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 June 30, 1997
AND
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from____________to______________
Commission File Number 33-94884
COATES INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
Delaware 22-2925432
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 449-7717
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(Former name, former address and formal fiscal year if changed since last
report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934
after the distribution of securities under a plan confirmed by a court.
Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,963,600 shares of Series A
Preferred Stock at June 30, 1997.
<PAGE>
COATES INTERNATIONAL LTD.
Quarterly Report on Form 10Q for Quarter Ended June 30, 1997
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Attached.
1
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
- ------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
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<TABLE>
June 30,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 16,263 $ 28,809
Inventory 219,043 83,658
Prepaid Expenses 12,535 --
---------- -----------
Total Current Assets 247,841 112,467
---------- -----------
Property, Plant and Equipment - Net 1,602,396 1,627,276
---------- -----------
Other Assets:
Deposit 2,500 2,500
Due from Stockholder 12,042 39,116
Due from Affiliated Companies 4,428 2,116
---------- -----------
Total Other Assets 18,970 43,732
---------- -----------
Total Assets $1,869,207 $ 1,783,475
========== ===========
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Amounts Due to Potential Investors $ 486,970 $ --
Redeemable Series A Preferred Stock 10,000 496,970
Mortgage Payable 210,000 225,000
Accrued Legal Fees 1,456,880 884,405
Accounts Payable 42,686 22,988
Accrued Interest 109,408 107,833
Other Accrued Expenses 177,936 82,476
Due to Officer 13,638 --
Due to Stockholder 8,000 --
---------- -----------
Total Current Liabilities 2,515,518 1,819,672
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity [Deficit]:
Common Stock, $.001 Par Value, 20,000,000 Shares
Authorized - No Shares Issued -- --
Preferred Stock, Series A, $.001 Par Value, 14,000,000
Shares Authorized - Voting, Non-Cumulative Convertible,
5,963,600 Shares Issued and Outstanding at June 30, 1997
and 1996 5,963 5,963
Additional Paid-in Capital 13,460,857 12,464,729
Deficit Accumulated During the Development Stage (14,113,131) (12,506,889)
Total Stockholders' Equity [Deficit] (646,311) (36,197)
---------- -----------
Total Liabilities and Stockholders' Equity [Deficit] $1,869,207 $ 1,783,475
========== ===========
See Notes to Condensed Financial Statements.
</TABLE>
2
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
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CONDENSED STATEMENTS OF OPERATIONS
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<TABLE>
For the
Period from
August 31,
1988 [Date of
Inception]
Three months ended Six months ended through
June 30, June 30, June 30,
-------- -------- -------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 1 9 9 7
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 37,375 $ -- $ 37,375 $ 687,375
---------- --------- ---------- ---------- -----------
Expenses:
Research and Development
Costs 64,744 59,682 136,191 160,464 7,589,097
General and Administrative
Expenses 347,151 294,031 572,911 559,421 6,795,152
Depreciation Expense 6,419 10,309 19,950 20,298 299,328
---------- --------- ---------- ---------- -----------
Total Operating Expenses 418,314 364,022 729,052 740,183 14,683,577
---------- --------- ---------- ---------- -----------
Loss From Operations (418,314) (326,647) (729,052) (702,808) (13,996,202)
---------- --------- ---------- ---------- -----------
Other Income [Expense]:
Interest Income 7 100 13 560 113,617
Interest Expense (3,600) (6,359) (7,200) (27,859) (230,546)
---------- --------- ---------- ---------- -----------
Net Other [Expense] (3,593) (6,259) (7,187) (27,299) (116,929)
---------- --------- ---------- ---------- -----------
Net Loss $ (421,907) $(332,906) $ (736,239) $ (730,107) $(14,113,131)
========== ========= ========== ========== ============
Net Loss Per Share $ (.07) $ (.06) $ (.12) $ (.12)
========== ========= ========== ==========
Weighted Average Number
of Shares 5,963,600 5,963,600 5,963,600 5,963,600
========== ========= ========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
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CONDENSED STATEMENTS OF CASH FLOWS
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<TABLE>
For the
Period from
August 31,
1988 [Date of
Inception]
Six months ended through
June 30, June 30,
-------- -------
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Net Cash - Operating Activities $ (561,363) $ (604,962) $(6,651,451)
----------- ----------- -----------
Investing Activities:
Payments for Property and Equipment -- (5,252) (413,032)
Loans to Stockholders -- (3,430) (1,208,678)
----------- ----------- -----------
Net Cash - Investing Activities -- (8,682) (1,621,710)
----------- ----------- -----------
Financing Activities:
Proceeds of Additional Paid-in Capital 550,347 614,684 1,919,638
Proceeds from Issuance of Stock -- -- 6,378,148
Payment for Treasury Stock -- -- (30,000)
Loans from Stockholders -- -- 8,000
Loan from Officer 13,638 -- 13,638
----------- ----------- -----------
Net Cash - Financing Activities 563,985 614,684 8,289,424
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 2,622 1,040 16,263
Cash and Cash Equivalents - Beginning of Periods 13,641 27,769 --
----------- ----------- -----------
Cash and Cash Equivalents - End of Periods $ 16,263 $ 28,809 $ 16,263
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ 7,200 $ 11,062 $ 53,357
Taxes Paid $ -- $ -- $ --
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONDENSED FINANCIAL STATEMENTS
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[1] Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments [consisting of normal
recurring accruals] considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1997 and 1996 are not necessarily indicative of the results that may be expected
for the years ended December 31, 1997 and 1996. The unaudited condensed
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
[2] Additional Paid-in Capital
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. The Company has
met its obligations in 1997 and 1996 primarily through capital infusions from
one of its principal stockholders, Gregory Coates.
[3] Related Party Transaction
Subcontract Labor - The Company subcontracts its project expense [payroll,
insurance and supplies] from an entity which George J. Coates is the sole
stockholder. During the six months ended June 30, 1997 and 1996, $107,000 and
$122,812, respectively, were paid for these services.
[4] Commitments and Contingencies
As more fully discussed in Note 4 to the financial statements at December 31,
1996, George J. Coates, principal and controlling shareholder and chief
executive officer of CIL, per the original consent order of the Court, was
ordered to pay up to the first $773,500 of amounts due to Rescinding
Shareholders. Per the August 19, 1996, court order, new Potential Investors have
taken the place of the Rescinding Shareholders. To the extent that Mr. Coates is
unable to pay any such amounts to the Potential Investors, CIL is required to
pay same and is thus contingently liable for such amounts as it may have to pay
should Mr. Coates not fulfill all or part of his primary commitment on amounts
due to Potential Investors. It is at least reasonably possible that the above
circumstances will change in the near term due to future confirming events and
the effect of any such change would be material to the financial statements.
. . . . . . . . . . . .
5
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Coates International Ltd. ("CIL" or the "Company") has completed the
basic development of a spherical rotary valve system (the "Coates System"), the
development of which was initiated by its founder, George J. Coates, for use in
internal combustion engines of all types. With respect to the Coates System,
seven applicable United States patents (the "Coates Patents") have been issued
to George J. Coates. CIL holds a non-exclusive license from George J. Coates and
his son Gregory Coates, to manufacture, sell and grant sublicenses with respect
to products based on the Coates Patents, within the United States, its
territories and possessions (the "Licensed Areas"). George J. Coates and Gregory
Coates have also agreed, as long as CIL remains independent and viable, not to
compete with CIL in the manufacture, assembly, use or sale of internal
combustion engines utilizing the technology falling within the scope of the
Coates Patents in the Licensed Areas, or to grant any other exclusive or
non-exclusive license in the Licensed Areas except through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement granting CIL the
right to retain any monies including royalties received from Nicholson McLaren
Engines Ltd. (U.K.) ("Nicholson McLaren") or from Noble Motor Sport
(manufacturer of Ascari racing cars) for manufacture, sale, use or assembly of
internal combustion engines anywhere in the world using the technology falling
within the scope of the Coates Patents.
CIL has had a short operating history during which it has primarily
devoted its attention to developing the technology associated with the Coates
System. During such time CIL has also arranged for certain tests in order to
evaluate the effectiveness of the technology. CIL has also devoted such time in
an attempt to interest various persons and entities in acquiring sub-licenses to
use the technology.
CIL is currently manufacturing high performance automotive engines
modified with the Coates System on a limited basis at its Wall Township, New
Jersey manufacturing facility. Except as set forth herein, none of the engines
has been sold. CIL has received numerous oral and written inquiries from
potential customers, expressing an interest in acquiring high performance
automotive racing engines modified with the Coates System. No assurances can be
given that these inquiries will result in binding sales orders. After it
completes manufacture of a sufficient backlog of such engines, CIL intends to
attempt to convert these inquiries into binding sales orders, to fill such
orders from its limited inventory of engines and to continue to manufacture on a
limited basis and market high performance automotive, motorcycle and marine
racing engines using the Coates System technology. CIL also intends to attempt
to sublicense such technology.
Results of Operations from Inception August 31, 1988 through June 30, 1997
Virtually no revenues were realized from the inception of operations
through June 30, 1997, as the principal operations were those of a development
stage company. In July 1991, CIL signed a prototype manufacturing agreement with
Harley-Davidson, Inc. ("Harley Davidson") and commenced to attempt to retrofit a
Harley Davidson motorcycle engine using the Coates technology. An initial
$150,000 engineering and development fee was paid to CIL by Harley Davidson. CIL
has not, as yet, developed a retrofitted Harley Davidson motorcycle engine using
the Coates technology that is acceptable to Harley Davidson.
Under the terms of a February 1994 license agreement, a $500,000
initial payment was made by Millwest Corporation ("Millwest") for a license of
the technology and was held in a bank account entitled "Coates International
Licensing." This sum was subsequently paid over to CIL. Pursuant to the terms of
the license agreement, Millwest was obligated to make another payment of $9.5
Million to CIL on or before May 4, 1994. Millwest did not make such payment. CIL
placed Millwest on notice that it was in default. In June 1995, Millwest
informed CIL of an intention to activate the license agreement and claimed that
financing has been arranged to do so but to date, no additional payments have
been received by CIL from Millwest and no assurances can be given that any
additional payments will be made.
CIL did not recognize any revenues during the quarter ended June 30,
1997. During the quarter ended June 30, 1996, CIL recognized $37,375 in revenues
paid by Nicholson McLaren in partial payment for two high performance racing car
engines modified with the Coates System and shipped to Nicholson McLaren by CIL.
Loss from operations and net loss aggregated ($418,314) and ($421,907) in the
June 30, 1997 quarter as compared to ($326,647) and ($332,906) in the June 30,
1996 quarter. The increase in losses in the June 30, 1997 quarter was
principally attributable to higher general and administrative expenses in the
later quarter ($347,151 vs. $294,031).
6
<PAGE>
CIL did not recognize any revenues for the six months ended June 30,
1997 whereas for the six months ended June 30, 1996, CIL recognized $37,375 in
revenues. Loss from operations and net loss aggregated ($729,052) and ($736,239)
for the six months ended June 30, 1997 as compared to ($702,808) and ($730,107)
for the six months ended June 30, 1996. The income realized in the earlier six
month period was offset by higher research and development costs in such period
($160,464 vs.
$136,191).
Liquidity and Capital Resources
Since its inception, all of the development costs and related
operational costs of CIL have primarily been paid through the cash generated
through the sale of stock, through capital contributions made by George J.
Coates' son, Gregory Coates and the $500,000 initial license payment made by
Millwest. Capital contributions advanced to CIL by Gregory Coates in 1995 and
1996 aggregated $404,549 and $1,132,523 respectively. Harley Davidson paid CIL
$150,000 as an initial deposit towards a license agreement; that money has also
been expended by CIL. Certain of the aforesaid funds generated income from bank
accounts in a depository institution; that interest income was also expended by
CIL. CIL has incurred losses as a development stage company from inception,
August 31, 1988, to June 30, 1997, of ($14,113,131) and at June 30, 1997 had a
negative net worth of ($646,311) and negative working capital of ($2,267,677).
At June 30, 1996, CIL had a negative net worth of ($36,197) and
negative working capital of ($1,707,205). The decrease in net worth and in
working capital from June 30, 1996 to June 30, 1997 was principally attributable
to a substantial increase in accrued legal fees at June 30, 1997. The increase
was attributable to litigation based on a Securities and Exchange Commission
action described in CIL's annual report on Form 10-K for the year ended December
31, 1996. In addition, at June 30, 1997, CIL had a $486,970 liability to
potential investors who had previously advanced funds in order to purchase CIL
Series A Preferred Stock, which funds were used by CIL to purchase Series A
Preferred Stock owned by persons who had accepted CIL's 1995 Rescission and
Exchange Offer.
CIL's ability to generate revenues and achieve profitable operations
is principally dependent upon the execution and funding of sub-license
agreements with engine manufacturers or retrofitters, and upon the manufacture
and sale, by CIL, of high performance automotive, motorcycle and marine racing
engines. CIL is actively attempting to market its technology and is in
communication with various persons and entities who may be interested in
acquiring sub-licenses to use the technology.
CIL is currently manufacturing high performance automotive engines
modified with the Coates System on a limited basis at its Wall Township, New
Jersey manufacturing facility. Except as set forth herein, none of the engines
has been sold. CIL has received numerous oral and written inquiries from
potential customers, expressing an interest in acquiring high performance
automotive racing engines modified with the Coates System. After it completes
manufacture of a sufficient backlog of such engines, CIL intends to attempt to
convert these inquiries into binding sales orders, to fill such orders from its
limited inventory of engines and to continue to manufacture on a limited basis
and market high performance automotive, motorcycle and marine racing engines
using the Coates System technology. Assuming CIL obtains sufficient financing
and a sufficient number of orders, CIL management believes that it will be able
to produce racing engines using the Coates System technology at its Wall
Township facility on a limited basis at the rate of approximately 30 engines per
month. CIL expects that the bulk of its initial sales of engines, to the extent
it is able to effectuate same, will be at a base sales price in the range of
$25,000 to $30,000 per engine although depending on type and size, some of the
engines may be priced as high as $75,000. To achieve such production levels, CIL
will be required to expand its production work force to approximately 15-20
production workers.
Assuming its sales develop to a sufficiently increased level, CIL
intends to establish a full scale production facility (presumably in central New
Jersey), significantly larger than its present facility, at which it will
manufacture high performance racing engines modified with the Coates System on
an assembly line basis. Management estimates that CIL will require approximately
$7,500,000 of additional funding to establish and operate such a facility. Such
funding would be required to acquire the larger facility and production
machinery, to prepare assembly lines, castings and molds for manufacturing, to
acquire inventory including engine blocks and heads, crank shafts and bearings
and to employ additional production workers, mechanics, machine tool operators
and assembly personnel as well as marketing personnel.
7
<PAGE>
It is the intention of CIL to fund its business plan by borrowings
and the sale of equity and/or debt instruments, and through the sale of
sub-licenses. All of these financing vehicles will be pursued simultaneously. It
is not presently known which, if any, of these alternatives will be utilized,
whether they are available to CIL, and if available, in what mixture or in what
amounts.
In view of its minimal revenues and recurring losses from operations
since inception, its deficit accumulated during its development stage and its
limited liquid assets, no assurances can be given that CIL will be able to
pursue its business plan. If it does not obtain sufficient liquid assets to fund
such plan, CIL may be forced to sell its assets or to seek protection from
creditors through a bankruptcy or similar filing.
Note Regarding Forward-Looking Statements
This Quarterly Report contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Quarterly Report pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks and uncertainties that may cause the Company's actual results in
future periods to be materially different from any future performance suggested
herein.
8
<PAGE>
PART II - OTHER INFORMATION
None
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COATES INTERNATIONAL LTD.
By /s/ George J. Coates, President
George J. Coates, President,
Chief Executive and Chief Financial Officer
Dated: October, 1997
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statements of operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> jun-30-1997
<CASH> 16,263
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 219,043
<CURRENT-ASSETS> 247,841
<PP&E> 1,602,396
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,869,207
<CURRENT-LIABILITIES> 2,515,518
<BONDS> 0
0
5,963
<COMMON> 0
<OTHER-SE> 640,348
<TOTAL-LIABILITY-AND-EQUITY> 1,869,207
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 418,314
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600
<INCOME-PRETAX> (421,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (421,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (421,907)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
