FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT O 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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
(Address of Principal Executive Office) (Zip Code)
(908) 449-7717
(Registrant's telephone number including area code)
Indicate by check mark 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 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 of Registrant's Preferred Stock Series A, $0.001 par
value, outstanding as of March 31, 1998, was 6,572,424 shares.
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Balance Sheet
- March 31, 1998 3
Statements of Operations
- Three months ended March 31, 1998 and 1997
and since inception 4
Statements of Cash Flows
- Three months ended March 31, 1998 and 1997
and since inception 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7 - 8
PART II - OTHER INFORMATION 9
SIGNATURES 10
EXHIBIT AND REPORTS ON FORM 8-K 11
FINANCIAL DATA SCHEDULE 14
2
<PAGE>
PART I - Item 1
Coates International, Ltd.
(A Development Stage Company)
Balance Sheet
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 32,690
Restricted cash 112,000
--------------
Total Current Assets 144,690
--------------
Property, Plant and Equipment - Net 1,580,448
--------------
Other Assets
Deposit 2,500
--------------
Total Assets 1,727,638
==============
Liabilities and Stockholders' Equity
Current Liabilities
Mortgage payable 160,000
Accounts payable and accrued expenses 910,139
Accrued interest payable 106,559
Due to stockholder 12,462
--------------
Total Current Liabilities 1,189,160
--------------
Stockholders' Equity
Preferred stock, Series A, $.001 par value, 14,000,000 shares authorized - voting,
non-cumulative convertible, 6,572,424 shares issued and outstanding 6,572
Common stock, $.001 par value, 20,000,000 shares authorized - no shares issued -
Additional paid-in capital 25,528,229
Deficit accumulated during the development stage (24,996,323)
--------------
Total Stockholders' Equity 538,478
--------------
$ 1,727,638
Total Liabilities and Stockholders' Equity
==============
</TABLE>
See notes to the condensed financial statements.
3
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
March 31,
1998
----------------
Three Months Ended
March 31,
--------------------------------- ----------------
1998 1997
--------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
--------------- --------------- ----------------
<S> <C> <C> <C>
Revenue $ - $ - $ 687,375
--------------- --------------- ----------------
Operating Expenses:
Research and development costs 92,740 71,447 18,211,323
General and administrative expenses 89,393 292,285 7,033,463
Depreciation expense 1,606 9,975 321,276
--------------- --------------- ----------------
Total Operating Expenses 183,739 373,707 25,566,062
--------------- --------------- ----------------
Loss From Operations (183,739) (373,707) (24,878,687)
--------------- --------------- ----------------
Other Income (Expense):
Interest income 94 6 124,960
Interest expense (3,600) (3,600) (242,596)
--------------- --------------- ----------------
Total Other Income (Expense) (3,506) (3,594) (117,636)
--------------- --------------- ----------------
Net Loss $ (187,245) $ (377,301) $ (24,996,323)
=============== =============== ================
Net Loss Per Share $ (0.03) $ (0.06)
=============== ===============
6,571,091 5,963,600
Weighted Average Number of Shares
=============== ===============
</TABLE>
See notes to the condensed financial statements.
4
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
March 31,
1998
-----------------
Three Months Ended
March 31,
-------------------------------- -----------------
1998 1997
--------------- -------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
--------------- -------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities $ (180,306) $ (321,863) $ (8,171,480)
--------------- -------------- -----------------
Cash Flows From Investing Activities - - (1,621,710)
--------------- -------------- -----------------
Cash Flows From Financing Activities
Proceeds of additional paid-in capital 48,747 321,275 2,356,185
Proceeds from issuance of stock 129,000 - 7,467,148
Payment for treasury stock - - (30,000)
Loans from stockholder - - 32,547
--------------- -------------- -----------------
Net Cash Provided by Financing Activities 177,747 321,275 9,825,880
--------------- -------------- -----------------
Net Increase (Decrease) in Cash (2,559) (588) 32,690
Cash - Beginning of Periods 35,249 13,641 -
--------------- -------------- -----------------
Cash - End of Periods $ 32,690 $ 13,053 $ 32,690
=============== ============== =================
</TABLE>
See notes to the condensed financial statements.
5
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Condensed Financial Statements
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 months ended March 31, 1998
and 1997 are not necessarily indicative of the results that may be expected
for the years ended December 31, 1998 and 1997. 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, 1997.
RELATED PARTY TRANSACTION
Subcontract Labor - The Company subcontracts its project expense (payroll,
insurance and supplies) from an entity in which George J. Coates is the sole
stockholder. During the three months ended March 31, 1998 and 1997, $25,121
and $52,000, respectively, were paid for these services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incident to the ordinary
course of business which are not possible to determine the probable outcome
or the amount of liability, if any, under these lawsuits. However, in the
opinion of management, the disposition of these lawsuits will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Coates International Ltd. ("CIL" or the "Company") is a Delaware corporation
organized in October 1991 by George J. Coates, as the successor in interest to a
Delaware corporation of the same name incorporated in August 1988 (the
"Predecessor Entity"). As a result of a dispute with certain former
employee-directors who claimed to own approximately nine % of the Predecessor
Entity's outstanding capital stock, the Predecessor Entity was reorganized in
November 1991. Pursuant to the reorganization, all of the Predecessor Entity's
assets subject to liabilities were distributed to CIL, the non-litigating
stockholders of the Predecessor Entity became the stockholders of CIL, and the
Predecessor Entity was dissolved.
CIL 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 Unites States patents (the "Coates Patents")
have been issued to George J. Coates. CIL holds an exclusive license from George
J. Coates and his son Gregory Coates, to manufacture, sell and grant
sub-licenses with respect to products based on the Coates Patents, within all of
the countries, their territories and possessions, comprising North America,
South America and Central America (the "License 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 moneys including royalties received from 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 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 much time attempting 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. CIL intends to aggressively
pursue all inquiries with the goal of obtaining firm orders. CIL's ability to
generate revenues and achieve profitable operations is principally dependent
upon the execution of sub-license agreements with engine manufacturers and
retrofitters and upon the Company's successful marketing and sales of high
performance automotive, motorcycle and marine racing engines. Despite limited
success to-date Coates will continue manufacturing a limited inventory of
automotive engines, and pursue the marketing of Coates System technology. Such
efforts will especially be directed towards sub-licensing of the technology.
7
<PAGE>
Results of Operations for the Quarters Ended March 31, 1998 and 1997
No revenues were recognized during the quarters ended March 31, 1998, and 1997.
During the last quarter, the Company continued its efforts to complete testing
and trial of certain engine configurations, to further the prospects for
successful negotiation of potential sub-license agreements with engine
manufacturers and refitters. These efforts, however, were hampered by a shortage
of cash, and management at this time cannot with any degree of certainty predict
when meaningful revenues might be achieved.
Operating expenses incurred during the last quarter amounted to $183,739
compared to $373,707 for the same period in 1997. The largest single cost
element was research & development expense which totaled $92,740 during the
first three months in 1998. Significant savings were achieved in general and
administrative expenses which decreased to $89,393 for the quarter, from
$292,285 in the first quarter 1997. These cost decreases were the result of
staff reductions and streamlining of operations, partly due to the ongoing cash
shortage.
After recognizing $3,506 net interest expense, the Company's operations show a
net loss of $187,245 or $0.03 per share for the quarter ended March 31, 1998,
compared to a net loss of 377,301 or $0.06 per share for the same quarter in the
preceding year.
Total losses since inception in August 1988 through March 31, 1998 amount to
$24,996,323 .
Liquidity and Capital Resources
At March 31, 1998, CIL had a net worth of $538,478 compared to a net worth of
$547,976 at the beginning of the year. Working capital showed a deficiency of
$(1,044,470) at March 31, 1998, compared to a negative $(1,036,578) at December
31, 1997. The cash outflow primarily as a result of operating losses could be
compensated for by funds received from the private sale of 7,500 shares of the
Company's Series A preferred equity which yielded $129,000 in cash. Thus, the
financial condition of the Company in essence remained unchanged from the status
at the beginning of the fiscal year.
In order to further improve the Company's financial situation and provide funds
to meet current obligations and finance the ongoing efforts to market the
Company's products, management plans to raise additional capital through a
combination of private placements and debt issues.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The response to this item can be found in the Company's annual report on Form
10-KSB, Item 3, for the year ended December 31, 1997, which is being
incorporated herein by reference to such report.
Item 2 CHANGES IN SECURITIES
During the first quarter of 1998, the Company issued the following unregistered
securities:
7,500 shares of Series A Preferred Stock for an aggregate $129,000 in
cash, to Gregory Coates, the son of the Company's President and Chief Executive
Officer, George J. Coaqtes. The Company issued the aforesaid shares pursuant to
Section 4(2) of the Securities Act. In addition, the Company issued 500 shares
of its Series A Preferred Stock to a vendor for services rendered.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(1) Form 8-K, filed with the Securities and Exchange Commission
via EDGAR on March 31, 1998, re item 4, Changes in Registrant's
Certifying Accountant attached as an exhibit hereto.
9
<PAGE>
SIGNATURES
Pursuant to 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.
COATES INTERNATIONAL, LTD.
Date: June 30 , 1998 By: _s/George J. Coates________________
George J. Coates
Chief Executive and Chief
Financial Officer
10
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 27, 1998
Coates International, Inc.
Exact name of Registrant as specified in charter)
Delaware 33-94884 22-2925432
(State or other (Commission (IRS employer
jurisdiction of file number) identification
incorporation no.)
Highway 34 & Ridge Road, Wall, New Jersey 07719
(Address of principal executive office) Zip Code
Registration telephone number, including area code: (732) 449-7717
Former name or former address, if changed since last report)
11
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
(a)
304(a)(1)(i): Moore Stephens, P.C., Registrant's former
independent accountant previously engaged as the principal accountant
to audit the Registrant's financial statements, was dismissed on March
27, 1998.
(a)(1)(ii): Moore Stephens, P.C. issued a qualified opinion in
its audit report of Registrant's financial statements for the fiscal
years ended December 31, 1996 and December 31, 1995, dated January 24,
1997, wherein Moore Stephens, P.C.expressed uncertainty as to whether
Registrant would be able to continue its operations and businesses as a
going concern.
(a)(1)(iii): The Registrant's Board of Directors recommended
and approved the dismissal of Moore Stephens, P.C. and the hiring of
Rosenberg Rich Baker Berman & Company Certified Public Accountants, 380
Foothill Road, Bridgewater, New Jersey as the Registrant's principal
independent accountant.
(a)(1)(iv)(A),(B) and (C): Registrant is unaware of any
disagreements between Registrant and Moore Stephens, P.C. on any matter
of accounting principles or practices, financial statement disclosures,
or auditing scopes or procedures during Registrant's fiscal years ended
December 31, 1996 and December 31, 1995, reported upon by Moore
Stephens, P.C.
(a)(1)(v)(A),(B) and (C): Not applicable.
(a)(1)(v)(D)(3): Registrant has provided its former
accountant, Moore Stephens, P.C., with a copy of the disclosures set
forth in this Current Report filed on Form 8-K, requesting it to
furnish the Registrant with a letter addressed to the Securities and
Exchange Commission (the "Commission") stating whether it agrees with
the statements contained herein and, if not, setting forth in said
letter the respects in which it does not agree. Registrant undertakes
to file any letter received from Moore Stephens, P.C. in response
hereto as an exhibit to this Current Report filed on Form 8-K by
amendment on the earlier date of (a) 10 days from the date this Current
Report on Form 8-K is filed with the Commission, or, (b) within two
business days of Registrant's receipt of such letter.
12
<PAGE>
Item 7. Financial Statements and Exhibits.
(a),(b): Not applicable.
(c): Exhibits (1): The Letter to Moore Stephens,
P.C., dated March 31, 1998, re change in certifying accountants is
filed herewith in accordance with Item 601 (16) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
March 31, 1998 Coates International, Ltd.
By: s/George J. Coates
George J. Coates, President
13
coates.8k
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1998 FINANCIAL STATEMENTS OF COATES INTERNATIONAL
LTD. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000948426
<NAME> Coates International, Ltd.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Dec-31-1997
<PERIOD-END> Mar-31-1998
<CASH> 144,690
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 144,690
<PP&E> 1,936,219
<DEPRECIATION> 355,771
<TOTAL-ASSETS> 1,727,638
<CURRENT-LIABILITIES> 1,189,160
<BONDS> 160,000
0
6,572
<COMMON> 0
<OTHER-SE> 531,906
<TOTAL-LIABILITY-AND-EQUITY> 1,727,638
<SALES> 0
<TOTAL-REVENUES> 94
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 187,739
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> (187,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (187,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (187,245)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
