Revving Up The Small Investor

By Adam Corelli (First Published Financial Times Of Canada, September 1988)

KINGSTON, Ont.  — It is the stuff of small investor dreams. Only two weeks after retiring to Florida in April 1985, Gerry McKendry, a softspoken 60-year-old, is already restless. He meets another recent retiree, Leon Lilley, 61, a former race-car driver and engine inventor extraordinaire. McKendry is electrified by Lilley’s engineering ingenuity; a few months later the pair head north to establish the Plastic Engine Technology Corp. – Petco. McKendry is an inspiring promoter with honest eyes; his gospel convinces hundreds of Ontario residents to part with their dollars – and to become part of Petco’s dream.

His gospel is anything but plastic. McKendry pleads for Canada, for a technological breakthrough, for a plastic engine that is easily produced through injection moulding.

The product, he says, is light-weight and cheaper than conventional engines. Initially, McKendry says, the plastic engine would target only the $500-million-a-year small-engine market; in five years will come the real prize: Petco will aim to make plastic automobile engines. Investors, ultimately will pour $11.5 million into Petco. Boasts McKendry: “This will be like Xerox (Corp.) by the time we are done.”

Perhaps. But Petco’s dreams could turn into night-mares for its investors. Employing about 111 people, Petco is currently making simple conventional engines, similar to those produced by larger, more established companies. During the next 12 months, McKendry claims, Petco will sell about 500,000 partly plastic engines for about $40 million.

But scientists question whether Petco will ever bring to production the major breakthrough in engine technology that it promises. Calling claims in Petco’s prospectus incorrect, George Messenger, a National Research Council (NRC) scientist, says: “They have not proven what they are saying.”

McKendry denies that his claims about the engine are incorrect. “The proof of the pudding,” he says, “is in the eating.” He says that “hundreds” of people have seen Petco’s engine operating. Says McKendry: “You can come see it, feel it, smell it.” However, after insisting that the engine had been examined in detail by other scientists, McKendry last week conceded that only Petco personnel had proven that the engine performs as claimed.

The company will not send the engine away for testing, he says, because the patent is pending and it fears that someone will steal the technology. “We have never let it out of our sight.” McKendry says. “‘We did the analysis.”

But Petco has had offers of a more independent testing. The NRC says it issued a standing proposal to Petco two years ago to test the plastic engine at the company’s convenience, but the offer went unanswered. “We offered to give them a place that would be neutral and impartial,” says NRC scientist John Coleman, “and they haven’t tested it with us to confirm or deny that it works.”

In 1986, the NRC gave Petco $100,000 towards developing the use of hi-tech plastic components. But the money was not allocated for building a plastic engine. Nor did the NRC see evidence that one existed. “It (Petco) seems to be very carefully keeping this product under wraps, ” Coleman says. “‘Maybe they’re worried about competitors getting it, but I suppose the story a year from now will be whether the wraps have come off. We would be delighted to see a Canadian engine maker.”

Petco’s prospectus says Petco’s technological break-through consists of “a proprietary crankshaft-control-valve design,” which in conjunction with “other factors, is considered unique to the engine and is considered to be patentable.” In stating performance claims, the prospectus notes “several potential benefits” of the engine compared to conventional ones. It is, the prospectus claims, 20 % lighter, 50% cooler, more fuel efficient, quieter and more durable.

McKendry says he has purchase agreements with 23 customers to sell about $40 million worth of engines, containing varying degrees of plastic content, but would not name any of his customers. He says the purchase orders require that the small engines (under 2.4 horsepower) fit to the products they’ll serve, such as lawn trimmers.

At least one other engine maker is skeptical of Petco’s claims, saying that the use of plastics in engines will always be limited. The head of research and development at Wisconsin-based Briggs & Stratton, Robert Mitchell, visited Petco last year but says he saw no evidence it could do what was promised. Mitchell says most small engine makers are adding more and more plastic to engines. (Briggs & Stratton makes engines containing about 50% plastic by volume.)

But Mitchell says that only so much plastic can be added to an engine. Plastic, he notes, has less thermal conductivity than metal; as a result, it would likely be impossible to make a 100% plastic engine because heat would build up inside the cylinder. “Part of the purpose of the metal is to conduct the heat out through the fins,” says Mitchell. “I just don’t understand how it could do what is claimed.”

McKendry, a former promoter for Pocon Inc., a Florida-based energy-management firm, remains undaunted by his critics. The company, he says, is set to move into a large plant it has leased in Kingston Township. And he and Lilley continue to own almost a million shares each in the firm, which were received at minimal cost in return for founding and running Petco. But in the mean-time, Petco shares, which reached a pre-crash high of $5.88 on the Toronto Stock Exchange, last week were trading at about $1.40.

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