can continue to quickly source vendors for any Xboard part and make any future changes if needed.  We will also synchronize our CAD drawing programs so the Xboard, new products and engine development can be done much faster.  D-3 has already been working on the larger rotary engine drawings in order to get a head start as we finish the 407cc and move to larger engine development.

Additional updates on the testing and delivery of the 407cc to Olsen Labs will follow as soon as possible

Xtreme Engines' 407cc Rotary Engine
CARB and EPA Testing Update;
NACIO Systems Inc. Update

Rotary Engine Testing and Certification
 

California Air Resources Board (CARB) testing of the 407cc rotary engine is expected to begin within 6 weeks and we are told it could take 60 days of testing to acquire the necessary data for application to both CARB and the Environmental Protection Agency (EPA). Certification by these agencies will allow us to market the engine in the United States as well as most other countries.  The actual certification process should take about 2 months after applying, barring any unforeseen problems.

The engine testing will take place at Olsen Ecologic Engine Testing Laboratories in California.  Encompass already has a positive account balance with Olsen that will pay for most if not all of the new testing costs. After consulting with Olsen Labs, the following procedures were established as our best plan of action.  We will apply for certification for marine applications first. This will expedite completion of our Xboard and other personal watercraft (PWC) development.  Once we have that certification we will apply for other uses such as off road vehicles and stationary applications such as power generators.

We have hired an Environmental Regulations Consultant who has an extensive background working with CARB.  He will help us prepare and submit the proper documentation and applications to CARB and EPA.  Since we are testing a rotary engine which is not the usual type of combustion engine tested, we are told they may require certain additional tests as they deem appropriate.  While we wait for CARB instructions we will continue engine endurance testing.
 

Now that we have established that we are using the best possible seal material and design, we are placing an order with our manufacturer.  We have not yet received a delivery date but expect them within 6 weeks.  As soon as we receive these seals, we will build a new 407cc engine (as required) to submit to the testing lab.  The new engine will go through a 10 hour break-in period at Olsen Labs prior to starting “official” testing. We expect a minimum of 250 hours run time with periodic emissions testing.  This timing is our best estimate.  CARB will establish the actual test protocol.

EPA testing will run concurrently with CARB testing as EPA accepts and will certify engines that meet the more stringent CARB requirements.  Additional updates will be posted on our websites as we receive delivery dates and procedures from CARB.
 

The past Encompass Board of Directors (B.O.D.) determined that it would be in the shareholders best interest to "spin-off" NACIO Systems Inc. as a separate public company.  The logic behind the decision was that NACIO was not synergistic with the other Encompass companies. It also had liabilities that would require management to divert valuable time and energy away from present Encompass opportunities.  Unfortunately, once the decision was made, very little progress towards that goal took place.
 

A change of the NACIO B.O.D. was needed and was completed when the present Encompass B.O.D. was elected in late 2007.  The new directors of NACIO are Carey Daly and Randall Lanham.  Carey had been hired by NACIO in Feb. 2007 and inherited problems that stemmed from decisions made prior to his involvement.  He’s done an outstanding job and spent many hours developing solutions to these problems, while at the same time developing new business for NACIO.  Randall is an attorney that specializes in securities law and corporate finance both domestic and international.

Randall and Carey have provided Encompass with a Letter of Interest from an investment group to purchase NACIO Systems.  This group proposes to invest a substantial amount of money as part of NACIO’s “Plan of Re-Organization” being filed with the US District Court for Northern California.  The proposed plan, when completed, will result in NACIO becoming a separate public company.  The new investment group, Encompass and Encompass shareholders will receive an equity position in the new company in the form of common stock.
 

The proposed agreement is very good for all parties and all involved will have the same objective.  The new investors receive equity in the form of the new NACIO shares.  Since the new investors will obviously want to build share value, NACIO will be funded to take care of its liabilities as well as build upon new business opportunities that Carey Daly has brought to the table. The Encompass shareholders will receive shares in a properly funded and well-managed public company.  Encompass will receive shares that it can convert to cash to finance new operations and pay debt.

Both Carey and Randall will continue to work with Encompass on similar strategies that benefit all parties involved as well as seek joint venture, merger and acquisition opportunities for Encompass.
 

Independent Engine Seal Test Completed
 

April 8, 2008
Today Encompass Holdings, Inc. received the evaluation of the 407cc rotary engine apex seal wear from the manufacturer.  Tests on the engine's apex seals done by Rotary Engine Technologies Inc. staff had shown no measurable wear after 50 hours of run time.  There was also no measurable wear on the housing's internal protective coating, another important wear consideration.
 

The seals were sent back to the manufacturer for a microscopic evaluation.  This much more detailed examination showed no chipping or seal degradation of any type that might lead to failure during extended warranty periods.  The evaluation confirmed that there was virtually no measurable seal wear, reporting less than one ten-thousandths of an inch wear.
 

This independent and more thorough inspection was needed prior to sending the engine in for EPA emissions testing.  Encompass will schedule that testing and will report on the time-line given by the testing laboratories.
 

We are confident that the 407cc rotary engine will pass endurance and emissions testing that is needed for certification by CARB and EPA.  Rotary Engine Technologies Inc. will do additional endurance testing while waiting to send the engine to the test location.
 

We feel this news will be received positively by those who have funded this development as well as future funding sources.  We thank all of our shareholders for their patience while this complicated development was taking place.  We will continue to build in a steady, logical progression to ensure success.
 

Meetings are taking place this week to select a fiberglass manufacturer close to our West Palm Beach facility to produce Xboard parts as well as additional products we are considering. Our goal is to localize as many of our parts and material suppliers as possible to maintain quality control and reduce shipping times and expenses.
 

Xtreme Engines, Inc.'s 407cc Rotary Engine Passes In-house
Emissions and Endurance Testing
 

This was a very big week for Aqua Xtremes, Inc. and each of the Encompass Holdings owned companies. Many of you know that we have been developing technologies that would enable the rotary engines to meet today's emission standards and be able to out-perform piston engines with similar horsepower. Our primary focus for the past two years has been the 407cc rotary engine that powers our XBoard.
 

Past management and consultants had correctly identified the 407cc engine as the best and possibly only engine that would enable the XBoard to perform to design expectations. Unfortunately, their background was in piston engine development; engines which have very little in common with rotary engines.
 

In late 2005, a carbureted 407cc rotary engine was sent to an EPA approved test laboratory to get the needed certification to sell in the United States. In early 2006, Larry Cooper and I began our association with Encompass. We both have a long history with rotary engine development with extensive knowledge of the strengths and weaknesses inherent in the engines. We were very concerned knowing the 407cc was not ready and would not pass emission testing. We had no choice but to stop the EPA tests and have the engine sent to our West Palm Beach facility for further development to avoid failure.
 

After extensive testing with various carburetors and ignition timing, we determined the engine could not meet emissions standards. Our only choice was to convert the engine to fuel injection. Since rotary engines are so different from piston engines, we needed an Electronic Fuel Control (ECU) that would efficiently manage rotary engine fuel consumption. This was a very long and involved process since there were none available that worked with the efficiencies we need. We had no choice but to have one developed.
 

Developing a rotary engine fuel injection system from scratch was a daunting and expensive task but with the help of some very capable design consultants, we have succeeded.  Our fuel injection system cut fuel consumption nearly in half and also exceeds EPA and California Air Resources Board (CARB) emission standards.
 

Encompass Holdings' management then released positive test information prematurely. Without proper endurance testing, which is required by EPA and CARB, the engine could not be considered ready for submission.
 

Endurance testing is done by running the engine at varying RPM under varying loads, over extended time periods. The goal was to warranty the engine for 300 hours, a marine standard. Unfortunately, testing showed seal wear that would cause the engine to fail prematurely. We determined that to be fully confident in the engine life cycle, we needed to significantly reduce seal wear. We tested different seal materials until the seal produced the results we needed.  The results indicate longevity well beyond our desired warranty period with little or no reduction in performance.
 

Today, we completed the first phase of our endurance testing with seal ware results that have exceeded all our expectations. We have disassembled the test engine and found virtually no seal wear at 50 hours of run time.  We are sending the tested seals to our vendor for their inspection.  This will be the second time they've examined this seal material and we expect our results to be confirmed again within the next two weeks. Once we have confirmation, we will schedule our testing at the approved EPA test facility. We will issue a Press Release on significant developments.
 

Scott Webber
CEO, Encompass Holdings Inc

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