FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-94884
COATES INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2925432
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
(Address of Principal Executive Office) (Zip Code)
(908) 449-7717
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No _____
The number of shares of Registrant's Preferred Stock Series A,$0.001 par value,
outstanding as of June 30, 1998, was 6,572,424 shares.
1
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Balance Sheet
- June 30, 1998 3
Statements of Operations
- Three and six months ended June 30, 1998 and 1997
and since inception 4
Statements of Cash Flows
- Three and six months ended June 30, 1998 and 1997
and since inception 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 7-8
And Results of Operations
ART II - OTHER INFORMATION 9
SIGNATURES 10
FINANCIAL DATA SCHEDULE 11
2
<PAGE>
PART I - Item 1
Coates International, Ltd.
(A Development Stage Company)
Balance Sheet
June 30, 1998
(Unaudited)
Assets
Current Assets
Cash $ 203,555
Restricted cash 112,000
--------------
Total Current Assets 315,555
--------------
Property, Plant and Equipment, - Net of Accumulated
Depreciation of $355,771 1,580,448
--------------
Other Assets
Technology and Designs, Net of Accumulated
Amortization of $0 4,900,000
Mortgage Loan Costs, Net of Accumulated Amortization of $0 39,461
Deposit 2,500
--------------
Total Assets 6,837,964
==============
Liabilities and Stockholders' Equity
Current Liabilities
Mortgage payable 500,000
Accounts payable and accrued expenses 886,881
Accrued interest payable 106,559
Due to stockholder 5,462
--------------
Total Current Liabilities 1,498,902
--------------
Stockholders' Equity
Preferred stock, Series A, $.001 par value, 14,000,000
shares authorized - voting, non-cumulative convertible,
6,572,424 shares issued and outstanding 6,572
Common stock, $.001 par value, 20,000,000 shares
authorized - no shares issued -
Additional paid-in capital 25,647,519
Deficit accumulated during the development stage (20,315,029)
--------------
Total Stockholders' Equity 5,339,062
--------------
$ 6,837,964
Total Liabilities and Stockholders' Equity ==============
See notes to the condensed financial statements.
3
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
June 30,
1998
----------------
Three Months Ended Six Months Ended
March 31, June 30,
-------------------------------- --------------------------------- ----------------
1998 1997 1998 1997
--------------- --------------- --------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ - $ 687,375
--------------- --------------- --------------- --------------- ----------------
Operating Expenses:
Research and development costs 91,808 64,744 184,548 136,191 18,303,131
General and administrative
expenses 123,415 347,151 212,808 572,911 7,156,878
Depreciation expense - 6,419 1,606 19,950 321,276
--------------- --------------- --------------- --------------- ----------------
Total Operating Expenses 215,223 418,314 398,962 729,052 25,781,285
--------------- --------------- --------------- --------------- ----------------
Loss From Operations (215,223) (418,314) (398,962) (729,052) (25,093,910)
--------------- --------------- --------------- --------------- ----------------
Other Income (Expense):
Interest income 298 7 392 13 125,258
Interest expense (3,781) (3,600) (7,381) (7,200) (246,377)
--------------- --------------- --------------- --------------- ----------------
Total Other Income (Expense) (3,483) (3,593) (6,989) (7,187) (121,119)
--------------- --------------- --------------- --------------- ----------------
(Loss) From Operations Before
Cumulative Effect of Change in
Accounting Principle (218,706) (421,907) (405,951) (736,239) (25,215,029)
Cumulative Effect of Change in
Accounting Principle (Net of Tax
Effect of $0) 4,900,000 - 4,900,000 - 4,900,000
--------------- --------------- --------------- --------------- ----------------
Net Income (Loss) $ 4,681,294 $ (421,907) $ 4,494,049 $ (736,239) $ (20,315,029)
=============== =============== =============== =============== ================
Income (Loss) Per Share
(Loss) From Operations $ (0.03) $ (0.07) $ (0.06) $ (0.12)
Cumulative Effect of Change in
Accounting Principle 0.74 - 0.74 -
--------------- --------------- --------------- ---------------
Net Income (Loss) Per Share $ 0.71 $ (0.07) $ 0.68 $ (0.12)
=============== =============== =============== ===============
6,572,424 5,963,600 6,571,757 5,963,600
Weighted Average Number of
Shares Outstanding
=============== =============== =============== ===============
</TABLE>
See notes to the condensed financial statements.
4
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
June 30,
1998
-----------------
Six Months Ended
June 30,
--------------------------------- -----------------
1998 1997
--------------- --------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities $ (422,170) $ (561,363) $ (8,413,344)
--------------- --------------- -----------------
Cash Flows From Investing Activities - - (1,621,710)
--------------- --------------- -----------------
Cash Flows From Financing Activities
Proceeds from mortgage payable 460,539 - 460,539
Repayment of mortgage payable (160,000) - (160,000)
Proceeds of additional paid-in capital 168,037 550,347 2,475,475
Proceeds from issuance of stock 129,000 - 7,467,148
Payment for treasury stock - - (30,000)
Proceeds from (repayment of) stockholder loans (7,100) 13,638 25,447
--------------- --------------- -----------------
Net Cash Provided by Financing Activities 590,476 563,985 10,238,609
--------------- --------------- -----------------
Net Increase in Cash 168,306 2,622 203,555
Cash - Beginning of Periods 35,249 13,641 -
--------------- --------------- -----------------
Cash - End of Periods $ 203,555 $ 16,263 $ 203,555
=============== =============== =================
</TABLE>
See notes to the condensed financial statements.
5
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Condensed Financial Statements
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended
June 30, 1998 and 1997 are not necessarily indicative of the results that
may be expected for the years ended December 31, 1998 and 1997,
respectively. The unaudited condensed financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
RELATED PARTY TRANSACTION
Subcontract Labor - The Company subcontracts its project expense (payroll,
insurance and supplies) from an entity in which George J. Coates is the sole
stockholder. During the six months ended June 30, 1998 and 1997, $48,885 and
$107,000, respectively, were paid for these services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incident to the ordinary
course of business which are not possible to determine the probable outcome
or the amount of liability, if any, under these lawsuits. However, in the
opinion of management, the disposition of these lawsuits will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In accordance with paragraph #29 of Accounting Principles Board Opinion No.
20 ("APB 20") "Accounting Changes", the Company has elected to change its
method of accounting for research and development (R & D) costs in
connection with the completion of its prototype testing phase and a
forthcoming public offering of shares of its common stock. The cummulative
effect of the change in accounting principle ("the change"), pursuant to
Financial Accounting Standards Board No. 2 ("FASB No. 2") "Accounting for
Research and Development Costs", consists of the adoption of the "Selective
Capitalization" criteria from the previous practice of expensing all R & D
costs. No effects from the change are applicable to the periods ended June
30, 1998 and March 31, 1998. The following are the new results after
applying the effect of the change on a prior period:
Year Ended
December 31, 1997
------------------------
(Loss) From Operations $ (10,792,513)
========================
Net (Loss) $ (10,796,901)
========================
Net (Loss) Per Share $ (1.79)
========================
The change resulted in the recording of an asset "Technology and Designs"
amounting to $4,900,000 which will be amortized on a straight-line basis
over a 15 year period beginning July 1, 1998.
MORTGAGE PAYABLE
The Company acquired a new mortgage during June 1998. The old mortgage of
$160,000 was settled from the proceeds of the new mortgage. Terms of the new
mortgage are such that the principal amount will be due in one year, monthly
interest payments only will be made at 18% per annum, and the mortgage is
secured by a first mortgage on the land and buildings of the Company with a
net book value at June 30, 1998 of $1,552,875. The Company's principal
stockholder and Chief Executive Officer has also personally guaranteed the
mortgage.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Coates International Ltd. ("CIL" or the "Company") is a Delaware corporation
organized in October 1991 by George J. Coates, as the successor in interest to a
Delaware corporation of the same name incorporated in August 1988 (the
"Predecessor Entity"). As a result of a dispute with certain former
employee-directors who claimed 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 a non-exclusive license from
George J. Coates and his son Gregory Coates, to manufacture, sell and grant
sub-licenses with respect to products based on the Coates Patents, within all of
the countries, their territories and possessions, comprising North America,
South America and Central America (the "License Areas"). George J. Coates and
Gregory Coates have also agreed, as long as CIL remains independent and viable,
not to compete with CIL in the manufacture, assembly, use or sale of internal
combustion engines utilizing the technology falling within the scope of the
Coates Patents in the Licensed Areas, or to grant any other exclusive or
non-exclusive license in the Licensed Areas except through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement granting CIL the
right to retain any moneys including royalties received from Nicholson McLaren
or from Noble Motor Sport (manufacturer of Ascari racing cars) for manufacture,
sale, use or assembly of internal combustion engines anywhere in the world using
the technology falling within the scope of the Coates Patents.
CIL has a short operating history, during which it has primarily devoted its
attention to developing the technology associated with the Coates System. During
such time CIL has also arranged for certain tests in order to evaluate the
effectiveness of the technology. CIL has also devoted much time attempting to
interest various persons and entities in acquiring sub-licenses to use the
technology.
CIL is currently manufacturing components for high performance automotive
engines modified with the Coates System on a limited basis at its Wall Township,
New Jersey, manufacturing facility. 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.
7
<PAGE>
Results of Operations for the Quarters Ended June 30, 1998 and 1997
No revenues were recognized during the quarters ended March 31, 1998, and 1997.
The cash shortage during the last quarter severely hampered the Company's
efforts to complete testing and trial of certain engine configurations which is
considered crucial in furthering the prospects for successful negotiation of
potential sub-license agreements with engine manufacturers and refitters. To
overcome this constraint, management during the last quarter had to spend much
time and effort in seeking to improve liquidity with the result that towards the
end of the quarter, additional funding was secured (see "Liquidity and Capital
Resources"). The relatively improved financial situation makes it possible to
continue research and development work during the upcoming quarters. However,
management at this time cannot with any degree of certainty predict when
meaningful revenues might be achieved.
As a result of strict cost control measures and curtailment of activities,
operating expenses incurred during the last quarter decreased to $215,223
compared to $418,314 for the same period in 1997. The largest single cost
element was research & development expense which totaled $91,808 during the
second quarter in 1998. General and administrative expenses totaled $123,415 for
the quarter, down from $347,151 in the same quarter in 1997.
After recognizing $3,483 net interest expense, the Company's operations show a
net loss from operations of $218,706 or $0.03 per share for the quarter ended
June 30, 1998, compared to a net loss of 421,907 or $0.07 per share for the same
quarter in the preceding year. A change in the accounting treatment of Research
and Development expenditures (see Notes to Financial Statements) created an
extraordinary one-time profit of $4,900,000 which was recognized during the
quarter, and resulted in an overall net profit of $4,494,049 or $0.68 per share
for the period.
Total losses since inception in August 1988 through June 30, 1998 amount to
$20,315,029 .
Liquidity and Capital Resources
During the quarter, the Company's balance sheet was significantly impacted by
two occurrences - the completion of a mortgage refinancing transaction which
improved short term liquidity, and a change in accounting principle which added
$4,900,000 to assets and equity. During June 1998 the Company acquired a new
mortgage in the amount of $500,000 and paid off the old mortgage of which had a
balance of $160,000. The new mortgage will be due in one year and is secured by
a first lien on the land and buildings of the Company. Also, in accordance with
paragraph #29 of Accounting Principles Board Opinion No.20 ("APB 20")
"Accounting Changes", the Company has elected to change its method of accounting
for research and development (R&D) costs in connection with the completion of
its prototype testing phase. The cumulative effect of the change in accounting
principle consists of the adoption of the "Selective Capitalization" criteria
from the previous practice of expensing all R&D costs and resulted in the
recording of an asset "Technology and Designs" amounting to $4,900,000 which
will be amortized on a straight-line basis over a 15 year period beginning July
1, 1998.
At June 30, 1998, CIL had a net worth of $5,339,062. Working capital showed a
deficit of $(1,183,347), compared to a negative $(1,036,578) at December 31,
1997. This deficit will continue to affect the Company's operations even though
the mortgage financing transaction described above provided operating funds. In
order to further improve the Company's financial situation and provide funds to
meet maturing obligations and finance the ongoing efforts to market the
Company's products, management plans to raise additional capital through a
combination of private placements and debt issues.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The response to this item can be found in the Company's annual report on Form
10-KSB, Item 3, for the year ended December 31, 1997, which is being
incorporated herein by reference to such report.
Item 2 CHANGES IN SECURITIES - None
Item 3 DEFAULTS ON SENIOR SECURITIES - None
-----------------------------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K - None
--------------------------------
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COATES INTERNATIONAL, LTD.
Date: August 13, 1998 By: s/ George J. Coates
-------------------
George J. Coates
Chief Executive and
Chief Financial Officer
coat10q.698
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1998 FINANCIAL STATEMENTS OF COATES INTERNATIONAL, LTD. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000948426
<NAME> Coates International, Ltd.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Apr-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 315,555
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 315,555
<PP&E> 1,936,219
<DEPRECIATION> 355,771
<TOTAL-ASSETS> 6,837,964
<CURRENT-LIABILITIES> 998,902
<BONDS> 500,000
0
6,572
<COMMON> 0
<OTHER-SE> 5,332,490
<TOTAL-LIABILITY-AND-EQUITY> 1,727,638
<SALES> 0
<TOTAL-REVENUES> 298
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 215,223
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,781
<INCOME-PRETAX> (218,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (218,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 4,900,000
<NET-INCOME> 4,681,294
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
