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, 1998
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 (732) 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, 1998.
During the year ended December 31, 1998, there was no established public trading
market for the issuer's Series A Preferred Stock. On December 31, 1998, there
were 6,572,424 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 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 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 from
several entities for prototype models and license fees. As a development stage
company, CIL has incurred losses from the inception of the Predecessor Entity in
August 1988 through December 31, 1998 of $10,845,470 and at December 31, 1998,
had a net worth (deficit) of ($18,816) and negative working capital of
($1,101,056).
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CIL's auditors have included in its report, dated April 8, 1999, and
filed as an exhibit to the Form 10-KSB, prepared in connection with its audit of
CIL's financial statements for the fiscal year ended December 31, 1998, its
observations that (1) CIL has suffered recurring losses during its development
stage and has accumulated a deficit since its inception to December 31, 1998, of
$10,845,470; (2) that CIL has minimal liquid assets, while reporting
$1,253,729 in current liabilities and; (3) that 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 of high performance engines.
These observations have led the auditors to opine that there exists substantial
doubts about CIL's ability to continue as a going concern.
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 components for the assembly of several high
performance automotive engines modified with the Coates System on a limited
basis at its Wall Township, New Jersey manufacturing facility. These components
include automotive seals, casings, shafts and spheres comprising the Coates
System. During CIL's fiscal year ended December 31, 1997, CIL built or
retrofitted ten (10) V8 302 automobile engines, 3 of which were installed in a
Bronco truck, 1996 Ford Mustang and in a 1988 Ford Mustang, respectively. Except
as set forth herein, none of the engines have 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.
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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.
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.
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
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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 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
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.
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, 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
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a manufacturing license from CIL against payment of royalties on the manufacture
of components at a rate to be established. CIL 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, 1998, CIL employed five (5) full-time employees, 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 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. On March 22, 1999, CIL refinanced its property and gave a first
mortgage in the amount of $900,000 to Eastern Savings Bank, FSB of New York.
This first mortgage requires monthly payments of $12,521, accrued interest at
the rate of 15.99%, per annum, and its outstanding principal balance and accrued
interest become due and payable in March, 2004.
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.
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
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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. 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
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
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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 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.
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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.
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 1998.
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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, 1998, 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.
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.
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 CIL'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, 1998
Virtually no revenues were realized from the inception of operations through
December 31, 1998, as the principal operations were those of a development stage
company. See "The Coates System". No revenues were recognized during the last
quarter and year ended December 31, 1998.
Operating expenses incurred during the last quarter and the year ended December
31, 1998, amounted to $371,707 and $1,043,538 respectively, compared to $426,699
and $1,427,798 for the same periods in 1997. General and administrative expenses
net of R&D declined from $721,829 in 1997 to $619,320 in 1998, due principally
to inactivity, 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, total aggregate operating expenses incurred since
August 31, 1988, amounted to $11,360,500, of which the largest portion pertained
to general and administrative expenses which total $7563,390.
After recognizing $58,215 interest expenses, CIL's operations show a net loss of
$1,101,753 or $.17 per share for the year ended December 31, 1998, compared to a
net loss of $1,432,186 or $.24 per share for the preceding year.
Total net losses since inception in August 1988 through December 31, 1998 amount
to $10,845,470.
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 through several payments for prototype and license fees made by two
entities.. Capital contributions of $384,961 were advanced to CIL by Gregory
Coates in 1998 as compared to $953,834 advanced during 1997. Certain of the
aforesaid funds generated income from bank accounts in a depository institution;
that interest income was also expended by CIL.
10
<PAGE>
At December 31, 1998, CIL had a net worth (deficit) of $18,816 compared to
$547,976 for the prior year. The working capital deficiency which showed a
negative balance of $(1,036,578) at December 31, 1997, declined to a negative
$(1,101,056) at December 31, 1998. This decline of net worth was due principally
to a lack of both revenues and capital contributions in 1998..
In order to improve CIL's financial situation and provide funds to meet current
obligations and finance the ongoing efforts to market CIL'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 continues to be confident that CIL's unique patented
technology will attract investments, which shall 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 CIL's actual results in future
periods to be materially different from any future performance suggested herein.
11
<PAGE>
Item 7. Financial Statements
The information called for by this item appears at the end of this Form
10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 27, 1998, CIL dismissed the firm of Moore Stephens, P.C. which
firm was its principal independent accounting firm previously engaged to audit
CIL's financial statements.
Moore Stephens, P.C. audit report with respect to CIL's financial
statements for the fiscal years ended December 31, 1996 and 1995, dated January
24, 1997, contained a qualified opinion, expressing uncertainty as to whether
CIL would be able to continue its operations and business as a going concern.
The decision to dismiss Moore Stephens 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, 1996 and 1995, there
were no disagreements between CIL and Moore Stephens, P.C. 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
Moore Stephens, P.C., would have caused it to make a reference to the subject
matter of the disagreement in connection with its report.
During 1998, CIL engaged the accounting firm of Rosenberg Rich Baker
Berman & Company ("RRBB") to serve as its principal independent accounting firm
and to audit its finaicial statements for the year ended December 31, 1997 and
December 31, 1996.
RRBB's report issued in connection with CIL's financial statements for
the years ended December 31, 1997 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:
...CIL has insignificant revenues to date, has incurred losses and has
accumulated a deficit since its inception to December 31, 1998, of over
$9,743,717 in research and development activities. CIL also has minimal
liquid assets, while reporting $1,183,827 in current liabilities. These
conditions raise substantial doubt about CIL'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.
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.
12
<PAGE>
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, 1998, the executive officers and directors of
CIL were as follows:
Name Age Position
George J. Coates 58 President, Treasurer, Chief Executive
Officer, Chief Financial Officer and
Director
Richard W. Evans 67 Secretary and Director
Michael J. Suchar D.D.S. 43 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.
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.
13
<PAGE>
Item 10. Executive Compensation
None of CIL's executive officers has an employment contract with CIL.
With respect to each of calendar years 1996, 1997 and 1998, 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, 1998 $186,947
Chief Executive Officer 1997 $183,550
1996 $184,908
* 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 1998, 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 1998.
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, 1998 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* 4,994,000 shs 76%
Gregory Coates* 318,150 shs 5%
Richard W. Evans 16,500 shs .003%
Michael J. Suchar 6,000 shs .001%
All directors and executive
officers as a Group (four persons) 5,334,650 shs 81%
* c/o CIL, Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719.
14
<PAGE>
Item 12. Certain Relationships and Related Transactions
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. For
the fiscal year ended December 31, 1998, CIL did not pay for any project labor
expense through Coates Precision Engineering, Inc.
In the second half of calendar 1995, and during calendar years 1996,
1997 and 1998, 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, 1997 and 1998, aggregated $404,549, $1,132,523, $953,834 and $384,961,
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.
On October 9, 1998, George J. Coates and his son Gregory executed and
delivered a certain Exclusive Conditional Worldwide License Agreement to CIL in
connection with an arrangement to raise private equity with a placement agent.
Pursuant to the terms of the license, it would automatically terminate in the
event the placement agent did not arrange for certain equity funding on or
before January 17, 1999. The placement agent failed to perform and this license
automatically terminated on January 17, 1999.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
The following listed Exhibits are hereby incorporated by reference into
this Form 10-KSB for the fiscal year ended December 31, 1998 from CIL's
Registration Statement, filed on Form S-1 with the Securities and
Exchange Commission on November 1, 1995, File No. 33-94884:
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.
15
<PAGE>
Exhibit No. Description of Exhibit
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.
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).
The following Exhibit is hereby incorporated into this Form 10-KSB for the
fiscal year ended December 31, 1998 from CIL's Form 10-KSB for the fiscal year
ended December 31, 1997, filed with the Securities and Exchange Commission on
June 17, 1998:
10.3 License Agreement dated December 22, 1997 between George
J. Coates, Gregory Coates and CIL.
__________
(27) Financial Data Schedule - attached to Exhibit A
(b) Reports on Form 8-K
(1) CIL filed a Current Report on Form 8-K with the Securities
and Exchange Commission disclosing the facts surrounding the execution and
delivery of a certain Exclusive Conditional Worldwide License Agreement, dated
October 9, 1998, by and between Coates International, Ltd., George J. Coates and
Gregory Coates.
16
<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.
April 14, 1999 By: /s/George J. Coates
George J. Coates, President
Chief Executive Officer and
Chief Financial Officer
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 April 14, 1999
Principal Financial Officer, Principal
Accounting Officer
/s/Richard W. Evans
Richard W. Evans Director April 14, 1999
Michael J. Suchar Director April __, 1999
coat10k.98
17
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Financial Statements
December 31, 1998 and 1997
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Index to the Financial Statements
December 31, 1998 and 1997
Page
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>
Independent Auditors' Report
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, 1998 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. 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 audit 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, 1998, and the results of their
operations, and cash flows for the years ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles. We express no opinion
on the cumulative period from inception (August 31, 1988) through December 31,
1998 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, 1998, of
$10,845,470 in research and development activities. The Company also has minimal
liquid assets, while reporting $1,253,729 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
April 8, 1999
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 14,575
Restricted cash 112,000
Prepaid insurance 6,555
Due from related parties 19,543
--------------
Total Current Assets 152,673
--------------
Property, Plant and Equipment - Net 1,556,359
Other Assets
Mortgage loan costs, net of accumulated amortization of $23,380 23,381
Deposit 2,500
--------------
Total Assets 1,734,913
==============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable 26,180
Accrued expenses 1,108,485
Accrued interest payable 106,559
Due to stockholder 12,505
--------------
Total Current Liabilities 1,253,729
--------------
Mortgage payable 500,000
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 10,820,082
Deficit accumulated during the development stage (10,845,470)
--------------
Total Stockholders' Equity (18,816)
--------------
$ 1,734,913
Total Liabilities and Stockholders' Equity
==============
</TABLE>
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,
1998
----------------
Years Ended December 31,
--------------------------------- ----------------
1998 1997
--------------- --------------- ----------------
(Unaudited)
----------------
<S> <C> <C> <C>
Revenue $ - $ - $ 687,375
--------------- --------------- ----------------
Operating Expenses:
Research and development costs 274,522 453,051 2,498,979
Research and development costs - related party 100,623 212,626 929,388
General and administrative expenses 619,320 721,829 7,563,390
Depreciation and amortization expense 49,073 40,292 368,743
--------------- --------------- ----------------
Total Operating Expenses 1,043,538 1,427,798 11,360,500
--------------- --------------- ----------------
Loss From Operations (1,043,538) (1,427,798) (10,673,125)
--------------- --------------- ----------------
Other Income (Expense):
Interest income 898 11,262 125,764
Interest expense (59,113) (15,650) (298,109)
--------------- --------------- ----------------
Total Other Income (Expense) (58,215) (4,388) (172,345)
--------------- --------------- ----------------
Net Loss $ (1,101,753) $ (1,432,186) $ (10,845,470)
=============== =============== ================
Net Loss Per Share $ (0.17) $ (0.24)
=============== ===============
6,572,013 6,033,669
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, 1998
<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 2,280,000)
Preferred Stock - - - - 2,280,000 2,280 ( (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 - -
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) - -
</TABLE>
4A
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the Stockholders'
Paid-In Treasury Development Equity
Capital 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)
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)
</TABLE>
4B
<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
----------- --------- ---------- --------- ----------- --------- ----------- ---------
Restoration of Shares Not Redeemed by
<S> <C> <C> <C> <C> <C>
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 - -
----------- --------- ---------- --------- ----------- --------- ----------- ---------
Issuance of Stock - - - - 8,000 8 - -
Additional Contributions of Capital From a
Shareholder - - - - - - - -
Net Loss for Year Ended December 31,
1998 - - - - - - - -
----------- --------- ---------- --------- ----------- --------- ----------- ---------
Balance - December 31, 1998 $ -$ -$ -$ -$ 6,572,424$ 6,572$ -$ -
=========== ========= ========== ========= =========== ========= =========== =========
</TABLE>
See notes to the financial statements.
4C
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the Stockholders'
Paid-In Treasury Developoment Equity
Capital Stock Stage (Deficit)
----------- ---------- ----------- --------------
Restoration of Shares Not Redeemed by
<S> <C> <C> <C>
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 433,864 - - 434,139
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 - - (1,997,445) (1,997,445)
------------- --------- -------------- --------------
Balance - December 31, 1995 (Restated) 6,683,903 - (6,711,421) (21,555)
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 7,816,426 - (8,311,531) (489,142)
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 - - - 500
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 - - (1,432,186) (1,432,186)
------------- --------- -------------- --------------
Balance - December 31, 1997 10,285,129 - (9,743,717) 547,976
------------- --------- -------------- --------------
Issuance of Stock 149,992 - - 150,000
Additional Contributions of Capital From a
Shareholder 384,961 - - 384,961
Net Loss for Year Ended December 31,
1998 - - (1,101,753) (1,101,753)
------------- --------- -------------- --------------
Balance - December 31, 1998 $ 10,820,082$ - $ (10,845,470$ (18,816)
============= ========= ============== ===============
</TABLE>
See notes to the financial statements.
4D
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
December 31,
1998
-----------------
Years Ended December 31,
--------------------------------- -----------------
1998 1997
--------------- --------------- -----------------
(Unaudited)
-----------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net Loss $ (1,101,753)$ (1,432,186)$ (10,845,470)
--------------- --------------- -----------------
Adjustments to Reconcile Net Loss to Net Cash Used in Operating
Activities
Depreciation and amortization 49,073 40,292 368,743
Noncash issuance of stock for services 10,000 - 10,000
Changes in Assets and Liabilities
(Increase) Decrease in
Inventory - 144,033 -
Prepaid insurance (6,555) - (6,555)
Due to/from affiliated companies (19,600) 4,485 (19,543)
Increase (Decrease) in
Accounts payable and accrued expenses 229,961 (542,861) 1,165,798
Accrued interest payable - (114,849) 62,340
--------------- --------------- -----------------
Total Adjustments 262,879 (468,900) 1,580,783
--------------- --------------- -----------------
Net Cash Used in Operating Activities (838,874) (1,901,086) (9,264,687)
Cash Flows from Investing Activities
Payments for property and equipment - - (413,032)
Loans to stockholders - - (774,039)
--------------- --------------- -----------------
Net Cash Used in Investing Activities - - (1,187,071)
--------------- --------------- -----------------
Cash Flows From Financing Activities
Proceeds from mortgage payable 500,000 - 500,000
Repayment of mortgage payable (160,000) - (160,000)
Payment for mortgage loan costs (46,761) - (46,761)
Proceeds of additional paid-in capital 374,961 938,147 2,682,399
Proceeds from issuance of stock 150,000 960,000 7,488,148
Payment for treasury stock - - (30,000)
Loans from stockholder - 24,547 32,547
--------------- --------------- -----------------
Net Cash Provided by Financing Activities 818,200 1,922,694 10,466,333
--------------- --------------- -----------------
Net (Decrease) Increase in Cash (20,674) 21,608 14,575
Cash - Beginning of Periods 35,249 13,641 -
--------------- --------------- -----------------
Cash - End of Periods $ 14,575 $ 35,249 $ 14,575
=============== =============== =================
</TABLE>
See notes to the financial statements.
5
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
December 31,
1998
-----------------
Years Ended December 31,
--------------------------------- -----------------
1998 1997
--------------- --------------- -----------------
(Unaudited)
-----------------
Supplemental Disclosures of Cash Flow Information Cash paid during the periods
for:
<S> <C> <C> <C>
Interest paid $ 59,113 $ 18,499 $ 123,769
Income taxes paid $ 400 $ - $ 400
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The financial statements at December 31, 1997, 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, 1997, include noncash investing and
financing transactions of $15,688 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 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.
Land and building amounting to $1,500,000 was transferred to the company
from the majority stockholder and his family pursuant to a consent judgement
on February 6, 1995. A mortgage of $300,000 was assumed as well as
$1,200,000 recorded in additional paid-in capital.
</TABLE>
See notes to the financial statements.
6
<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, 1998, of $10,845,470. The Company also has minimal liquid
assets, while reporting $1,253,729 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. 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.
In the event that facts and circumstances indicate that long-lived assets
may be impaired, an evaluation of recoverability would be performed and,
accordingly, a determination of the write-down related to the specific
assets made.
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.
Revenue Recognition
The Company has not generated revenues from sales of engines. Revenue from
the granting of sub-licenses is recognized upon receipt of funds.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense was $104,558 and $50,069 for the years ended December 31, 1998
and 1997, respectively.
7
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Research and Development
Research and development (R&D) costs are charged to operations as incurred.
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, 1998.
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.
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, 1998:
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 379,861
---------------
Total $ 1,556,359
===============
Depreciation expense amounted to $25,692 and $40,292 for the years
ended December 31, 1998 and 1997, respectively.
ACCRUED EXPENSES
Accrued expenses at December 31, 1998 is comprised of the following:
Legal Fees $ 809,439
Patent Legal Fees 74,873
Printing Fees 18,000
Audit Fees 151,384
Accounting Fees 7,700
Real Estate Taxes 22,089
---------------
$ 1,083,485
===============
MORTGAGE PAYABLE
The mortgage payable is collateralized by the land and the building with a
net book value of $1,411,555 that the Company uses as its principal place of
business. The mortgage bears interest at the rate of 18% per annum due
monthly and is due in June 1999. The Company is making interest only
payments on the mortgage. In March 1999, the mortgage payable was
refinanced to a $900,000 balance which will become due and payable on
April 1, 2004 and bears interest at 15% per annum payable monthly. The
balance has been reclassified as a long-term liability as a result of
the subsequent refinancing and has been guaranteed by GJC.
INCOME TAXES
The Company has available net operating loss carryforwards at December 31,
1998, which may be used to reduce Federal taxable income and tax liabilities
in future years, approximating $9,918,000 which begin to expire December 31,
2003 through 2012.
The Company's total deferred tax asset and valuation allowance at December
31, 1998 is as follows:
Total deferred tax asset $ 3,471,000
Less valuation allowance $ (3,471,000)
------------
-
Net deferred tax asset $ ============
9
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Financial Statements
LICENSES
The Company has incurred legal and related costs associated with licenses.
Such costs amounted to $44,113 and $75,305 for the years ended December 31,
1998 and 1997. As the probable future economic benefit of such costs is
uncertain, they have been expensed.
RELATED PARTY TRANSACTIONS
Due from related parties are entities of which GJC is the sole shareholder
and represent net advances/repayments owed to the Company which amounts to
$19,543 at December 31, 1998 and are unsecured, non-interest bearing and
payable on demand.
Due to Stockholder represent net advances/repayments made to the Company
which amounts to $12,505 at December 31, 1998 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, 1998 and 1997, the
Company paid $0 and $212,626, 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.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incident to the ordinary
course of business as to which it is not possible to determine the probable
outcome or the amount of liability, if any. 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.
10
<PAGE>
EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 22, 1998
Coates International, Inc.
Exact name of Registrant as specified in charter)
Delaware 33-94884 22-2925432
(State or other (Commission (IRS employer
jurisdiction of file number) identification
incorporation no.)
Highway 34 & Ridge Road, Wall, New Jersey 07719
(Address of principal executive office) Zip Code
Registration telephone number, including area code: (732) 449-7717
Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
On October 9, 1998, Registrant received an exclusive,
worldwide license to make, use and sell products incorporating
the patents owned by George J. Coates, the founder and
controlling shareholder of Registrant, and his son, Gregory
Coates, which cover the "Coates Spherical Rotary Valve"
system. This new license, which supersedes the previous
license, expands the territorial coverage of the previous
license held by Registrant from those countries, their
territories and possessions, comprising North America, Central
America and South America, to all the countries in the world.
The new license automatically terminates under certain
conditions involving bankruptcy or receivership and in the
event Registrant fails to obtain equity financing in the
minimum amount of $2,000,000 by January 17, 1999. A copy of
the "Exclusive Conditional Worldwide License Agreement", dated
October 9, 1998 is annexed to this Current Report as an
exhibit.
In consideration of the grant of this worldwide license,
Registrant agreed to (a) issue to George J. Coates (i) 500,000
shares of its Series A Preferred Stock (ii) 500,000 shares of
its Common Stock and (iii) 500,000 shares of a new series of
Series A Preferred Stock with supervoting rights entitling its
holder to exercise 1,000 votes per share on all shareholder
matters. In addition, Registrant agreed to pay to George J.
Coates (x) a license payment in the amount of $2,500,000 when,
as and if Registrant has sufficient capital to make such
payment and (y) royalty payments in amounts equal to twenty
(20%) percent of royalties received by Registrant from its
future licensing activities.
2
<PAGE>
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
(10) Exclusive Conditional Worldwide License
Agreement, dated October 9, 1998, by and
between Coates International, Ltd., George J.
Coates and Gregory Coates.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Current Report to
be signed on its behalf by the undersigned hereunto duly authorized.
October 22, 1998 Coates International, Ltd.
By: s/George J. Coates
George J. Coates, President
and Chief Executive Officer
coates2.8k
3
<PAGE>
EXHIBIT
EXCLUSIVE CONDITIONAL WORLDWIDE LICENSE AGREEMENT
THIS AGREEMENT, dated this 9th day of October, 1998, 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 had each granted to LICENSEE, by
License Agreement, dated December 22, 1997, an exclusive revocable license for
all of the countries, their territories and possessions, comprising North
America, Central America and South 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
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, either currently existing or hereinafter formed, in the world.
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 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; 500,000
Common Shares to LICENSOR I; the LICENSEE shall cause the creation of a new
series of Series A Preferred shares with voting rights for all shareholder
matters equal to 1,000 votes per share and to issue 500,000 of the to-be-created
new series A Preferred shares to LICENSOR I.
3.2 - In further consideration of the granting of this License,
LICENSEE shall (a) pay all costs associated with the PATENT RIGHTS identified
herein in the TERRITORY; (b) pay to LICENSOR I a license payment fee in the
amount of $2,500,000, payable when, as and if the LICENSEE has sufficient
capital to make such payment, and; (c) pay to LICENSOR I a royalty payment in
the amount of twenty (20%) percent of any and all royalties received by
4
<PAGE>
the LICENSEE pursuant to any and all license, royalty or other agreement with
any third party in the TERRITORY derived from the manufacture, assembly or sale
of any part, accessory, component or engine incorporating any aspect of the
PATENT RIGHTS, the CSRV VALVE SYSTEM or IMPROVEMENTS.
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. 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.
5
<PAGE>
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 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 voluntary or involuntary consent of 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,
6
<PAGE>
make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations; or
(c) the failure of LICENSEE to successfully consummate the
private placement of the minimum 400,000 of its Common Shares being offered
pursuant to LICENSEE'S Confidential Private Offering Memorandum, dated October,
1998, pursuant to the terms and provisions set forth therein.
ARTICLE VI - LIMITATION OF ASSIGNMENT BY LICENSEE
6.1 - This License 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 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.
7
<PAGE>
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 both the February 17, 1997 License from LICENSOR I to
LICENSEE and any subsequent amendments thereto as well as the Agreement from
LICENSOR II to LICENSEE dated February 22, 1997 as well as the License
Agreement, dated December 22, 1997, executed and delivered by and between
LICENSOR I, LICENSOR II and LICENSEE 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:
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
8
<PAGE>
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 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.
9
<PAGE>
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/George J. Coates
GEORGE J. COATES - INDIVIDUALLY
s/Gregory Coates
GREGORY COATES - INDIVIDUALLY
COATES INTERNATIONAL, LTD.
BY: s/George J. Coates
GEORGE J. COATES
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
coatlic2.agr
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 FINANCIAL STATEMENTS OF COATES INTERNATIONAL, LTD. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Coates International, Ltd.
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<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1997
<PERIOD-END> Dec-31-1998
<CASH> 126,575
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 152,673
<PP&E> 1,936,220
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