UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 1998
( ) 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
PO Box 128, Wood-Ridge, New Jersey 07075-0128
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 973/777-7373
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 fie such
reports), and (2) has been subject to such filing requirements for the past 90
days.
( ) Yes (X) No
The number of shares outstanding of the Registrant's Common Stock par value
$0.01, as of August 4, 1998 was 5,968,516.
Transitional Small Business Disclosure Format: ( ) Yes (X) No
ROTARY POWER INTERNATIONAL, INC.
<PAGE>
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for
the Six Months & Three Months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Months ended June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 2. Changes in Securities 9
Item 6. Exhibs and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 41,321 $ 371,007
Accounts receivable 56,289 42,723
Other receivables 25,000 15,000
Inventories 1,303,499 1,341,665
Prepaid expenses 3,870
Due from officer 24,263 --
Other current assets 1,530 500
------------ ------------
Total current assets 1,455,772 1,770,895
Fixed assets 647,138 1,280,794
Patents 585,025 615,817
Other assets, net 282,259 266,214
------------ ------------
Total assets $ 2,970,194 $ 3,933,720
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Current portion of long-term debt $ -- $ 274,275
Accounts payable 231,510 939,274
Loan payable 216,768 216,768
Accrued liabilities 913,779 904,865
Other current liabilities 507,000 507,000
Deferred acquisition obligation - current 725,000 725,000
------------ ------------
Total current liabilities 2,594,057 3,567,182
------------ ------------
Long-term liabilities
Deferred acquisition obligation 2,779,190 2,644,049
Long-term debt 3,817,444 3,631,265
Note payable 400,000 400,000
------------ ------------
Total liabilities 9,590,691 10,242,496
------------ ------------
Commitments and deficiencies
Stockholders' deficiency
Preferred Stock, 500,000 shares authorized
Common stock, par value $.01
Authorized: 10,000,000 shares
Issued and outstanding:
June 30, 1998: 6,042,211
December 31, 1997: 5,968,516 60,422 59,685
Paid-in capital 11,826,934 11,336,367
Accumulated deficit (18,507,853) (17,704,828)
------------ ------------
Total stockholders' deficiency (6,620,497) (6,308,776)
------------ ------------
Total liabilities and stockholders'
deficiency $ 2,970,194 $ 3,933,720
============ ============
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSUDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------ ------------------------
June 30 June 30
1998 1997 1998 1997
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues $ 24,720 $ 66,754 $ 72,283 $ 137,754
--------- ----------- --------- -----------
Costs and expenses
Cost of revenue 29,176 582,291 47,231 1,179,291
Selling, general and administrative
expenses 195,091 348,976 407,211 747,976
Engineering costs 134,807 124,413 263,978 434,413
--------- ----------- --------- -----------
Total costs and expenses 359,074 1,055,680 718,420 2,361,680
--------- ----------- --------- -----------
Loss from operations (334,354) (988,926) (646,137) (2,223,926)
--------- ----------- --------- -----------
Other income (expense)
Interest income 5,034 61,197 6,460 134,136
Interest expense (160,983) (250,773) (321,320) (500,773)
Other - net (70) -- 322 245,061
Gain on disposal of fixed assets -- -- 157,650 --
--------- ----------- --------- -----------
Total other (expense) income (156,019) (189,576) (156,888) (121,576)
----------------------------------------------------
Net loss $(490,373) $(1,178,502) $(803,025) $(2,345,502)
========= =========== ========= ===========
</TABLE>
See accompanying notes to unaudited financial statements
4
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
June 30 June 30
1998 1997
--------- -----------
<S> <C> <C>
Cash Flows from operating activities:
Net loss $(803,025) $(2,345,502)
--------- -----------
Adjustments to reconcile net cash
used in operating activities:
Depreciation 222,077 480,895
Amortization 42,492 46,592
Interest, net 321,320 16,097
Gain/loss on sale of long-term investment -- (245,061)
Gain on disposal of fixed assets (198,730) --
Changes in assets and liabilities:
Accounts receivable (13,566) 66,273
Other receivables (10,000) (5,917)
Inventory 38,166 283,144
Prepaid expenses (3,870) (21,584)
Other assets (28,775) (25,663)
Accounts payable (216,460) (231,333)
Accrued liabilities 8,913 25,041
Other liabilities -- 143,862
--------- -----------
Net cash (used in)
operating activities (641,458) (1,813,156)
--------- -----------
Cash flows from investing activities:
Purchase of long-term investment -- (1,583,000)
Sale of securities available for sale -- 2,583,000
Purchase of fixed assets (10,970) --
Proceeds from sale of fixed assets 621,280 4,831
--------- -----------
Net cash provided by
investing activities 610,310 1,004,831
--------- -----------
Cash flows from financig activities:
Repayment of long term debt (274,275) (72,917)
Loan payable -- 216,767
Officer's loan (24,263) --
Payment of deferred debt obligation -- --
Net cash (used in) in financing activities (298,538) 143,850
--------- -----------
Net (decrease) increase in cash (329,686) (664,475)
Cash and cash equivalents at
beginning of period 371,008 633,597
Cash and cash equivalents at
end of period $ 41,322 $ (30,878)
========= ===========
Supplementary disclosure of cash flows information:
Interest paid during the period -- 301,326
Income taxes paid during the period -- --
</TABLE>
Accounts payable in the amount of $491,304 were satisfied with the issuance of
73,695 shares of the Company's common stock and $49,130 in cash.
See accompanying notes to unaudited financial statements-
<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 unaudited financial statements of the Company should be
read in conjunction with the financial statements and footnotes thereto
contained in the Annual Report on Form 10-KSB for the year ended December 31,
1997, as filed with the SEC.
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
DEVIATION FROM PURCHASE AGREEMENT
The Company did not make a payment of $150,000 on the deferred acquisition
obligation due to John Deere Technologies International ("JDTI") on January 30,
1997 and is in negotiation with Deere & Company with regard to the fixed minimum
payments due to JDTI under the deferred acquisition obligation. Also, in 1998
the Company was unable to make the annual payment of $500,000 due under the JDTI
deferred acquisition obligation.
STOCK ISSUED AS PAYMENT
The Company issued 70,000 shares of Common Stock on July 8, 1998, in partial
payment for accounting services rendered which were not completed by the filing
date of this report.
Accounts Payable in the amount of $491,304 were settled by composition of
creditors by June 30, 1998. In accordance with this settlement, 73,695 shares of
the Company's Common Stock were issued to creditors in July, 1998.
6
<PAGE>
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of operations
According to management's plan, activities for the six months ended June 30,
1998, were largely involved with reorganization of the Company's long-term and
short-term debts, reducing fixed costs to a minimum, and generally making the
Company's position attractive to new capital. In accordance with this plan, the
Company organized a successful composition of creditors, negotiated a new lease
for its premises, consolidated its operations in smaller quarters, converted its
obsolete accounting software to a third-generation product to integrate
accounting and manufacturing activities, and negotiated new arrangements with
key suppliers for critical engine parts.
As part of this restructuring, the Company redeemed and paid off all $6.5
million of its NJEDA bonds outstanding by liquidating the balance of its FICO
strips, applying $2.9 million of the net proceeds from the FICO strips towards
the NJEDA bonds, and floating a new $10,000,000 maturing principal amount of
ten-year, 10.412% bonds due December 15, 2007, which raised the remaining
balance, $3.6 million. The liquidation of the FICO strips resulted in a gain of
$479,014. Redemption of the NJEDA bonds cured various default conditions under
the loan agreement with the NJEDA. The new bonds are callable any time at their
accreted value and are zero-coupon bonds, preserving the Company's cash flow
during the restructuring and for some time thereafter. The Indenture of Trust
for these bonds requires the Company to establish and maintain a Bond Reserve
Fund equal to 50% of the principal amount of the then outstanding bonds on
December 31. 2000. With no bonds called, the requirement for this Bond Reserve
Fund would be $2,457,000 on January 1, 2001.
There was no new engine production in the first six months of 1998.
Comparison of six months ended June 30, 1998, and June 30, 1997
Revenues for the second quarter of 1998 reflected sales of inventory by the
Company's wholly-owned subsidiary, Rotary Power Marine, Inc.. Sales for the six
months ended June 30, 1998, were reduced $65,471 from the prior year to $72,283.
This reduction reflects reduced sales of Rotary Power Marine's Series 65 engines
in 1998.
General and Administrative costs remained steady at approximately $200,000 per
quarter, due to steady employment at core staffing levels and no major changes
in fixed costs. On February 15, 1998, the Company transferred all its employees
except management to an employee leasing company, Employee Solutions, Inc.
Moving expenses for the second quarter of 1998 were $18,091, for a total of
$34,727 for the six months ended June 30, 1998.
7
<PAGE>
Engineering costs increased slightly to $134,807 for the second quarter of 1998
compared to the first quarter of 1997, but for the first half, they are
substantially below the level of the first half of 1997 ($263,978 for 1998 vs
$434,413 for 1997). This reduction of $170,435 reflects the cessation of work on
gaseous fueled industrial engines and Series 65 marine engines. The bulk of
engineering costs for the six months ended June 30, 1998, are depreciation on
test cells and related equipment ($204,230) and amortization of patent expense
($30,792).
As a result of the above cost reductions and reorganizations, the loss from
operations for the first half of 1998 was held to $646,137, a 70% reduction over
the similar period of 1997.
Net interest expense of $314,860 for the first half of 1998 reflects a period
charge for the accretion of interest on the $10,000,000 maturing principle
amount of ten-year 10.412% bonds due December 15, 2007, which, net of the
interest paid on the FICO strips held as collateral on the paid-off NJEDA bonds,
is a 14% reduction from interest paid on the NJEDA bonds, $366,367 in the first
half of 1997.
Other net income in the first half of 1997 of $245,061 was due to the realized
gain on the sale of FICO strips. Gain on disposition of fixed assets of $156,019
in 1998 was the net of the gain on the disposition of furniture, machinery and
equipment sold and commissions and expenses of the sale.
Net loss for the first half of 1998 was reduced 66% from $2,345,502 in 1997 to
$803,025 in 1998. Net operating loss carryforward as of June 30, 1998 is
approximately $15,738,000 expiring in 2006 through 2012.
Liquidity and Capital Resources
Cash for operations for the first six months of 1998 were provided primarily by
proceeds from the sale of certain fixed assets ($621,280) and sales of engine
inventories ($72,283). These funds were applied to settlement of $491,304
accounts payable (together with 73,695 shares of the Company's Common Stock),
the settlement of rents due Curtiss-Wright, the landlord, of $705,890, $400,000
of which is represented by a 4% note, due Curtiss-Wright on January 1, 2003, to
the expenses of consolidating the company's operations in the test cells,
$34,727, and to fixed and variable expenses of operations with a minimum core
staff.
In accordance with its plans to redirect the RPM subsidiary, the Company signed
a contract for the sale of a portion of RPM's 65 Series gasoline marine pleasure
craft engine inventory and some associated production equipment with Rotary
Power Marine Corporation, a New York corporation, on June 4, 1998, which closed
on July 28, 1998. Under this agreement the purchaser will also assume the Rotary
Power Marine name and trademark. The RPM subsidiary was renamed E-Drive Systems,
Inc. in connection with the redirection of this subsidiary toward new business
opportunities.
To obtain additional working capital for its planned operations in 1998, the
Company signed a contract with Rotary Power Enterprise, Inc. ("RPE") on July 2,
1998 for the sale of its 65 Series
8
<PAGE>
Natural Gas Rotary Engine product line and a Distributor Agreement for the
Natural Gas fueled 580 Series engines. Upon completion of the transaction, which
is subject to the fulfillment of various closing conditions, the Mazda NGRE
agreements and the Hussmann agreement will be included in the sale of the 65
Series Natural Gas engine product line asset to RPE. The anticipated proceeds
from this sale includes the release of a lien for $217,000, issued to secure a
loan by PowerCold to the Company.
The Company's current cash resources, including anticipated proceeds from the
RPM and RPE contracts described above, is sufficient to enable the Company to
meet its anticipated operating needs until October, 1998.
"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.
PART II - Other Information
Item 1 - Legal Proceedings
In April, 1998, the Company paid $4,725 to Zurich Insurance Company in
satisfaction of a default judgement.
In May, 1998, the Company paid $2,462 to General Automation in satisfaction of a
default judgement.
Dearing Compressor obtained a default judgement of $23,638 which remains unpaid.
In June, 1998, Rotary Power Marine (RPM), Inc. settled a dispute with Cambden
Supercharger for $22,000 arising out of unfulfilled orders made by Rotary Marine
Industries (RMI), from whom Rotary Power Marine purchased bulk assets. RPM has
served upon RMI and its successors a Notice of Demand for compensation under the
terms of the Asset Purchase Agreement.
Throughout the quarter the Company has settled with former employees who were
terminated on May 23, 1997, and who had unused vacation pay earned. These
settlements were made on an individual basis. In one case an employee refused
settlement on a default judgment in the amount of approximately $5,000, which
remains unpaid. In all other cases negotiation led to a settlement and a release
of the Company's liability was obtained.
Item 2 - Changes in Securities
9
<PAGE>
In July, 1998, the Company issued 73,698 shares of its Common Stock as part of
the settlement of debts in a Composition of Creditors. Also in June, 1998, the
Company issued 70,000 shares of its Common Stock in partial payment for
accounting services. All of the Common Stock was issued in both transactions
pursuant to Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS TO 10-QSB
11 Computations of Earnings (Loss) Per Common Share for the Six Months
Ended June 30, 1998 and 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
10
EXHIBIT NO. 11
ROTARY POWER INTERNATIONAL, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
--------- -----------
<S> <C> <C>
BASIC
Shares outstanding, beginning of period 5,968,516 6,641,432
Weighted average number of shares issued,
retired and issuable share equivalents 0 (522,552)
--------- -----------
Weighted average number of common and
common equivalent shares outstanding 5,968,516 6,118,880
========= ===========
Net Loss $(803,025) $(2,345,502)
========= ===========
Net Loss per Common Share $(0.12) $(0.38)
========= ===========
DILUTED
Weighted average number of common and common
equivalent shares outstanding as adjusted
for full dilution 6,118,880 6,118,880
Net Loss $(803,025) $(2,345,502)
========= ===========
Net Loss per Common Share $(0.12) $(0.38)
========= ===========
</TABLE>
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROTARY POWER INTERNATIONAL, INC.
(Registrant)
/s/Kenneth Leighton Brody
Kenneth Leighton Brody
President and Principal Financial Officer
August 24, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914539
<NAME> ROTARY POWER INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 41,321
<SECURITIES> 0
<RECEIVABLES> 81,289
<ALLOWANCES> 0
<INVENTORY> 1,303,499
<CURRENT-ASSETS> 1,455,772
<PP&E> 647,138
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,970,194
<CURRENT-LIABILITIES> 2,594,057
<BONDS> 3,817,444
0
0
<COMMON> 60,422
<OTHER-SE> (6,680,919)
<TOTAL-LIABILITY-AND-EQUITY> 2,970,194
<SALES> 24,720
<TOTAL-REVENUES> 24,720
<CGS> 29,176
<TOTAL-COSTS> 359,074
<OTHER-EXPENSES> 156,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,949
<INCOME-PRETAX> (490,373)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (490,373)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
