<PAGE>
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 September 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
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.
( ) Yes (X) No
The number of shares outstanding of the Registrant's Common Stock par value
$0.01, as of September 30, 1998, was 6,112,855.
Transitional Small Business Disclosure Format: ( ) Yes (X) No
<PAGE>
ROTARY POWER INTERNATIONAL, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
Item 1. Unaudited Consolidated Financial Statements:
<S> <C>
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997........................ 3
Consolidated Statements of Operations for the Three and Nine Months ended
September 30, 1998 and 1997....................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months ended
September 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 and Use of Proceeds......................................................... 9
Item 5. Other Information................................................................................. 10
Item 6. Exhibits and Reports on Form 8-K.................................................................. 10
Signatures ................................................................................................. 11
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30 December 31
1998 1997
(Unaudited)
-------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 5,502 $ 371,007
Accounts receivable 59,034 42,723
Other receivables 30,030 15,000
Inventories 852,175 1,341,665
Prepaid expenses
Due from officer 21,826 --
Other current assets 500
-------------- -------------
Total current assets 968,568 1,770,895
Fixed assets 548,460 1,280,794
Patents 585,025 615,817
Other assets, net 250,155 266,214
-------------- -------------
Total assets $ 2,352,208 $ 3,933,720
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Current portion of long-term debt $ -- $ 274,275
Accounts payable 119,784 939,274
Loan payable -- 216,768
Accrued liabilities 883,051 904,865
Other current liabilities 500,000 507,000
Deferred acquisition obligation - current 725,001 725,000
-------------- -------------
Total current liabilities 2,227,836 3,567,182
-------------- -------------
Long-term liabilities
Deferred acquisition obligation 2,845,876 2,644,049
Long-term debt 3,916,685 3,631,265
Note payable 400,000 400,000
-------------- -------------
Total liabilities 9,390,397 10,242,496
-------------- -------------
Commitments and contingencies
Stockholders' deficiency
Preferred Stock, 500,000 shares authorized
Common stock, par value $.01
Authorized: 10,000,000 shares
Issued and outstanding:
September 30, 1998: 6,112,855
December 31, 1997: 5,968,516 61,122 59,685
Paid-in capital 11,438,914 11,336,367
Accumulated deficit (18,538,225) (17,704,828)
-------------- -------------
Total stockholders' deficiency (7,038,189) (6,308,776)
-------------- -------------
Total liabilities and stockholders'
deficiency $ 2,352,208 $ 3,933,720
============== =============
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues $ -- $ 3,303 $ 72,848 $ 141,057
----------- ----------- ----------- -----------
Costs and expenses
Cost of revenue -- 345,168 39,731 1,524,459
Selling, general and administrative 212,328 164,660 734,607 912,636
Engineering costs 141,583 -- 449,684 434,413
----------- ----------- ----------- -----------
Total costs and expenses 353,911 509,828 1,224,022 2,871,508
----------- ----------- ----------- -----------
Loss from operations (353,911) (506,525) (1,151,175) (2,730,451)
----------- ----------- ----------- -----------
Other income (expense)
Interest income (60) 18,812 6,793 152,948
Interest expense (99,240) (247,736) (285,420) (748,509)
Other-net -- -- 1,006 245,061
Gain on Disposal of Fixed Assets 14,844 -- 675,120 --
----------- ----------- ----------- -----------
Total other (expense) income (84,456) (228,924) 397,501 (350,500)
----------- ----------- ----------- -----------
Net loss $ (438,367) $ (735,449) $ (753,674) $(3,080,951)
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements
</TABLE>
4
<PAGE>
ROTARY POWER INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
September 30 September 30
1998 1997
------------ -------------
<S> <C> <C>
Cash Flows from operating activities:
Net loss $ (753,674) $(3,080,951)
------------ -------------
Adjustments to reconcile net cash
used in operating activities:
Depreciation 319,894 721,343
Amortization 63,738 69,888
Interest, net 278,626 69,321
Gain/loss on sale of long-term investment -- (245,060)
Gain on disposal of fixed assets (198,730) --
Changes in assets and liabilities:
Accounts receivable (16,311) 274,938
Other receivables (15,030) (5,917)
Inventory 489,490 287,554
Other assets (21,326) (29,608)
Accounts payable (819,490) (197,296)
Accrued liabilities (21,814) 197,631
Other liabilities (223,767) 134,165
------------ -------------
Net cash (used in)
operating activities (918,394) (1,803,992)
------------ -------------
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 -- --
Proceeds from sale of fixed assets 848,991 4,831
------------ -------------
Net cash provided by
investing activities 848,991 1,004,831
------------ -------------
Cash flows from financing activities:
Repayment of long term debt (274,275) (72,918)
Loan payable -- 216,768
Officer's loan (21,826) --
Payment of deferred debt obligation -- --
Issuance of common stock -- 75,000
------------ -------------
Net cash provided by in financing activities (296,101) 218,850
------------ -------------
Net (decrease) increase in cash (365,505) (580,311)
Cash and cash equivalents at
beginning of period 371,007 633,597
------------ -------------
Cash and cash equivalents at
end of period $ 5,502 $ 53,286
============ =============
Supplementary disclosure of cash flows information:
Interest paid during the period 285,420 301,326
Income taxes paid during the period -- --
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE>
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 September
30, 1998.
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 nine months ended September
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 sold off unproductive
assets.
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.
The first step in the restructuring plan was to identify all generic
production assets, excess furniture and fixtures, which were auctioned to
yield $575,000 on January 27, 1998. All custom made equipment and necessary
furnishings were retained to keep a modest manufacturing capability
in-house. These funds were used to settle the rent arrearage noted above, as
working capital, and as funds for subsequent settlements.
Next, the Company conducted a composition of creditors, in which $552,218 of the
Company's debt was formally settled for $56,643 and 74,336 shares of the
Company's common stock. These settlements were concluded by June 30, 1998 and
the stock was issued in July, 1998.
In January, 1998, in order to reduce its overhead, the Company negotiated a new
rental contract with Curtiss-Wright which reduced rent from $57,000 per month to
$7,300 per month, retaining the core office space, test cells, inventory area
and a modest manufacturing space. The old space was vacated and the equipment
relocated by the end of August, 1998. There was no change in the Company's
address.
7
<PAGE>
As part of the restructuring and pursuant to an agreement dated June 4, 1998,
the Company's wholly owned subsidiary, Rotary Power Marine, Inc. (RPM), sold a
portion of its assets, consisting of Series 65 marine engines, parts, and the
supplier agreement for those engines with Mazda North America, as well as
certain related production machinery, tooling and documentation. In accordance
with this agreement, the Company's wholly owned subsidiary was renamed E-Drive
Systems Corp, in keeping with its revised mission as a supplier of electric
drive components. The purchaser assumed the name and logo of Rotary Power Marine
Corporation, as provided by the agreement.
On July 2, 1998, the Company signed a contract with Rotary Power Enterprises,
Inc. (RPE), a value-added reseller of natural gas refrigeration and power
generation equipment, for the sale of the Company's Series 65 natural gas engine
inventory, parts, and intellectual property. The natural gas version of the
Series 65 was developed by RPI from the Mazda 13B engine block and has no
components in common with the Company's other engines. It was therefore divested
as part of the Company's restructuring and turnaround.
Along with the transfer of engines and parts, the Company assigned its existing
supplier contract from Mazda North America for the gas version of the 13B
engines, and also assigned to RPE a contract with Hussman to sell refrigeration
components containing those engines. The Company also signed an Engine
Distributor Agreement with RPE, giving them an exclusive industrial market
territory for the Company's Series 580 NGRE (natural gas fueled) engines.
RPE then disclosed that it had been purchased by PowerCold, who became a party
to the agreement. A portion of the price for this Sale of Assets was the
forgiveness of a note due PowerCold for $217,000.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Revenues for the nine months ended September 30, 1998, decreased 48% to $72,848
due to the cessation of operations which began May 23, 1997, other than those
related to the Company's restructuring. Sales of assets for the nine months
ended September 30, 1998, accounted for virtually all income in 1998.
Cost of revenue for three quarters of 1998 of $39,731 reflects the cost of
prototype and Mazda engine blocks sold from inventory. Cost of revenue also
includes fixed period charges, such as rent on production facilities and
depreciation on production machinery and equipment, that are not related to
sales volume.
While payroll, benefits and rent for the quarter ended September 30, 1998, were
significantly reduced, the bulk of General and Administrative costs consists of
fixed expense related to depreciation, legal and auditing expenses, period
charges and corporate expenses, the sum of which did not change appreciably.
8
<PAGE>
Engineering costs, likewise, increased 3% due to the addition of temporary
engineering staff to accommodate the planning and relocation of inventory and
equipment. No engine development was accomplished in this period.
The loss from operations decreased from a $2,730,451 loss in the first nine
months of 1997 to a loss of $1,151,175 for the same period in 1998, because of a
one-time write-off in 1997.
Net interest expense for the first nine months of 1998 decreased 47%, or
$278,627 over the same quarter of 1997, reflecting reduced interest on the
Company's 10.412% zero-coupon bonds versus the retired NJEDA bonds, as well as
the reduction in other debts.
The gain on disposal of fixed assets of $675,120 reflects the auction of
depreciated machinery and equipment and the two sales of equipment and inventory
related to the Mazda engine businesses.
As a result of the above, net loss decreased dramatically by $2,327,277 to
$753,674 in the first nine months of 1998 from $3,080,951 in the first nine
months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
It was anticipated that cash resources and the expected revenues from further
asset sales were sufficient to enable the Company to continue its operations
through January 31, 1999.
Cash expenditures of $296,101 in the first nine months of 1998 were entirely
directed toward the repayment of debt.
"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.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
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. See discussion under
"Results of Operations" above.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In prior years the Company held an Annual Meeting of Shareholders. No such
meeting was held in 1997. No matters were voted on by the Shareholders during
the fiscal period ended September 30, 1998.
ITEM 5 - OTHER INFORMATION
On July 2, 1998, the Company signed a contract with Rotary Power Enterprises,
Inc. (RPE), a value-added reseller of natural gas refrigeration and power
generation equipment, for the sale of the Company's Series 65 natural gas engine
inventory, parts, and intellectual property. The natural gas version of the
Series 65 was developed by RPI from the Mazda 13B engine block and has no
components in common with the Company's other engines. It was therefore not
included as part of the Company's restructuring and turnaround.
Along with the transfer of engines and parts, the Company assigned its existing
supplier contract from Mazda North America for the gas version of the 13B
engines, and also assigned to RPE a contract with Hussman to sell refrigeration
components containing those engines. The Company also signed an Engine
Distributor Agreement with RPE, giving them an exclusive industrial market
territory for the Company's Series 580 NGRE (natural gas fueled) engines.
RPE then disclosed that it had been purchased by PowerCold, who became a party
to the agreement. A portion of the price for the sale to RPE was the forgiveness
of a note due to PowerCold by the Company for $217,000.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits to Form 10-QSB
11 Computations of Earnings (Loss) Per Common Share for the Nine Months
Ended September 30, 1998 and 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
10
<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
March 15, 2000
11
<PAGE>
EXHIBIT NO. 11
--------------
ROTARY POWER INTERNATIONAL, INC.
--------------------------------
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
---------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 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 144,339 (471,329)
============= ============
Weighted average number of common and
common equivalent shares outstanding 6,112,855 6,170,103
============= ============
Net Loss $ (753,674) $(3,080,951)
Net Loss per Common Share $ (0.12) $ (0.50)
============= ============
DILUTED
Weighted average number of common and common
equivalent shares outstanding as adjusted
for full dilution 6,112,855 6,170,103
============= ============
Net Loss $ (753,674) $(3,080,951)
============= ============
Net Loss per Common Share $ (0.12) $ (0.50)
============= ============
</TABLE>
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> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
(QUARTERLY SEC REPORT FINANCIAL SUMMARY)
</LEGEND>
<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> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,502
<SECURITIES> 0
<RECEIVABLES> 59,064
<ALLOWANCES> 0
<INVENTORY> 852,175
<CURRENT-ASSETS> 968,568
<PP&E> 548,460
<DEPRECIATION> 319,894
<TOTAL-ASSETS> 2,352,208
<CURRENT-LIABILITIES> 2,227,836
<BONDS> 3,916,685
0
0
<COMMON> 61,122
<OTHER-SE> (7,099,311)
<TOTAL-LIABILITY-AND-EQUITY> 2,352,208
<SALES> 72,848
<TOTAL-REVENUES> 72,848
<CGS> 39,731
<TOTAL-COSTS> 1,224,022
<OTHER-EXPENSES> 1,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (285,420)
<INCOME-PRETAX> (753,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 675,120
<CHANGES> 0
<NET-INCOME> (753,674)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
