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, 1996
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, 1996
<PAGE>
COATES INTERNATIONAL LTD.
Quarterly Report on Form 10Q for Quarter Ended June 30, 1996
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 6 1 9 9 5
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 28,809 $ 269,405
Inventory 83,658 --
---------- -----------
Total Current Assets 112,467 269,405
---------- -----------
Property, Plant and Equipment - Net 1,627,276 1,668,288
---------- -----------
Other Assets:
Deposit 2,500 --
Due from Stockholder 39,116 3,462
Due from Affiliated Companies 2,116 1,516
---------- -----------
Total Other Assets 43,732 4,978
---------- -----------
Total Assets $1,783,475 $ 1,942,671
========== ===========
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Redeemable Series A Preferred Stock $ 496,970 $ 496,970
Mortgage Payable 225,000 300,000
Accrued Legal Fees 884,405 520,364
Accounts Payable 22,988 11,489
Accrued Interest 107,833 127,068
Other Accrued Expenses 82,476 6,741
Due to Officer -- 5,500,000
---------- -----------
Total Current Liabilities 1,819,672 6,962,632
---------- -----------
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 and 5,688,000 Shares Issued and Outstanding at
June 30, 1996 and 1995, Respectively 5,963 5,688
Additional Paid-in Capital 12,464,729 5,845,489
Deficit Accumulated During the Development Stage (12,506,889) (10,871,138)
Total Stockholders' Equity [Deficit] (36,197) (5,019,961)
---------- -----------
Total Liabilities and Stockholders' Equity [Deficit] $1,783,475 $ 1,942,671
========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
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 6 1 9 9 5 1 9 9 6 1 9 9 5 1 9 9 6
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $ 37,375 $ -- $ 37,375 $ -- $ 687,375
---------- --------- ---------- ---------- -----------
Expenses:
Research and Development
Costs 59,682 78,395 160,464 5,656,889 7,367,745
General and Administrative
Expenses 294,031 188,738 559,421 427,790 5,466,380
Depreciation Expense 10,309 16,551 20,298 32,920 258,761
---------- --------- ---------- ---------- -----------
Total Operating Expenses 364,022 283,684 740,183 6,117,599 13,092,886
---------- --------- ---------- ---------- -----------
Loss From Operations (326,647) (283,684) (702,808) (6,117,599) (12,405,511)
---------- --------- ---------- ---------- -----------
Other Income [Expense]:
Interest Income 100 2,891 560 5,687 113,043
Interest Expense (6,359) (22,625) (27,859) (45,250) (214,421)
---------- --------- ---------- ---------- -----------
Net Other [Expense] (6,259) (19,734) (27,299) (39,563) (101,378)
---------- --------- ---------- ---------- -----------
Net Loss $ (332,906) $(303,418) $ (730,107) $(6,157,162) $(12,506,889)
========== ========= ========== =========== ============
Net Loss Per Share $ (.06) $ (.05) $ (.12) $ (1.08)
========== ========= ========== ===========
Weighted Average Number
of Shares 5,963,600 5,688,600 5,963,600 5,688,600
========== ========= ========== ==========
</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 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Cash - Operating Activities $ (604,962) $ (193,319) $(5,063,457)
----------- ----------- -----------
Investing Activities:
Payments for Property and Equipment (5,252) -- (413,032)
Payments on Loans to Stockholders -- 332,343 --
Loans to Stockholders (3,430) -- (1,204,621)
----------- ----------- -----------
Net Cash - Investing Activities (8,682) 332,343 (1,617,653)
----------- ----------- -----------
Financing Activities:
Proceeds of Additional Paid-in Capital 614,684 -- 966,733
Proceeds from Issuance of Stock -- -- 6,378,148
Payment for Treasury Stock -- -- (30,000)
Payment on Stockholders' Loans -- (4,538) --
----------- ----------- -----------
Net Cash - Financing Activities 614,684 (4,538) 7,314,881
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 1,040 134,486 633,771
Cash and Cash Equivalents - Beginning of Periods 27,769 134,919 --
----------- ----------- -----------
Cash and Cash Equivalents - End of Periods $ 28,809 $ 269,405 $ 633,771
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid $ 11,062 $ 13,500 $ 38,806
Taxes Paid $ -- $ -- $ --
See Notes to Condensed Financial Statements.
</TABLE>
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,
1996 and 1995 are not necessarily indicative of the results that may be expected
for the years ended December 31, 1996 and 1995. 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, 1995.
[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 1995 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, 1996 and 1995, $122,812 and
$84,500, respectively, were paid for these services.
[4] Patents and Licenses
Development of the Coates System technology was initiated by George J. Coates,
CIL's founder, principal and controlling stockholder and chief executive
officer, in the late 1970's and development efforts have been conducted
continuously since such time. From July 1982 through May 1993, seven United
States patents [the "Coates Patents"][as well as a number of foreign patents],
were issued to George J. Coates with respect to the Coates System. The consent
order allowed George J. Coates the alternative to elect to retain title to his
patents on the condition that he either: (a) grant to CIL an exclusive and
irrevocable license to utilize and exploit the patents, or (b) reimburse CIL for
all monies expended in the preparation, application and/or prosecution of the
patents, including but not limit to, legal fees paid by CIL. George J. Coates
elected to reimburse CIL and retain possession of the patents and did so during
1995. In February 1995, George J. Coates and his son Gregory Coates each granted
CIL a non-exclusive license 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"]. The licenses were
non-exclusive so that neither George J. Coates nor Gregory Coates were
prohibited from granting similar licenses to other parties within the Licenses
Areas or to otherwise compete directly with CIL. The licenses expire in the
event of bankruptcy or similar insolvency of CIL. CIL agreed to pay a $5,500,000
license fee to George J. Coates in consideration for his grant to CIL of the
non-exclusive license payable at management's discretion but in no event later
than February 17, 1998. In September 1995, this arrangement was modified. CIL
and George J. Coates agreed that instead of the $5,500,000 payment, CIL would
issue 275,000 shares of Series A Stock to Mr. Coates, which cost the Company
charged to research and development for the year ended December 31, 1995. The
stock was issued to George J. Coates in November 1995.
5
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONDENSED FINANCIAL STATEMENTS, Sheet #2
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[5] Commitments and Contingencies
As more fully discussed in Note 4 to the financial statements at December 31,
1995, 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.To the extent that Mr. Coates is unable to pay any such amounts to
the Rescinding Shareholders, 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 Rescinding
Shareholders. 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.
. . . . . . . . . . . .
6
<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, 1996
Virtually no revenues were realized from the inception of operations through
June 30, 1996, 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.
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.
No revenues were recognized by CIL with respect to the quarter ended June 30,
1995. Loss from operations and net loss aggregated ($326,647) and ($322,906) in
the June 30, 1996 quarter as compared to ($283,684) and ($303,418) in the June
30, 1995
7
<PAGE>
quarter, the difference being principally attributable to increased general and
administrative expenses in the second quarter of 1996.
For the six months ended June 30, 1996, CIL recognized $37,375 in revenues.
CIL did not recognize any revenues for the six months ended June 30, 1995. Loss
from operations and net loss aggregated ($702,808) and ($730,107) for the six
months ended June 30, 1996 as compared to ($6,117,599) and ($6,157,162) for the
six months ended June 30, 1995. The difference in results was principally
attributable to a $5,500,000 license fee expensed as a research and development
expense in the prior period payable to George J. Coates which was subsequently
satisfied by issuance of 275,000 shares of CIL Series A Preferred Stock to
George J. Coates.
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 aggregated
$404,549. 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, 1996, of
($12,506,889) and at June 30, 1996 had a negative net worth of ($36,197) and
negative working capital of ($1,707,205).
At June 30, 1995, CIL had a negative net worth of ($5,019,961) and negative
working capital of ($6,693,227) of which $5,500,000 was attributable to the
license fee owed to George J. Coates and carried as a current liability. The
improvement in CIL's net worth and working capital position at June 30, 1996 was
principally attributable to the satisfaction of the license fee obligation
through the issuance of 275,000 shares of CIL Series A Preferred Stock to Mr.
Coates in November 1995.
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.
8
<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.
9
<PAGE>
PART II - OTHER INFORMATION
None
10
<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
George J. Coates, President,
Chief Executive and Chief Financial Officer
Dated: October, 1997
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> jun-30-1996
<CASH> 28,809
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 83,658
<CURRENT-ASSETS> 112,467
<PP&E> 1,627,276
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,783,475
<CURRENT-LIABILITIES> 1,819,672
<BONDS> 0
0
5,963
<COMMON> 0
<OTHER-SE> 30,234
<TOTAL-LIABILITY-AND-EQUITY> 1,783,475
<SALES> 0
<TOTAL-REVENUES> 37,375
<CGS> 0
<TOTAL-COSTS> 364,022
<OTHER-EXPENSES> (100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,359
<INCOME-PRETAX> (332,906)
<INCOME-TAX> 0
<INCOME-CONTINUING> (332,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (332,906)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
