SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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: 6,035,450 shares of Series A
Preferred Stock at September 30, 1997
<PAGE>
COATES INTERNATIONAL LTD.
Quarterly Report on Form 10Q for Quarter Ended September 30, 1997
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Attached.
1
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
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CONDENSED BALANCE SHEETS
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<TABLE>
September 30,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 205,862 $ 3,518
Cash Held in Escrow 112,000 --
Inventory 226,841 132,792
Total Current Assets 544,703 136,310
Property, Plant and Equipment - Net 1,592,421 1,616,968
Other Assets:
Deposits -- 2,500
Due from Stockholder 15,915 39,116
Due from Affiliated Companies 2,211 2,116
Total Other Assets 18,126 43,732
Total Assets $2,155,250 $ 1,797,010
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Redeemable Series A Preferred Stock $ -- $ 496,970
Mortgage Payable 210,000 210,000
Accrued Legal Fees 633,495 1,041,153
Accounts Payable 41,443 37,184
Accrued Interest 106,559 109,408
Other Accrued Expenses 172,260 88,616
Due to Stockholder 8,000 3,000
Total Current Liabilities 1,171,757 1,986,331
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,
6,035,450 and 5,963,600 Shares Issued and Outstanding
at September 30, 1997 and 1996, Respectively 6,035 5,963
Additional Paid-in Capital 15,355,490 12,669,739
Deficit Accumulated During the Development Stage (14,378,032) (12,865,023)
Total Stockholders' Equity [Deficit] 983,493 (189,321)
Total Liabilities and Stockholders' Equity [Deficit] $2,155,250 $ 1,797,010
</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 Nine months ended through
September 30, September 30, September 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 $ 687,375
Expenses:
Research and Development
Costs 68,373 38,983 204,564 199,447 7,657,470
General and Administrative
Expenses 193,699 304,923 766,610 864,344 6,988,851
Depreciation Expense 9,975 10,308 29,925 30,606 309,303
Total Operating Expenses 272,047 354,214 1,001,099 1,094,397 14,955,624
Loss From Operations (272,047) (354,214) (1,001,099)(1,057,022)(14,268,249)
Other Income [Expense]:
Interest Income 10,747 55 10,760 615 124,364
Interest Expense (3,600) (3,975) (10,800) (31,834) (234,146)
Net Other [Expense] 7,147 (3,920) (40) (31,219) (109,782)
Net Loss $ (264,900) $(358,134) $(1,001,139$(1,088,241$(14,378,031)
Net Loss Per Share $ (.04) $ (.06) $ (.17)$ (.18)
Weighted Average Number
of Shares 6,022,954 5,963,600 5,983,602 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]
Nine months ended through
September 30, September 30,
1 9 9 7 1 9 9 6 1 9 9 7
<S> <C> <C> <C>
Net Cash - Operating Activities $(1,768,396)$ (823,263) $(7,858,484)
Investing Activities:
Payments for Property and Equipment -- (5,252) (413,032)
Payments on Loans to Stockholders -- -- --
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 1,010,617 -- 2,379,908
Proceeds from Issuance of Stock in Private
Placement 960,000 804,694 7,338,148
Payment for Treasury Stock -- -- (30,000)
Loans from Stockholder -- 3,000 8,000
Payment to Potential Investor (10,000) -- (10,000)
Net Cash - Financing Activities 1,960,617 807,694 9,686,056
Net [Decrease] Increase in Cash and Cash
Equivalents 192,221 (24,251) 205,862
Cash and Cash Equivalents - Beginning of Periods 13,641 27,769 --
Cash and Cash Equivalents - End of Periods $ 205,862 $ 3,518 $ 205,862
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the periods for:
Interest Paid $ 10,800 $ 15,037 $ 56,957
Taxes Paid $ -- $ -- $ --
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended September 30, 1997, the Company had a noncash
financing transaction by issuing 23,825 shares of Series A Preferred Stock with
an aggregate par value of $24 and recording additional paid-in capital in the
amount of $476,946 in exchange for amounts due to potential investors of
$476,970.
During the nine months ended September 30, 1997, the Company had a noncash
investing and financing transaction in the amount of $15,688 for the acquisition
of equipment by a stockholder treated as additional paid-in capital.
Also during the nine months ended September 30, 1997, the Company had a
financing transaction in the amount of $10,000 for the repurchase of Redeemable
Series A Preferred Stock by a stockholder treated as additional paid-in capital.
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 Item 310 of Regulation S-B.
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 nine month periods ended September 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
In July 1997, as approved by the United States District Court for the Southern
District of New York [the "Court"], the Company, in conjunction with its
principal stockholder, completed a private placement of its Series A Preferred
Stock. As instructed by the Court, the Company satisfied its amounts due to
potential and other investors [as more fully described in Note 4 to the December
31, 1996, financial statements], by issuing 23,825 shares of its Series A
Preferred Stock. Also, as part of the private placement, the Company sold 48,000
shares of its Series A Preferred Stock for $960,000. These transactions resulted
in an increase to Series A Preferred Stock par value and additional paid-in
capital of $72 and $1,436,898, respectively.
As also instructed by the Court, the Company placed $112,000 of the net proceeds
in escrow for the payment of interest due to two former stockholders [as more
fully described in Note 4 to the December 31, 1996, financial statements]. The
balance of the net proceeds of the private placement were used to settle accrued
legal fees and other liabilities.
The completion of the private placement also relieved the Company of its
$773,500 contingent liability to potential investors, as more fully described in
Notes 4 and 10 to the December 31, 1996, financial statements, when the
Company's principal stockholder settled his court ordered liability with such
individuals by the transfer of his personal shares of the Company's Series A
Preferred Stock.
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, and the private placement
discussed in the preceding paragraph.
[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 nine months ended September 30, 1997 and 1996, $144,000
and $142,968, respectively, were paid for these services.
. . . . . . . . . . . .
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 September 30, 1997
Virtually no revenues were realized from the inception of operations
through September 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.
6
<PAGE>
CIL did not recognize any revenues during the quarter ended September
30, 1997 or during the corresponding quarter ended September 30, 1996. Loss from
operations and net loss aggregated ($272,047) and ($264,900) in the September
30, 1997 quarter as compared to ($354,214) and ($358,134) in the September 30,
1996 quarter. The reduction in losses in the September 30, 1997 quarter was
principally attributable to reduced general and administrative expenses in the
later quarter ($193,699 vs. $304,923) partially offset by higher research and
development expenses in the later quarter ($68,373 vs. $38,983).
CIL did not recognize any revenues for the nine months ended September
30, 1997. For the nine months ended September 30, 1996, CIL recognized $37,375
in revenues paid by Nicholson McLaren Engines Ltd. (U.K.) 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 ($1,001,099) and ($1,001,139) for the nine months ended September 30,
1997 as compared to ($1,057,022) and ($1,088,241) for the nine months ended
September 30, 1996. The income realized in the earlier nine month period was
offset by higher general and administrative expenses in such period ($864,344
vs. $766,610).
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, 1996
and during the nine months ended September 30, 1997 aggregated $404,549,
$1,132,523 and $1,053,339, 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 September 30, 1997, of ($14,378,031) and at September 30, 1997, had a
positive net worth of $983,493 and negative working capital of ($627,054).
At September 30, 1996, CIL had a negative net worth of ($189,321) and
negative working capital of ($1,850,021). The increase in net worth and in
working capital during the period September 30, 1996 to September 30, 1997 was
attributable to the receipt by CIL of capital contributions from Gregory Coates
and to the completion in July 1997 of a private placement by CIL, in conjunction
with George J. Coates, of Series A Preferred Stock, offset by losses. Pursuant
to the private placement, CIL sold 48,000 shares of its Series A Preferred Stock
for $960,000 and issued an additional 23,825 shares of Series A Preferred Stock
to investors who had previously subscribed for and advanced payment for such
shares. (See Item 3 of CIL's annual report on Form 10-KSB for the year ended
December 31, 1996).
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.
7
<PAGE>
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.
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
Item 1. Legal Proceedings
CIL incorporates herein by reference its response to Item 3 of its
annual report on Form 10- KSB for the year ended December 31, 1996.
Item 2. Changes in Securities and Use of Proceeds
(c) See "Management's Discussion - Liquidity and Capital Resources" as
to a private placement completed by CIL in July 1997 pursuant to which CIL sold
48,000 shares of Series A Preferred Stock for $960,000 and issued an additional
23,825 shares of Series A Preferred Stock to investors who had previously
subscribed for and advanced payment for such shares. Each of the investors
represented that he or she was an "accredited investor" as defined in Regulation
D promulgated under Securities Act of 1933 and was acquiring such shares for
investment and not with a view to distribution. The bulk of the net proceeds of
the private placement was applied to the payment of legal fees and other
payables.
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: November 18, 1997
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1997
<PERIOD-END> sep-30-1997
<CASH> 205,862
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 226,841
<CURRENT-ASSETS> 544,703
<PP&E> 1,592,421
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,155,250
<CURRENT-LIABILITIES> 1,171,757
<BONDS> 0
0
6,035
<COMMON> 0
<OTHER-SE> 977,458
<TOTAL-LIABILITY-AND-EQUITY> 2,155,250
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 272,047
<OTHER-EXPENSES> (10,747)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600
<INCOME-PRETAX> (264,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (264,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (264,900)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
