UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from to
Commission file number 1-12756
ROTARY POWER INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3632860
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. Box 128, Wood-Ridge, New Jersey 07075-0128
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 777-7373
Former name, former address and former fiscal year, if changed
since last report.
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock
par value $.01, as of May 1, 1996 was 4,391,432.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
<PAGE>
ROTARY POWER INTERNATIONAL, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 2
Consolidated Statements of Operations for
the Three Months ended March 31, 1996 and
1995 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1996 and 1995 5
Notes to Unaudited Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
ROTARY POWER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
March 31, 1996 December 31, 1995
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,767 $ 328
Securities available-for-sale 0 631
Accounts receivable 796 1,738
Other receivables 9 15
Inventories 1,574 1,042
Prepaid expenses & other
current assets 24 9
----- -----
Total current assets 4,170 3,763
Fixed assets 2,933 3,118
Patents 723 739
Investment held by trustee 3,710 3,638
Other assets 690 659
------- -------
Total Assets $12,226 $11,917
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term
debt $ 173 $ 171
Accounts payable 282 530
Accrued liabilities 353 297
Other current liabilities 549 42
Deferred acquisition obligation,
current 225 150
------- -------
Total current liabilities 1,582 1,190
Long-term liabilities:
Deferred acquisition obligation 2,651 2,733
Long term debt 6,769 6,813
Other long-term liabilities 19 25
------- -------
Total Liabilities 11,021 10,761
Stockholders' equity:
Preferred stock, 500,000 shares authorized:
Series 1 convertible preferred stock, par
value $.01; issued and outstanding, 0 at
March 31, 1996 and December 31, 1995. 0 0
Common stock, par value $.01;
10,000,000 shares authorized;
issued and outstanding, 4,391,432
at March 31, 1996 and 3,391,432 at
December 31, 1995, respectively. 44 34
Subscription receivable (3,150) 0
Paid-in Capital 12,801 8,824
Unrealized loss on securities
available-for-sale 0 0
Accumulated deficit (8,490) (7,702)
------- -------
Total Stockholders' Equity 1,205 1,156
Total Liabilities and
Stockholders' Equity $12,226 $11,917
======= =======
See accompanying notes to unaudited consolidated financial
statements.
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
ROTARY POWER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Revenues $1,747 $2,698
Costs and expenses:
Cost of revenues 1,497 1,755
General and administrative 592 602
Research and development 276 368
----- -----
2,365 2,725
Loss from Operations (618) (27)
Other Income (expense):
Interest expense (251) (251)
Interest income 81 92
Other, net 0 1
------- -------
Net loss $( 788) $( 185)
======= =======
Net loss per common share
Primary $ (.20) $ (.06)
Weighted average common and common
equivalent shares outstanding:
Primary 3,991,432 3,269,208
========= =========
See accompanying notes to unaudited consolidated financial
statements.
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
ROTARY POWER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
(unaudited)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (788) $ (185)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 231 203
Amortization 24 36
Interest (4) (1)
Change in assets and liabilities:
Accounts receivable 916 (681)
Other receivables 33 22
Inventory (532) 1
Prepaid expenses (14) (73)
Other assets (40) (24)
Accounts payable (248) (40)
Accrued liabilities 55 274
Other liabilities 501 6
------- ------
Net cash provided by (used in)
operating activities 134 (462)
Cash flows from investing activities:
Purchase of Securities available-for-sale 0 0
Sale of Securities available-for-sale 630 740
Purchases of fixed assets (46) (165)
------- ------
Net cash provided by
investing activities 584 575
Cash flows from financing activities:
Repayment of long-term debt ( 41) ( 38)
Payment of deferred debt obligation ( 75) (150)
Proceeds from sale of common stock, 3,987 0
Stock subscription receivable (3,150) 113
------- ------
Net cash provided by (used in)
financing activities 721 (75)
------- ------
Net increase (decrease) in cash 1,439 38
Cash and cash equivalents at beginning of 328 675
year ------- ------
Cash and cash equivalents at end $ 1,767 $ 713
of period ======= ======
Supplemental disclosure of cash flow information:
Interest paid during the period $ 255 $ 334
Income taxes paid during the period - -
See note 2 for supplemental cash flow information.
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
ROTARY POWER INTERNATIONAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements for Rotary Power
International, Inc. (the "Company") have been prepared by the
Company, without audit, in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-QSB. In the opinion of management, the
information contained herein reflects all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly
the results for the interim periods presented.
The balance due on the loan made by the Company to Hydro Lance
Maritime Transport, Inc. ("Hydro Lance") was treated as a
subscription receivable since the loan is collateralized entirely
by shares of the Company's Common Stock owned by Abejon Rotary
Power Corporation ("Abejon"), an entity with common directors,
officers and shareholders with Hydro Lance.
Information included in the Balance Sheet as of December 31, 1995
has been derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for
the full year.
NOTE 2: SUPPLEMENTAL NON-CASH TRANSACTIONS
DIFFERENCE BETWEEN RENT EXPENSE AND RENT PAYMENTS
Rent expense is recognized on a straight-line basis over the three
year lease. For the three month period ending March 31, 1996, rent
payments were $6,250 lower than rent expense.
DEVIATION FROM PURCHASE AGREEMENT
Pursuant to a deviation from the purchase agreement between John
Deere Technologies International, Inc. and the Company, the Company
postponed payment of $75,000 of the $150,000 deferred acquisition
obligation due to JDTI on January 30, 1996 for one year.
<PAGE>
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Comparison three months ended March 31, 1996 and March 31, 1995
Revenues for the three months ended March 31, 1996 decreased
approximately 35% to $1,747,000 compared to $2,698,000 for the same
period in 1995. This net decrease was the result of a number of
factors including (i) increased revenue of $798,000 from the United
States Marine Corps ("USMC") five-rotor 580 Series engine contract,
(ii) an increase of $82,000 in revenue derived from sales of the
Company's 65 Series rotary marine engine activity which began in
the fourth quarter of 1995, (iii) decreased revenue of $1,586,000
from the Lockheed Martin Joint Tactical - Unmanned Aerial Vehicle
contract which was terminated by Lockheed Martin in August, 1995,
(iv) decreased revenue of $44,000 from other small contracts in the
first quarter of 1996 as compared to the first quarter of 1995, and
(v) a decrease of $254,000 in the level of activity from the
Company's original USMC contract.
Cost of revenues decreased 15% in the first quarter of 1996 as
compared to the same period in 1995. This decrease was due both to
lower costs as a percent of revenues on the government contracts in
the 1996 period as well as lower cost of sales due to the lower
revenues. These reduced costs of revenues were offset by the
recognition of gross margin losses on the initial 65 Series natural
gas and marine engines.
General and administrative expenses decreased 2% from $602,000 in
the first quarter of 1995 to $592,000 in the first quarter of 1996.
This decrease was due primarily to reduced expenses for
professional fees, trade shows and the elimination of royalty
expense associated with the Wankel GmbH License Agreement which
resulted from the termination of the Wankel GmbH License Agreement.
The decrease in general and administrative expenses was offset by
expenses for salaries and rent to support the Company's Rotary
Power Marine subsidiary.
Research and development expenses decreased 25% from $368,000 for
the first three months of 1995 to $276,000 for the 1996 period.
This decrease was primarily due to decreased activity on
independent research and development projects related to the
development of the Company's 65 Series engines running on natural
gas for use in industrial markets.
The loss from operations increased $591,000 from a $27,000 loss in
the first three months of 1995 to a $618,000 loss in the same
period in 1996. The higher loss from operations in the first
quarter of 1996 was due to the impact of the lower revenues and was
offset by the reduced research and development expenses discussed
above.
Interest expense remained $251,000 in the first quarter of 1996 as
it was in the 1995 period, and interest income decreased 12% to
$81,000 in the first quarter of 1996 from $92,000 in the first
quarter of 1995. The decrease in interest income was due to lower
interest realized on investments in the first quarter of 1996 as
compared to the first quarter of 1995.
As a result of the above, net loss increased $603,000 to $788,000
in the first quarter of 1996 from $185,000 in the first quarter of
1995.
Liquidity and Capital Resources
Net proceeds of approximately $5,000,000 were provided from the
Company's initial public offering of common stock in February 1994.
At the end of 1995, the Company had used approximately $4.4 million
of these proceeds.
In February 1996, the Company entered into agreements with Abejon
under which Abejon purchased 1,000,000 shares of the Company's
common stock at $4.00 per share (the "Sale"). Simultaneously with
the Sale, the Company loaned $3,750,000 to Hydro Lance to be repaid
to the Company between March 31, 1996 and March 31, 1998 upon the
terms and conditions more fully set forth in the loan agreement
between the Company and Hydro Lance. During April 1996, Hydro Lance
repaid $600,000 of the loan plus interest. Further, coincident with
the Sale, Abejon issued a $2,350,000 purchase order to the Company
for two six rotor and nine two rotor 580 Series marine engines. As
of March 31, 1996, Abejon paid $500,000 as a down payment on this order.
On March 1, 1996, the Company entered into a termination settlement
agreement with Lockheed Martin ("LM") relating to the Joint
Tactical - Unmanned Aerial Vehicle contract between the Company and
Lockheed Martin. Pursuant to the settlement agreement, LM paid the
Company $833,000.
The Company believes that its current and expected cash reserves
will be adequate to fund its operations only until the 580 Series
marine engine inventory buildup occurs later this year. However,
the Company is currently in the process of negotiating the financing
of, on a debt and/or equity basis, the inventory and receivables
related to the 580 Series marine engines, the 65 Series natural gas
engines and the 65 Series marine engines. If the Company is successful
in arranging such financing, the Company believes it will have adequate
resources to fund its operations during the 580 Series marine engine
inventory buildup and until positive cash flow is achieved from the
commercial sales of the Company's engines. There can be no assurance
that the Company will enter into any arrangement to finance the inventory
and receivables relating to such engines.
The Company's cash investment in its wholly owned subsidiary,
Rotary Power Marine, since its inception in July 1995 has been
approximately $1,259,000. This use of cash consists of inventory
increases of $716,000, a purchase price of the assets of $165,000,
fixed asset acquisitions of $17,000 and a loss of $361,000.
The Company expects current United States Government contracts to
be substantially completed by the end of the year. Unless the
Company is awarded additional U. S. Government contracts pursuant
to outstanding proposals, future U. S. Government contract revenues
will be minimal.
Capital expenditures were approximately $46,000 in the first
quarter of 1996 compared to $165,000 in the first quarter of 1995.
Capital expenditures for the current year are expected to be
approximately $150,000. The source of funds for these expenditures
is expected to be provided solely by the recovery of depreciation
expense under cost-reimbursement contracts.
Working capital at March 31, 1996 was $2,588,000 compared to
$2,573,000 at December 31, 1995. This increase is due to increases
in inventory and cash, and is offset by a reduction in accounts
receivable and an increase in current liabilities associated with
the Abejon agreements.
"Safe Harbor" Statement
Forward looking statements made herein are based on current
expectations of the Company that involve a number of risks and
uncertainties and should not be considered as guarantees of future
performance. These statements are made under the Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995. The factors that
could cause actual results to differ materially include interruption or
cancellation of existing contracts, the impact of competitive products and
pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development and
commercialization risks and an inability to arrange additional debt or
equity financing.
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) EXHIBITS TO 10-QSB
11 Computations of Earnings (Loss) Per Common 13
Share for the Three Months Ended March 31, 1996
and 1995.
10.43 Deviation From Purchase Agreement between John 14
Deere Technologies International, Inc. and the
Company, dated February 19, 1996, as referred
to in Exhibit 10.7.
(b) REPORTS ON FORM 8-K
On February 21, 1996, the Company filed a Form 8-K with
the Securities and Exchange Commission. Such Form 8-K
discussed the series of transactions between the Company,
Abejon and Hydro Lance.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROTARY POWER INTERNATIONAL, INC.
(Registrant)
Dated: May 15, 1996
Gerald Horowitz
Vice President &
Corporate Controller
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE>
<TABLE>
EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
PRIMARY
Shares outstanding, beginning of
period 3,391,432 3,269,208
Weighted average number of shares
issued, retired and issuable
share equivalents 600,000 0
--------- --------
Weighted average number of common
and common equivalent shares
outstanding 3,991,432 3,269,208
Net loss $(788,096) $(184,746)
============ ============
Net loss per $ (.20) $ (.06)
common share ============ ============
FULLY DILUTED
Weighted average number of common
and common equivalent shares
outstanding as adjusted for
full dilution 3,475,698 3,433,147
Net loss $(788,096) $(184,746)
============ ============
Net loss per $ (.23) $ (.05)*
common share ============ ============
*These calculations are submitted in accordance with SEC
requirements, although they are not in accordance with APB Opinion
No. 15 because they are anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1767
<SECURITIES> 0
<RECEIVABLES> 805
<ALLOWANCES> 0
<INVENTORY> 1574
<CURRENT-ASSETS> 4170
<PP&E> 6791
<DEPRECIATION> 3858
<TOTAL-ASSETS> 12226
<CURRENT-LIABILITIES> 1582
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 1161
<TOTAL-LIABILITY-AND-EQUITY> 12226
<SALES> 1747
<TOTAL-REVENUES> 1747
<CGS> 1497
<TOTAL-COSTS> 2365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251
<INCOME-PRETAX> (788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (788)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.23)
</TABLE>
DEVIATION FROM PURCHASE AGREEMENT
This Agreement ("Deviation Agreement") is entered into and
effective as of 19 February 1996, and is between John Deere
Technologies International, Inc., ("Seller"), a Delaware
Corporation having its principal office in Moline, Illinois, and
Rotary Power International, Inc., formerly known as Rotary Power
Technologies International, Inc. ("Buyer"), a Delaware Corporation.
All capitalized terms used herein without definition shall have the
respective meaning assigned to them in the Agreement (as defined
below).
WHEREAS, Seller & Buyer entered into a Purchase Agreement on
November 15, 1991, as amended by the Addendum Agreement dated
December 31, 1991, and the Second Addendum Agreement dated April
26, 1993, (as so amended, the "Agreement"), which provided for the
sale by Seller and the purchase by Buyer of the assets of the
rotary engine business of Seller ("Business") on December 31, 1991,
(the "Acquisition");
WHEREAS, Article IV, Section 6, and Article V of the Agreement
require that Buyer pay to Seller within thirty (30) days following
each of the calendar years 1993 through 2005 certain Fixed Deferred
Payments;
WHEREAS, Buyer has been unable to make the Fixed Deferred Payment
of One Hundred Fifty Thousand Dollars ($150,000) due by January 30,
1996;
WHEREAS, Buyer is willing to grant to Seller a security interest in
certain equipment owned by Buyer if Seller agrees to accept a
delayed payment of a portion of the Fixed Deferred Payment of One
Hundred Fifty Thousand Dollars ($150,000) due by January 30, 1996;
WHEREAS, Seller is willing to accept a delayed payment of one-half
(1/2) of the Fixed Deferred Payment of One Hundred Fifty Thousand
Dollars ($150,000) due by January 30, 1996 in return for a security
interest in certain equipment owned by Buyer;
WHEREAS, BUYER and SELLER are desirous of modifying the Agreement
to give Seller additional time in which to pay one-half (1/2) of
the Fixed Deferred Payment of One Hundred Fifty Thousand Dollars
($150,000) due by January 30, 1996, and to provide a security
interest in certain equipment owned by Buyer;
NOW, THEREFORE, in consideration of the premises, warrants,
promises, agreements and conditions herein contained, it is further
agreed as follows:
1. Buyer represents and warrants that it is the owner of the
following equipment located at its facilities at One Passaic
Street, Wood-Ridge, new Jersey, and that such equipment is not
encumbered in any way or manner (hereinafter the "Secured
Equipment");
a.) Three (3) Zollner Kiel dynamometers, model A-220, 75kw,
10,000 rpm, serial numbers 2375, 2378, and 2379; and,
b.) One (1) Hugland trochoid grinder with Whitnon spindle,
model E 238, serial number 20523.
2. Subject to Buyer fulfilling all the requirements of paragraphs
3 and 5 below, Seller agrees to extend the time of payment of one-
half (1/2) of the Fixed Deferred Payment of One Hundred Fifty
Thousand Dollars ($150,000) originally due by January 30, 1996,
until January 30, 1997.
3. Buyer agrees to pay, and has paid, to seller, the receipt of
which Seller hereby acknowledges, the sum of Seventy-Five Thousand
Dollars ($75,000.00) representing one half (1/2) of the Fixed
Deferred Payment of One Hundred Fifty Thousand Dollars ($150,000)
originally due by January 30, 1996.
4. Buyer agrees that it will pay to Seller, by January 30, 1997,
the sum of Seventy-Five Thousand Dollars ($75,000.00) representing
the second one-half (1/2) of the Fixed Deferred Payment of One
Hundred Fifty Thousand Dollars ($150,000) originally due by January
30, 1996.
5. Buyer hereby grants Seller a security interest in the Secured
Equipment, which security interest shall expire upon payment by
Buyer of the amounts contemplated by paragraph 4 hereof. In the
event of a default in making payments by Buyer under this Deviation
Agreement, Seller shall have and may exercise Seller's rights under
the Uniform Commercial Code, including Seller's rights under Sec.
9-505(2) of the Code to retain the Secured Equipment in
satisfaction of the debt. Buyer also agrees that it shall within
five (5) days of the execution of this Deviation Agreement, deliver
to Seller, a signed Financing Statement suitable for filing with
the New Jersey Secretary of State which describes the Secured
Equipment along with proof that such Financing Statement has been
filed with the New Jersey Secretary of State. A sample of the
Financing Statement to be signed is attached hereto as Exhibit A.
6. Seller agrees that upon receipt of the amounts contemplated by
paragraph 4 it will execute any appropriate instruments and
documents reasonably requested by Buyer to terminate the security
interest granted in paragraph 5.
7. This Deviation Agreement does not cancel, supersede, replace
or modify any of the terms of the Agreement except as specifically
set forth herein and specifically does not change
the time of payment of any Deferred Payment except as specifically
set forth herein.
8. To the extend not modified by this Deviation Agreement, all
terms, conditions, and definitions set forth in the Agreement shall
apply to this Deviation Agreement and, specifically, all payments
and deliveries shall be considered made in accordance with Article
XIX of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Deviation
Agreement to be executed in duplicate originals as of the date
first above written.
JOHN DEERE TECHNOLOGIES INTERNATIONAL, INC.
By__________________________________________
Vice President
ROTARY POWER INTERNATIONAL, INC.
By___________________________________________
Title: Vice President & General Manager
