SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from____________to______________
Commission File Number 33-94884
COATES INTERNATIONAL LTD.
(Exact name of small business issuer 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)
Issuer's telephone number, including area code (908) 449-7717
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or in any amendment to
this Form 10-KSB. [ ]
Issuer did not generate any revenues for the year ended December 31, 1997.
During the year ended December 31, 1997, there was no established public trading
market for the issuer's Series A Preferred Stock. On December 31, 1997, there
were 6,564,424 shares of Series A Preferred Stock of the Issuer issued and
outstanding.
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COATES INTERNATIONAL LTD.
PART I
Item 1. Description of Business
Background
Coates International Ltd. ("CIL") has completed the basic development of a
spherical rotary valve system (the "Coates System") for use in piston driven
internal combustion engines of all types. Development of the Coates System was
initiated by CIL's founder, George J. Coates, in Ireland in the late 1970's. In
1982, Mr. Coates obtained a patent from the Republic of Ireland for the Mark I
version of the Coates spherical rotary valve system for use in piston driven
engines. In 1986, George J. Coates emigrated to the United States where he
commenced development of the Mark II version and subsequently, the Mark III
version of his spherical rotary valve system. Between 1990 and 1994, George J.
Coates was issued seven United States patents (the "Coates Patents") with
respect to various aspects of the Coates System including the Mark II and the
Mark III version. Mr Coates has also been issued a number of foreign patents
with respect to various aspects of the Coates System and has patent applications
pending in several foreign jurisdictions. See "Patents and Licenses."
CIL holds an 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 all of the countries, their territories and
possessions, comprising North America, Central America and South America (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 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. See "Patents and Licenses."
CIL and its Predecessor Entity have realized insignificant revenues from
the inception of the Predecessor Entity in August 1988 through the present date
and is a company in the development stage. In July 1991, CIL signed a prototype
manufacturing agreement with Harley-Davidson, Inc. ("Harley Davidson") as a
prelude to an anticipated license agreement. Pursuant to the prototype
manufacturing agreement, CIL 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, to date,
developed a retrofitted Harley Davidson motorcycle engine using the Coates
technology that is acceptable to Harley Davidson and no assurances can be given
that an acceptable engine will be developed or that a license agreement will be
concluded with Harley Davidson. Under the terms of a February 1994 license
agreement, CIL received a $500,000 initial payment made by Millwest Corporation
("Millwest") for a license of the Coates System technology. Millwest
subsequently defaulted in making the next payment required under the license
agreement. In 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 shipped to
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Nicholson McLaren by CIL. In April and July 1996, CIL executed a License
Agreement and a Sales Representative Agreement with Nicholson McLaren. See
"Patents and Licenses."
Since its inception, the bulk of the development costs and related
operational costs of CIL have been funded primarily through cash generated from
the sale of stock, through capital contributions made by Gregory Coates and the
above described payments from Harley Davidson and Millwest. As a development
stage company, CIL has incurred losses from the inception of the Predecessor
Entity in August 1988 through December 31, 1997 of $24,809,078 and at December
31, 1997, had a negative net worth of ($547,976) and negative working capital of
($1,036,578).
Business Plan
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 several 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.
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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.
The Coates System
The Coates System differs from the conventional poppet valve currently
used in almost all piston driven automotive, motorcycle and marine engines, by
changing the method by which the air and fuel mixture is delivered to the engine
cylinder as well as the method of expelling the exhaust gases after the mixture
is ignited. Unlike the poppet valve which protrudes into the engine cylinder,
the Coates System utilizes spherical valves which do not protrude into the
cylinder but rotate in a cavity formed between a two piece cylinder head. As a
result of employing fewer moving parts as compared to the poppet valve and not
protruding into the engine cylinder, management believes that the Coates System
will promote less engine wear and will require less lubrication over the life of
the engine. In addition, because the Coates System does not employ parts which
protrude into the engine cylinder, it is designed with larger openings into the
cylinder than conventional poppet valves so that more fuel and air mixture can
be inducted into and expelled from the engine cylinder in a shorter period of
time using the Coates System, leading to an ability to operate the engine faster
and an ability to utilize higher compression ratios with lower combustion
chamber temperatures. Management believes that as a result, engines modified
with the Coates System will produce more power than similar engines utilizing
the poppet valve system.
Third Party Evaluations. In May 1993, a team of Chrysler Corporation
("Chrysler") engineers made a trip to the CIL facility in Wall Township, New
Jersey to observe and evaluate the "Coates Spherical Rotary Valve Train System"
for a possible investment by Chrysler. The Chrysler team recommended that "...no
further activity should be undertaken by Chrysler at this time..." because of a
lack of documented proof to substantiate that the System functions as claimed.
Among other factors, the Chrysler team concluded that CIL required an
"exorbitant" up-front licensing fee and vehicle royalty, that documented proof
of component durability, system performance and emissions characteristics were
non-existent and that demonstrated components were not acceptable. The Chrysler
team also concluded that the Coates System's kinematics were extremely
efficient, would yield a lower package height than a comparable poppet valve
system and had good emission development potential. In listing potential
benefits of the Coates System, the Chrysler team indicated that in comparison to
a poppet valve train system, the Coates System will consist of fewer components,
will reduce the vertical height of the cylinder head and will permit a higher
rotating speed. Other cited potential benefits of the Coates System included
improved power output and idle quality, reduced hydrocarbon emissions and
potential emissions and fuel economy benefits. The Chrysler team also cited
certain Coates System components as potential problems for meeting 100,000 mile
durability goals including the combustion chamber seals, the spherical rotary
valves "especially the exhaust", and the rotating valve shaft bearings. Other
cited potential problems included a statement
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that the overall weight may be greater than a comparable poppet valve train
system and that initial manufacturing costs will be greater than a comparable
poppet valve train system.
Pursuant to a July 1991 prototype manufacturing agreement signed by CIL
with Harley Davidson as a prelude to an anticipated license agreement, Harley
Davidson engineers (according to Harley Davidson) conducted dynamometer tests of
two prototype motorcycle engines modified to incorporate the Coates System. In
the fall of 1991, Harley Davidson advised CIL that relatively early in the test
process, each prototype engine experienced mechanical durability problems.
Subsequently, CIL has reassembled the Harley Davidson motorcycle engine, the
same engine previously tested by Harley Davidson, again utilizing the Coates'
technology. CIL is in the process of testing this reassembled motorcycle engine
which has now been running for over two years. Notwithstanding the facts that
the Harley Davidson motorcycle engine has been reassembled and has been running
for over two years, it has not been delivered nor tested by Harley Davidson.
Accordingly, there can be no assurances given that Harley Davidson will accept,
test and/or agree to license this reassembled Harley Davidson motorcycle engine.
Test Results. An automobile engine modified with the Coates System was
tested in February and August 1990 and February 1991 at the facilities of
Compliance and Research Services, Inc. ("CRS") an independent motor vehicle
testing contract laboratory recognized by the United States Environmental
Protection Agency ("EPA"), in tests set up to measure power and fuel economy.
The test results indicated emission levels of pollutants which were
substantially higher than maximum emission levels permitted pursuant to
regulations adopted by the EPA. However, the tests conducted were not emissions
tests and the engine of the vehicle being tested had been operated for more than
100,000 miles prior to testing. Furthermore, the engine tested was not equipped
with an EGR system or an air pump, two standard pollution control devices
required to be installed in most automobiles operating on U.S. roads today.
Subsequently, CRS conducted an emission test in February 1995 on a 1985 Mercedes
engine modified to utilize the Coates System as compared to a similar 1985
Mercedes engine not so modified. The test, conducted on a dynamometer and
characterized as a "hot start" test, comprised only one of the three required
Federal Testing Procedure or "FTP" tests required by the EPA to be passed before
any vehicles containing engines can be sold to the public for commercial use in
the United States. The test results were as follows:
Pollutants Emitted
(in Grams per Mile)
Total Total CarbonOxides of
Hydrocarbons Monoxide Nitrogen
Mercedes Engine
with Coates System .642 1.752 3.069
Mercedes Engine
without Coates System .978 4.237 3.032
Maximum allowable
EPA emission standards .41 3.4 1.0
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Although the Mercedes engine modified with the Coates System emitted
substantially less pollutants than the non-modified Mercedes engine in two of
the three categories and emitted only slightly more oxides of nitrogen than the
non-modified Mercedes; in two of the three pollutant categories, the Coates
System modified engine emissions exceeded maximum permitted EPA emission
standards. It should be noted that in these preliminary tests conducted in 1995,
neither engine was equipped with an EGR system or an air pump. No assurances can
be given that equipping the Coates System modified engine with an EGR system and
an air pump would have reduced pollutant emissions to EPA acceptable levels or
that continued developmental efforts on the Coates System will reduce total
hydrocarbon and oxides of nitrogen emissions to EPA acceptable levels.
A vehicle engine runs approximately 50% of its life at idle, or close to
idle. Most pollution occurs when vehicles are bumper to bumper, in a stop and go
situation. This happens mainly in cities where the majority of people and
vehicles are concentrated. The EPA has standards for vehicles in these
situations. Every vehicle in the United States must pass a tailpipe emissions
test on a regular basis. On February 26, 1991, a Mercedes 280 equipped with the
Coates System was tested at Glendinning Ultra Service Center, Wall Township, New
Jersey 07719 (a local service station which is not an independent motor vehicle
testing contract laboratory recognized by the EPA), with results as follows:
HC 134 PPM
CO 0.22%
CO2 14.66%
O2 0.0%
RPM 1,000
At such time, the maximum EPA limits were:
HC 220 PPM
CO 1.2%
NOx was not required.
On March 30, 1993 another tailpipe test was carried out with a Mercedes 280
fitted with the Coates System at a local State of New Jersey Motor Vehicle
Inspection Station (which is also not an independent motor vehicle testing
contract laboratory recognized by the EPA), in order to register the vehicle and
the emission levels were as follows:
HC 0 PPM
CO .00%
RPM 825
Another test carried out on the same day at the same facility indicated the
following emission levels:
HC 0 PPM
CO .01%
RPM 1,264
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The tests conducted at the local service station and at the Motor Vehicle
Inspection Station were not dynamometer tests and were conducted merely to
indicate how much emissions the engine puts out at idle or in a traffic
situation.
Patents and Licenses
In 1982, George J. Coates obtained a patent from the Republic of Ireland
for the Mark I version of the Coates spherical rotary valve system for use in
piston driven internal combustion engines. In 1986, George J. Coates emigrated
to the United States where he commenced development of the Mark II version and
subsequently the Mark III version of his spherical rotary valve system. Between
1990 and 1994, George J. Coates was issued seven United States patents (the
"Coates Patents") with respect to various aspects of the Coates System including
the Mark II and Mark III version. The Coates Patents are as follows:
Date Date
U.S. Patent No. Application Filed of Patent
4,989,576 (Mark I) July 26, 1982 February 5, 1991
4,953,527 (Mark II) November 14, 1988 September 4, 1990
4,989,558 September 14, 1989 February 5, 1991
4,944,261 (Mark IIB) October 16, 1989 July 31, 1990
4,976,232 December 6, 1989 December 11, 1990
5,109,814 May 10, 1991 May 5, 1992
5,361,739 (Mark III) May 12, 1993 November 8, 1994
The Mark I, Mark II, Mark IIB and Mark III patents were also the
subject of foreign filings by Mr. Coates who has been issued foreign patents
with respect to some of these filings by Austria, Belgium, Denmark, France,
Germany, Great Britain, Greece, Italy, Luxembourg, The Netherlands, Spain,
Sweden and Switzerland as well as by Australia, Brazil, Canada, Hong Kong,
Japan, Korea, Mexico, Singapore, South Africa and Taiwan. Mr. Coates continues
to have patent applications pending in some of these as well as other foreign
jurisdictions.
In connection with the settlement of the SEC complaint described in Item 3
herein, the final consent judgment executed by George J. Coates permitted him to
retain title to the Coates Patents as well as all other patents pending or
issued with respect to his Spherical Rotary Valve technology and future patent
applications with respect to such technology (collectively, the "Patents")
provided that he reimburse CIL for all monies expended in the preparation,
application and/or prosecution of the Patents. Such sums in the aggregate amount
of $434,639 were credited to or paid to CIL in 1995 so that George J. Coates
retained title to the Patents.
Subsequent thereto, 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. On December 22, 1997, George J.
Coates and his son Gregory Coates amended the existing license agreement and
previous amendments thereto, modifying them from a non-exclusive license to an
exclusive one. The licenses expire in the event of bankruptcy or similar
insolvency of CIL. 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
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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 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 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 as the license fee. The shares were issued to Mr. Coates
in November 1995.
See "Item 1 - Business-The Coates System-Third Party Evaluations" as to a
July 1991 prototype manufacturing agreement executed by CIL with Harley Davidson
as a prelude to an anticipated license agreement. As CIL has been unable, to
date, to develop a retrofitted Harley Davidson motorcycle engine using the
Coates technology that is acceptable to Harley Davidson, no assurances can be
given that a license agreement will be concluded with Harley Davidson.
In February 1994, CIL executed a license agreement with Millwest
Corporation of Dumas, Texas ("Millwest") granting Millwest a five year exclusive
license to retrofit pre-existing internal combustion engine blocks (excluding
air-cooled engines and engines used for racing competition) by replacing the
pre-existing valve system with the Coates Spherical Rotary Valve System in the
United States, its territories and possessions, Canada and Mexico, the five year
term to commence after payment to CIL by Millwest on or before May 4, 1994 of a
$10,000,000 licensing fee. The agreement also provided Millwest with a
non-exclusive license to manufacture the Coates Spherical Rotary Valve System
subject to the payment of royalties. Additional payments of $1,666,666 were
required to be paid to CIL on the third, fourth and fifth anniversary of the
effectiveness of the license. An additional $15,000,000 payment is due on
February 5, 1999. Millwest made an initial $500,000 payment pursuant to the
agreement in February 1994 but has failed to pay the additional $9,500,000 to
activate the license. CIL has placed Millwest on notice that it is in default.
In June 1995, Millwest informed CIL of an intention to activate the license
agreement claiming that financing had 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.
His appearance at the Birmingham (U.K.) Autosport Show in January 1996
resulted in George J. Coates receiving a letter of intent from Nicholson McLaren
to acquire a license to distribute the racing engines modified with the Coates
System within the European Patent Community upon a commission or royalty basis
to be negotiated. Also, as a result of George J. Coates' appearance at the same
show, CIL received a $1,000 check from Noble Motorsport U.S.A., a subsidiary of
Ascari Cars Ltd. (U.K.) (formerly Noble Motor Sport Ltd.) and a $28,000 order to
install a high performance racing car engine modified with the Coates System in
an Ascari racing car. The car was delivered in March 1996 to the CIL plant in
Wall Township, New Jersey, but to date, an engine modified with the Coates
System has not been installed in the car.
In April 1996, CIL executed a license agreement with Nicholson McLaren
granting Nicholson McLaren a non-exclusive license to assemble, sell, use and
lease internal combustion engines incorporating the Coates Spherical Rotary
Valve System within the European Patent Community, which includes but is not
limited to Austria, Belgium, Denmark, France, Germany, Greece, Ireland,
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Italy, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. In
consideration of the rights granted under the license agreement, Nicholson
McLaren agreed to pay CIL a licensing fee of $5 million payable $37,375 upon
receipt of the first demonstration model by Nicholson McLaren from CIL; another
$37,375 upon receipt of the second; with the balance to be paid out of sales (if
any) of internal combustion engines modified with the Coates Spherical Rotary
Valve System assembled by Nicholson McLaren with components purchased from CIL.
The balance is payable pursuant to a payment schedule to be mutually agreed
between both parties. The license agreement also gives Nicholson McLaren the
right to obtain a manufacturing license from CIL against payment of royalties on
the manufacture of components at a rate to be established. The Company
recognized revenue of $37,375 in 1996 upon receipt of cash from Nicholson
McLaren after delivery of the first demonstration model in April 1996. CIL has
waived payment for the second demonstration model which was delivered in July
1996. CIL has retained ownership to this second model which is being
demonstrated by Nicholson McLaren for potential customers on behalf of CIL. The
payment schedule with respect to the balance of the licensing fee has not yet
been finalized by the parties. No assurances can be given that CIL will be paid
a substantial portion of the balance of the licensing fee by Nicholson McLaren
as such balance is contingent upon future sales by Nicholson McLaren of internal
combustion engines modified with the Coates Spherical Rotary Valve System.
During 1996, John Nicholson, the president of Nicholson McLaren purchased 4,000
shares of CIL Series A Stock at $20 per share.
In June 1996, CIL executed a Sales Representative Agreement retaining an
affiliate of Nicholson McLaren as its exclusive sales representative in the
United Kingdom and Europe for the sale of the Coates Technology for a four-year
term. The agreement provides for a sliding scale commission varying from 5% of
the first $1 million in Net Product Billings to 1% of the fifth $1 million in
Net Product Billings and all amounts in excess thereof. No assurances can be
given that the sales representative will produce significant billings for CIL
products pursuant to the agreement.
Employees
At December 31, 1997, CIL employed 5 full-time employees and 1 part-time
employee including George J. Coates and his son Gregory who perform both
management, assembly and research and development functions; George J. Coates'
wife Bernadette who is involved in administration functions and a part-time
bookkeeper.
Item 2. Description of Property
CIL's executive offices and testing facility are located in an
approximately 25,000 square foot one and one-half story building of concrete and
steel construction on a 6 1/2 acre site in Wall Township, New Jersey. CIL
acquired this property from The George J. Coates 1991 Family Partnership, L.P.
in 1995. See "Item 12" herein.
In its development operations, CIL owns and utilizes milling machines,
lathes, grinders, hydraulic lifts and presses, tooling, dynamometers and
emission testing machines and computerized drafting and printing equipment. All
of such equipment is in good condition, reasonable wear and tear excepted.
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Item 3. Legal Proceedings
SEC Complaint
In July 1994, the SEC filed a complaint in the United States District
Court for the Southern District of New York (94 Civ. 5361) against George J.
Coates, CIL and certain affiliated companies seeking injunctive and other
relief. In its complaint, the SEC alleged that CIL and George J. Coates raised
"...almost $6.5 million from almost 400 investors..." through offers, purchases
and sales of CIL securities which the SEC alleged were fraudulent. The SEC
alleged that CIL and George J. Coates misrepresented the capabilities of the
Coates engine; omitted to disclose negative results of independent tests on the
engine; falsely claimed that CIL had sold licenses and received orders and other
commercial opportunities; and misrepresented that George J. Coates had assigned
all patents related to the Coates engine to CIL. The SEC also alleged that CIL
and George J. Coates had failed to disclose to shareholders that certain of the
shares sold by Mr. Coates were not authorized by CIL; that George J. Coates
misappropriated or misused approximately $2 million of investor funds for his
personal benefit; and that CIL had engaged in several related party transactions
with other entities controlled by George J. Coates.
At the time of the filing of the SEC complaint, the Court issued an order
freezing the assets of CIL and George J. Coates (although George J. Coates was
permitted to use future income for living expenses). The Court appointed Donald
H. Steckroth, Esq., a New Jersey attorney, as Temporary Receiver, to take
possession and control of CIL's assets and properties, to preserve the status
quo and to prevent any misuse, encumbrance or disposal of CIL's corporate
property and assets.
Arrest of George J. Coates
At the same time as the SEC complaint was filed in July 1994, an inspector
for the United States Postal Inspection Service swore out a criminal complaint
against George J. Coates in the United States District Court for the Southern
District of New York, based on allegations similar to those contained in the SEC
complaint. As a result, Mr. Coates was arrested but he was released after four
days of incarceration. On May 30, 1995, a United States Magistrate Judge of the
United States District Court for the Southern District of New York signed an
order in response to a request by the office of the United States Attorney for
the Southern District of New York dismissing without prejudice, the criminal
complaint against George J. Coates.
Settlement of the SEC Complaint
On February 6, 1995, CIL and George J. Coates, without admitting or
denying the allegations contained in the SEC complaint, consented to the entry
of final consent judgments enjoining them from effecting sales of any security
unless a registration statement is in effect as to such security or an
applicable exemption from registration is available and from engaging in
fraudulent activities in connection with the offer or sale of any security. CIL
was also ordered to provide an accounting of its assets and liabilities; its
financial statements and a list of all purchasers of CIL stock from CIL, George
J. Coates or any other source during the period commencing April 24, 1990 to the
date of the consent judgment including the number of shares purchased and the
purchase price. George J. Coates was ordered to provide an accounting as to his
assets and liabilities; as to any money, property, assets or other revenue
received by him or for his benefit from January 1, 1990 to the date of the
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accounting; and as to all assets, funds, securities or real or personal property
of investors in CIL which were transferred to or for George J. Coates' benefit
during such period.
George J. Coates was also ordered to cause the transfer by The George J.
Coates 1991 Family Partnership, L.P. to CIL of the real property and building
used by CIL as its principal facility located at Highway 34 and Ridgewood Road
in Wall Township, New Jersey. This transfer was effected on February 21, 1995.
George J. Coates has guaranteed repayment of the mortgage loan on this property
and CIL is obligated to indemnify George J. Coates from any liability based on
the mortgage loan on the property. The consent judgment permitted George J.
Coates to retain title to the Coates Patents provided that he reimbursed CIL for
all of the monies it expended in the preparation, application and prosecution of
the Patents. Such sums in the aggregate amount of $335,805 were paid to CIL by
February 15, 1995 so that George J. Coates retained title to the Patents. Mr.
Coates was also ordered to cause the transfer to CIL of all licensing fees and
other funds paid to persons or entities other than CIL in connection with the
acquisition by the payor of an interest in the Patents or in the technology
embodied in the Patents, including the $500,000 licensing fee paid by Millwest
Corporation and held in a bank account entitled "Coates International
Licensing." On February 24, 1995, the $500,000 license fee and $12,144 of
interest thereon was paid to CIL.
Rescission and Exchange Offer
The consent judgment also required CIL to file a registration statement
with the SEC to effect a Rescission and Exchange Offer, as follows:
Purchasers of Series A Stock who purchased such stock from CIL or George
J. Coates during the period commencing April 24, 1990 through November 13, 1995
and who continued to own their shares at such date were afforded the option to
choose one of the following two forms of consideration in exchange for his or
her shares of Series A Stock.
Option One - Subject to the availability of same, the right to receive
cash or assets equal in amount to the consideration such Purchaser paid for his
or her shares of Series A Stock, in exchange therefore, plus simple interest
calculated at an annual rate of five (5%) percent from the date of payment for
the Series A Preferred Stock; or
Option Two - the right to receive one share of newly issued Series A Stock
identical to the previously purchased Series A Stock in exchange for each share
of Series A Stock held by such Purchaser.
Pursuant to the consent judgment, CIL filed a registration statement on
Form S-1 with the SEC (File No. 33-94884) to effect the Rescission and Exchange
Offer. The registration statement was declared effective by the SEC on November
13, 1995.
Pursuant to the consent judgment, Donald H. Steckroth, Esq., the Temporary
Receiver, was appointed Special Master, to continue in possession and control of
any and all assets of CIL until a distribution was made pursuant to the
Rescission and Exchange Order and until he was discharged by order of the Court.
The consent judgment required CIL to mail a copy of the November 13, 1995
Prospectus together with a cover letter prepared by the Special Master advising
the Purchasers of the allegations contained in the SEC complaint, the terms of
the final CIL consent judgment, the fact that the Prospectus contained detailed
information concerning the status of CIL's business and efforts to
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develop and commercially exploit the Coates engine technology, and explaining
the above two options, and an Election Form, by certified mail return receipt
requested, to each Purchaser.
After the November 13, 1995 effectiveness of the above registration
statement, the Prospectus and the required cover letter and Election Form were
mailed to each of the Purchasers. Of the 328 persons to whom the Rescission and
Exchange Offer was directed (who had invested approximately $6,500,000 in CIL),
an aggregate 32 Purchasers elected to rescind their prior purchases of an
aggregate 48,500 shares of Series A Preferred Stock entitling them to be paid an
aggregate $1,270,000 plus interest. Two of the 32 Purchasers invested $900,000
of the $1,270,000 in CIL with respect to which rescission was elected. In the
second quarter of calendar year 1996, a group of investors advanced funds in
order to purchase Series A Preferred Stock. These funds were used by CIL to
repurchase Series A Preferred Stock owned by the persons who accepted the 1995
Rescission and Exchange Offer. An aggregate $1,260,000 of the funds and $65,000
of interest was paid to 31 of the 32 Purchasers who elected to accept Option One
of the Rescission and Exchange Offer and their 48,000 shares of Series A
Preferred Stock were canceled. No shares were issued to the investors who
advanced said funds at such time.
By letter dated July 31, 1996, the Special Master filed a report with the
United States District Court recommending that CIL be permitted to undertake a
private offering. A successful private offering would generate sufficient funds
to permit reimbursement of those investors (the "Potential Investors") who
advanced funds in the second quarter of calendar 1996 in order to purchase
Series A Preferred Stock, which funds were used by CIL to repurchase Series A
Preferred Stock owned by persons who elected pursuant to the Rescission and
Exchange Offer to rescind their prior purchases of Series A Preferred Stock. On
August 19, 1996, United States District Court Judge Kimba Wood signed an order
permitting a Private Offering to proceed and ordered CIL and George J. Coates to
reimburse the Potential Investors for the amounts advanced by them.
George J. Coates had consented to pay up to the first $773,500 of the
amounts payable pursuant to the Rescission and Exchange Offer to those
Purchasers who elected Option One using all of his personal assets other than
his personal residence. To the extent that he was unable to pay any such
amounts, CIL was required to pay same and would retain its rights to assert
claims against George J. Coates personally to recover its payment of any such
shortages. CIL also consented to pay any additional amounts required to fund the
Rescission and Exchange Offer.
The Private Offering permitted by Judge Wood's August 1996 order was
completed in July 1997. Pursuant to the terms of the Private Offering, each of
the Potential Investors was offered the right to elect to receive shares of
Series A Preferred Stock at a value of $20 per share for the amounts he advanced
in the second quarter of calendar year 1996 or to have the amount of his advance
refunded. Of the $1,270,000 advanced, one Potential Investor elected to have his
advance of $10,000 refunded and the remaining Potential Investors elected to
receive Series A Preferred Stock. George J. Coates made the $10,000 cash payment
to the Potential Investor who elected the refund and transferred 38,175 shares
of his Series A Preferred Stock to the remaining Potential Investors. CIL issued
the balance of 24,825 shares of Series A Preferred Stock to the Potential
Investors. CIL also received $960,000 in cash proceeds from the Private Offering
(paid to purchase shares of Series A Preferred Stock at $20 per share) which it
applied to the payment of outstanding payables including the final bill of the
Special Master who was then discharged by Judge Wood.
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CIL is a defendant in various lawsuits. In the opinion of management, none
of these lawsuits will have a material adverse effect on CIL, its business or
its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
CIL did not submit any matter to a vote of its stockholders during the
fourth quarter of calendar year 1996.
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COATES INTERNATIONAL LTD.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There is no established public trading market for CIL's only outstanding
class of capital stock, its Series A Preferred Stock. At December 31, 1997, the
approximate number of holders of record of the Series A Preferred Stock was 510.
CIL has not paid any dividends with respect to its Series A Preferred Stock and
anticipated capital requirements make it highly unlikely that any dividends will
be paid by CIL in the foreseeable future.
Pursuant to the SEC Complaint described in "Item 3" herein, the SEC
alleged that since April 24, 1994, CIL (including its predecessor) and George J.
Coates raised "...almost $6.5 million from almost 400 investors..." through
offers, purchases and sales of CIL's securities which the SEC alleged were
fraudulent. The SEC also alleged that such offers, purchases and sales were
effected without registration under the Securities Act of 1933 or pursuant to an
applicable exemption thereunder. The shares of Series A Preferred Stock were
sold at effective prices of $5, $10, $20 and $30 by CIL, its predecessor and its
controlling stockholder for $6,578,000 in gross proceeds. As a result of the
settlement of the SEC Action described in "Item 3," no exemption from
registration under the Securities Act of 1933 is being claimed by CIL and the
"Rescission and Exchange Offer" therein described has been effectuated.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 top 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. See "Item 1
Patents and Licensees."
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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.
Results of Operations from Inception August 31, 1988, through December 31, 1997
Virtually no revenues were realized from the inception of operations through
December 31, 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. See
"The Coates System".
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". The
funds were subsequently transferred over to CIL. Pursuant to the terms of the
license agreement, Millwest was obligated to make another payment of $9,500,000
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
its intention to activate the license agreement and advised that financing has
been arranged, however, to date no additional payments have been received by CIL
from Millwest. No assurances can be given that any additional payments will be
made.
No revenues were recognized during the quarter and year ended December 31, 1997.
During 1996, CIL recognized $37,375 in revenues, representing a partial payment
from Nicholson McLaren Engines Ltd. (U.K.) ("Nicholson McLaren") for two high
performance racing car engines modified with the Coates System, shipped to
Nicholson McLaren.
Operating expenses incurred during the last quarter and the year ended December
31, 1997, amounted to $363,730 and $1,427,798 respectively, compared to $507,425
and $1,564,447 for the same periods in 1996. In addition, the Company during the
last quarter in 1997 recognized a charge of $10,000,000 in the research &
development category of operating expenses, representing the value of 500,000
shares of the Company's Series A Preferred Stock issued to George J. Coates
pursuant to an exclusive license agreement between CIL an George J. Coates (see
"Related Party Transactions" in Notes to Financial Statements). General and
administrative expenses net of R&D declined from $1,356,197 in 1996 to $762,121
in 1997, due to, principally, lay-offs of CIL's production staff because of lack
of funding as well as the result of ongoing efforts to streamline operations and
reduce overhead.
Including the above mentioned $10,000,000, total aggregate operating expenses
incurred since August 31, 1988, amounted to $25,382,323, of which the largest
portion pertained to research and development expenses which total $18,118,583 .
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After recognizing $4,388 interest expenses, the Company's operations show a net
loss of $11,432,186 or $1.74 per share for the year ended December 31, 1997,
compared to a net loss of $1,600,110 or $0.27 per share for the preceding year.
As mentioned above, the 1997 figure includes a non-recurring special charge of
$10,000,000 . Total losses since inception in August 1988 through December 31,
1997 amount to $24,746,109 .
Liquidity and Capital Resources
Since its inception, all of the development costs and operating expenses of CIL
have primarily been financed through the cash generated through the sale of
stock, through capital contributions made by George J. Coates' son, Gregory
Coates, and the $500,000 license payment made by Millwest. Capital contributions
advanced to CIL by Gregory Coates in 1996 and during the year ended December 31,
1997, aggregated $1,132,523 and $953,834, 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.
At December 31, 1997, CIL had a net worth of $547,976 compared to a negative net
worth or capital deficiency of $(488,642) at the beginning of the year. The
working capital deficiency which showed a negative balance of $(2,114,271) at
December 31, 1996, relatively improved to a negative $(1,036,578) at December
31, 1997. These improvements were a result of capital raising efforts throughout
the last year which included capital contributions from Gregory Coates and
certain private placements of the Company's preferred stock as well as debt
restructuring, which altogether contributed an aggregate $2,468,804 to equity, a
figure which does not include an amount of $9,999,500 additional paid-in capital
and $500 preferred equity realized in connection with the issuance of 500,000
shares Series A Preferred Stock issued to George J. Coates pursuant to an
exclusive license agreement between CIL and George J. Coates (see "Related Party
Transactions" in Notes to Financial Statements). The latter amounts have been
offset by a $10,000,000 charge to earnings, as described above.
The 1997 capital transactions furthermore included (i) the issuance of 48,000
Series A preferred shares in private placement transactions which raised a total
of $960,000 equity; (ii) the issuance of 24,325 Series A preferred shares to
investors who had previously subscribed and paid for such shares, for a
cumulative $496,970 in equity contributions, and; (iii) issuance of a total of
8,000 Series A preferred shares pursuant to the conversion of certain loans and
mortgage liabilities, with such transactions contributing altogether $58,000 to
capital.
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. While the successful
realization of such plans cannot be assured, management is confident that the
Company's unique patented technology will attract further investments, which
provide the means for continued efforts to obtain firm orders and sub-license
agreements with engine manufacturers and refitters, which ultimately will yield
positive cash flows.
Note Regarding Forward-Looking Statements
This Annual Report contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual 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.
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Item 7. Financial Statements
Attached.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On August 7, 1996, CIL dismissed the firm of Warner, Berman & Lott,
Certified Public Accountants, P.A. ("WB&L") which firm was its principal
independent accounting firm previously engaged to audit CIL's financial
statements.
WB&L's report with respect to CIL's financial statements for the years
ended December 31, 1994 and 1995 did not contain an adverse opinion or a
disclaimer of opinion. However, such report did include a modification of the
auditors' standard report, stating that "...the company has suffered recurring
losses from operations since inception and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern....The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty."
The decision to dismiss WB&L and to retain a new principal independent
accounting firm was approved by CIL's board of directors.
During the two fiscal years ended December 31, 1995, there were no
disagreements between CIL and WB&L on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of WB&L, would have caused it
to make a reference to the subject matter of the disagreement in connection with
its report.
However during the interim period subsequent to December 31, 1995, a
disagreement arose between WB&L and CIL concerning the fiscal 1995 financial
statements. The issue is whether a bank account known as the "CIL Transfer
Account" maintained at NatWest Bank in Wall, New Jersey was an asset of CIL's at
December 31, 1995. The balance in said account at December 29, 1995 was
$508,428.44. CIL's balance sheet at December 31, 1995 with respect to which WB&L
issued its report, included this account as an asset of CIL. In July 1996, CIL's
management and its attorneys, with the approval of its board of directors,
discussed this issue with WB&L and advised WB&L that as such account was not an
asset of CIL's at December 31, 1995, that CIL's financial statements for the
year ended December 31, 1995 were in error and should be revised and reissued
with a new auditor's report. WB&L refused to accede to management's request to
issue a new report with respect to financial statements revised in such manner.
WB&L stated in part;
"When we issued our opinion we were attesting to the presentation of
the company's financial position as represented to us by management and
based on the evidence collected during the course of our audit. If
management now determines that this account does not belong to the
company we cannot present our opinion that the financial statements
present fairly in all material respects, the financial position of the
company. Accordingly, we would have no choice but to withdraw our
opinion concerning these financial statements."
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As a result of this disagreement, CIL's board of directors decided to
dismiss WB&L as CIL's principal independent accountants.
By order dated December 30, 1996, United States District Judge Kimba
Wood determined that the transfer account was not a CIL asset at December 31,
1995 and CIL's revised financial statements at December 31, 1995 as audited by
MSPC do not include the balance in such account as a CIL asset.
During 1996, CIL engaged the accounting firm of Moore Stephens, P.C.
("MSPC") to serve as its principal independent accounting firm and to audit its
finaicial statements for the year ended December 31, 1995 and December 31, 1996.
On March 27, 1998, CIL's Board of Directors dismissed MSPC as its independent
auditors.
MSCP's report issued in connection with CIL's financial statements for
the years ended December 31, 1995 and 1996 did not contain an adverse opinion or
disclaimer of opinion. However, such report did include a modification of the
auditor's standard report, stating that:
...the Company has had insignificant revenues to date, has suffered
recurring losses and has accumulated a deficit since its inception to
December 31, 1996, of over $13,000,000. The Company also has minimal
liquid assets, and has over $2.2 million in current liabilities. In
addition to a recorded liability of $496,970 to certain potential
investors, the Company has a contingent liability of $773,500 related
to these potential investors. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also discussed in
Note 5. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
CIL's Board of Directors approved the dismissal of MSPC and retained a
new principal accounting firm, Rosenberg Rich Baker Berman & Company of
Bridgewater, New Jersey to audit the financial statements for the fiscal year
ended December 31, 1997.
During the fiscal year ended December 31, 1996, CIL and MSPC did not
have any disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of MSPC, would have caused it
to make a reference to the subject matter of the disagreement in connection with
its report.
With the exception of the disagreement referred to above in connection
with Warner, Berman & Lott's treatment of the "CIL Transfer Account", CIL is
unaware of the occurrence of any of the kinds of events described in
subparagraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-B as
promulgated by the SEC.
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COATES INTERNATIONAL LTD.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
At December 31, 1997, the executive officers and directors of CIL were
as follows:
Name Age Position
George J. Coates 57 President, Treasurer, Chief Executive
Officer, Chief Financial Officer and
Director
Richard W. Evans 66 Secretary and Director
Michael J. Suchar D.D.S. 42 Director
George J. Coates has been employed by CIL since its inception as
president and chief executive officer. Mr. Coates is an Irish citizen but has
been granted resident alien status in the United States. See"Item 3" herein as
to the final consent judgment executed by George J. Coates in connection with an
SEC complaint and as to his arrest and release after a four day incarceration
based on allegations similar to those contained in the SEC complaint. On May 30,
1995, a United States Magistrate Judge of the United States District Court for
the Southern District of New York signed an order in response to a request by
the office of the United States Attorney for the Southern District of New York
dismissing without prejudice, the criminal complaint against George J. Coates.
Richard W. Evans became a director of CIL in May 1996. Dr. Evans, who holds
an Ed.D. degree from Rutgers University, was a Supervisor a Highland Park High
School in Highland Park, New Jersey, a post he held for more than the preceding
five years until his retirement in June 1996. Dr. Evans will not devote a
substantial portion of his working time to the business of CIL
Michael J. Suchar became a director of CIL in May 1996. Dr. Suchar, who
holds a Doctor of Dental Surgery degree from the Temple University Dental
School, has been a practicing pediatric dentist for more than the preceding five
years. Dr. Suchar will not devote a substantial portion of his
working time to the business of CIL.
Compliance with Section 16(a) of the Exchange Act
CIL's only class of outstanding capital stock, its Series A Preferred
Stock, is not registered pursuant to Section 16(a) of the Exchange Act so that
filings of Forms 3, 4 and 5 in compliance with such Section are not required.
Item 10. Executive Compensation
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None of CIL's executive officers has an employment contract with CIL.
With respect to each of calendar years 1995, 1996 and 1997, no executive officer
had compensation paid or accrued in excess of $100,000 for any such year except
for George J. Coates, CIL's chief executive officer, whose compensation was as
follows:
SUMMARY COMPENSATION TABLE
Annual Compensation
Year Ended
Name December 31 Salary
George J. Coates, 1997 $183,550
Chief Executive Officer 1996 $184,908
1995 $183,549*
* CIL had agreed to pay a $5,500,000 license fee to George J. Coates in
consideration for his grant to CIL of a non-exclusive license. See "Item
1-Business-Patents and Licenses." The fee was 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 Preferred Stock
to Mr. Coates as the license fee. The shares were issued to Mr. Coates in
November 1995.
To date, no employee stock options have been granted by CIL.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of December 31, 1997 the ownership of
CIL Series A Preferred Stock by (i) each person known by CIL to be the
beneficial owner of more than 5% of the outstanding Series A Preferred Stock,
(ii) each director and executive officer of CIL who owned shares, and (iii) all
directors and executive officers as a group.
Shares of Series A
Name of Stock Beneficially Owned
Beneficial Owner Number Percent
George J. Coates* 4,769,000 shs 80%
Gregory Coates* 318,150 shs 5%
Richard W. Evans 26,000 shs -%
Michael J. Suchar 5,500 shs -%
All directors and executive
officers as a Group
(four persons) 4,800,500 shs 80%
* c/o CIL, Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719.
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Item 12. Certain Relationships and Related Transactions
After its February 1993 purchase of CIL's office and product
development facility in Wall Township, New Jersey (the "Facility") from
unaffiliated third parties, The George J. Coates 1991 Family Partnership, L.P.
(the "Partnership") continued the lease of the Facility to CIL. Pursuant to the
February 6, 1995 final consent judgment described in "Item 3" herein, George J.
Coates was ordered to cause the Partnership to transfer the Facility to CIL and
the transfer was effected on February 21, 1995 with CIL obtaining title to the
Facility and assuming the $300,000 mortgage loan obligation, the residue of the
$400,000 mortgage note issued by the Partnership at the time of its purchase of
the Facility. At the time of such transfer, all accrued rents in the aggregate
amount of $287,100 owed by CIL to the Partnership were forgiven. CIL's "Loan
Receivable Officer" account on its financial statement was adjusted accordingly.
CIL is obligated to indemnify George J. Coates from any liability he may suffer
based on the remaining mortgage loan on the Facility. In December 1995, CIL made
an additional $50,000 principal payment against this mortgage loan thereby
reducing the principal balance to $250,000. An additional aggregate $40,000 paid
by CIL in May and July 1996 reduced the balance to $210,000. The mortgagees have
agreed to reduce the mortgage balance by an additional $50,000 to $160,000 upon
issuance to them of an aggregate 2,500 shares of CIL Series A Preferred Stock.
In January 1992, CIL, which had previously been assigned George J.
Coates' ownership rights in the Coates Patents, transferred such rights back to
George J. Coates in return for an exclusive right to negotiate licenses and
transfers of technology associated with the Coates Patents. The final consent
judgment permitted George J. Coates to retain title to the Coates Patents
provided that he reimbursed CIL for all the monies it expended in the
preparation, application and prosecution of the Patents. The amount due was
determined by management to total $434,639 of which $98,834 was offset from
other amounts due to George J. Coates prior to December 31, 1994. The $335,805
balance was paid to CIL in 1995. See "Item 1 - Business-Patents and Licenses" as
to a non-exclusive license with respect to the Coates Patents granted to CIL by
George J. Coates and Gregory Coates.
Pursuant to the final consent judgment, George J. Coates was ordered to
cause the transfer to CIL of all licensing fees and other funds paid to persons
or entities other than CIL in connection with the acquisition by the payor of an
interest in the Patents or in the technology embodied in the Patents. On
February 24, 1995, the $500,000 licensing fee paid by Millwest Corporation in
1994 and held in a bank account entitled "Coates International Licensing"
together with $12,144 of interest thereon was paid over to CIL. See "Item 1
Business-Patents and Licenses" and "Item 3" herein.
Through the first half of calendar 1997, CIL subcontracted for its project
labor expense with Coates Precision Engineering, Inc., an entity controlled by
George J. Coates. The amounts paid to such subcontractor with respect to 1995,
1996 and 1997 were $187,889, $181,500 and $212,626, respectively. These payments
constitute a direct pass through to the subcontractor of payroll, workers'
compensation and hospitalization insurance expense and management believes the
arrangement was in CIL's best interests.
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In the second half of calendar 1995, and during calendar years 1996 and
1997, CIL was primarily dependent for its working capital on capital
contributions made by Gregory Coates, the son of George J. Coates, a principal
(5% or greater) stockholder and until January 1996, an executive officer and a
director of CIL. Such capital contributions advanced by Gregory Coates in 1995,
1996 and 1997, aggregated $404,549, $1,132,523 and $953,834, respectively. The
funds for such advances were obtained from sales of Gregory Coates' shares of
CIL Series A Preferred Stock at a price of $20 per share.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
3.1* CIL's Restated Certificate of Incorporation.
3.2* CIL's By-Laws.
4.1* Form of Certificate for CIL's Series A Non-Cumulative
Convertible Preferred Stock.
10.1* Deed dated February 21, 1995 transferring title to CIL's
Principal Facility at Route 34
and Ridgewood Road, Wall Township, N.J. from The George J.
Coates 1991 Family
Partnership, L.P. (the "Partnership") to CIL.
10.2* Assumption and Indemnification Agreement dated February 21,
1995 between the partnership and CIL.
10.3 License Agreement dated December 22, 1997 between George
J. Coates, Gregory Coates and CIL.
10.4* License Agreement dated February 17, 1995 between George J.
Coates and CIL and
First and Second Amendments thereto dated July 17, 1995.
10.4(a)* Third Amendment dated September 21, 1995 to License Agreement dated
February 17, 1995 between George J. Coates and CIL.
10.5* License Agreement dated February 22, 1993 between Gregory
Coates and CIL and First Amendment thereto dated July 17, 1995.
10.6* Prototype Manufacturing Agreement dated July 16, 1991 between
CIL, George J. Coates and Harley-Davidson, Inc.
__________
*Incorporated by reference to the Exhibits filed with CIL's Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on
November 1, 1995 under File No. 33-94884.
21
<PAGE>
Exhibit No. Description of Exhibit
10.7* License Agreement dated February 4, 1994 by and between CIL,
Coates International Licensing Partnership, L.P., George J.
Coates and Millwest Corporation.
10.8* Securities and Exchange Commission Complaint filed on July 22,
1994 in the United States District Court for the Southern
District of New York (94 Civ. 5361) against George J. Coates, CIL
and related entities.
10.9* Final Consent Judgment of CIL in the above action initiated by
the Commission (94 Civ. 5361).
10.10* Final Consent Judgment of George J. Coates in the above action
initiated by the Commission (94 Civ. 5361).
(23) Independent Auditors' Consent - attached to Exhibit A
(27) Financial Data Schedule - attached to Exhibit A
_________
* Incorporated by reference to the exhibits filed with CIL's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on November 1, 1995 under File No.33-94884.
(b) Reports on Form 8-K
CIL did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date COATES INTERNATIONAL LTD.
June 16, 1998 By: s/George J. Coates
George J. Coates, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
s/George J. Coates
George J. Coates Director (Principal Executive June 16, 1998
Principal Financial Officer, Principal
Accounting Officer
s/Richard W. Evans
Richard W. Evans Director June 16, 1998
s/Michael J. Suchar
Michael J. Suchar Director June 16, 1998
coat10k.97
23
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Financial Statements
December 31, 1997 and 1996
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Index to the Financial Statements
December 31, 1997 and 1996
Page
Independent Auditors' Report ................................... 1
Financial Statements
Balance Sheet............................................... 2
Statements of Operations.................................... 3
Statement of Stockholders' Equity........................... 4
Statements of Cash Flows.................................... 5-6
Notes to the Financial Statements........................... 7-10
<PAGE>
To the Board of Directors and Shareholders of
Coates International, Ltd.
We have audited the balance sheet of Coates International, Ltd. (A Development
Stage Company) as of December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coates International, Ltd. (A
Development Stage Company) as of December 31, 1997, and the results of their
operations, and cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles. We express no opinion
on the cumulative period from inception (August 31, 1988) through December 31,
1997 as shown in the cumulative columns on the statements of operations,
stockholders' equity and cash flows.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the notes to the financial
statements, the Company has insignificant revenues to date, has incurred losses
and has accumulated a deficit since its inception to December 31, 1997, of over
$24 million in research and development activities. The Company also has minimal
liquid assets, while reporting over $1,000,000 in current liabilities. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in the notes to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Bridgewater, New Jersey
May 14, 1998
1
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Balance Sheet
December 31, 1997
Assets
Current Assets
Cash $ 35,249
Restricted cash 112,000
--------------
Total Current Assets 147,249
--------------
Property, Plant and Equipment - Net 1,582,054
--------------
Other Assets
Deposit 2,500
--------------
Total Assets 1,731,803
==============
Liabilities and Stockholders' Equity
Current Liabilities
Mortgage payable 160,000
Accounts payable and accrued expenses 904,706
Accrued interest payable 106,559
Due to stockholder 12,562
--------------
Total Current Liabilities 1,183,827
--------------
Stockholders' Equity
Preferred stock, Series A, $.001 par value, 14,000,000 shares authorized -
voting, non-cumulative convertible, 6,564,424 shares
issued and outstanding 6,564 Common stock, $.001 par value, 20,000,000 shares
authorized - no shares issued - Additional paid-in capital 25,350,490 Deficit
accumulated during the development stage (24,809,078)
--------------
Total Stockholders' Equity 547,976
--------------
$ 1,731,803
Total Liabilities and Stockholders' Equity ==============
See notes to the financial statements.
2
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
December 31,
1997
Years Ended December 31,
--------------------------------- ----------------
1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Revenue $ - $ 37,375 $ 687,375
--------------- --------------- ----------------
Operating Expenses:
Research and development costs 453,051 64,125 2,224,457
Research and development costs - related party 10,212,626 181,500 15,894,126
General and administrative expenses 721,829 1,315,282 6,945,380
Depreciation expense 40,292 40,915 319,670
--------------- --------------- ----------------
Total Operating Expenses 11,427,798 1,601,822 25,383,633
--------------- --------------- ----------------
Loss From Operations (11,427,798) (1,564,447) (24,696,258)
--------------- --------------- ----------------
Other Income (Expense):
Interest income 11,262 1,121 124,866
=====
Interest expense (15,650) (36,784) (238,996)
--------------- --------------- ----------------
Total Other Income (Expense) (4,388) (35,663) (114,130)
--------------- --------------- ----------------
Net Loss $ (11,432,186) $ (1,600,110) $ (24,810,388)
=============== =============== ================
Net Loss Per Share $ (1.89) $ (0.27)
=============== ===============
6,033,669 5,963,600
Weighted Average Number of Shares
=============== ===============
</TABLE>
See notes to the financial statements.
3
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statement of Stockholders' Equity
Inception (August 31, 1988) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Common Stock Series A Preferred
Class A Class C Stock Preferred Stock
----------------------- -------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------- --------- ---------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
August 31, 1988 (Date of Inception -$ - -$ - -$ - -$ -
Issuance of Shares 854,500 854 - - - - - -
Issuance of Stock Pursuant to Private Placement
Offering 100,000 96 - - - - - -
Net Loss for the Period from August 31, 1988
(Date of Inception) Through
December 31, 1988 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- --------- ---------
Balance - December 31, 1988 954,500 950 - - - - - -
Stock Dividend 50,000 50 450,000 450 - - - -
Issuance of Stock for Services Rendered 12,000 12 - - - - - -
Net Loss for Year Ended December 31, 1989 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- --------- ---------
Balance - December 31, 1989 1,016,500 1,012 450,000 450 - - - -
Issuance of Stock Pursuant to Private
Placement Offering 76,000 76 - - - - - -
Issuance of Stock 962,500 962 - - - - - -
Net Loss for Year Ended December 31, 1990 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- --------- ---------
Balance December 31, 1990 2,055,000 2,050 450,000 450 - - - -
Exchange of Preferred Stock for Common
Stock Class A (2,055,000) (2,050) - - - - 2,055,000 2,050
Exchange of Preferred Stock for Common
Stock Class C - - (450,000) (450) - - 450,000 450
Cancellation of Common Stock Class C - - - - - - (225,000) (220)
Issuance of Stock in Connection with
Reorganization 100 - - - - - - -
Dissolution of Coates International, Ltd. (100) - - - - - - -
Exchange of Series A Preferred Stock for
Preferred Stock - - - - 2,280,000 2,280(2,280,000) (2,280)
Issuance of Stock - - - - 102,000 102 - -
Purchase of Treasury Stock - - - - - - - -
Stock Split 2:1 - - - - 2,382,000 2,382 - -
New Loss for Year Ended December 31, 1991 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- ----------- --------
Balance -December 31, 1991 - - - - 4,764,000 4,764 - -
To Correct Balance at December 31, 1991 - - - - 772,500 772 - -
Issuance of Stock for Service - - - - 500 - - -
Issuance of Stock - - - - 115,850 116 - -
Private Placement Costs - - - - - - - -
Net Loss for Year Ended December 31, 1992 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- --------- ---------
Balance - December 31, 1992 - - - - 5,652,850 5,652 - -
Issuance of Stock - - - - 82,250 83 - -
Purchase of Treasury Stock - - - - - - - -
Prior Period Adjustment - - - - - - - -
Adjustment for Redeemable Preferred Stock - - - - (479,950) (480) - -
Net Loss for Year Ended December 31, 1993 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- --------- ---------
Balance - December 31, 1993 - - - - 5,255,150 5,255 - -
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Additional Deficit
Paid-In Accumulated Total
Capital During the Stockholders'
Treasury Development Equity
Stock Stage (Deficit)
<S> <C> <C> <C> <C>
August 31, 1988 (Date of Inception $ -$ -$ -$ -
Issuance of Shares - - - 854
Issuance of Stock Pursuant to Private Placement
Offering 499,900 - - 499,996
Net Loss for the Period from August 31, 1988
(Date of Inception) Through
December 31, 1988 - - (52,708) (52,708)
---------- ----------- -------------- --------------
Balance - December 31, 1988 499,900 - (52,708) 448,142
Stock Dividend (500) - - -
Issuance of Stock for Services Rendered (12) - - -
Net Loss for Year Ended December 31, 1989 - - (252,288) (252,288)
----------- ----------- -------------- --------------
Balance - December 31, 1989 499,388 - (304,996) 195,854
Issuance of Stock Pursuant to Private
Placement Offering 701,165 - - 701,241
Issuance of Stock - - - 962
Net Loss for Year Ended December 31, 1990 - - (392,564) (392,564)
----------- ----------- -------------- --------------
Balance December 31, 1990 1,200,553 - (697,560) 505,493
Exchange of Preferred Stock for Common
Stock Class A - - - -
Exchange of Preferred Stock for Common
Stock Class C - - - -
Cancellation of Common Stock Class C - - - (220)
Issuance of Stock in Connection with
Reorganization 1,000 - - 1,000
Dissolution of Coates International, Ltd. (1,000) - - (1,000)
Exchange of Series A Preferred Stock for
Preferred Stock 18,990 - - 18,990
Issuance of Stock 1,019,898 - - 1,020,000
Purchase of Treasury Stock - (25,000) - (25,000)
Stock Split 2:1 (2,382) - - -
New Loss for Year Ended December 31, 1991 - - (739,096) (739,096)
----------- ----------- -------------- --------------
Balance -December 31, 1991 2,237,059 (25,000) (1,436,656) 780,167
To Correct Balance at December 31, 1991 (772) - - -
Issuance of Stock for Service 10,000 - - 10,000
Issuance of Stock 2,306,884 - - 2,307,000
Private Placement Costs (80,675) - - (80,675)
Net Loss for Year Ended December 31, 1992 - (996,055) (996,055)
----------- ----------- -------------- --------------
Balance - December 31, 1992 4,472,496 (25,000) (2,432,711) 2,020,437
Issuance of Stock 1,944,917 - - 1,945,000
Purchase of Treasury Stock - (55,000) - (55,000)
Prior Period Adjustment - - 219,224 219,224
Adjustment for Redeemable Preferred Stock (5,921,818) 65,000 - (5,857,298)
Net Loss for Year Ended December 31, 1993 - (1,270,966) (1,270,966)
----------- ----------- -------------- --------------
Balance - December 31, 1993 495,595 (15,000) (3,484,453) (2,998,603)
</TABLE>
4A
<PAGE>
<TABLE>
<CAPTION>
Common Stock Common Stock Series A Preferred
Class A Class C Stock Preferred Stock
----------------------- -------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------- --------- ---------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Stock - - - - 2,000 2 - -
Purchase of Treasury Stock - - - - - - - -
Adjust Treasury Stock for Redeemable
preferred Stock - - - - (1,000) (1) - -
Adjust Remaining Redeemable Preferred
Stock Issued in 1994 - - - - (1,000) (1) - -
Restoration of Shares Not Redeemed by
Stockholders - - - - 415,200 415 - -
Net Loss for Year Ended December 31, 1994 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- -------- ---------
Balance - December 31, 1994 - - - - 5,670,350 5,670 - -
Restoration of Shares Not Redeemed by
Stockholders - - - - 18,250 18 - -
Issuance of Stock in Exchange for U.S.
Patent Rights - - - - 275,000 275 - -
Adjustments to Paid-in Capital - - - - - - - -
Treasury Stock Adjustment - - - - - - - -
Net Loss for Year Ended December 31, 1995 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- -------- ---------
Balance - December 31, 1995 (Restated) - - - - 5,963,600 5,963 - -
Adjustments to Paid-in Capital - - - - - - - -
Net Loss for Year Ended December 31, 1996 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- -------- ---------
Balance - December 31, 1996 - - - - 5,963,600 5,963 - -
Issuance of Stock - - - - 48,000 48 - -
Restoration of Shares Not Redeemed by
Stockholders - - - - 24,325 24 - -
Issuance of Stock in Exchange for Mortgage
Paydown - - - - 2,500 3 - -
Issuance of Stock in Exchange for Exclusive
License - - - - 500,000 500 - -
Issuance of Stock for Loans Reclassification - - - - 5,500 6 - -
Completion of 1990 Stock Split 2:1 - - - - 20,499 20 - -
Additional Contributions of Capital From a
Shareholder - - - - - - - -
Net Loss for Year Ended December 31, 1997 - - - - - - - -
------------- --------- ---------- --------- ----------- --------- -------- ---------
Balance - December 31, 1997 -$ - -$ - 6,564,424$ 6,564 -$ -
============= ========= ========== ========= =========== ========= ======== =========
</TABLE>
4B
<PAGE>
<TABLE>
<CAPTION>
Additional Deficit
Paid-In Accumulated Total
Additional During the Stockholders'
Paid-In Treasury Development Equity
Capital Stock Stage (Deficit)
<S> <C> <C> <C> <C>
Issuance of Stock 39,998 - - 40,000
Purchase of Treasury Stock - (35,000) - (35,000)
Adjust Treasury Stock for Redeemable
preferred Stock (19,999) 20,000 - -
Adjust Remaining Redeemable Preferred
Stock Issued in 1994 (19,999) - - (20,000)
Restoration of Shares Not Redeemed by
Stockholders 4,586,883 - - 4,587,298
Net Loss for Year Ended December 31, 1994 - - (1,229,523) (1,229,523)
----------- ----------- -------------- --------------
Balance - December 31, 1994 5,082,478 (30,000) (4,713,976) 344,172
Restoration of Shares Not Redeemed by
Stockholders 19,982 - - 20,000
Issuance of Stock in Exchange for U.S.
Patent Rights 5,499,725 - - 5,500,000
Adjustments to Paid-in Capital 1,177,579 - - 1,177,579
Treasury Stock Adjustment (30,000) 30,000 - -
Net Loss for Year Ended December 31, 1995 - - (7,062,806) (7,062,806)
----------- ----------- -------------- --------------
Balance - December 31, 1995 (Restated) 11,749,764 - (11,776,782) (21,055)
Adjustments to Paid-in Capital 1,132,523 - - 1,132,523
Net Loss for Year Ended December 31, 1996 - (1,600,110) (1,600,110)
----------- ----------- -------------- --------------
Balance - December 31, 1996 12,882,287 - (13,376,892) (488,642)
Issuance of Stock 959,952 - - 960,000
Restoration of Shares Not Redeemed by
Stockholders 496,946 - - 496,970
Issuance of Stock in Exchange for Mortgage
Paydown 49,997 - - 50,000
Issuance of Stock in Exchange for Exclusive
License 9,999,500 - - 10,000,000
Issuance of Stock for Loans Reclassification 7,994 - - 8,000
Completion of 1990 Stock Split 2:1 (20) - - -
Additional Contributions of Capital From a
Shareholder 953,834 - - 953,834
Net Loss for Year Ended December 31, 1997 - - (11,432,186) (11,432,186)
----------- ----------- -------------- --------------
Balance - December 31, 1997 $ 25,350,490$ -$ (24,809,078$ 547,976
=========== =========== ============== ==============
</TABLE>
4C
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
December 31,
1997
-----------------
Years Ended December 31,
--------------------------------- -----------------
1997 1996
--------------- --------------- -----------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net Loss $ (11,432,186)$ (1,600,110)$ (24,809,078)
--------------- --------------- -----------------
Adjustments to Reconcile Net Loss to Net Cash Used in Operating
Activities
Depreciation 40,292 40,915 319,670
Noncash research and development costs 10,000,000 31,131 15,531,131
Changes in Assets and Liabilities
(Increase) Decrease in
Inventory 144,033 (144,033) -
Due to/from affiliated companies 4,485 (2,312) 57
Increase (Decrease) in
Accounts payable and accrued expenses (542,861) 629,407 904,706
Accrued interest payable (114,849) 18,371 62,340
--------------- --------------- -----------------
Total Adjustments 9,531,100 573,479 16,817,904
--------------- --------------- -----------------
Net Cash Used in Operating Activities (1,901,086) (1,026,631) (7,991,174)
--------------- --------------- -----------------
Cash Flows from Investing Activities
Payments for property and equipment - (5,252) (413,032)
Loans to stockholders - (7,487) (1,208,678)
--------------- --------------- -----------------
Net Cash Used in Investing Activities - (12,739) (1,621,710)
--------------- --------------- -----------------
Cash Flows From Financing Activities
Proceeds of additional paid-in capital 938,147 1,017,242 2,307,438
Proceeds from issuance of stock 960,000 - 7,338,148
Payment for treasury stock - - (30,000)
Loans from stockholder 24,547 8,000 32,547
--------------- --------------- -----------------
Net Cash Provided by Financing Activities 1,922,694 1,025,242 9,648,133
--------------- --------------- -----------------
Net Increase (Decrease) in Cash 21,608 (14,128) 35,249
Cash - Beginning of Periods 13,641 27,769 -
--------------- --------------- -----------------
Cash - End of Periods $ 35,249 $ 13,641 $ 35,249
=============== =============== =================
</TABLE>
See notes to the financial statements.
5
Coates International, Ltd.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
December 31,
1997
-----------------
Years Ended December 31,
--------------------------------- -----------------
1997 1996
--------------- --------------- -----------------
Supplemental Disclosures of Cash Flow Information Cash paid during the periods
for:
<S> <C> <C> <C>
Interest paid $ 18,499 $ 18,413 $ 64,656
=============== =============== =================
Taxes paid $ - $ - $ -
=============== =============== =================
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The financial statements at December 31, 1996, include noncash financing
transactions of $40,000 as a result of mortgage payments made by a
shareholder which were treated as additional paid-in capital.
The financial statements at December 31, 1997 and 1996, include a noncash
financing transaction of $486,970 for the respective exchange and
reclassification of redeemable preferred stock to amounts due to certain
stockholders.
The financial statements at December 31, 1996, including a noncash operating
and financing transaction of $67,781 for the payment of interest to
rescission stockholders by a shareholder which was treated as additional
paid-in capital.
The financial statements at December 31, 1997 and 1996, include noncash
investing and financing transactions of $15,688 and $7,500 for the
acquisition of equipment by a shareholder which were treated as additional
paid-in capital.
The financial statements at December 31, 1997, include a noncash financing
and operating transaction of $5,500,000 for the issuance of 275,000 shares
of Series A Stock in exchange for an exclusive license agreement from George
J. Coates.
The financial statements at December 31, 1996, include a noncash operating
and investing transaction of $31,131 for patent costs that were paid on
behalf of CIL's principal stockholder in 1995, which costs were expensed in
1996 (as research and development) in consideration of a granting of certain
rights to the Company.
The financial statements at December 31, 1997 include a noncash investing
and financing transaction of an $8,000 loan from a stockholder, made in the
prior year was exchanged for 500 shares of Series A preferred stock. In
addition, 2,500 shares of Series A preferred stock was exchanged for a
$50,000 decrease in the mortgage payable.
6
See notes to the financial statements.
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Coates International, Ltd. ("CIL" or the "Company") is a Delaware corporation
organized in October 1991 by its President and majority stockholder George J.
Coates ("GJC') as the successor in interest to a Delaware corporation of the
same name incorporated in August 1988.
CIL has developed a spherical rotary valve system (the"Coates System") for
use in piston driven internal combustion engines of all types and is
manufacturing automotive engines modified with the Coates system on a
limited scale basis at its Wall Township, New Jersey facility. CIL also has
an exclusive license to sell and grant sublicenses with respect to products
using the Coates System based on the Coates Patents. Since there has been no
significant revenue generated from the sales of engines modified with the
Coates System, or from the granting of sub-licenses, the Company is
considered to be a Development Stage Company for financial reporting
purposes.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. CIL's ability to generate revenues
and achieve profitable operations is principally dependent upon the
execution and funding of sub-license agreements with the engine
manufacturers of retrofitters, and upon the manufacture and sale, by CIL, of
high performance engines. The Company has suffered recurring losses during
its development stage and has accumulated a deficit since its inception to
December 31, 1997, of over $24,000,000. The Company also has minimal liquid
assets, while reporting over $1,000,000 in current liabilities. The
aforementioned raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary in the event the Company cannot continue
as a going concern.
Management's plans are to raise additional capital through a common stock
offering, sell sub-licenses to use its technology to interested purchasers
as well as to obtain firm orders on its engines for delivery to interested
customers. On this accord, the Company plans to construct a manufacturing
facility as well as to acquire the necessary machinery and equipment for a
full scale assembly line.
Property, Plant & Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight line method over the estimated useful life of the assets:
40 years for building and building improvements, 5 to 7 years for machinery
and equipment and 5 to 10 years for furniture and fixtures. Repairs and
maintenance expenditures which do not extend the useful lives of the related
assets are expensed as incurred.
Earnings (Loss) Per Share
The Company has not issued any common stock, but the preferred stock has
voting privileges. (Loss) per share, in accordance with the provisions of
Financial Accounting Standards Board No. 128, "Earnings Per Share," is
computed by dividing the net (loss) by the weighted average number of
preferred shares outstanding during the periods.
Research and Development
Research and development (R&D) costs are charged to operations as incurred.
R&D expense for the year ended December 31, 1997 includes a non-cash $10
million charge related to the signing of an exclusive agreement with GJC to
license the Coates System technology owned by GJC for 500,000 shares of CIL
Series A Preferred Stock. (see "RELATED PARTY TRANSACTIONS")
7
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Income Taxes
In accordance with the provisions of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), deferred taxes are
recognized for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to realized. The Company incurred
net operating losses for financial-reporting and tax-reporting purposes.
Accordingly, the benefit from income taxes has been offset entirely by a
valuation allowance against the related deferred tax asset for the year
ended December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain items pertaining to the prior year have been reclassified to conform
with the current year's presentation.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
The Company maintains cash balances in several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000, of which the Company's accounts may, at times,
exceed the federally insured limits.
The Company intends to market its engines modified with the Coates System to
the automotive racing market. To successfully develop and sell an
automobile, truck or motorcycle engine for road use (as opposed to racing
use) in the United States (U.S.), the Company will be required to obtain a
Certificate of Conformity from the Office of Mobile Services of the
Environmental Protection Agency (EPA) to the effect that its engines as
modified with the Coates System comply with applicable emission standards.
Development of the Coates System technology was initiated by GJC, CIL's
founder, President and controlling stockholder in the late 1970's and
development efforts have been conducted continuously since such time. From
July 1982 through May 1993, seven U.S. patents as well as a number of
foreign patents were issued to GJC with respect to the Coates System. Since
the inception of CIL in 1988, all aspects of the business have been
completely dependent upon the activities of GJC (who is a resident alien and
not a U.S. citizen and who does not have an employment contract with CIL).
The loss of GJC's availability or services due to death, incapacity or
otherwise would have a material adverse effect on the Company's business and
operations.
RESTRICTED CASH
The Company placed $112,000 in an escrow account (pursuant to a court order)
of net proceeds raised from a 48,000 CIL Series A Preferred Stock private
placement offering in July 1997. The funds were escrowed for the payment of
interest due to two former stockholders.
8
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost, less accumulated depreciation,
consists of the following at December 31, 1997:
Land $ 920,550
Building 579,450
Building improvements 145,871
Machinery and equipment 251,054
Furniture and fixtures 39,295
---------------
1,936,220
Less: Accumulated depreciation (354,166)
---------------
Total $ 1,582,054
===============
Depreciation expense amounted to $40,292 and $40,915 for the years ended
December 31, 1997 and 1996, respectively.
MORTGAGE PAYABLE
The mortgage payable is collateralized by the land and the building that the
Company uses as its principal place of business. The mortgage bears interest
at the rate of 9% per annum and was due February 4, 1994. The Company is
making interest only payments on the mortgage which has not been demanded in
full by the mortgagor. The balance has been classified as a current
liability and has been guaranteed by GJC.
INCOME TAXES
The Company has available net operating loss carryforwards at December 31,
1997, which may be used to reduce Federal taxable income and tax liabilities
in future years, approximating $8,500,000 which begin to expire December 31,
2003 through 2012.
The Company's total deferred tax asset and valuation allowance at December
31, 1997 is as follows:
Total deferred tax asset $ 3,000,000
Less valuation allowance (3,000,000)
---------------
$ -
Net deferred tax asset
===============
LICENSES
The Company has incurred legal and related costs associated with licenses.
Such costs amounted to $10,073,111 and $75,305 for the years ended December
31, 1997 and 1996. As the probable future economic benefit of such costs is
uncertain, they have been expensed.
9
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
RELATED PARTY TRANSACTIONS
Due to Stockholder represent net advances/repayments made to the Company
which amounts to $12,562 at December 31, 1997 and are unsecured,
non-interest bearing and payable on demand.
The Company subcontracts its project expense from any entity of which GJC is
the sole shareholder. During the years ended December 31, 1997 and 1996, the
Company paid $212,626 and $181,500, respectively, for these services.
The Company has signed a licensing agreement with a company and its
affiliates of which the President is a less than 1% stockholder of CIL.
During 1997, the Company incurred a $10,000,000 non-cash charge related to
the signing of an exclusive agreement with GJC, the majority shareholder of
CIL, to license the Coates System technology in exchange for 500,000 shares
of CIL Series A Preferred Stock at $20 per share.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts payable and accrued expenses:
The carrying amount approximates fair value because of the short
maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
NEW AUTHORITATIVE ACCOUNTING PROFESSION PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Other Comprehensive Income".
SFAS No. 130 is effective for periods beginning after December 15, 1997. The
provisions of SFAS No. 130 may be early applied in which the Company chose not
to do so. It is unlikely that the provisions for SFAS No. 130 will even apply
nor have a material impact on the Company.
10
<PAGE>
EXHIBIT 10.3
LICENSE AGREEMENT
THIS AGREEMENT, dated this 22 day of December, 1997, by and between
GEORGE J. COATES, individually, residing at 1811 Murray Drive, Wall Township,
New Jersey 07719 (hereinafter referred to as "LICENSOR I") and GREGORY COATES,
residing at 1811 Murray Drive Wall Township, New Jersey 07719 (hereinafter
referred to as "LICENSOR II"), and COATES INTERNATIONAL, LTD. having its
principle place of business at Route 34 and Ridgewood Road, Wall Township, New
Jersey 07719, (hereinafter referred to as "LICENSEE").
B A C K G R O U N D:
WHEREAS, LICENSOR I is the patentee and owns and has the right to
license certain PATENT RIGHTS (as hereinafter defined) used in the design and
construction of internal combustion engines employing spherical rotary valves
(the "COATES SPHERICAL ROTARY VALVE SYSTEM"); and
WHEREAS, LICENSOR II has loaned LICENSOR I funds to reimburse
Coates International, ltd. for patent expenses; and
WHEREAS, LICENSOR I has granted to LICENSOR II and LICENSOR has
accepted an exclusive, revocable license with the right to sublicense; and
WHEREAS, LICENSOR I and LICENSOR II have each granted to LICENSEE,
previously, an exclusive revocable license for the United States of America to
make, use, sell and have made, LICENSED PRODUCT falling within the scope of the
PATENT RIGHTS; and
<PAGE>
WHEREAS, it is the desire of LICENSOR I and LICENSOR II to modify and
expand upon the previously granted license for the consideration set forth
herein and to render the previously granted licenses superseded by this license
and hence null and void.
NOW THEREFORE, in consideration of the premises and covenants and other
good and valuable consideration and the mutual promises of the performance of
the undertakings herein, it is agreed by and between the parties hereto as
follows:
ARTICLE I - DEFINITIONS
head or heads for an
1.1 - "CSRV VALVE SYSTEM" shall mean a cylinder head or heads for an
internal combustion engine manufactured in accordance with the PATENT RIGHTS (as
hereinafter defined)
.
1.2 - "IMPROVEMENTS" shall mean any improvement, change, or
modification to the CSRV VALVE SYSTEM which may be developed, created, or
acquired by either party to this Agreement, but only to the extent that the same
comes within the scope of one or more of the claims of the patent rights (as
hereinafter defined).
1.3 - "PATENT RIGHTS" shall mean the patents as listed in Attachment
1.3.
1.4 - "PROTOTYPES" shall mean LICENSED PRODUCT manufactured for testing
and evaluation purposes only.
1.5 - "TERRITORY" shall mean all of the countries, their territories
and possessions, comprising North America, Central America and South America.
2
<PAGE>
ARTICLE II - LICENSES GRANTED
2.1 - LICENSES GRANTED TO LICENSEE
(1) LICENSOR I and LICENSOR II (hereinafter referred to
jointly as "LICENSOR") hereby grants to LICENSEE an exclusive license in the
TERRITORY, to make, use, sell, and have made, product falling within the scope
of the PATENT RIGHTS, and to prevent others from making, using, selling or
having made product falling within the scope of the PATENT RIGHTS;
(2) LICENSOR hereby grants to LICENSEE the non-exclusive right
to manufacture and sell PROTOTYPES falling within the scope of the PATENT RIGHTS
anywhere in the world.
2.2 - IMPROVEMENTS
If LICENSORS have heretofore brought about or shall hereafter during
the term of this Agreement bring about any IMPROVEMENTS to the PATENT RIGHTS
LICENSORS shall promptly disclose such IMPROVEMENTS TO LICENSEE. Any such
IMPROVEMENTS shall become subject to this Agreement.
2.3 - PATENT MARKINGS
LICENSEE shall mark on an exposed surface of all products made through
use of the PATENT RIGHTS hereunder, appropriate patent markings identifying
LICENSOR I as the owner of the pertinent PATENT RIGHTS. The content, formal
language used in such markings shall be in accordance with the laws and
practices of the countries where such products bearing such markings are made,
sold, or used and shall be approved by LICENSOR I.
3
<PAGE>
2.4 ACKNOWLEDGMENT OF LICENSE
On all CSRV VALVE SYSTEMS, LICENSEE and Sublicensee shall
acknowledge that the same are manufactured under license from
LICENSOR I. Unless otherwise agreed to by the parties, the
following notice shall be used by LICENSEE and sublicensees on an
exposed surface of all products: "Manufactured under License from
George J. Coates". Sublicensees shall use the notice:
"Manufactured under License from Coates International, Ltd. and
George J. Coates." Such notices shall be used in all descriptive
materials, instruction and service manuals relating to the CSRV
VALVE SYSTEM.
ARTICLE III - PAYMENTS
3.1 - In consideration for the grant of this license, the LICENSEE
shall grant to LICENSORS, shares of stock in LICENSEE.
The shares shall be granted as follows: 500,000 Series A Preferred shares
to LICENSOR I $4,000.00 to LICENSOR II 3.2 - In further consideration of this
License, LICENSEE shall pay all costs associated with the PATENT RIGHTS
identified herein both in the TERRITORY and world wide.
ARTICLE IV - REPRESENTATIONS, OBLIGATIONS, WARRANTIES AND
DISCLAIMERS
4.1 - LICENSOR I represents and warrants that LICENSOR I is the
rightful owner of the PATENT RIGHTS and has the exclusive right to license all
of the PATENT RIGHTS and that all such PATENT RIGHTS pertaining to the CSRV
VALVE SYSTEM under LICENSOR'S control and possession in the TERRITORY are set
forth in Attachment 1.4.
4
<PAGE>
Further, LICENSOR I and LICENSOR II have the power and authority to execute,
deliver and perform its obligations under this Agreement, nor the performance of
its obligations hereunder will constitute a breach of the terms or provisions of
any contract or agreement to which LICENSOR is a party.
4.2 - LICENSEE will use its best efforts to execute all such tasks as
may be necessary to bring about the speedy manufacture, sale or use of products
manufactured with the use of the PATENT RIGHTS consistent with good business
practice; and ensure that all steps within its power are undertaken with all
reasonable speed to ensure that such products made by LICENSEE comply with
relevant government regulations and to ensure that all steps within its power
are undertaken with all reasonable speed to ensure that sublicenses are
negotiated and executed with respect to the PATENT RIGHTS.
ARTICLE V - DURATION AND TERMINATION
5.1 - Subject to the provisions of Section 5.1 hereof, all rights and
obligations under this Agreement shall expire upon the last to expire patents of
the PATENT RIGHTS.
5.2 - This Agreement shall terminate effective immediately
upon:
(a) The filing by LICENSEE of an involuntary petition in
bankruptcy, the entry of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, trustee in bankruptcy or
liquidator for LICENSEE in any
5
<PAGE>
insolvency, readjustment of debt, marshaling of assets and liabilities,
bankruptcy or similar proceedings, or the winding up or liquidation of
its affairs, and the continuance of any such petition, decree or order
undismissed or unstayed and in effect for a period of sixty (60)
consecutive days; or
(b) The consent by LICENSEE to the appointment of a
conservator, receiver, trustee in bankruptcy or liquidator in any
insolvency, readjustment of debt, marshaling of assets and liabilities,
bankruptcy or similar proceedings of or relating to LICENSEE, or
relating to substantially all of its property, or if LICENSEE shall
admit in writing its inability to pay its debts generally as they
become due, file a petition to pay its debts generally as they become
due, file a petition to take advantage of any applicable insolvency,
reorganization or bankruptcy statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its
obligations.
ARTICLE VI - LIMITATION OF ASSIGNMENT BY LICENSEE
6.1 - This Licensee is non-assignable and the rights, duties and
privileges of LICENSEE hereunder shall not be sold, transferred, hypothecated,
or assigned by LICENSEE, either in whole or in part without the consent of
LICENSORS.
ARTICLE VII - GOVERNING LAW
7.1 - This Agreement shall be governed by and construed and enforced in
accordance with the Laws of the State of New Jersey and each party hereby
submits to the jurisdiction of any state or federal court in the State of New
Jersey in the event of any claims
6
<PAGE>
arising under this Agreement.
ARTICLE VIII - ENTIRE AGREEMENT
8.1 - This Agreement sets forth the entire Agreement and understanding
by and between LICENSOR and LICENSEE as to the subject matter hereof and has
priority over all documents, verbal consents and understandings made before the
execution of this Agreement and none of the terms of this Agreement shall be
amended or modified except in a written document signed by LICENSORS and
LICENSEE hereto.
8.2 - Should any portion of this Agreement be declared null and void by
operation of law, or otherwise, the remainder of this Agreement shall remain in
full force and effect.
8.3 - This Agreement is understood by the parties hereto to
specifically supersede the February 17, 1997 License from LICENSOR I to LICENSEE
and any subsequent amendments thereto as well s the Agreement from LICENSOR II
to LICENSEE dated February 22, 1997 and any subsequent amendments thereto.
ARTICLE IX - NOTICES
9.1 - Any notice, consent or approval required under this Agreement
shall be in English and in writing, and shall be delivered to the following
addresses (a) personally by hand, (b) by Certified Air Mail, postage prepaid,
with return receipt requested, or (c) by telefax, confirmed by such Certified
Air Mail:
7
<PAGE>
If to the LICENSORS:
Mr. George J. Coates
c/o COATES INTERNATIONAL, LTD.
Route 34 & Ridgewood Road
Wall Township, NJ 07719-9738
Telephone: (732) 449-7717
Telefax: (732) 449-7736
Mr. Gregory Coates
c/o COATES INTERNATIONAL, LTD.
Route 34 & Ridgewood Road
Wall Township, NJ 07719-9738
Telephone: (732) 449-7717
Telefax: (732) 449-7736
If to LICENSEE:
COATES INTERNATIONAL, LTD.
Route 34 & Ridgewood Road
Wall Township, NJ 07719-9738
All notices shall be deemed effective upon the date delivered by hand
or sent. If either party desires to change the address to which notice is sent
to such party, it shall so notify the other party in writing in accordance with
the foregoing.
ARTICLE X - MISCELLANEOUS
10.1 - Headings and References - Headings in this Agreement are
included herein for ease of reference only and have no legal effect. Reference
herein to Sections or Attachments are to Sections and Attachments to this
Agreement, unless expressly stated otherwise.
10.2 - Reference on Disclosure of Terms and Provisions (a)
This Agreement shall be distributed solely to:
(i) those personnel of LICENSORS and LICENSEE who shall have a need to know of
its contents; (ii) those persons whose knowledge of its contents will facilitate
performance of the obligations of the
8
<PAGE>
parties under this agreement; (iii) those persons, if any, whose knowledge of
its contents is essential in order to permit LICENSEE or LICENSORS to place,
maintain or secure benefits as required by law, regulation or judicial order.
IN WITNESS WHEREOF, the parties have cause this Agreement to be
executed as of the date first above written by their authorized representatives.
ATTEST:
s/Shirley Naidel s/George J. Coates
Notary Public of New Jersey GEORGE J. COATES - INDIVIDUALLY
My Commission Expires
Dec. 27, 2000
s/Shirley Naidel s/Gregory Coates
Notary Public of New Jersey GREGORY COATES - INDIVIDUALLY
My Commission Expires
Dec. 27, 2000
s/Shirley Naidel s/George J. Coates
Notary Public of New Jersey COATES INTERNATIONAL, LTD.
My Commission Expires BY: GEORGE J. COATES
Dec. 27, 2000
coat-lic.agr
9
<PAGE>
EXHIBIT 23
Rosenberg Rich Baker Berman & Company
380 Foothill Road
Bridgewater, New Jersey 08807
Independent Auditors' Consent
We consent to the incorporation by reference in the Annual Report filed on Form
10-KSB of Coates International, Ltd. and Subsidiaries for the fiscal year ended
December 31, 1997, of our report dated May 14, 1998.
ROSENBERG RICH BAKER BERMAN & COMPANY
s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
June 15, 1998
aud-cons.coa
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1997 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> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1997
<CASH> 147,249
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 147,249
<PP&E> 1,936,219
<DEPRECIATION> 354,165
<TOTAL-ASSETS> 1,731,803
<CURRENT-LIABILITIES> 1,183,827
<BONDS> 160,000
0
6,564
<COMMON> 0
<OTHER-SE> 541,412
<TOTAL-LIABILITY-AND-EQUITY> 1,731,803
<SALES> 0
<TOTAL-REVENUES> 11,262
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,427,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,650)
<INCOME-PRETAX> (11,432,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,432,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,432,186)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
