FORM 10-KSB/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________________
Commission File No.: 33-94884
COATES INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
Delaware 22-2925432
(State or other jurisdiction of (I.R.S. Employer )
incorporation or organization) Identification No.
|
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_| Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this Form 10-KSB, and no disclosure will 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 any amendment to this Form 10-KSB. |X| Check whether the issuer is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State
issuer's revenues for its most recent fiscal year: $0 Number of shares of the
issuer's Common Stock outstanding at October 16, 2006: 266,894,278 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates: Not applicable -- the issuer's Common Stock is not traded on any
market. Transitional Small Business Issuer Disclosure Format (check one): Yes
|_| No |X|
Item 1. Description of Business
General
Coates International, Ltd. ("we" or the "Company") has developed over a period of more than 25 years a patented spherical rotary valve system which is adaptable for use in piston-driven internal combustion engines of many types.
The Coates rotary valve system is designed to replace the intake and exhaust conventional "poppet valves" currently used in almost all piston-driven stationary, automotive, motorcycle and marine engines. Unlike conventional valves which protrude into the engine cylinder, the Coates rotary valve system utilizes spherical valves that rotate in a cavity formed between a two-piece cylinder head. The Coates rotary valve system uses approximately 1/10th the moving parts of conventional poppet valve assemblies. As a result of these design improvements, management believes that the engines incorporating the Coates rotary valve system (Coates engines) will last significantly longer and will require less lubrication over the life of the engine, as compared to conventional engines. In addition, Coates rotary valves can be designed with larger openings into the engine cylinder than conventional valves so that more fuel and air can be inducted into and expelled from the cylinder in a shorter period of time. Larger valve openings permit higher revolutions-per-minute (RPMs) and permit higher compression ratios with lower combustion chamber temperatures, allowing the Coates engine to produce more power than equivalent conventional engines.
We hold an exclusive license to this technology from our founder, George J. Coates, and his son, Gregory Coates, for North America, Central America and South America, and a more limited license, that will become effective no later than the end of 2006, to this technology outside of the territories mentioned in the beginning of this sentence.
Since our inception, the bulk of our development costs and related operational costs have been funded primarily through cash generated from the sale of stock, through capital contributions and loans made by George Coates, through a sale-and-leaseback transaction related to our principal facility, and from prototype models and licensing fees. The Company has never received any revenues from the sale of engines, has never been profitable and has incurred substantial losses from operations of $894,963 and $1,257,576 for the years ended December 31, 2005 and 2004, respectively. The Company expects that losses from operations will continue until the Coates engine is successfully introduced into the marketplace, or the Company receives substantial licensing revenues. These losses from operations were substantially related to research and development of our intellectual property and patent filing and maintenance costs.
Coates International, Ltd. is a Delaware corporation organized in October 1991 as successor-in-interest to a Delaware corporation of the same name incorporated in August 1988. All of our operations are located in Wall Township, New Jersey (outside of New York City). We maintain a website at the following address: www.coatesengine.com. Through a link on our website to the SEC website, www.sec.gov, we provide free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronic filing with the SEC. The charters of our Board committees, and our Code of Business Conduct and Ethics for our directors, officers and employees, will also be available on our website, and we will post on our website any waivers of, or amendments to, such code of ethics. Our website and the information contained therein or linked thereto are not incorporated by reference into this report.
Background
The internal combustion engine has been in use for approximately 100 years and is the most widely used engine in the world. Industry sources indicate that there are more than 120 million new combustion engines built in the world every year and that 40 million engines are rebuilt annually. In the late 1960's and 1970's, most vehicle combustion engines in the United States were running at a compression ratio of 12 to 1 (air to gasoline) which resulted in an engine efficiency of approximately 35 percent. The rest of the engine's power is lost in friction, pumping and heat loss. When it was found that lead additives in fuel had an adverse effect on the environment, unleaded gasoline was Federally mandated. Unleaded gasoline is not as desirable as a fuel as leaded gasoline from an engineering and efficiency standpoint, and the early use of unleaded gasoline created a number of design problems, principally related to overheating of the engine, pre-ignition and resultant damage. That problem was largely solved by lowering engine compression ratios, but at a cost of reduced efficiency from approximately 35% to approximately 22%. This loss of efficiency reduces gas mileage and engine performance. Efficiency can be increased by increasing "volumetric efficiency" at maximum RPMs, but conventional valves tend to "float" or bounce at higher RPMs and are consequently unable to deliver adequate air and fuel to the cylinder. In an attempt to solve this problem, engine manufacturers increased the number of valves per cylinder, but this approach created other problems that cause unburned fuel to escape through the exhaust valves leading to a loss of power, lower gas mileage and increased pollutants. In addition, variable valve timing partially solved some of these additional problems, but that solution involves additional moving parts that eventually degrade and wear out. Also, variable valve timing on quick deceleration can cause piston and valve contact with resultant serious damage. Furthermore, conventional valves with solid "valve lifters" as opposed to hydraulic valve lifters must have clearances readjusted periodically. In sum, conventional "poppet" valves have been the most troublesome part of the internal combustion engine. The basic inefficiencies of the conventional poppet valve design result in engine inefficiency and decreases in engine life.
Conventional valves also have significant environmental deficiencies. Conventional exhaust valves are lubricated with engine oil which burns in combustion and is expelled directly into the atmosphere. Intake valves are also lubricated with engine oil, which is washed off and forced into the combustion chamber with the air and fuel mixture. This slows combustion, produces further emissions and eventually clogs the catalytic converter.
Management believes that the patented Coates rotary valve system solves or significantly mitigates these problems. Coates rotary valves are vented and charged on the opposite side of each valve sphere and rotate away from the combustion chamber reducing engine heat and allowing higher compression ratios that make the engine significantly more efficient and powerful.
We are now engaged in adapting our technology to manufacturing industrial engines to power electric generators, and intend to begin to market engines utilizing our proprietary designs.
Markets
The design of the Coates Spherical Rotary Valve System (the "CSRV System") gives the Company the flexibility to retrofit it to existing internal combustion engines of all sizes and in a wide variety of markets. In addition, the CSRV System can run on alternative fuels. Accordingly, the markets the Company may sell the CSRV System include all markets in which internal combustion engines are sold, including, but not limited to the following: engines for electric generators from home use to the largest industrial complexes to augmenting "grid" installations; engines to power motorcycles, automobiles, light trucks, heavy trucks and machinery; marine engines; military equipment; light aircraft and helicopters; and lawn mowers, snow mobiles and jet ski's.
According to the latest information published by the US Census Bureau on 2002, the annual internal combustion engine market in the U.S. was in excess of $96 billion.
Strategy
The long-term objective of the Company is to become the leader in the Americas in the design and manufacture of internal combustion engines for a wide variety of uses. The primary market the Company initially is focused on is the industrial generators market. The Company adapted the CSRV System to manufacture its 14.0 liter inline, 6-cylinder, 855 cubic inch engine/generator fueled by natural gas which is in the final stages of testing. The Company has been informed by the independent testing company, Compliance and Research Services, Inc. of Plainfield New Jersey, a Federally-sanctioned independent facility, that our product as described above complies with the governmental standards as set forth in 40 CFR 1048, the Code of Federal Regulations Part 1048, that regulates environmental standards for gas powered industrial engines. The Company is now permitted to market this product to the market. In parallel to penetrating the industrial generators market, the Company intends to adapt the CSRV System to be used in the other markets in which internal combustion engines are used, such as motor vehicles, motorcycles, trucks, ships, trains, military equipment, light aircraft and helicopters and others.
Operational Plan
Currently, the prototypes of the CSRV System-based generator engine are undergoing final performance and other tests. The Company intends to market the engine/generators to parties who have conveyed conditional orders upon the successful completion of the above tests. We expect that purchase orders for thousands of the Company's generator engines will thereafter be converted to firm orders, the fulfillment of these orders to be completed over the next three to five years. The Company intends to take advantage of the fact that essentially all the components of the CSRV generator engine may be readily sourced and acquired from subcontractors, and accordingly, intends to manufacture the generator engine in the two following ways:
o Assembly - to develop assembly lines within the Company's premises. The Company has been evaluating various opportunities to expand or acquire additional manufacturing capacity. When the demand for our products justifies it, the Company will take the required steps in order to increase its work force. We may hire up to about 200 employees within 12 to 24 months.
o Licensing the technology to Original Equipment Manufacturers - to take advantage of third party manufacturers production ability by signing OEM agreements.
Material Agreements
License Agreement - Well to Wire Energy, Inc.
On September 29, 1999, we signed a license agreement with Well to Wire Energy, Inc. ("WWE"), an oil and gas company in Canada. The agreement exclusively licenses in Canada the use of the Coates technology for V-8 engines to be fueled by natural gas to generate electrical power. The agreement provided for license fee of $5,000,000, of which a deposit payment in the amount of $300,000 was made. A separate research and development agreement with WWE provides for development and delivery of certain prototype engines. The research and development agreement was not reduced to the form of a signed written agreement.
On July 7, 2006, we signed a confirmation letter agreement with WWE, that provides as follows:
o The Company expects to ship to WWE in the near term the third power unit of the Company's generator up to 300 kw depending on the fuel used (the 855 cubic inch, 6 cylinder industrial electric power generator, incorporating the CSRV engine, the "Generator"). Upon receipt of the Generator, and pending test results meeting WWE's expectations, the balance of $3,905,000 on account of the research and development agreement mentioned above will become due and payable to the Company by WWE. In addition, 180 days later, the balance of US $4,700,000 on account of September 29, 1999 agreement will become due and payable to the Company by WWE in 16 equal quarterly installments.
o Pursuant to the agreements by and between WWE and the Company, WWE will have the exclusive right to use, lease, and sell the generators that are based on the CSRV System technology within Canada.
o WWE will have a specified right of first refusal to market the Generators worldwide.
o The Company and WWE have agreed that the minimum annual number of Generators to be purchased by WWE in order to maintain exclusivity is 120. Until otherwise agreed between the parties, the price per Generator shall be US $150,000. The minimum purchase requirement shall start to apply in 2007. In the event WWE fails to purchase the minimum 120 Coates generator engines during any year, WWE will automatically lose its exclusivity. In such a case, WWE would retain non-exclusive rights to continue to use the Coates generator engine.
o WWE shall not be required to pay any royalties to us as part of the engagements between the parties.
o All patent and other intellectual property rights related to the engine will remain with the Company.
Competition
Management believes that the Coates generator engine prototypes which are based on the CSRV System will provide substantially enhanced efficiencies in power generation and longevity. We believe that the Coates generator engine will outperform all other comparable natural gas-fueled electric generator engines currently utilized in the energy conversion market.
Notwithstanding our perceived competitive advantages, the power generation market is a highly competitive industry currently occupied by extremely large companies such as Caterpillar, Inc., which owns MAK, Perkins and FG Wilson, Detroit Diesel Corporation, AB Volvo, Cummins and Marathon, among others. All of these companies have far greater financial and other resources than us and already occupy segments of the power generation market. In order to successfully penetrate this industry, the Coates generator engine will have to produce the performance and durability results anticipated by management and sell at a price or prices that will enable it to effectively compete and gain entrance into this market.
Parts and Supplies
To date, management has utilized the services of various vendors and manufacturers available throughout the United States to provide all of the parts necessary to assemble the Coates generator engine. We expect to continue to purchase all of our raw materials and parts, manufactured to our specifications, from a wide assortment of suppliers. We intend to commence the assembly of the Coates generator engines at our New Jersey facility and to acquire additional facilities if and when needed.
Patents and Licenses
On December 22, 1997 we signed a license agreement with George J. Coates and Gregory Coates. The agreement exclusively licenses us to make, use, sell and have made, products falling within the scope of certain patent rights that enable us to manufacture the CSRV System in North America, Central America and South America. In addition, the agreement non-exclusively licenses the manufacture and sale of a combustion engine head or components thereof incorporating certain patent rights for testing and evaluation purposes only anywhere in the world. The patent rights referred to above include the following, all of which licensed to us by George J. Coates: (I) 17 patents registered in the United States; (II) certain patents registered in Canada, Mexico and in countries in Central and South America relating to the CSRV System; and (III) 1 U.S. patent application filed by Mr. George Coates. In addition to the patent rights, the agreement licenses to us any improvement change or modification to the CSRV System developed created or modified by a party to this agreement to the extent the same comes within the scope of one or more of the claims of the patent rights mentioned above.
In consideration for our rights under the license agreement we issued George J. Coates 500,000 of our Series A Preferred Shares and paid Gregory Coates $4,000.
On November 10, 2005 we signed an additional license agreement with George J. Coates. The agreement exclusively licenses us to make, use, sell and have made, products falling within the scope of certain patent rights that relate to the manufacture of the CSRV System in North America, Central America and South America. In addition, the agreement non-exclusively licenses the manufacture and sale of prototypes based on the patent rights anywhere in the world. The patent rights referred to above include three US patents. In addition to the patent rights the agreement licenses to us any improvement change or modification to the CSRV System developed created or modified by a party to this agreement to the extent the same comes within the scope of one or more of the claims of the patent rights mentioned above. In consideration for our rights under the November 10, 2005 license agreement, we issued George J. Coates 1,000,000 of our common stock.
On October 23 2006, we signed a license agreement with George J. Coates and Gregory Coates (the "New Coates License Agreement"), that replaces the license agreements signed on December 22, 1997 and November 10, 2005. The New Coates License Agreement will become effective upon the closing by us of an equity investment of at least $10,000,000 provided that such investment occurs on or before December 31, 2006. Under the New Coates License Agreement, George J. Coates and Gregory Coates granted to us: (A) an exclusive, perpetual, royalty-free, fully paid-up license to all intellectual property that is currently owned or controlled by them that relates to an internal combustion engine that includes the CSRV System (the "CSRV Engine") plus any such intellectual property that is developed by them during their employment with us and for five years after termination of such employment for the purpose of development, manufacturing, sale and/or distribution of the CSRV Engine; and (B) a perpetual, royalty-free, fully paid-up license to all intellectual property that is currently owned or controlled by them or that is developed by them during their employment with us and for five years after termination of employment that do not relate to the CSRV Engine for the purpose of development, manufacturing, sale and/or distribution of the CSRV Engine. The license under (B) above shall be exclusive through the earlier to occur of: (i) the end of any four consecutive fiscal quarters in which we recognize revenue of at least $200 million (the "Threshold Date"); or (ii) December 31, 2009, and thereafter shall become non-exclusive. The licenses in (A) and (B) above are limited to North, South and Central America, provided, however, that until the Threshold Date such licenses shall apply worldwide. In addition, after the Threshold Date such licenses shall include all countries outside of North America, Central America and South America in which we will have sold our products through the Threshold Date for at least $5 million in the aggregate, provided, however, that such licenses shall be non-exclusive.
Under the New Coates License Agreement, George J. Coates and Gregory Coates agreed that they will not grant any licenses as follows: (I) until the Threshold Date with respect to intellectual property that relates to the CSRV Engine other than to us; and (II) until the earlier to occur of the Threshold Date or December 31, 2009 with respect to intellectual property that can be useful in the marketing or manufacture of the CSRV Engine. In addition, if the employment of George J. Coates or Gregory Coates terminates because the Company terminated it for cause, or if one of them terminates his own employment without good reason before the Threshold Date, then such person shall not be entitled to grant any right in intellectual property that relates to the CSRV Engine or that can be useful in the marketing or manufacture of the CSRV Engine for five years thereafter.
On October 23, 2006 we signed a license agreement with the Coates Trust, a trust formed under the laws of the Commonwealth of the Bahamas (the "Trust", the "Trust License Agreement"). The beneficiaries of the Trust are certain members of the Coates family, including George and Gregory Coates, and it holds certain right to the CSRV technology outside of the North America, South America and Central America. The Trust License Agreement perfects our rights to market and sell products based on our technology as set forth in the description of the New Coates License Agreement, and will become effective at the same time as the New Coates License becomes effective. The Trust License Agreement provides for a payment to the Trust of royalties of $100 for every CSRV Engine we, our affiliates and sublicensees sell that includes intellectual property rights licensed to us by the Trust. In addition, we will pay 50% of all payments received from our sublicensees for sublicensing to them for rights licensed to us under the Trust License Agreement.
For a description to our sublicense agreement with Coates Motorcycle Company, see Item 12, titled "Certain Relationship and Related Transaction".
We rely upon patents, trade secrets, know-how and continuing technological innovation to develop and maintain our competitive position. We cannot assure you that we can limit unauthorized or wrongful disclosures of trade secrets or otherwise confidential information. In addition, to the extent we rely on trade secrets and know-how to maintain our competitive technological position, we cannot assure you that others may not develop independently the same, similar or superior techniques.
Environmental Regulatory Compliance
All of our new engines, including the Coates generator engine, will be subject to extensive environmental laws, rules and regulations that impose standards for emissions and noise. Initially, compliance with the emissions standards promulgated by the U.S. Environmental Protection Agency ("EPA"), as well as those imposed by the State of New Jersey and other jurisdictions where we expect our engines will be used, will have to be achieved in order to successfully market the Coates generator engine. Our natural gas powered engine/generators comply with governmental standards as set forth in 40CFR (Code of Federal Regulations) 1048, that regulates environmental standards for gas-powered industrial engines. The Company's ability to comply with applicable and future emissions standards is necessary for us to enter the power generation and other markets. Failure to comply with these standards could result in material adverse effect on our business and financial condition.
Employees
At December 31, 2005, we had 11 employees, including George J. Coates and his son Gregory Coates, who perform management, assembly and research and development functions. Bernadette Coates, the spouse of George J. Coates, is employed as administrative manager for the Company. We subcontract for certain labor services, parts and materials from Coates Precision Engineering, Inc., a corporation owned by George J. Coates, to which during the years ended December 31, 2005 and 2004, the Company paid $84,058 and $46,112, respectively
Risk Factors
The following risk factors should be considered carefully in addition to the other information contained in this report. This report contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our, our customers' or our industry's actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as other sections in this report, discuss some of the factors that could contribute to these differences.
The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This report also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our Common Stock.
We have never sold any Coates engines, and we have never been profitable.
None of the cash needed to finance our business has come from sales of engines. We have never been profitable, and we may continue to incur losses. We may not be profitable or cash flow positive in 2006, unless we receive payments we may be entitled to from Well to Wire Energy Inc., as described under section `Material Agreements' above. In addition, we may not be profitable or cash flow positive for several additional years after 2006.
The Coates engine may not have the performance characteristics and longevity that we expect.
The Coates engine has been tested in a "real world" environment to a very limited degree. Commercial use of our industrial engines may not have the performance characteristics that we expect. Similarly, until the Coates engine has been in use for a substantial period of time, there is no certain way to ascertain its expected longevity. Superior performance and longevity are essential elements of our ability to penetrate the power generation market. Our failure to do so would have a material adverse effect on our business and we may be forced to close our operations.
We are substantially dependent on our founder, George J. Coates.
We are substantially dependent on our founder, George J. Coates, and to a lesser extent his son, Gregory Coates. We expect that our future market capitalization will be in significant part dependent on the productivity of George Coates. If the employment of George Coates by the Company were to cease for any reason before we have hired additional senior management and engineering personnel, our business would be materially adversely affected and we may have to discontinue operations. We do not maintain key person insurance on either George J. Coates or Gregory Coates. Our success also depends on our ability to attract and retain a staff of qualified managerial and engineering personnel. Qualified individuals are in high demand and are often subject to competing offers. We cannot be certain that we will be able to attract and retain the qualified personnel we need for our business. If we are unable to hire additional personnel as needed, it would likely have a material adverse effect on us.
Our industry is subject to intense competition, and our competitors are well-entrenched and are among the world's largest companies.
The power generation market is a highly competitive industry currently occupied by extremely large companies. All of these companies have far greater financial and other resources than us and already occupy segments of the power generation market. In order to successfully penetrate this industry, the Coates engine will have to produce the performance and durability results anticipated by management and sell at a price or prices that will enable it to effectively compete and gain entrance into this market.
We have limited marketing and sales experience.
The Company has only limited marketing and sales experience in the United States. The sales process is expected to be lengthy, in part because of skepticism about the performance of the Coates engine. We are evaluating alternative marketing and sales channels, distributors, sublicensees and marketing partners. The Company may never successfully market and sell the Coates engine.
We have only eleven employees, and in order to grow out business we will need to hire significant additional personnel.
The Company needs to hire, train and retain additional employees for all aspects of its business if it is to achieve its sales goals. In particular, the Company needs trained engineers and sales personnel to educate potential customers and provide post-installation customer support. The Company is likely to experience difficulty in recruiting and retaining qualified people because the pool of experienced candidates is small and the competition to hire them is intense.
We have significant immediate capital needs, and ability to raise funds is highly uncertain.
The Company may need additional financing in the future for a number of uses, including:
o developing the Company's engineering, administrative and marketing
and sales organization;
o expanding manufacturing capacity;
o conducting testing of the Coates engine and obtaining requisite
governmental approvals; and
o expanding our research and development programs with respect to the
basic Coates technology and applying the Coates technology to
engines for different applications.
Additional financing may not be available on terms acceptable to the Company or not available at all.
There is no public market for our outstanding Common Stock, and there will be restrictions on transferability.
There is presently no public market for our outstanding Common Stock, and we cannot assure you that a public market will ever develop. We intend to finance our business through an equity offering, but there can be no assurance that such an offering will be completed. If such an offering is completed, we anticipate that our Common Stock may be quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system or a stock exchange.
Trading of our Common Stock may be restricted by the SEC'S "penny stock" regulations which may limit a stockholder's ability to buy and sell our stock.
The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities will likely be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and other quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statement showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure and suitability requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our capital stock. Trading of our capital stock may be restricted by the SEC'S "penny stock" regulations which may limit a stockholder's ability to buy and sell our stock. We have no intention to pay dividends.
George J. Coates and his family own a majority of our Common Stock allowing him to unilaterally determine the outcome of all matters submitted to our stockholders for approval, which influence may conflict with our interests and the interests of our other stockholders.
George J. Coates, together with members of his family and related trusts, beneficially own more than 80% of the outstanding shares of Common Stock at October 16, and will therefore be able to unilaterally determine the outcome of all matters submitted to our stockholders for approval, including the election of our directors and other corporate actions. In addition, such influence by Mr. Coates could have the effect of discouraging others from attempting to take us over, thereby increasing the likelihood that the market price of the Common Stock will not reflect a premium for control.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our Common Stock only if it appreciates in value.
We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain our future earnings, if any, to finance further research and development and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our Common Stock will depend upon any future appreciation in its value. There is no guarantee that our Common Stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
Trading in our Common Stock, if and when it commences may be volatile, which may result in substantial declines in its market price.
If our Common Stock becomes publicly traded (and there can be no assurance that it will), it is likely to experience significant volatility in response to periodic variations in:
o results of testing of the Coates engine;
o performance of the Coates engine in the field;
o improvements in competitive engines; and
o changes in general conditions in the economy or the financial
markets.
The market has also experienced significant decreases in value. This volatility and the recent market decline has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and may adversely affect the price of our Common Stock.
If our Common Stock becomes listed, the market for it will be limited. We cannot assure that an active trading market will develop or, if developed, will be maintained. As a result, our stockholders may find it difficult to dispose of shares of our Common Stock and, as a result, may suffer a loss of all or a substantial portion of their investment.
Item 2. Description of Property.
Our executive offices and testing facility are located in an approximately 25,000 square foot in Wall Township, New Jersey, outside of New York City. At the end of November 2005, the Company entered into a sale/leaseback arrangement of this property. The Company has an option to repurchase the property at any time during the first three years of the agreement for $5,200,000. The new lease agreement with the purchaser provides for monthly payments of $32,500 over a six year period. Under the lease agreement, the Company is responsible for all real estate taxes and operating expenses of the property, including insurance. On June 2006 the Company signed a non-binding letter of intent to buy the leased premises for an aggregate amount of $4,500,000. We will be able to finance the purchase of the leased premises only with outside financing in the near future.
In our development operations, we own and utilize 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.
Item 3. Legal Proceedings.
The Company, its officers and directors and other related and unrelated parties have been named as defendants in a lawsuit brought in the Superior Court of New Jersey that is captioned H. Alton Neff v. George Coates, Coates International, Ltd. et al. Plaintiff contends that he is the assignee of 1107 North West Central Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto relating to purchase of certain license by 1107 from the Company provided, inter alia, that the $500,000 deposit made by 1107 to the Company would convert to the stock of the Company if certain conditions were not met by 1107. The Company maintains that 1107 did not fulfill such conditions, and failed to make a certain payment, and therefore, the deposit converted into shares of the Company's restricted Common Stock. Management believes that this lawsuit is without merit and intends to vigorously defend this action. The Company is not a party to any other litigation that is material to the Company's business.
In July 2004, the Company agreed to settle its claim against an accounting firm for proceeds of $107,500.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a stockholder vote in 2005.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
There is no established public trading market for our Common Stock.
Holders
At December 31, 2005, the number of holders of record of the Common Stock was 1,183. We have not paid any dividends with respect to our Common Stock, and anticipated capital requirements make it highly unlikely that we will pay any dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In 2004, the Company issued a total of 267,286 shares of its Common Stock to seven accredited investors for a total of $815,000 in cash at the following prices per share: 200,000 shares at $2.50 per share, 14,286 shares at $3.50 per share and 53,000 shares at $5.00 per share.
In 2005, the Company issued 1,000,000 shares of its Common Stock to George J. Coates in exchange for a new technology license agreement. Also in 2005, the Company issued a total of 33,000 shares of its Common Stock to two accredited investors at a price of $5.00 per share.
We did not employ an underwriter in connection with the issuance of the securities described above. We believe that the issuance of the foregoing securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), as transactions not involving a public offering. Each of the recipients were accredited investors, and acquired the securities for investment purposes only and not with a view to distribution.
Rule 144
In general, under Rule 144 under the Securities Act, a person who has beneficially owned shares of our Common Stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
o 1% of the number of shares of our Common Stock then outstanding,
which will equal approximately 2,668,942 shares of our Common Stock;
or
o the average weekly trading volume of our Common Stock, if and when
our Common Stock is traded on the OTC Bulletin Board, during the
four calendar weeks preceding the filing of a notice on Form 144
with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us for at least 90 days. As of May 31, 2006, a total of 265,861,278 shares of our Common Stock are eligible for resale under Rule 144.
Under Rule 144(k) under the Securities Act, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 144(k), as of May 31, 2006, 43,644,398 shares of our Common Stock qualified for resale under Rule 144(k).
Stock Options
The Company has never granted any stock options. The Company undertook to grant an aggregate number of 7,525,000 options to four of its employees. It has adopted its 2006 Stock Option and Incentive Plan described below, subject to stockholder approval. The Board will consider option grants to new and existing employees following stockholder approval.
Dividends
We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, cash needs and growth plans
Item 6. Management's Discussion and Analysis or Plan of Operation.
Background and Critical Accounting Policies
We have substantially completed the development of the Coates spherical rotary valve engine. We are now engaged in adapting our technology to manufacturing industrial engines to power electric generators with outup of up to 300kw, depending on the primary fuel. Thereafter, we intend to manufacture engines for many other applications and uses.
Results of Operations for the Years Ended December 31, 2005 and December 31, 2004
The Company did not earn any revenues during 2005 and 2004. The Company's
principal business activities and efforts during 2005 and 2004 were devoted to
(i) the completion of the research, development, construction and testing of the
prototype engines for WWE, and (ii) successfully securing additional working
capital through the sale and leaseback financing of its principal offices,
warehouse and manufacturing facility.
Total operating expenses for the years ended December 31, 2005 and 2004 were $894,963 and $1,257,576, respectively, representing a decrease of approximately 28.9%, which was primarily attributable to the Company's lack of available funds during most of 2005 to finalize testing for the functionality, design and components through the final phases of the prototype engines and the Company's focus on reducing general and administrative expenses. Approximately $380,000 and $391,000 for the years ended December 31, 2005 and 2004, respectively, represented labor charges. Research and development expenses decreased primarily as a result of a lower level of purchases of parts and supplies. General and administrative expenses decreased from $1,032,529 in 2004 to $819,915 in 2005. This $212,614, or 20.6%, decrease primarily resulted from the Company's efforts to preserve its working capital by reducing such expenditures.
The loss from operations of $894,963 for the year ended December 31, 2005 decreased from $1,257,576 in 2004. During 2005, the Company's activities were adversely affected by inadequate working capital.
Other (Expense) Income decreased to a net expense in 2005 of ($365,953) from net other income of $275,902 in 2004. This resulted from (i) gains in 2004 of $225,000 and $260,336 from a one-time settlement of litigation and one-time settlement of legal fees, partially offset by a gain of $47,000 from the sale of a portion of the Company's investment in Coates Motorcycle (ii) an increase in the Company's equity share of the losses from its investment in Coates Motorcycle from ($101,856)in 2004 to ($260,344)in 2005 and (iii) a higher level of interest expense due to the financing at the end of November 2005, of its principal offices, warehouse and manufacturing facility.
The Company provided for state income taxes in 2005 in the amount of ($11,117) as compared with a state income tax benefit realized in 2004 of $218,349. This resulted from the requirement to recognize a taxable gain for income tax purposes on the sale/leaseback of the Company's principal offices, warehouse and manufacturing facility in 2005. No federal income tax resulted from this gain on sale as there were sufficient net operating loss carryforwards to offset this gain. However, as the Company had previously sold all of its state income tax net operating loss carryforwards, no such offset was available for state income tax purposes.
The net result for the year was a loss of ($1,272,033) or $0.00 per share, as compared to a net loss of ($763,325) or $0.00 per share for 2004.
Liquidity and Capital Resources
In 2005, the Company issued a total of 35,000 shares of its Common Stock to two accredited investors at a price of $5.00 per share and realized cash proceeds of $175,000 which is being used for working capital purposes. During 2004, the Company received subscription proceeds of $815,000 in cash from seven accredited investors from the issuance of 267,286 shares of its Common Stock, concluding our private placement. We had positive working capital of $1,721,743 as of December 31, 2005, compared with negative working capital of ($268,404) at December 31, 2004. This substantial improvement was primarily the result of the successful sale/leaseback of the Company's principal offices, warehouse and manufacturing facility in 2005. This transaction is being treated as a financing transaction for accounting purposes. The Company realized net proceeds from this transaction of $3,876,607 which was partially used to repay the $868,182 remaining balance of a mortgage loan bearing interest at a 13.99% annual rate and the balance of the proceeds will be utilized for working capital purposes. Under this method of accounting, the monthly rent payments under the lease of $32,500 are treated as interest expense translating into an effective annual interest rate of 10.06%. Current liabilities are primarily composed of approximately $486,000 of legal fees due to a law firm for its representation of us in litigation over the past several years, income taxes payable of $127,000 and due to related parties of $138,000.
We are currently refining the construction of the production prototype Coates generator engines and testing them. We expect to be able to complete the testing of the production model and delivery to WWE this year. Subject to meeting WWE expectations with respect to the prototype Coates generator engine, we will receive the balance of $3,905,000 from WWE under our research and development agreement with them. Under our agreement with WWE, an additional balance due to us of $4,700,000 is payable in equal quarterly payments over a four year period, commencing 180 days following delivery to WWE of this third prototype, and subject to meeting WWE expectations as mentioned above. We expect that the prototype Coates generator engine will meet WWE's expectations. There can be no assurance, however, that these agreements, as well as those presently in negotiations with other licensees, will be consummated in accordance with these expectations or that payments will be received as called for in the agreements.
Item 7. Financial Statements.
Reference is made to the Index to Financial Statements on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 8A. Controls and Procedures.
Evaluation of disclosure controls and procedures:
Based on their evaluation as of a date within 90 days of the filing date of this report, George J. Coates, our principal executive officer and principal financial officer until October 23, 2006, Mark Goldsmith, our current Chief Executive Officer, and Barry Kaye, our current Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are sufficiently effective to ensure that the information required to be disclosed by the Company in the reports that we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.
Changes in internal controls:
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. Accordingly, no corrective actions were required or undertaken.
Limitations on the effectiveness of controls:
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Item 8B. Other Information.
The following actions and events took place recently, which otherwise should have been reported on Form 8-K:
The Company has entered into the following Material Definitive Agreements, all of them described in Item 10: Executive Compensation, under caption `Employment contracts and termination of employment and change-in-control arrangements':
o Employment Agreement between the Company and Mark D. Goldsmith dated October 18, 2006
o Employment Agreement between the Company and Barry C. Kaye dated October 18, 2006
o Employment Agreement between the Company and George J. Coates dated October 23, 2006
o Employment Agreement between the Company and Gregory Coates dated October 23, 2006
The Company has entered into the following Material Definitive Agreements, all of them described in Item 1: Description of Business, under caption `Patents and Licenses':
o License Agreement between the Company and George J. Coates and Gregory Coates dated October 23, 2006
o License Agreement between the Company and Coates Trust dated October 23, 2006
The composition of the Company's Board of Director has been changed, as provided for in Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The Company replaced all of its executive officers, as provided for in Item 9:
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The following table lists the current members of our board of directors and our executive officers. The address for our directors is c/o Coates International, Ltd., Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719. There are no family relationships among members of our board or our executive officers, with the exception of Gregory Coates, who is the son of George Coates.
--------------------------------------------------------------------------------
Name Age Position
--------------------------------------------------------------------------------
Gregory Coates 36 Director, Chairman of the Board, and President-
Technology Division
--------------------------------------------------------------------------------
Mark D. Goldsmith 63 Director, President and Chief Executive Officer
--------------------------------------------------------------------------------
Barry C. Kaye 53 Director, Treasurer and Chief Financial Officer
--------------------------------------------------------------------------------
Richard W. Evans 75 Director and Secretary
--------------------------------------------------------------------------------
Dr. Michael J. Suchar 50 Director *, **
--------------------------------------------------------------------------------
Dr. Frank Adipietro 48 Director *, **
--------------------------------------------------------------------------------
Glen Crocker 57 Director *, ***
--------------------------------------------------------------------------------
Richard Whitworth 57 Director *, ***
--------------------------------------------------------------------------------
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* Serves as an independent director. ** Serves as a member of our compensation committee *** Serves as a member of our audit committee
Gregory Coates became a director of the Company on October 24, 2006, and has served as the Chairman of our Board of Directors since then. On October 23, 2006 he became our President - Technology Division. For the past fifteen years, Gregory Coates has worked with us as a design engineer, working in the research and development designing and building of the CSRV System and adapting this system to various existing applications. He created certain of our licensed inventions, and patented certain of them. Gregory Coates is an Associate Member of the Society of Automotive Engineers, Inc., and a Member of the American Society of Mechanical Engineers. He graduated from the College of Technology of Ireland.
Mark D. Goldsmith became a director of the Company on October 24, 2006, and has been serving as our President and Chief Executive Officer since October 18, 2006. Prior to that Mr. Goldsmith served as the President, Chief Executive, Officer, Interim Chief Financial Officer and Director of Coates Motorcycle Co Ltd. Prior to that, Mr. Goldsmith worked in the securities industry in various managerial and supervisory capacities, beginning in 1973. In 1973, Mr. Goldsmith was named Vice President in charge of internal auditing and accounting for MKI Securities Inc., a New York Stock Exchange member, a position he held until 1979 when he took the position of Treasurer and Chief Financial Officer with Muller & Company, Inc., a New York Stock Exchange member firm. Mr. Goldsmith served in these positions until 1988. In 1988, Mr. Goldsmith left Muller & Company, Inc. when it was sold and became Senior Vice President of Sales with Moore, Schley, Cameron & Co., Inc., a New York Stock Exchange member firm, in which position he managed certain accounts of high net worth individuals through 1991. From 1991 through 1995, Mr. Goldsmith served as a Senior Vice President in charge of investment banking and syndication with Stuart Coleman & Co., Inc., a New York Stock Exchange member firm.
During the period 1996 through 1998, Mr. Goldsmith served as Executive Vice President, supervising investment banking and syndication, with Northeast Securities, Inc., a registered NASD broker-dealer in Garden City, New York. Following this period, Mr. Goldsmith served as a Securities Principal with the firm of Paul L. Forchheimer & Co., Inc., an American Stock Exchange associate member firm, until 2000 when he became President of Adolph, Komorsky & Co., Inc., a registered NASD broker-dealer in Tarrytown, New York. Mr. Goldsmith served in this capacity until October, 2001 when Adolph, Komorsky & Co., Inc. was merged into another securities brokerage firm.
In January 2002 Mr. Goldsmith became a financial consultant, initially, with the NASD member firm, MH Meyerson & Co., Inc., a public company, and shortly thereafter was appointed the Chief Financial Officer of this firm. In January, 2004, Mr. Goldsmith left to become a Managing Director of Chapman Spira & Carson LLC, an investment banking and consulting firm in New York City.
During his tenure at MH Meyerson & Co., Inc. the firm was found to be in violation of Rule 15c3-1 and Section 15(c) of the Securities Exchange Act of 1934, the "net capital rule" on three separate occasions with respect to certain of the firm's periodic reports filed with the Securities and Exchange Commission and the NASD that contained material misstatements. By reason of the foregoing, it was alleged that Mr. Goldsmith violated NASD Conduct Rules. Without admitting or denying the NASD allegations and for the purpose of settling this matter, on December 4, 2004 Mr. Goldsmith entered into a settlement with NASD providing for a four month NASD member suspension and a fine of $10,000, payable only upon Mr. Goldsmith's re-registration with the NASD. Mr. Goldsmith is currently eligible to re-register with an NASD firm if he chooses to do so. Mr. Goldsmith attended Pace University in New York.
Barry C. Kaye became a director of the Company on October 24, 2006 and has been serving as our Treasurer and Chief Financial Officer since October 18, 2006. Mr. Kaye is a Certified Public Accountant in both New York and New Jersey. From 2004 to 2005, Mr. Kaye served as Corporate Controller of Development Corporation for Israel. He was the Vice President, Finance & Operations for Alliance Corner Distributors, Inc. from 2003 to 2004. From 1999 to 2003, he was an Executive Business Consultant with BCK Business Consulting. From 1987 to 1999, he served as Group Vice President, Finance at Sharp Electronics Corporation. From 1976 to 1987, Mr. Kaye was a Senior Audit Manager for Arthur Andersen & Co. He is a member of the American Institute of Certified Accountants as well as a member of the New York and New Jersey State Societies of Certified Public Accountants. Mr. Kaye received his B.S. Degree in Accounting from Brooklyn College.
Richard W. Evans became a director of the Company in May 1996. Dr. Evans holds an ED.D degree from Rutgers University, was a Supervisor of the Highland Park School in Highland Park, New Jersey, a post held for more than the preceding five years until his retirement in June 1996.
Michael J. Suchar became a director of the Company in May 1996. Dr. Suchar, who holds a Doctor of Dental Surgery degree from Temple University Dental School, has been a practicing pediatric dentist for more than the preceding five years.
Frank Adipietro became a director of the Company on October 24, 2006. Dr. Adipietro, who holds an M.D. degree from Downstate Medical School, Brooklyn, has been practicing in the area of anesthesia and interventional pain management for more than twenty years.
Glenn Crocker became a director of the Company on October 24, 2006. Mr. Crocker, who holds an MBA degree in Engineering Design, has been working for most of the past thirty five years as a designer and design engineer with various vehicle manufacturers.
Richard Whitworth became a director of the Company on October 24, 2006. Mr. Whitworth, who holds a Bachelor of Science degree from the University of Florida, has been serving as the president of the Whitworth Group Inc. for the past 19 years. The Whitworth Group specializes in governmental and public relations, organizational development and financial services.
Significant Employees; Control Persons
George J. Coates is our founder and served since our organization and until October 23, 2006 as a director of our Company, Chairman of the Board of Directors, President, Chief Executive Officer, Treasurer and Chief Financial Officer. Since October 23, 2006, he is employed by us in a non-executive position, and is considered by us as a significant employee. George J. Coates served two apprenticeships in Europe while attending the College of Technology in London , and as an associate member of the S.A.E. He received The City and Guilds of London for electrical and mechanical engineering. He is a former management director of SCR motor engineers of Europe and holds the certificates of Ministry of Transport in the United Kingdom. He worked as an engineer for Rolls Royce and Mercedes Benz, and holds approximately 300 patents worldwide. He invented coolant disc brakes, invented a hydraulic suspension, invented and patented the Coates rotary valve system and invented and patented a turbine engine. George Coates is 66 years old.
Due to his holdings in the our share capital George J. Coates is a control person. In 1991, the SEC commenced proceedings against Mr. Coates and the Company in the United States District Court, Southern District of New York, which, in August 2001, was settled and the case dismissed. The SEC brought a civil action against the Company, Mr. George Coates and related parties for alleged breaches of federal securities laws in connection with certain private placements that occurred in the early 1990's. Initially, the Court froze the assets of the Company and George J. Coates and appointed a special master to manage the Company's business affairs. Thereafter, the Company and George J. Coates negotiated a settlement with the SEC and a consent judgment was signed by them. The principal settlement provisions of this final consent judgment required Mr Coates to transfer ownership of the Company's Wall Township business premises to the Company, permitted Mr. Coates to retain title to the Coates Patents as long as he reimbursed the Company for the costs associated therewith, and the Company's commitment to undertake a registered rescission offer to certain private placement investors. George J. Coates agreed to use up to approximately $800,000 of his own funds first to buy back Company stock from those investors who chose rescission, with any required further rescission funds necessary to complete the rescission offer to be paid by the Company. The rescission offer was completed in 1997 with only 32 of the 328 private placement investors electing to rescind their investment. The 32 rescinding investors received $1,270,000 of rescission funds out of approximately $6,500,000 invested by all investors. Following the rescission, the Court dismissed the special master and the Company continued under the control of Mr. Coates. In concluding this proceeding, Mr. Coates was assessed a fine of $40,000 by the Court based upon its findings of four violations of federal securities disclosure laws in connection with the private placements. Specifically, the Court found that the private placement offering documents used by Mr. Coates at the time misrepresented that (1) the Coates engine surpassed the emissions standards imposed by the EPA; (2) the Company had a substantial number of firm orders for engines equipped with the Coates engine when the orders were found to be provisional; (3) the Company owned the patents to the Coates System when, at the time, they were owned by Mr. Coates, and; (4) the offering documents omitted disclosing Harley Davidson's discontinuance of testing the Coates prototype engines due to Harley's claims of malfunction.
Mr. Coates does not agree with a number of the Court's findings.
Board Committees
Our board of directors established an audit committee and a compensation committee in October 2006. All of the members of each of these standing committees are independent as defined under Nasdaq rules and, in the case of the audit committee, the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act.
Audit Committee
The audit committee's responsibilities will include: appointing, approving the compensation of, and assessing the independence of our independent auditor; overseeing the work of our independent auditor, including through the receipt and consideration of reports from the independent auditor; reviewing and discussing with management and our independent auditor our annual and quarterly financial statements and related disclosures; monitoring our internal control over financial reporting, disclosure controls and procedures, and code of business conduct and ethics; discussing our risk management policies; establishing policies regarding hiring employees from our independent auditor and procedures for the receipt and retention of accounting related complaints and concerns; meeting independently with our independent auditor and management; and preparing the audit committee report required by SEC rules to be included in our proxy statements.
All audit services and all non-audit services, except de minimis non-audit services, must be approved in advance by the audit committee.
Our Board of Directors has determined that it does not have a member of its audit committee that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B, and is "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended. The Company restructured its Board of Directors, which required efforts and resources. However, it failed to attract adequate nominees for the position of audit committee financial expert due to the Company's limited resources.
Compensation Committee
The compensation committee's responsibilities will include:
o annually reviewing and approving corporate goals and objectives
relevant to compensation of our chief executive officer;
o determining the compensation of our chief executive officer;
o reviewing and approving, or making recommendations to our board of
directors with respect to, the compensation of our other executive
officers;
o overseeing an evaluation of our senior executives;
o overseeing and administering our cash and equity incentive plans;
and
o reviewing and making recommendations to our board with respect to
director compensation.
Corporate Governance
We believe that good corporate governance is important to ensure that, as a public company, we will managed for the long-term benefit of our stockholders. In that regard, we have established and adopted charters for the audit committee and compensation committee, as well as a code of business conduct and ethics applicable to all of our directors, officers and employees.
Compensation Committee Interlocks and Insider Participation
Mark D. Goldsmith, Gregory Coates, Richard Evans and Barry C. Kaye will be our only executive officers who serve as members of the board of directors. None of our executive officers serves as a member of our compensation committee, audit committee or other committee serving an equivalent function. None of the current members of the compensation committee of our board has ever been one of our employees.
Liability Limitations and Indemnification
The following description is intended as a summary only and is qualified in its entirety by reference to our amended and restated charter and amended and restated by-laws filed as exhibits to this report and to Delaware law. We refer in this section to our amended and restated charter as our charter, and we refer to our amended and restated by-laws as our by-laws.
Our charter and by-laws limit the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for:
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions that are not in good faith or that involve
intentional misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
The limitations do not apply to liabilities arising under the federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission.
Our charter and by-laws provide that we will indemnify our directors and officers, and may indemnify other employees and agents, to the maximum extent permitted by law. We believe that indemnification under our by-laws covers at least negligence and gross negligence on the part of indemnified parties. Our by-laws also permit us to secure insurance on behalf of any officer, director, employee or agent for any liability arising out of actions taken in his or her capacity as an officer, director, employee or agent, regardless of whether the by-laws would permit indemnification.
At present, the only litigation or proceeding involving any of our directors, officers or employees in which indemnification is, or may be sought in the future is the H. Alton Neff v. George Coates, Coates International, Ltd. et al. case which is described under Item 3 above (Legal Proceedings). We are not aware of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons under our charter or by-laws or the indemnification agreements we have entered into with our directors and officers, we have been advised that in the opinion of the SEC this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company knows of no person, who, at any time during the fiscal year ended December 31, 2005 to the date hereof, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company (a "Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a). Based upon a review of Forms 3, 4 and 5 furnished to the Company under Rule 16(a)-3(d), the Company knows of no Reporting Person that failed to file the required reports within the required time limits.
Item 10. Executive Compensation.
With respect to the 2005 fiscal year, we had no executive officers other than George J. Coates, whose compensation was as follows:
Summary Compensation Table
(for the fiscal year ended December 31, 2005)
Long Term Compensation
Awards
Annual Compensation ----------------------
--------------------------------------- Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Awards Options Compensation
--------------------------- ---- --------- -------- ------------- ---------- ---------- -------------
George J. Coates, 2005 $ 183,549 $ 0 $ 0 $ (1) 0 $ (1)
President, Chief Executive Officer,
Treasurer and Chief Financial
Officer 2004 $ 186,948 $ 0 $ 0 $ 0 0 $ 0
2003 $ 183,548 $ 0 $ 0 $ 0 0 $ 0
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(1) The Company granted Mr. Coates 1,000,000 shares of its common stock as consideration for a license agreement.
Option Grants / SARs
The Company has never granted any stock options or SARs.
Director Compensation
As of today, the directors who are not also our employees do not receive any compensation for serving in the Company's Board of Directors, the audit or compensation committees. The Company intends to adopt a scheme for compensation of our non-employee directors. Non-employee directors also will be eligible to receive stock options under our equity incentive plan.
We reimburse all of our non-employee directors for reasonable travel and other expenses incurred in attending board of directors and committee meetings. Any director who is also one of our employees receives no additional compensation for serving as a director.
Employment contracts and termination of employment and change-in-control arrangements
On October 18 and 23, 2006, we signed employment contracts with George J. Coates and with three new executives, who are serving as directors of the Company. Under the four employment agreements the employees are entitled to terminate their employment with us under certain circumstances, referred to as a good reason, thus receiving severance payment and full acceleration of their options. Such circumstances include reduction in salary or benefits and diminution in authority or responsibility to a non-executive position.
Under the four employment agreements the employees are entitled to customary benefits and expense reimbursement, as well as for an annual bonus that shall not exceed $100,000 until the Threshold Date. Summary of the additional compensation terms under the employment agreements appears in the table below.
-------------------------- --------------- --------------- --------------- ------------------ ------------
Annual Number of stock Severance Term of the
Name & position compensation options * Life insurance payment** Agreement
-------------------------- --------------- --------------- --------------- ------------------ ------------
George Coates, non
executive, significant One year salary
employee $ 300,000 3,000,000 $2,000,000 *** Five years
-------------------------- --------------- --------------- --------------- ------------------ ------------
Gregory Coates, President One year salary
Technology Division $ 200,000 3,000,000 $2,000,000 *** Five years
-------------------------- --------------- --------------- --------------- ------------------ ------------
Salary through
the remaining
Mark D. Goldsmith, term of the
President and Chief agreement,
Executive Officer $ 200,000 1,500,000 None minimum One year Three years
-------------------------- --------------- --------------- --------------- ------------------ ------------
Barry C. Kaye, Treasurer
and Chief Financial
Officer $ 125,000 25,000 None One year salary Three years
-------------------------- --------------- --------------- --------------- ------------------ ------------
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* The Options have not been granted, yet the Company undertook to grant them as stated above. The options will be granted under the following terms: the options vest in three equal installments each year, the first installment to vest once the employment agreement that includes the undertaking to grant the options becomes effective. The options will immediately fully vest in the event the employee terminates his employment for a good reason, or if we terminate such an employee without cause. The exercise price will equal to the fair market value on the date of grant.
** The entitlement for the severance payment is subject to the employee terminating his employment for a good reason.
*** The severance payment shall be increased to an amount equal to two years salary in the event such termination for a good reason occurs after the Threshold Date.
Under their employment agreements, George and Gregory Coates undertook to vote all their shares in the Company to elect to our Board of Directors at least two `independent directors' as defined by the rules of the SEC and NASDAQ. In addition, our rights in intellectual property rights developed by George and Gregory Coates will be as set forth in a certain license agreement dated October 23, 2006 and described in Item 1, under caption `Patents and Licenses'. Under their employment agreements we are not entitled to terminate either George or Gregory Coates employment unless they are terminated for cause.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information with respect to the beneficial ownership of our Common Stock as of October 16, 2006 for:
o each of our executive officers and directors;
o all of our executive officers and directors as a group; and
o any other beneficial owner of more than 5% of our outstanding Common
Stock.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days. Except as otherwise indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
Percentage ownership calculations are based on 266,894,278 shares outstanding as of October 16, 2006 . Addresses of named beneficial owners are care of Coates International, Ltd., Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719.
Beneficial Ownership
-----------------------------------------------------------------------
Outstanding Shares Right to Acquire Shares Beneficially Owned
------------------ ---------------- -------------------------
Name and Address of Beneficial Beneficially Owned Within 60 Days After Number Percentage
Owner June 30, 2005
------------------------------ ------------------- -------------------- ------------- -----------
Gregory Coates 14,032,520 0 14,032,520 5.26%
Frank Adipietro 810,000 0 810,000 0.3%
Richard Evans 660,000 0 660,000 0.25%
Michael J. Suchar 241,600 (1) 0 241,600 (1) 0.09%
All executive officers and
directors as a group (3
persons) 15,744,120 0 15,744,120 5.9%
Other 5% owners:
George J Coates 208,272,760 (2) 0 208,272,760 (2) 78.03%
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(1) Includes 20,000 shares owned by Mr. Suchar's spouse, beneficial ownership of which is disclaimed by Michael J. Suchar.
(2) Includes 1,956,960 shares owned by Mr. Coates' spouse, beneficial ownership of which is disclaimed by George J. Coates.
Option Grants
The Company has never granted any stock options. It has adopted its 2006 Stock Option and Incentive Plan described below, subject to stockholder approval. The Board will consider option grants to new employees following stockholder approval. The Company undertook to grant an aggregate number of 7,525,000 options to four of its employees.
2006 Stock Option and Incentive Plan
The Company's 2006 Stock Option and Incentive Plan (the "Stock Plan") was adopted by the Company's Board of Directors in October 2006, subject to stockholder approval. The Stock Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, the Company and its subsidiaries. Under the Stock Plan, the Company may grant options that are intended to qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options not intended to qualify as incentive stock options ("non-statutory options"), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the Company. A total of 12,500,000 shares of Common Stock may be issued upon the exercise of options or other awards granted under the Stock Plan. The maximum number of shares with respect to which awards may be granted to any employee under the Stock Plan shall not exceed 25% of that number.
The Stock Plan is administered by the Board of Directors and the Compensation Committee. Subject to the provisions of the Stock Plan, the Board of Directors and the Compensation Committee each has the authority to select the persons to whom awards are granted and determine the terms of each award, including the number of shares of Common Stock subject to the award. Payment of the exercise price of an award may be made in cash, in a "cashless exercise" through a broker, or if the applicable stock option agreement permits, shares of Common Stock or by any other method approved by the Board or Compensation Committee. Unless otherwise permitted by the Company, awards are not assignable or transferable except by will or the laws of descent and distribution.
Upon the consummation of an acquisition of the business of the Company, by merger or otherwise, the Board shall, as to outstanding awards (on the same basis or on different bases as the Board shall specify), make appropriate provision for the continuation of such awards by the Company or the assumption of such awards by the surviving or acquiring entity and by substituting on an equitable basis for the shares then subject to such awards either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the acquisition, (b) shares of stock of the surviving or acquiring corporation or (c) such other securities or other consideration as the Board deems appropriate, the fair market value of which (as determined by the Board in its sole discretion) shall not materially differ from the fair market value of the shares of Common Stock subject to such awards immediately preceding the acquisition. In addition to or in lieu of the foregoing, with respect to outstanding stock options, the Board may, on the same basis or on different bases as the Board shall specify, upon written notice to the affected optionees, provide that one or more options then outstanding must be exercised, in whole or in part, within a specified number of days of the date of such notice, at the end of which period such options shall terminate, or provide that one or more options then outstanding, in whole or in part, shall be terminated in exchange for a cash payment equal to the excess of the fair market value (as determined by the Board in its sole discretion) for the shares subject to such Options over the exercise price thereof. Unless otherwise determined by the Board (on the same basis or on different bases as the Board shall specify), any repurchase rights or other rights of the Company that relate to a stock option or other award shall continue to apply to consideration, including cash, that has been substituted, assumed or amended for a stock option or other award pursuant to these provisions. The Company may hold in escrow all or any portion of any such consideration in order to effectuate any continuing restrictions.
The Board may at any time provide that any stock options shall become immediately exercisable in full or in part, that any restricted stock awards shall be free of some or all restrictions, or that any other stock-based awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.
The Board of Directors or Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or made under the Stock Plan, so long as such amendment, modification or termination would not materially and adversely affect the participant.
Item 12. Certain Relationships and Related Transactions.
The Company subcontracts its project expense from Coates Precision Engineering, of which George J. Coates is the sole shareholder. During the years ended December 31, 2005 and 2004, the Company paid $84,058 and $46,112, respectively, for these services.
On April 30, 2003, the Company entered into a sublicense agreement with Coates Motorcycle Company, Ltd ("Coates Motorcycle"). Prior to the agreement, Gregory Coates, son of George J. Coates, owned 100% of Coates Motorcycle. Pursuant to the agreement, the Company granted an exclusive license to utilize the CSRV System for the manufacturing use or sale of motorcycles and gasoline powered internal combustion engines used in motorcycles in North America, Central America and South America. In addition the Company granted the non-exclusive license to use the CSRV Seals in the manufacture of the CSRV Systems for incorporation into motor engines in North America, Central America and South America. In consideration we received approximately 51% of the common shares of Coates Motorcycle. In addition, the Company had an anti-dilution right. On March 5, 2004, the Company amended its license agreement with Coates Motorcycle to expand the license rights granted and to remove the anti-dilution provision in exchange for 1,000,000 common shares of Coates Motorcycle. As a result of the transactions, the Company owned 3,558,000 shares of Coates Motorcycle, representing a 30% ownership interest. During 2005, the Company sold 9,400 shares of Coates Motorcycle for $5.00 per share and realized a gain of $47,000 on the sale.
Item 13. Exhibits.
--------------------------------------------------------------------------------
Exhibit No. Description
--------------------------------------------------------------------------------
3.1* - Restated Certificate of Incorporation
--------------------------------------------------------------------------------
3.1(i)+ - Certificate of Amendment to Certificate of Incorporation filed
with the Secretary of State of Delaware on May 22, 2000
--------------------------------------------------------------------------------
3.1(ii)+ - Certificate of Amendment to Certificate of Incorporation filed
with the Secretary of State of Delaware on August 31, 2001
--------------------------------------------------------------------------------
3.2* - Bylaws
--------------------------------------------------------------------------------
10.3* - License Agreement dated December 22, 1997 between George J.
Coates and the Company and First and Second Amendments thereto
dated July 17, 1995.
--------------------------------------------------------------------------------
10.4* - Third Amendment dated September 21, 1995 to License Agreement
dated February 17, 1995 between George J. Coates and the
Company
--------------------------------------------------------------------------------
10.5* - License Agreement dated February 22, 1993 between Gregory
Coates and the Company, and First Amendment thereto dated July
17, 1995
--------------------------------------------------------------------------------
10.6+ - License Agreement, dated September 29, 1999, with Well to Wire
Energy, Inc.
--------------------------------------------------------------------------------
10.7+ - Amendment No. 1 to License Agreement with Well to Wire Energy
Inc. dated April 6, 2000
--------------------------------------------------------------------------------
10.8+ - Amendment No. 2 to License Agreement with Well to Wire Energy
Inc. dated July 21, 2000
--------------------------------------------------------------------------------
10.11# - Sublicense Agreement, dated April 30,2003, the Company and
Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.12# - License Agreement, dated April 30, 2003, by and between George
J. Coates, Gregory G. Coates and the Coates Trust,
collectively as Licensor, and Coates Motorcycle Company, Ltd.,
as Licensee.
--------------------------------------------------------------------------------
10.13& Amendment No. 1 to Sublicense Agreement, dated March 5, 2004,
between the Company and Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.14& - Amendment No. 1 to License Agreement, dated March 5, 2004,
between George J. Coates, Gregory G, Coates and the Coates
Trust and Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.15 ^ - Confirmation Letter Agreement between the Company and Well to
Wire Energy Inc. dated July 7, 2006
--------------------------------------------------------------------------------
- 24 -
|
--------------------------------------------------------------------------------
Exhibit No. Description
--------------------------------------------------------------------------------
10.16 @ - Employment Agreement between the Company and Mark D. Goldsmith
dated October 18, 2006
--------------------------------------------------------------------------------
10.17 @ - Employment Agreement between the Company and Barry C. Kaye
dated October 18, 2006
--------------------------------------------------------------------------------
10.18 @ - Employment Agreement between the Company and George J. Coates
dated October 23, 2006
--------------------------------------------------------------------------------
10.19 @ - Employment Agreement between the Company and Gregory Coates
dated October 23, 2006
--------------------------------------------------------------------------------
10.20 @ - License Agreement between the Company and George J. Coates and
Gregory Coates dated October 23, 2006
--------------------------------------------------------------------------------
10.21 @ - License Agreement between the Company and Coates Trust dated
October 23, 2006
--------------------------------------------------------------------------------
10.22 @ - 2006 Employee Stock Option and Incentive Plan adopted on
October 25, 2006
--------------------------------------------------------------------------------
|
* These Exhibits are hereby incorporated by reference from the Company's Registration Statement filed on Form S-1 with the Securities and Exchange Commission on November 1, 1995, File No. 33-94884. + Incorporated by reference from the Company's Registration Statement and amendments thereto filed on Form 10-SB12G with the Securities and Exchange Commission, File No. 000-33155. # Incorporated by reference from the Company's Form 10-QSB for the quarter ended June 30, 2003.
& Incorporated by reference from the Company's Form 10-KSB for the fiscal year ended December 31, 2004.
^ Incorporated by reference from the Company's Form 10-QSB for the quarter ended June 30, 2006.
@ Filed herewith
No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2005.
Item 14. Principal Accounting Fees and Services.
Audit Fees:
Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the aggregate amount of $42,445 and $40,883 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-QSB for the year ended December 31, 2005 and December 31, 2004, respectively.
Audit-related Fees:
Rosenberg did not bill us for, nor performed professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Company's financial statements for the fiscal years ended December 31, 2005 and December 31, 2004.
Tax Fees:
Rosenberg billed us in the aggregate amount of $2,194 and $1,820 for professional services rendered for tax related services for the fiscal years ended December 31, 2005 and December 31, 2004, respectively.
All Other Fees:
No fees were billed by Rosenberg for services rendered to the Company during the last two fiscal years, other than as audit, audit-related and tax fees.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 25, 2006.
COATES INTERNATIONAL, LTD.
By: /s/ Mark D. Goldsmith ------------------------------------- Mark D. Goldsmith, President |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
Signature Title Date
---------------------- ----------------------------------- -------------------
/s/ Gregory Coates Director, Chairman, October 25, 2006
---------------------- President-Technology Division
Gregory Coates
/s/ Mark D. Goldsmith Director, President, October 25, 2006
---------------------- Chief Executive Officer
Mark D. Goldsmith (principal executive officer)
/s/ Barry C. Kaye Director, Treasurer, October 25, 2006
---------------------- Chief Financial Officer
Barry C. Kaye (principal financial and
accounting officer)
/s/ Richard W. Evans Director and Secretary October 25, 2006
----------------------
Richard W. Evans
/s/ Michael J. Suchar Director October 25, 2006
----------------------
Michael J. Suchar
/s/ Frank Adipietro Director October 25, 2006
----------------------
Frank Adipietro
/s/ Glenn Crocker Director October 25, 2006
----------------------
Glenn Crocker
Director October 25, 2006
----------------------
Richard Whitworth
|
Coates International, Ltd.
Index to the Financial Statements
December 31, 2005
Page
Report of Independent Registered Public Accounting Firm 1
Financial Statements
Balance Sheet 2
Statements of Operations 3
Statements of Stockholders' Impairment 4
Statements of Cash Flows 5
Notes to the Financial Statements 6-11
|
Report of Independent Registered Public Accounting Firm
|
To the Board of Directors and Shareholders Coates International, Ltd.
We have audited the accompanying balance sheets of Coates International, Ltd. as of December 31, 2005 and 2004, and the related statements of operations, cash flows and stockholders' impairment for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coates International, Ltd. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As more fully described in the notes to the financial statements, the Company's financial statements as of December 31, 2004 and for the year then ended have been restated.
Bridgewater, New Jersey
February 28, 2006
Coates International, Ltd.
Balance Sheets
Assets
2005 2004
(Restated)
------------ ------------
Current Assets
Cash $ 1,928,123 $ 180,182
Inventory 409,300 290,312
Prepaid expenses 191,644 --
------------
Total Current Assets 2,529,067 470,494
Investment in related party -- 260,344
Deferred offering costs 22,500 --
Property, plant and equipment, net of accumulated 1,502,494 1,555,103
depreciation of $708,291 and $652,676 in 2005 and 2004,
respectively (note 11)
Due from related party -- 32,888
Security deposits (note 10) 197,500 2,500
Patents, net of accumulated amortization of $1,102 in 2005 54,356 --
------------ ------------
Total Assets 4,305,917 2,321,329
============ ============
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable 1,289 39,819
Accrued expenses 541,242 544,309
Current portion of mortgage payable -- 4,770
Income taxes payable 127,156 --
Due to related parties 137,637 150,000
------------
Total Current Liabilities 807,324 738,898
License deposits 940,000 940,000
Mortgage payable, net of current portion -- 863,412
Finance obligation (note 11) 3,876,607 --
------------ ------------
Total Liabilities 5,623,931 2,542,310
------------ ------------
Commitments and Contingencies -- --
Stockholders' Impairment
Preferred stock, Series A, $.001 par value 14,000,000
shares authorized,
------------ ------------
no shares issued or outstanding
Common stock, $.0001 par value, 1,000,000,000 shares authorized,
266,894,278 and 265,859,278 shares issued and outstanding in 2005 26,689 26,586
and
2004, respectively
Additional paid-in capital 17,176,155 17,001,258
Accumulated deficit (18,520,858) (17,248,825)
Total Stockholders' Impairment (1,318,014) (220,981)
------------ ------------
Total Liabilities and Stockholders' Impairment $ 4,305,917 $ 2,321,329
============ ============
|
The accompanying notes are an integral part of these financial statements.
Coates International, Ltd.
Statements of Operations
Year Ended December 31,
------------------------------
2005 2004
(Restated)
------------- -------------
Revenue $ -- $ --
------------- -------------
Operating Expenses:
Research and development costs 18,290 112,949
Research and development costs, related party -- 46,112
General and administrative expenses 819,915 1,032,529
Depreciation 55,656 62,743
Amortization 1,102 3,243
------------- -------------
Total Operating Expenses 894,963 1,257,576
------------- -------------
Loss From Operations (894,963) (1,257,576)
------------- -------------
Other Income (Expense):
Equity loss in related party investment (260,344) (101,856)
Gain on sale of investment in related party 47,000 --
Gain from legal settlement -- 225,000
Gain from settlement of legal expenses -- 260,336
Interest income -- 17,610
Interest expense (152,609) (125,188)
------------- -------------
Total Other (Expense) Income (365,953) 275,902
------------- -------------
Loss Before Income Taxes (1,260,916) (981,674)
(Provision) Benefit from Income Taxes , net (11,117) 218,349
------------- -------------
Net Loss $ (1,272,033) $ (763,325)
============= =============
Net Loss Per Share, basic and diluted $ (0.00) $ (0.00)
------------- -------------
Weighted Average Number of Shares 265,996,673 265,269,092
============= =============
|
The accompanying notes are an integral part of these financial statements.
Coates International, Ltd.
Statements of Stockholders' Impairment
(Restated)
Common Stock Additional
--------------------------- Paid in Accumulated Shareholders'
Shares Amount Capital Deficit Impairment
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2004, as previously reported 265,591,992 $ 2,655 $ 16,210,189 $(16,485,500) $ (272,656)
Restatement for correction of error -- 23,904 (23,904) -- --
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2004, restated 265,591,992 26,559 16,186,285 (16,485,500) (272,656)
Issuance of common stock for cash 267,286 27 814,973 -- 815,000
Net loss for the year -- -- -- (763,325) (763,325)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 265,859,278 26,586 17,001,258 (17,248,825) (220,981)
Issuance of common stock for license agreement 1,000,000 100 (100) -- --
Issuance of common stock for cash 29,000 2 144,998 -- 145,000
Issuance of common stock in settlement of 6,000 1 29,999 -- 30,000
accounts payable and accrued interest
Net loss for the year -- -- -- (1,272,033) (1,272,033)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 266,894,278 $ 26,689 $ 17,176,155 $(18,520,858) $ (1,318,014)
============ ============ ============ ============ ============
|
The accompanying notes are an integral part of these financial statements.
Coates International, Ltd.
Consolidated Statements of Cash Flows
Year Ended December 31,
2005 2004
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(1,272,033) $ (763,325)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities -
Depreciation 55,656 62,743
Amortization 1,102 3,243
Write off obsolete inventory -- 12,394
Gain on sale of investment in related party (47,000) (17,322)
Equity losses from investment in related party 260,344 101,856
Changes in Operating Assets and Liabilities - --
Inventory (86,100) --
Prepaid expenses (191,644) --
Accounts payable (8,530) 16,023
Accrued expenses 9,009 (289,258)
Accrued interest (12,076) --
Income taxes payable 127,156 --
----------- -----------
Net Cash (Used in) Operating Activities (1,164,116) (873,646)
----------- -----------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (3,047) --
Proceeds from sale of investment - related party 47,000 --
Security deposit on leased property (195,000) --
Outlays for patents (55,458) --
----------- -----------
Net Cash Used in Investing Activities (206,505) --
----------- -----------
Cash Flows From Financing Activities:
Cash received from finance obligation (note 11) 3,876,607 --
Deferred offering costs paid (22,500) --
Proceeds from issuance of stock 145,000 815,000
Proceeds of loan from related party 200,437 --
Repayment of loan from related party (212,800) (313,164)
Repayment of mortgage (note 11) (868,182) (2,962)
----------- -----------
Net Cash Provided by Financing Activities 3,118,562 498,874
----------- -----------
Net Increase (Decrease) in Cash 1,747,941 (374,772)
Cash - Beginning of Period 180,182 554,954
----------- -----------
Cash - End of Period $ 1,928,123 $ 180,182
=========== ===========
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Coates International, Ltd. (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. The Company's operations are principally dependent upon successful commercial applications of it proprietary internal combustion engine, which has been designed around its patented Coates Spherical Rotary Valve system ("CSRV"). These internal combustion engines have numerous applications, including high performance industrial, automotive and marine racing engines as well as all other applications for internal combustion engines. The Company intends to manufacture and sell such engines. It has also entered into sublicense agreements with engine manufacturers or retrofitters and intends to enter into further such sublicense agreements in the future.
Inventory
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
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 is performed. Should such evaluation indicate that there has been an impairment of one or more long-lived assets, the cost basis of such assets would be adjusted accordingly at that time.
Loss per Share
In accordance with the provisions of Financial Accounting Standards Board No. 128, "Earnings Per Share," Loss per share is determined by dividing the net loss by the weighted average number of common shares outstanding during the period.
Revenue Recognition
The Company has not generated revenue from the sales of engines. Revenue from the granting of sub-licenses is recognized when earned, generally commencing upon utilization by the licensee over the period of time that the sub-license has been granted (i.e. upon expiration of the Company's patent protection period which expires at the earliest in 2007), using the straight-line method. Revenue from research and development activities is recognized when earned provided that financial risk has been transferred from the Company to its customer.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense was $20,757 and $25,001 for the years ended December 31, 2005 and 2004, respectively.
Research and Development
Research and development 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 be realized. The Company incurred net operating losses for financial-reporting and tax-reporting purposes. The benefit from federal income tax net operating losses incurred in the current and prior years has been offset by a valuation allowance against the related deferred tax asset. The income tax benefit from sales of unutilized state tax net operating losses to third parties is recognized in the period of sale.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash and cash equivalents for purposes of the statements of cash flows is comprised of cash and short-term, highly liquid investments with a maturity of three months or less.
Cash payments for interest expense totaled $152,609 for the year ended December 31, 2005 and $125,188 for the year ended December 31, 2004.
There were no cash payments for income taxes during the years ended December 31, 2005 and 2004.
During 2005, the Company issued 1,000,000 shares of its common stock to acquire a patent license from a related party.
During 2005, the Company issued 6,000 common shares in payment of accounts payable and accrued interest totaling $30,000.
3. 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.
Development of the Coates System technology was initiated by George Coates, the Company'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 with respect to the Coates System. Since the inception of the Company in 1988, all aspects of the business have been completely dependent upon the activities of George Coates, who does not have an employment contract with the Company. The loss of George Coates' availability or service due to death, incapacity or otherwise would have a material adverse effect on the Company's business and operations.
4. 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 judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
5. CONTINGENCIES
The Company has entered into a research and development agreement with Well to Wire, Inc. (the "R&D Agreement"). The R&D Agreement requires the payment of $5,000,000 to the Company for research, development and delivery of three prototype Coates Generator Engines which revenue will be recognized by the Company as received since the financial risk has been transferred from the Company to its customer. The Company has received payments to date, of $1,200,000 under this agreement. The $3,800,000 balance is not payable until the Company completes testing and delivery of the last of three prototype engines. The Company expects to complete such testing and delivery during the first half of 2006. The performance period during which the Company is required to conduct such activities has been extended from time to time by mutual agreement.
6. INVENTORY
Inventory at December 31, consists of the following:
2005 2004
-------- --------
Raw Materials $186,918 $102,860
Work in Process 222,382 187,452
-------- --------
Total $409,300 $290,312
======== ========
|
7. PREPAID EXPENSES
Prepaid expense consists of payments made in advance pursuant to a lease agreement covering the Company's principal offices, warehouse and manufacturing facility.
8. LICENSE DEPOSITS
Effective September 29, 1999 the Company entered into a license agreement with a Canadian corporation. Pursuant thereto, the Company has received a license deposit of $300,000.
During 2002 the Company entered into various license agreements. Pursuant to such agreements, the Company received an aggregate $1,140,000 of license deposits.
During 2003 license deposits totaling $500,000 were converted to 25,000 shares of common stock of the Company, pursuant to the license agreement. No other license agreements have a convertible feature.
License deposits received by the Company are non-refundable and are to be applied against the total licensing agreement fee upon the completion of certain tests and approval by the licensee.
Recognition of revenue attributable to the above license payments has been deferred until such time as all conditions have been satisfied and the benefits of the license can be realized by the licensee Thereafter, such revenue will be recognized over the term of the Company's various patent registrations which expire at various times during the period from 2007 through 2020.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost, less accumulated depreciation, consists of the following at December 31:
2005 2004
----------- -----------
Land $ 920,550 $ 920,550
Building 579,450 579,450
Building improvements 219,371 219,371
Machinery and equipment 452,119 449,113
Furniture and fixtures 39,295 39,295
----------- -----------
2,210,785 2,207,779
Less: Accumulated depreciation (708,291) (652,676)
----------- -----------
Total $ 1,502,494 $ 1,555,103
=========== ===========
|
Depreciation expense amounted to $55,656 and $62,743 for the years ended December 31, 2005 and 2004, respectively.
10. SECURITY DEPOSITS
Security deposits primarily consist of a deposit on the Company's principal offices, warehouse and manufacturing facility pursuant to a lease agreement.
11. SALE/LEASEBACK OF LAND AND BUILDING
At the end of November 2005, the Company entered into a sale/leaseback arrangement of the property which houses its principal offices, warehouse and manufacturing facilities. Pursuant to generally accepted accounting principles this transactions is to be accounted for under the finance method because the Company has a continuing interest in the property represented by an option to repurchase the property at any time during the first three years of the agreement for $5,200,000. The Company realized net proceeds from this transaction of $3,876,607 which was partially used to repay the $868,182 remaining balance of a mortgage loan bearing interest at a 13.99% annual rate and the balance of the proceeds will be utilized for working capital purposes. The monthly rental payments provided for by the lease agreement are being accounted for as interest expense, which amounted to $35,750 in the accompanying statement of operations for the year ended December 31, 2005.
Had this transaction qualified for sale reporting, the Company would have realized a net gain of $2,411,579. This gain will be recognized upon expiration or exercise of the option to repurchase. The new lease agreement with the purchaser, which is being accounted for on the finance method, provides for monthly payments of $32,500 over a six year period. Under the finance method, these payments are to be accounted for as interest expense at the implicit annual interest rate of 10.06%. In addition, the land, building and building improvements will continue to be carried at cost and depreciated. Under the lease agreement, the Company is responsible for all real estate taxes and operating expenses of the property, including insurance. Minimum payments under the lease agreement, which are being charged to interest expense, are as follows:
11. SALE/LEASEBACK OF LAND AND BUILDING (Continued)
Year Ending December 31, Amount
2006 $390,000
2007 390,000
2008 390,000
2009 390,000
2010 390,000
Thereafter 357,500
|
12. PATENTS
In 2005, the Company changed it accounting policy for costs incurred in connection with registering new patent protection of patent technology it licenses from George J. Coates, President and controlling stockholder. In prior years, such costs were charged to expense in the year incurred. Effective with the year ended December 31, 2005, patent fees such as legal cost for registration, legal fees, if any, from the costs incurred in successful defense to the extent of an evident increase in the value of the patents and models and drawings required for registration are stated at cost less accumulated amortization which is calculated on a straight-line basis over the remaining useful lives of the assets, estimated by management to average 20 years. At December 31, the cost of such patent expenses, net of accumulated amortization amounted to $54,356.
13. ACCRUED EXPENSES
Accrued expenses at December 31 are comprised of the following:
2005 2004
-------- --------
Legal fees $519,345 $483,297
General and administrative expenses 21,896 48,936
-------- --------
Interest expense -0- 12,076
-------- --------
Total $541,241 $544,309
======== ========
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14. SALE OF COMMON STOCK
In 2005, the Company issued 1,000,000 shares of its common stock to George J. Coates in exchange for a new technology license agreement granting the Company the non-exclusive rights to make, use, sell and have made in all of the countries and their territories and possessions, comprising North American, Central America and South America, three licensed products patented by George J. Coates. These products consist of a self-adjusting bearing assembly, an improved valve seal (pressure regulated) and a cooling system for the rotary valve engine. The term of this license agreement will expire upon the last patent to expire on these products. The Company is also responsible for all costs associated with maintaining the underlying patent rights in the licensed territory. Also, in 2005, the Company issued a total of 35,000 shares of its common stock to two accredited investors at a price of $5.00 per share. In 2004 the Company issued a total of 267,286 shares of its common stock to seven accredited investors for a total of $815,000 in cash at the following prices per share: 200,000 shares at $2.50 per share, 14,286 shares at $3.50 per share and 53,000 shares at $5.00 per share.
15. INCOME TAXES
The current income tax (provision) benefit is comprised of the following:
2005 2004
-------- --------
Federal $ -- $ --
-------- --------
State $(11,117) $218,349
-------- --------
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In 1998, the State of New Jersey enacted legislation allowing emerging technology and/or biotechnology companies to sell their unused New Jersey Net Operating Loss ("NOL") Carryover Research and Development Tax Credits ("R&D Credits") to corporate taxpayers in New Jersey. During 2005 and 2004, the Company entered into an agreement under which it retained a third party broker to identify a buyer for its New Jersey State income
15. INCOME TAXES (Continued)
tax net operating loss carryforwards from for the 2004 and 2003 tax years. As a result, the Company realized a current tax benefit of $116,039 and $218,348, for the years ended December 31, 2005 and 2004, respectively.
The Company's total deferred tax asset and valuation allowance are as follows at December 31:
2005 2004
----------- -----------
Total deferred tax assets $ 5,097,713 $ 4,098,789
Less valuation allowance (5,097,713) (4,098,789)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
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The differences between income tax benefit (provision) in the financial statements and the tax benefit (provision) computed at the U.S. Federal statutory rate of 34% at December 31 are as follows:
2005 2004
------ ------
Federal Tax benefit at the statutory rate 34.0% 34.0%
State income taxes, net of federal benefit (6.7) 5.9
Sale of prior year state net operating loss carryforward,
net of federal tax 6.1 (22.2)
Gain on sale of property deferred for financial reporting (65.0) --
purposes
Equity in loss of unconsolidated subsidiary not deductible (7.0) --
Utilization of Federal net operating loss carryforward 37.7 --
Valuation Allowance -- (39.9)
------ ------
Effective Tax Rate 0.9% (22.2)%
====== ======
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At December 31, 2005, the Company had available approximately $14,993,000 of net operating loss carryforwards which may be used to reduce future federal taxable income, which expire between December 31, 2008 and 2023. There are no available net operating loss carryforwards available for state income tax purposes.
16. RELATED PARTY TRANSACTIONS
The Company subcontracts its project expense from Coates Precision Engineering, of which George J. Coates is the sole shareholder. During the years ended December 31, 2005 and 2004, the Company paid $84,058 and $46,112, respectively, for these services. On April 30, 2003, the Company entered into a sublicense agreement with Coates Motorcycle Company, Ltd ("Coates Motorcycle"). Prior to the agreement, Gregory Coates, an officer of the Company, owned 100% of Coates Motorcycle. Pursuant to the agreement, the Company granted certain exclusive licenses in exchange for approximately 51% of the common shares of Coates Motorcycle. In addition, the Company had an anti-dilution right. During 2004, the Company amended its license agreement with Coates Motorcycle to expand the license rights granted and to remove the anti-dilution provision in exchange for 1,000,000 common shares of Coates Motorcycle. As a result of the transactions, the Company owned 3,558,000 shares of Coates Motorcycle, representing a 30% ownership interest. During 2005, the Company sold 9,400 shares of Coates Motorcycle for $5.00 per share and realized a gain of $47,000 on the sale.
The Company's investment in Coates Motorcycle is valued at $-0-, because that was the cost basis of the assets and the license agreement exchanged for those shares. This investment in Coates Motorcycle is being accounted for under the equity method of accounting for investments. As such, the investment is being carried at cost, adjusted for the Company's proportionate share of undistributed earnings and losses.
16. RELATED PARTY TRANSACTIONS (CONTINUED)
Summarized information for Coates Motorcycle is as follows:
Year Ended December 31,
--------------------------
2005 2004
----------- -----------
Revenue $ -- $ --
Operating expenses 1,087,331 344,249
Net loss (1,083,292) (340,705)
As of December 31,
--------------------------
2005 2004
----------- -----------
Current assets $ 209,216 $ 27,711
Total assets 759,159 383,384
Current liabilities (438,821) (219,925)
Total liabilities (1,030,020) (224,425)
Stockholders' impairment (272,861) (158,959)
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The Company also made loans to Coates Motorcycle from time to time to provide working capital for the development and testing of motorcycle engines which incorporate the Company's technologies. As of December 31, 2004, the total outstanding balance of these loans, including accrued interest thereon, was $362,200 and was converted into 362,200 shares of Preferred Series A Stock of Coates Motorcycle. The Company has accounted for its equity in the common stock and ownership of Preferred Stock of Coates Motorcycle in accordance with Emerging Issues Task Force (EITF") Issue No. 98-13 "Accounting by an Equity Method Investor for Investee Losses When the Investor has Loans to and Investments in Other Securities of the Investee." The Company's equity investment in the common stock of Coates Motorcycle is $-0- as of December 31, 2005 and 2004. The EITF requires that additional equity in the losses of Coates Motorcycle be recorded until the Company's investment in the preferred stock of Coates Motorcycle has been reduced to $-0-.
During the year ended December 31, 2005, the Company received $76,911 from Coates Motorcycle as partial reimbursement for various overhead expenses, incurred on its behalf.
George J. Coates and Bernadette Coates, George's wife have made loans to the Company at various times to provide working capital. The net outstanding balance was $137,637 and $-0- at December 31, 2005 and 2004, respectively. These borrowings are in the form of demand loans which carry no interest and are repaid from time to time depending upon cash availability. It is the intention of Mr. George J. Coates and Mrs. Bernadette Coates to assist the Company with its working capital requirements in the form of loans as needed in the future even, though they are not legally obligated to do so.
17. EQUITY METHOD LOSSES AND IMPAIRMENT OF INVESTMENT IN RELATED PARTY
Emerging Issues Task Force ("EITF") 98-13, "Accounting by an Equity Method Investor for Investee Losses When the Investor has Loans to and Investments in Other Securities of the Investee", requires an investor using the equity method, that has reduced the value of the investment to $-0-, but also has loans outstanding or other forms of equity such as preferred stock to continue to report its share of the losses. Accordingly, during the years ended December 31, 2005 and 2004, the Company recorded losses from its investment in Coates Motorcycle in the amount of $260,344 and $101,856, respectively.
The Company computed its share of the losses in accordance with EITF 99-10 "Percentage Used to Determine the Amount of Equity Method Losses," where the percent ownership was based on the assumed conversion of the Preferred Series A Stock held by the Company.
18. SETTLEMENT OF LITIGATION
In July 2004, the Company agreed to settle its claim against an accounting firm for $225,000. In connection therewith, the Company and its attorneys agreed to evenly divide the settlement proceeds to satisfy the expenses and legal fees owed to the attorneys pertaining to this litigation. In addition, its attorneys also waived $260,336 of its legal fees. The Company realized net proceeds in the amount of $107,500.
19. NEW ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet effective, accounting standards would have a material effect on the accompanying financial statements if adopted currently.
20. RESTATEMENT
The opening balances of common stock, par value and additional paid-in capital at January 1, 2004 have been restated in order to correct an error in the recorded amount of common stock, at par value. This restatement did not have any affect on the statement of operations or total stockholders' impairment.
Also, the Company has determined that FASB Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" as it relates to EITF 98-13 does not apply to it's investment in Coates Motorcycle as its preferred shares are not readily marketable securities as defined by FASB Statement 115.
Therefore, the investment in related party has been reduced from $362,200 to $260,344 and the other comprehensive income component of stockholders' impairment has been reduced from $101,857 to $-0- in order to correct this error.
The impact of these adjustments on the financial statements as originally reported is summarized below:
December 31, 2004
As reported As Restated
------------ ------------
Investment in related party $ 362,200 $ 260,344
Total assets 2,423,185 2,321,329
Common stock, par value 2,658 26,586
Additional paid in capital 17,025,186 17,001,258
Accumulated other comprehensive income 101,856 -0-
Stockholders' impairment (119,125) (220,981)
Other comprehensive income (101,856) -0-
Net loss per share -0- -0-
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Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated October 18, 2006
By and Between:
COATES INTERNATIONAL, LTD., a Delaware corporation (the "Company" or the "Employer"),
AND
MARK D. GOLDSMITH, an individual having an address at 34 Luchon Street Lido Beach, New York 11561 ("Executive")
WHEREAS, the Company desires to hire the Executive and employ him in the position of Chief Executive Officer and Vice President; and
WHEREAS, Executive has agreed to serve as the Company's Chief Executive Officer and Vice President, pursuant to the terms and conditions set forth herein.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises and the mutual covenants, agreements, representations and warranties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employer hereby hires the Executive as the Chief Executive Officer and Vice President of the Company and Executive hereby affirms and accepts such positions and employment by Employer for the Term (as defined in Article 3 below), upon the terms and conditions set forth herein.
1.2 The Employer shall utilize its best efforts to cause its Board of Directors to appoint the Executive as a member of the Employer's Board of Directors throughout the Term.
ARTICLE 2
DUTIES
During the Term, Executive shall serve Employer faithfully, diligently and to the best of his ability, under the direction and supervision of the Board of Directors of Employer ("Board of Directors") and shall use his best efforts to promote the interests and goodwill of Employer and any affiliates, successors, assigns, parent corporations, subsidiaries, and/or future purchasers of Employer. Executive shall render such services during the Term at Employer's principal place of business or at such other place of business as may be determined by the Board of Directors, as Employer may from time to time reasonably require of him, and shall devote all of his business time to the performance thereof. Executive shall have those duties and powers as generally pertain to each of the offices of which he holds, as the case may be, subject to the control of the Board of Directors. Employer and Executive also agree that Executive shall serve as a member of the Employer's Board of Directors during the Term.
ARTICLE 3
TERM
The term of this Agreement (the "Term") shall commence on the date hereof (the "Effective Date"), and continue thereafter for a term of three (3) years, as may be extended or earlier terminated pursuant to the terms and conditions of this Agreement. The Term is renewable upon the agreement of the parties hereto.
ARTICLE 4
COMPENSATION
4.1 Salary and Equity Compensation
(a) In consideration of Executive's services to Employer, Employer shall
pay to Executive an annual salary (the "Salary") of Two Hundred Thousand Dollars
($200,000.00), payable in equal installments at the end of each regular payroll
accounting period as established by Employer, or in such other installments upon
which the parties hereto shall mutually agree, and in accordance with Employer's
usual payroll procedures, but no less frequently than monthly. Notwithstanding
the above, payment of the Salary will be deferred until the earlier to occur of:
(I) the closing by the Company of an equity investment of at least $10,000,000;
or (II) December 31, 2006.
(b) In addition to the Salary, Employer shall issue to Executive a Stock
Option to purchase 1,500,000 shares of the Employer's common stock, at an
exercise price equal to Employer's common stock fair market value as of the date
of issuance, as determined by the Board (the "Stock Option"). The Stock Option
shall vest (i.e., become exercisable) in three equal installments, as follows:
One third of the Stock Options shall vest on the Effective Date; an additional
third of the Stock Option shall vest on each of the first and second
anniversaries of the Effective Date. Executive must be continuously a full-time
employee of the Company through the time he exercises part or all of the Stock
Option, except, however, in the event this Agreement is terminated by the
Executive for a Good Reason, as defined in Article 10.1 and 10.2 below, or by
the Employer without Cause, as defined in Article 10.3 below, in which cases the
Stock Option shall immediately and fully vest upon such termination provided
further that the events surrounding any such termination have not been the
subject of any claim, proceeding or lawsuit by either the Executive or the
Company in which further case the Stock Option shall only vest upon final
adjudication, determining that such termination was a valid termination by the
Executive for Good Reason or by the Employer without Cause pursuant to the
applicable above referenced articles of this Agreement. The Stock Option shall
be deemed a non-qualified stock option (i.e., not an ISO). The Stock Option will
be issued out of the Employer's stock incentive plan, and subject to such
incentive plan.
(c) Executive hereby acknowledges that the Stock Option and the shares issuable upon the exercise thereof shall be "restricted securities" as such term is defined under Rule 144, unless and until an effective registration covering these shares takes place, promulgated under the Securities Act of 1933, as amended (the "1933 Act"); that the Executive hereby represents that he shall accept such compensation and has no present intent to distribute or transfer such securities; that such securities shall bear the appropriate restrictive legend providing that they may not be transferred except pursuant to the registration requirements of the 1933 Act or pursuant to exemptions therefrom, and; the Executive further acknowledges that he may be required to hold such securities for an indeterminable amount of time.
Benefits
4.2 Upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, and thereafter during the Term, Executive shall be entitled to participate in all medical and other executive benefit plans, including vacation, sick leave, retirement accounts and other executive benefits provided by Employer to any of the other senior officers of the Employer on terms and conditions no less favorable than those offered to such senior officers. Such participation shall be subject to the terms of the applicable plan documents and Employer's generally applicable policies.
4.3 Expense Reimbursement
Employer shall reimburse Executive for reasonable and necessary expenses incurred by him on behalf of Employer in the performance of his duties hereunder during the Term, including any and all travel and entertainment expenses related to the Employer's business in accordance with Employer's then customary policies, provided that such expenses are adequately documented.
4.4 Bonus
In addition to the compensation payable under Section 4.1, Executive shall be entitled to receive during the Term an annual bonus, the amount of which shall be determined by the Board of Directors ("Bonus"). Each year's Bonus shall be paid to the Executive within 110 days of the Employer's calendar year end.
4.5 Other Compensation
Employer shall provide Executive with a leased automobile for his exclusive use throughout the Term, including costs for gasoline, maintenance and comprehensive insurance including an "umbrella" policy.
ARTICLE 5
OTHER EMPLOYMENT
During the Term, Executive shall devote all of his business and professional time and effort, attention, knowledge, and skill to the management, supervision and direction of Employer's business and affairs as Executive's highest professional priority. Employer shall be entitled to all benefits, profits or other remuneration arising from or incidental to all work, services and advice performed or provided by Executive. Nothing in this Agreement shall preclude Executive from:
(a) serving as a director or member of a committee of any organization or corporation involving no conflict of interest with the interests of Employer, provided that Executive must obtain the prior written approval of the independent members of the Board;
(b) serving as a consultant in his area of expertise (in areas other than in connection with the business of Employer), to government, industrial, and academic panels provided that only de minimis time shall be devoted thereto and Executive must obtain the prior written approval of the independent members of the Board of Employer and where it does not conflict with the interests of Employer, provided that such written consent shall not be unreasonably withheld, delayed or conditioned; and
(c) managing his personal investments or engaging in any other non-competing business; provided that such activities do not materially interfere with the regular performance of his duties and responsibilities under this Agreement.
ARTICLE 6
CONFIDENTIAL INFORMATION/INVENTIONS
Confidential Information
6.1 Executive shall not, in any manner, for any reasons, either directly or indirectly, divulge or communicate to any person, firm or corporation, any confidential information concerning any matters not generally known in the internal combustion engine industry (the "Engine Industry") or otherwise made public by Employer which affects or relates to Employer's business, finances, marketing and/or operations, research, development, inventions, products, designs, plans, procedures, or other data (collectively, "Confidential Information") except in the ordinary course of business or as required by applicable law. Without regard to whether any item of Confidential Information is deemed or considered confidential, material, or important, the parties hereto stipulate that as between them, to the extent such item is not generally known in the Engine Industry, such item is important, material, and confidential and affects the successful conduct of Employer's business and goodwill, and that any breach of the terms of this Section 6.1 shall be a material and incurable breach of this Agreement. Confidential Information shall not include: information in the public domain other than because of a breach of this Agreement.
Documents
6.2 Executive further agrees that all documents and materials furnished to Executive by Employer and relating to Employer's business or prospective business are and shall remain the exclusive property of Employer. Executive shall deliver all such documents and materials, and all copies thereof and extracts therefrom, to Employer upon demand therefor and in any event upon expiration or earlier termination of this Agreement.
Inventions and Intellectual Property
6.3 All ideas, inventions, and other developments or improvements conceived or reduced to practice by Executive, alone or with others, during the Term of this Agreement, whether or not during working hours, that are within the scope of the business of Employer or that relate to or result from any of Employer's work or projects or the services provided by Executive to Employer pursuant to this Agreement, shall be the exclusive property of Employer. Executive agrees to assist Employer, at Employer's expense, to obtain patents and copyrights on any such ideas, inventions, writings, and other developments, and agrees to execute all documents necessary to obtain such patents and copyrights in the name of Employer.
Disclosure
6.4 During the Term, Executive will promptly disclose to the Board of Directors full information concerning any interest, direct or indirect, of Executive (as owner, shareholder, partner, lender or other investor, director, officer, executive, consultant or otherwise) or any member of his immediate family in any business that is reasonably known to Executive to purchase or otherwise obtain services or products from, or to sell or otherwise provide services or products to, Employer or any of their suppliers or customers.
ARTICLE 7
COVENANT NOT TO COMPETE
7.1 No Competitive Activities. Except as expressly permitted in Article 5 above, during the Term, Executive shall not engage in any activates that are competitive with the actual or prospective business of the Company, including without limitation: (a) engaging directly or indirectly in any business substantially similar to any business or activity engaged in (or proposed to be engaged in) by Employer, including and not limited to business that relates to internal combustion engines; (b) engaging directly or indirectly in any business or activity competitive with any business or activity engaged in (or proposed to be engaged in) by Employer; (c) soliciting or taking away any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor of Employer, or attempting to so solicit or take away; (d) interfering with any contractual or other relationship between Employer and any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor; or (e) using, for the benefit of any person or entity other than Employer any Confidential Information of Employer.
7.2 The foregoing covenant prohibiting competitive activities shall survive the termination of this Agreement, and shall extend, and shall remain enforceable against Executive, for the period of two (2) years following the date this Agreement is terminated. In addition, during the two-year period following such expiration or earlier termination, neither Executive nor Employer shall make or permit the making of any negative statement of any kind concerning Employer or their affiliates, or their directors, officers or agents or Executive.
ARTICLE 8
SURVIVAL
Except as otherwise provided, Executive agrees that the provisions of Articles 6, 7, 8 and 9 shall survive expiration or earlier termination of this Agreement for any reasons whether voluntary or involuntary, with or without Cause, and shall remain in full force and effect thereafter.
ARTICLE 9
INJUNCTIVE RELIEF
Executive acknowledges and agrees that the covenants and obligations of Executive set forth in Articles 6 and 7 with respect to non-competition, non-solicitation, confidentiality and Employer's property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause Employer irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees thatif Executive breaches this Agreement than Employer shall be entitled to apply for an injunction, restraining order or such other equitable relief as a court of competent jurisdiction as limited by Section 13.3 may deem necessary or appropriate to restrain Executive from committing any violation of the covenants and obligations referred to in this Article 9. Executive shall have the right to appeal from such injunction or order and to seek reconsideration. These injunctive remedies are cumulative and in addition to any other rights and remedies Employer may have at law or in equity.
ARTICLE 10
TERMINATION
Termination by Executive
10.1 Executive may terminate this Agreement for Good Reason at any time upon 30 days' written notice to Employer, provided the Good Reason has not been cured within such period of time. In addition, Executive may terminate this agreement anytime, upon providing a 60 days' written notice.
Good Reason
10.2 In this Agreement, "Good Reason" means, without Executive's prior written consent, the occurrence of any of the following events, unless Employer shall have fully cured all grounds for such termination within thirty (30) days after Executive gives notice thereof:
(i) any reduction in his then-current Salary or benefits, other than in connection with a percentage pay cut that is applicable to all senior executives and which is the same percentage for all such persons or in connection with a general reduction in benefits;
(ii) any material failure to timely grant, or timely honor, the Stock Option set forth in Article 4.1;
(iii) failure to pay or provide required expenses;
(iv) Any diminution in authority or responsibility to a non-executive position;
The written notice given for Good Reason by Executive to Employer shall specify in reasonable detail the cause for termination, and such termination notice shall not be effective until thirty (30) days after Employer's receipt of such notice, during which time Employer shall have the right to respond to Executive's notice and cure the breach or other event giving rise to the termination.
Termination by Employer
10.3 Employer may terminate its employment of Executive under this Agreement with or without Cause at any time by written notice to Executive. For purposes of this Agreement, the term Cause for termination by Employer shall be (a) a conviction of or plea of guilty or nolo contendere by Executive to a felony, or any crime involving fraud, securities laws violations, embezzlement or moral turpitude; (b) the refusal by Executive to perform his material duties and obligations hereunder or to follow the proper instructions of the Board of Directors; (c) Executive's willful or intentional misconduct in the performance of his duties and obligations; (d) conduct that is known or that should have been known by Executive to be detrimental to the best interests of the Company, as determined by the independent members of the board; (e) if Executive or any member of his family makes any personal profit arising out of or in connection with a transaction to which Employer is a party or with which it is associated without making disclosure to and obtaining the prior written consent of the independent members of the Board; or (f) the entry by the Securities and Exchange Commission or a self-regulatory organization of a consent decree relating to a securities law violation by Executive. The written notice given hereunder by Employer to Executive shall specify that it is without Cause or if it is with Cause shall specify in reasonable detail the cause for termination. For purposes of this Agreement, "family" shall mean "immediate family" as defined in the rules of the Securities and Exchange Commission. In the case of a termination for the causes described in (a), (d) and (e) above, such termination shall be effective upon receipt of the written notice. In the case of the causes described in (b) and (c) above, such termination notice shall not be effective until thirty (30) days after Executive's receipt of such notice, during which time Executive shall have the right to respond to Employer's notice and cure (if curable) the breach or other event giving rise to the termination. In the case of termination without Cause, such termination notice shall not be effective until thirty (30) days after Executive's receipt of such notice.
Severance
10.4 Upon a termination of this Agreement with Good Reason by Executive or without cause by Employer, Employer shall pay to Executive all accrued and unpaid compensation and expense reimbursement, as of the date of such termination and the "Severance Payment." The Severance Payment shall be payable in a lump sum, subject to Employer's statutory and customary withholdings. The Severance Payment shall be paid by Employer within thirty (30) business days of the expiration of any applicable cure period. The "Severance Payment" shall equal the total amount of the Salary payable to Executive under Section 4.1 of this Agreement for a period of one (1) year.
Termination Upon Death
10.5 If Executive dies during the Term , this Agreement shall terminate, except that Executive's legal representatives shall be entitled to receive any earned but unpaid compensation or expense reimbursement due hereunder through the date of death.
Termination Upon Disability
10.6 If, during the Term , Executive suffers and continues to suffer from a
"Disability" (as defined below), then Employer may terminate this Agreement by
delivering to Executive ten (10) calendar days' prior written notice of
termination based on such Disability, setting forth with specificity the nature
of such Disability and the determination of Disability by Employer. For purposes
hereof, "Disability" means "permanent and total disability" as defined in
Section 22(e)(3) of the Internal Revenue Code. Upon any such termination for
Disability, Executive shall be entitled to receive any earned but unpaid
compensation or expense reimbursement due hereunder through the date of
termination and the Severance Payment.
ARTICLE 11
PERSONNEL POLICIES, CONDITIONS, AND BENEFITS
Except as otherwise provided herein, Executive's employment shall be subject to the personnel policies and benefit plans which apply generally to Employer's Executives as the same may be interpreted, adopted, revised or deleted from time to time, during the Term of this Agreement, by Employer in its sole discretion. During the Term hereof, Executive shall be entitled to vacation during each year of the Term at the rate of four (4) weeks per year. Within 30 days after the end of each year of the Term, Employer shall elect to (a) carry over and allow Executive the right to use any accrued and unused vacation of Executive, or (ii) pay Executive for such vacation in a lump sum in accordance with its standard payroll practices. Executive shall take such vacation at a time approved in advance by the Board of Directors of Employer, which approval will not be unreasonably withheld but will take into account the staffing requirements of Employer and the need for the timely performance of Executive's responsibilities.
ARTICLE 12
BENEFICIARIES OF AGREEMENT
This Agreement shall inure to the benefit of the parties hereto, their respective heirs, successors and permitted assigns.
ARTICLE 13
GENERAL PROVISIONS
No Waiver
13.1 No failure by either party to declare a default based on any breach by the other party of any provisions of this Agreement, nor failure of such party to act quickly with regard thereto, shall be considered to be a waiver of any such breach, or of any future breach.
Modification
13.2 No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the parties to be charged therewith.
Submission to Jurisdiction; Consent to Service of Process.
13.3 Submission to Jurisdiction; Consent to Service of Process. This Agreement shall be governed in all respects, by the laws of the State of New York, including validity, interpretation and effect, without regard to principles of conflicts of law. The parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts in the State of New Jersey for any lawsuits, actions or other proceedings arising out of or related to this Agreement and agree not to commence any lawsuit, action or other proceeding except in such courts. The parties hereto further agree that service of process, summons, notice or document by mail to their addresses set forth above shall be effective service of process for any lawsuit, action or other proceeding brought against them in any such court. The parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, action or other proceeding arising out of or related to this Agreement in such courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or proceeding brought in any such court has been brought in an inconvenient forum.
Entire Agreement
13.4 This Agreement embodies the whole agreement between the parties hereto regarding the subject matter hereof and there are no inducements, promises, terms, conditions, or obligations made or entered into by Employer or Executive other than contained herein.
Severability
13.5 In the event a court of competent jurisdiction determines that a term or provisions contained in this Agreement is overly broad in scope, time geographical location or otherwise, the parties hereto authorize such Court to modify and reduce any such term or provision deemed overly broad in scope, time, geographic location or otherwise so that it complies with then applicable law.
Headings
13.6 The headings contained herein are for the convenience of reference and are not to be used in interpreting this Agreement.
Independent Legal Advice
13.7 Employer and Executive each acknowledge that he or it has obtained legal advice concerning this Agreement.
No Assignment
13.8 No party may pledge or encumber its respective interests in this Agreement nor assign any of its rights or duties under this Agreement without the prior written consent of the other party.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written.
By: __________________________
Name: _______________________
Title: ________________________
Exhibit 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated October 18, 2006
By and Between:
COATES INTERNATIONAL, LTD., a Delaware corporation (the "Company" or the "Employer"),
AND
BARRY C. KAYE, an individual having an address at 15 Susan Drive, Marlboro, New Jersey 07746 ("Executive")
WHEREAS, the Company desires to hire the Executive and employ him in the position of its Chief Financial Officer; and
WHEREAS, Executive has agreed to serve as the Company's Treasurer and Chief Financial Officer pursuant to the terms and conditions set forth herein.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises and the mutual covenants, agreements, representations and warranties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employer hereby hires the Executive as the Treasurer and Chief Financial Officer of the Company and Executive hereby affirms and accepts such positions and employment by Employer for the Term (as defined in Article 3 below), upon the terms and conditions set forth herein.
1.2 The Employer shall utilize its best efforts to cause its Board of Directors to appoint the Executive as a member of the Employer's Board of Directors throughout the Term.
ARTICLE 2
DUTIES
During the Term, Executive shall serve Employer faithfully, diligently and to the best of his ability, under the direction and supervision of the Board of Directors of Employer ("Board of Directors") and the Company's Chief Executive Officer and shall use his best efforts to promote the interests and goodwill of Employer and any affiliates, successors, assigns, parent corporations, subsidiaries, and/or future purchasers of Employer. Executive shall render such services during the Term at Employer's principal place of business or at such other place of business as may be determined by the Board of Directors, as Employer may from time to time reasonably require of him, and shall devote all of his business time to the performance thereof. Executive shall have those duties and powers as generally pertain to each of the offices of which he holds, as the case may be, subject to the control of the Board of Directors.
ARTICLE 3
TERM
The term of this Agreement (the "Term") shall commence on the date hereof (the "Effective Date"), and continue thereafter for a term of three (3) years, as may be extended or earlier terminated pursuant to the terms and conditions of this Agreement. The Term is renewable upon the agreement of the parties hereto.
ARTICLE 4
COMPENSATION
4.1 Compensation
(a) In consideration of Executive's services to Employer, Employer shall pay to Executive an annual salary (the "Salary") of One Hundred and Twenty Five Thousand Dollars ($125,000), payable in equal installments at the end of each regular payroll accounting period as established by Employer, or in such other installments upon which the parties hereto shall mutually agree, and in accordance with Employer's usual payroll procedures, but no less frequently than monthly. Notwithstanding the above, payment of the Salary will be deferred until the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006.
(b) In addition to the Salary, Employer shall issue to Executive a Stock
Option to purchase 25,000 shares of the Employer's common stock, at an exercise
price equal to Employer's common stock fair market value as of the date of
issuance, as determined by the Board (the "Stock Option"). The Stock Option
shall vest (i.e., become exercisable) in three equal installments, as follows:
One third of the Stock Options shall vest on the Effective Date; an additional
third of the Stock Option shall vest on each of the first and second
anniversaries of the Effective Date. Executive must be continuously a full-time
employee of the Company through the time he exercises part or all of the Stock
Option, except, however, in the event this Agreement is terminated by the
Executive for a Good Reason, as defined in Article 10.1 and 10.2 below, or by
the Employer without Cause, as defined in Article 10.3 below, in which cases the
Stock Option shall immediately and fully vest upon such termination provided
further that the events surrounding any such termination have not been the
subject of any claim, proceeding or lawsuit by either the Executive or the
Company in which further case the Stock Option shall only vest upon final
adjudication, determining that such termination was a valid termination by the
Executive for Good Reason or by the Employer without Cause pursuant to the
applicable above referenced articles of this Agreement. The Stock Option shall
be deemed a non-qualified stock option (i.e., not an ISO). The Stock Option will
be issued out of the Employer's stock incentive plan, and subject to such
incentive plan.
(c) Executive hereby acknowledges that the Stock Option and the shares issuable upon the exercise thereof shall be "restricted securities" as such term is defined under Rule 144, unless and until an effective registration covering these shares takes place, promulgated under the Securities Act of 1933, as amended (the "1933 Act"); that the Executive hereby represents that he shall accept such compensation and has no present intent to distribute or transfer such securities; that such securities shall bear the appropriate restrictive legend providing that they may not be transferred except pursuant to the registration requirements of the 1933 Act or pursuant to exemptions therefrom, and; the Executive further acknowledges that he may be required to hold such securities for an indeterminable amount of time.
4.2 Benefits
Upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, and thereafter during the Term, Executive shall be entitled to participate in all medical and other executive benefit plans, including vacation, sick leave, retirement accounts and other executive benefits provided by Employer to any of the other senior officers of Employer on terms and conditions no less favorable than those offered to such senior officers. Such participation shall be subject to the terms of the applicable plan documents and Employer's generally applicable policies.
4.3 Expense Reimbursement
Employer shall reimburse Executive for reasonable and necessary expenses incurred by him on behalf of Employer in the performance of his duties hereunder during the Term, including any and all travel and entertainment expenses related to the Employer's business in accordance with Employer's then customary policies, provided that such expenses are adequately documented.
4.4 Bonus
In addition to the compensation payable under Section 4.1, Executive shall be entitled to receive during the Term an annual bonus, the amount of which shall be determined by the Board of Directors ("Bonus"). Each year's Bonus shall be paid to the Executive within 110 days of the Employer's calendar year end.
ARTICLE 5
OTHER EMPLOYMENT
During the Term, Executive shall devote all of his business and professional time and effort attention, knowledge, and skill to the management, supervision and direction of Employer's business and affairs as Executive's highest professional priority. Employer shall be entitled to all benefits, profits or other remuneration arising from or incidental to all work, services and advice performed or provided by Executive. Nothing in this Agreement shall preclude Executive from:
(a) serving as a director or member of a committee of any organization or corporation involving no conflict of interest with the interests of Employer, provided that Executive must obtain the prior written approval of the independent members of the Board;
(b) serving as a consultant in his area of expertise (in areas other than in connection with the business of Employer), to government, industrial, and academic panels provided that only de minimis time shall be devoted thereto and Executive must obtain the prior written approval of the independent members of the Board of Employer and where it does not conflict with the interests of Employer, provided that such written consent shall not be unreasonably withheld, delayed or conditioned; and
(c) managing his personal investments or engaging in any other non-competing business; provided that such activities do not materially interfere with the regular performance of his duties and responsibilities under this Agreement.
ARTICLE 6
CONFIDENTIAL INFORMATION/INVENTIONS
Confidential Information
6.1 Executive shall not, in any manner, for any reasons, either directly or indirectly, divulge or communicate to any person, firm or corporation, any confidential information concerning any matters not generally known in the internal combustion engine industry (the "Engine Industry") or otherwise made public by Employer which affects or relates to Employer's business, finances, marketing and/or operations, research, development, inventions, products, designs, plans, procedures, or other data (collectively, "Confidential Information") except in the ordinary course of business or as required by applicable law. Without regard to whether any item of Confidential Information is deemed or considered confidential, material, or important, the parties hereto stipulate that as between them, to the extent such item is not generally known in the Engine Industry, such item is important, material, and confidential and affects the successful conduct of Employer's business and goodwill, and that any breach of the terms of this Section 6.1 shall be a material and incurable breach of this Agreement. Confidential Information shall not include: information in the public domain other than because of a breach of this Agreement.
Documents
6.2 Executive further agrees that all documents and materials furnished to Executive by Employer and relating to Employer's business or prospective business are and shall remain the exclusive property of Employer. Executive shall deliver all such documents and materials, and all copies thereof and extracts therefrom, to Employer upon demand therefore and in any event upon expiration or earlier termination of this Agreement. Any payment of sums due and owing to Executive by Employer upon such expiration or earlier termination shall be conditioned upon returning all such documents and materials, and Executive expressly authorizes Employer to withhold any payments due and owing pending return of such documents and materials.
Inventions
6.3 All ideas, inventions, and other developments or improvements conceived or reduced to practice by Executive, alone or with others, during the Term of this Agreement, whether or not during working hours, that are within the scope of the business of Employer or that relate to or result from any of Employer's work or projects or the services provided by Executive to Employer pursuant to this Agreement, shall be the exclusive property of Employer. Executive agrees to assist Employer, at Employer's expense, to obtain patents and copyrights on any such ideas, inventions, writings, and other developments, and agrees to execute all documents necessary to obtain such patents and copyrights in the name of Employer.
Disclosure
6.4 During the Term, Executive will promptly disclose to the Board of Directors full information concerning any interest, direct or indirect, of Executive (as owner, shareholder, partner, lender or other investor, director, officer, executive, consultant or otherwise) or any member of his immediate family in any business that is reasonably known to Executive to purchase or otherwise obtain services or products from, or to sell or otherwise provide services or products to, Employer or any of their suppliers or customers.
ARTICLE 7
COVENANT NOT TO COMPETE
7.1 No Competitive Activities. Except as expressly permitted in Article 5 above, during the Term, Executive shall not engage in any activities that are competitive with the actual or prospective business of the Company, including without limitation: (a) engaging directly or indirectly in any business substantially similar to any business or activity engaged in (or proposed to be engaged in) by Employer, including and not limited to business that relates to internal combustion engines; (b) engaging directly or indirectly in any business or activity competitive with any business or activity engaged in (or proposed to be engaged in) by Employer; (c) soliciting or taking away any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor of Employer, or attempting to so solicit or take away; (d) interfering with any contractual or other relationship between Employer and any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor; or (e) using, for the benefit of any person or entity other than Employer any Confidential Information of Employer.
7.2 The foregoing covenant prohibiting competitive activities shall survive the termination of this Agreement and shall extend, and shall remain enforceable against Executive, for the period of two (2) years following the date this Agreement is terminated. In addition, during the two-year period following such expiration or earlier termination, neither Executive nor Employer shall make or permit the making of any negative statement of any kind concerning Employer or their affiliates, or their directors, officers or agents or Executive.
ARTICLE 8
SURVIVAL
Except as otherwise provided, Executive agrees that the provisions of Articles 6, 7, 8 and 9 shall survive expiration or earlier termination of this Agreement for any reasons whether voluntary or involuntary, with or without Cause, and shall remain in full force and effect thereafter.
ARTICLE 9
INJUNCTIVE RELIEF
Executive acknowledges and agrees that the covenants and obligations of Executive set forth in Articles 6 and 7 with respect to non-competition, non-solicitation, confidentiality and Employer's property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause Employer irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that if Executive breaches this Agreement than Employer shall be entitled to apply for an injunction, restraining order or such other equitable relief as a court of competent jurisdiction as limited by Section 13.3 may deem necessary or appropriate to restrain Executive from committing any violation of the covenants and obligations referred to in this Article 9. Executive shall have the right to appeal from such injunction or order and to seek reconsideration, These injunctive remedies are cumulative and in addition to any other rights and remedies Employer may have at law or in equity.
ARTICLE 10
TERMINATION
Termination by Executive
10.1 Executive may terminate this Agreement for Good Reason at any time upon 30 days' written notice to Employer, provided the Good Reason has not been cured within such period of time. In addition, Executive may terminate this agreement anytime, upon providing a 60 days' written notice.
Good Reason
10.2 In this Agreement, "Good Reason" means, without Executive's prior written consent, the occurrence of any of the following events, unless Employer shall have fully cured all grounds for such termination within thirty (30) days after Executive gives notice thereof:
(i) any reduction in his then-current Salary or benefits, other than in connection with a percentage pay cut that is applicable to all senior executives and which is the same percentage for all such persons or in connection with a general reduction in benefits;
(ii) any material failure to timely grant, or timely honor the Stock Option set forth in Article 4.1;
(iii) failure to pay or provide required expenses;
(iv) Any diminution in authority or responsibility to a non-executive position;
The written notice given for Good Reason by Executive to Employer shall specify in reasonable detail the cause for termination, and such termination notice shall not be effective until thirty (30) days after Employer's receipt of such notice, during which time Employer shall have the right to respond to Executive's notice and cure the breach or other event giving rise to the termination.
Termination by Employer
10.3 Employer may terminate its employment of Executive under this Agreement with or without Cause at any time by written notice to Executive. For purposes of this Agreement, the term Cause for termination by Employer shall be (a) a conviction of or plea of guilty or nolo contendere by Executive to a felony, or any crime involving fraud, securities laws violations, embezzlement or moral turpitude; (b) the refusal by Executive to perform his material duties and obligations hereunder or to follow the proper instructions of the Board of Directors; (c) Executive's willful or intentional misconduct in the performance of his duties and obligations; (d) conduct that is known or that should have been known by Executive to be detrimental to the best interests of the Company, as determined by the independent members of the Board; (e) if Executive or any member of his family makes any personal profit arising out of or in connection with a transaction to which Employer is a party or with which it is associated without making disclosure to and obtaining the prior written consent of the independent members of the Board; or (f) the entry by the Securities and Exchange Commission or a self-regulatory organization of a consent decree relating to a securities law violation by Executive. The written notice given hereunder by Employer to Executive shall specify that it is without Cause or if it is with Cause shall specify in reasonable detail the cause for termination. For purposes of this Agreement, "family" shall mean "immediate family" as defined in the rules of the Securities and Exchange Commission. In the case of a termination for the causes described in (a), (d) and (e) above, such termination shall be effective upon receipt of the written notice. In the case of the causes described in (b) and (c) above, such termination notice shall not be effective until thirty (30) days after Executive's receipt of such notice, during which time Executive shall have the right to respond to Employer's notice and cure (if curable) the breach or other event giving rise to the termination. In the case of termination without Cause, such termination notice shall not be effective until thirty (30) days after Executive's receipt of such notice.
Severance
10.4 Upon a termination of this Agreement with Good Reason by Executive or without cause by Employer, Employer shall pay to Executive all accrued and unpaid compensation and expense reimbursement, as of the date of such termination and the "Severance Payment." The Severance Payment shall be payable in a lump sum, subject to Employer's statutory and customary withholdings. The Severance Payment shall be paid by Employer within thirty (30) business days of the expiration of any applicable cure period. The "Severance Payment" shall equal the total amount of the Salary payable to Executive under Section 4.1 of this Agreement for a period of one (1) year.
Termination Upon Death
10.5 If Executive dies during the Term of this Agreement, this Agreement shall terminate, except that Executive's legal representatives shall be entitled to receive any earned but unpaid compensation or expense reimbursement due hereunder through the date of death.
Termination Upon Disability
10.6 If, during the Term, Executive suffers and continues to suffer from a
"Disability" (as defined below), then Employer may terminate this Agreement by
delivering to Executive ten (10) calendar days' prior written notice of
termination based on such Disability, setting forth with specificity the nature
of such Disability and the determination of Disability by Employer. For purposes
hereof, "Disability" means "permanent and total disability" as defined in
Section 22(e)(3) of the Internal Revenue Code. Upon any such termination for
Disability, Executive shall be entitled to receive any earned but unpaid
compensation or expense reimbursement due hereunder through the date of
termination and the Severance Payment.
ARTICLE 11
PERSONNEL POLICIES, CONDITIONS, AND BENEFITS
Except as otherwise provided herein, Executive's employment shall be subject to the personnel policies and benefit plans which apply generally to Employer's Executives as the same may be interpreted, adopted, revised or deleted from time to time, during the Term of this Agreement, by Employer in its sole discretion. During the Term hereof, Executive shall be entitled to vacation during each year of the Term at the rate of four (4) weeks per year. Within 30 days after the end of each year of the Term, Employer shall elect to (a) carry over and allow Executive the right to use any accrued and unused vacation of Executive, or (ii) pay Executive for such vacation in a lump sum in accordance with its standard payroll practices. Executive shall take such vacation at a time approved in advance by the Board of Directors of Employer, which approval will not be unreasonably withheld but will take into account the staffing requirements of Employer and the need for the timely performance of Executive's responsibilities.
ARTICLE 12
BENEFICIARIES OF AGREEMENT
This Agreement shall inure to the benefit of the parties hereto, their respective heirs, successors and permitted assigns.
ARTICLE 13
GENERAL PROVISIONS
No Waiver
13.1 No failure by either party to declare a default based on any breach by the other party of any provisions of this Agreement, nor failure of such party to act quickly with regard thereto, shall be considered to be a waiver of any such breach, or of any future breach.
Modification
13.2 No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the parties to be charged therewith.
Submission to Jurisdiction; Consent to Service of Process.
13.3 Submission to Jurisdiction; Consent to Service of Process. This Agreement shall be governed in all respects, by the laws of the State of New York, including validity, interpretation and effect, without regard to principles of conflicts of law. The parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts in the State of New Jersey for any lawsuits, actions or other proceedings arising out of or related to this Agreement and agree not to commence any lawsuit, action or other proceeding except in such courts. The parties hereto further agree that service of process, summons, notice or document by mail to their addresses set forth above shall be effective service of process for any lawsuit, action or other proceeding brought against them in any such court. The parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, action or other proceeding arising out of or related to this Agreement in such courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or proceeding brought in any such court has been brought in an inconvenient forum.
Entire Agreement
13.4 This Agreement embodies the whole agreement between the parties hereto regarding the subject matter hereof and there are no inducements, promises, terms, conditions, or obligations made or entered into by Employer or Executive other than contained herein.
Severability
13.5 In the event a court of competent jurisdiction determines that a term or provisions contained in this Agreement is overly broad in scope, time geographical location or otherwise, the parties hereto authorize such Court to modify and reduce any such term or provision deemed overly broad in scope, time, geographic location or otherwise so that it complies with then applicable law.
Headings
13.6 The headings contained herein are for the convenience of reference and are not to be used in interpreting this Agreement.
Independent Legal Advice
13.7 Employer and Executive each acknowledge that he or it has obtained legal advice concerning this Agreement.
No Assignment
13.8 No party may pledge or encumber its respective interests in this Agreement nor assign any of its rights or duties under this Agreement without the prior written consent of the other party.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written.
COATES INTERNATIONAL, LTD.
THE COMPANY
By: ______________________
Name: ____________________
Title: _____________________
EXECUTIVE
Exhibit 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated October 23, 2006
by and between:
COATES INTERNATIONAL, LTD.., a Delaware corporation (the "Company" or the "Employer"),
AND
GEORGE J. COATES, an individual having an address at
1811 Murray Drive
Wall Township, New Jersey 07719
"Employee")
WHEREAS, Employee served as the Company's President, CEO, Treasurer and Principal Financial Officer for more than eighteen (18) years; and
WHEREAS, Employee has terminated from all the positions he held with the Company as a director and an officer, and the Company desires to continue to employ Employee; and
WHEREAS, Employee has agreed to continue to be employed by the Company pursuant to the terms and conditions set forth herein.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises and the mutual covenants, agreements, representations and warranties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT
Employee shall continue to be employed with the Company and Employee hereby affirms and accepts such employment by Employer for the Term (as defined in Article 3 below), upon the terms and conditions set forth herein.
ARTICLE 2
DUTIES
During the Term, Employee shall serve Employer faithfully, diligently and to the best of his ability, under the direction and supervision of the Board of Directors of Employer ("Board of Directors") and shall use his best efforts to promote the interests and goodwill of Employer and any affiliates, successors, assigns, parent corporations, subsidiaries, and/or future purchasers of Employer. Employee shall render such services during the Term at Employer's principal place of business or at such other place of business as may be determined by the Board of Directors, as Employer may from time to time reasonably require of him, and shall devote all of his business time to the performance thereof. Employee shall have those duties and powers as are assigned to him from time to time by the Board of Directors.
ARTICLE 3
TERM
The term of this Agreement (the "Term") shall commence on the date hereof (the "Effective Date"), and continue thereafter for a term of five (5) years, as may be extended or earlier terminated pursuant to the terms and conditions of this Agreement. The Term is renewable upon the agreement of the parties hereto.
ARTICLE 4
GOVERNANCE AND COMPENSATION
4.1 Governance. During the term of this Agreement, Employee agrees to vote all shares of the Company's Common Stock owned by him or as to which he had voting power to elect to the Company's Board of Directors at least two directors who qualify as "independent directors" under the rules of the Securities Exchange Commission and Nasdaq.
4.2 Compensation.
(a) In consideration of Employee's services to Employer, Employer shall pay to Employee an annual salary (the "Salary") of Three Hundred Thousand Dollars ($300,000.00), payable in equal installments at the end of each regular payroll accounting period as established by Employer, or in such other installments upon which the parties hereto shall mutually agree, and in accordance with Employer's usual payroll procedures, but no less frequently than monthly. Notwithstanding the above, payment of the Salary will be deferred until the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006.
(b) In addition to the Salary, Employer shall issue to Employee a Stock Option to purchase 3,000,000 shares of the Employer's common stock, at an exercise price equal to Employer's common stock fair market value as of the date of issuance, as determined by the independent members of the Board (the "Stock Option"). The Stock Option shall vest (i.e., become exercisable) in three equal installments, as follows: One third of the Stock Options shall vest on the Effective Date; an additional third of the Stock Option shall vest on each of the first and second anniversaries of the Effective Date. Employee must be continuously a full-time employee of the Company through the time he exercises part or all of the Stock Option, except, however, in the event this Agreement is terminated by the Employee for a Good Reason, as defined in Article 10.1 and 10.2 below, or by the Employer without Cause, as defined in Article 10.3 below, in which cases the Stock Option shall immediately and fully vest upon such termination provided further that the events surrounding any such termination have not been the subject of any claim, proceeding or lawsuit by either the Employee or the Company in which further case the Stock Option shall only vest upon final adjudication, determining that such termination was a valid termination by the Employee for Good Reason or by the Employer without Cause pursuant to the applicable above referenced articles of this Agreement. The Stock Option shall be deemed a non-qualified stock option (i.e., not an ISO). The Stock Option will be issued out of the Employer's stock incentive plan, and subject to such incentive plan.
(c) Employee hereby acknowledges that the Stock Option and the shares issuable upon the exercise thereof shall be "restricted securities" as such term is defined under Rule 144, unless and until an effective registration covering these shares takes place, promulgated under the Securities Act of 1933, as amended (the "1933 Act"); that the Employee hereby represents that he shall accept such compensation and has no present intent to distribute or transfer such securities; that such securities shall bear the appropriate restrictive legend providing that they may not be transferred except pursuant to the registration requirements of the 1933 Act or pursuant to exemptions there from, and; the Employee further acknowledges that he may be required to hold such securities for an indeterminable amount of time.
(d) The Company undertakes, that it shall file a Form S-8, that will cover the shares issuable upon exercise of the Stock Option, within a reasonable time after a registration statement covering the securities issued in connection with the Investment becomes effective.
(e) Employee shall not be entitled to any other compensation from the Company unless they have been unanimously approved by the independent directors of the Board.
4.3 Benefits
Upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, and thereafter during the Term, Employee shall be entitled to participate in all medical and other executive benefit plans, including vacation, sick leave, retirement accounts and other executive benefits provided by Employer to any of the other senior officers of Employer on terms and conditions no less favorable than those offered to such senior officers. Such participation shall be subject to the terms of the applicable plan documents and Employer's generally applicable policies. In addition, upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, Employer shall pay the premiums for : (A) Executive's disability insurance; and (B) life insurance in the amount of $2,000,000, but only to the extent that the cost thereof is determined to be reasonable by the independent directors of the Board. The beneficiary of the life insurance policy shall be Bernadette Coates, Employee's spouse. Employee also agrees to cooperate with the Company in obtaining for the benefit of the Company "key man" life insurance on Employee's life in the amount of at least $2,000,000. The amount of such insurance shall be approved by the independent directors of the Board.
4.4 Expense Reimbursement
Employer shall reimburse Employee for reasonable and necessary expenses incurred by him on behalf of Employer in the performance of his duties hereunder during the Term, including any and all travel and entertainment expenses related to the Employer's business in accordance with Employer's then customary policies, provided that such expenses are adequately documented.
4.5 Bonus
In addition to the compensation payable under Section 4.1, Employee shall be entitled to receive during the Term an annual bonus, the amount of which shall be determined by the unanimous vote of the independent members of the Board of Directors ("Bonus"). Each year's Bonus shall be paid to the Employee within 110 days of the Employer's calendar year end.
4.6 Other Compensation
Employer shall provide Employee with a leased automobile for his exclusive use throughout the Term, including costs for gasoline, maintenance and comprehensive insurance including an "umbrella" policy.
ARTICLE 5
OTHER EMPLOYMENT
During the Term, Employee shall devote all of his business and professional time and effort attention, knowledge, and skill to the management, supervision and direction of Employer's business and affairs as Employee's highest professional priority. Employer shall be entitled to all benefits, profits or other remuneration arising from or incidental to all work, services and advice performed or provided by Employee. Nothing in this Agreement shall preclude Employee from:
(a) serving as a director or member of a committee of any organization or corporation involving no conflict of interest with the interests of Employer, provided that Employee must obtain the prior written approval of the independent members of the Board;;
(b) serving as a consultant in his area of expertise (in areas other than in connection with the business of Employer), to government, industrial, and academic panels provided that only de minimis time shall be devoted thereto and Employee must obtain the prior written approval of the independent members of the Board consent of Employer and where it does not conflict with the interests of Employer, provided that such written consent shall not be unreasonably withheld, delayed or conditioned; and
(c) managing his personal investments or engaging in any other non-competing business;
provided that such activities do not materially interfere with the regular performance of his duties and responsibilities under this Agreement.
ARTICLE 6
CONFIDENTIAL INFORMATION/INVENTIONS
6.1 Confidential Information
Employee shall not, in any manner, for any reasons, either directly or indirectly, divulge or communicate to any person, firm or corporation, any confidential information concerning any matters not generally known in the internal combustion engine industry (the "Engine Industry") or otherwise made public by Employer which affects or relates to Employer's business, finances, marketing and/or operations, research, development, inventions, products, designs, plans, procedures, or other data (collectively, "Confidential Information") except in the ordinary course of business or as required by applicable law. Without regard to whether any item of Confidential Information is deemed or considered confidential, material, or important, the parties hereto stipulate that as between them, to the extent such item is not generally known in the Engine Industry, such item is important, material, and confidential and affects the successful conduct of Employer's business and goodwill, and that any breach of the terms of this Section 6.1 shall be a material and incurable breach of this Agreement. Confidential Information shall not include: information in the public domain other than because of a breach of this Agreement.
6.2 Documents. Employee further agrees that all documents and materials furnished to Employee by Employer and relating to Employer's business or prospective business are and shall remain the exclusive property of Employer. Employee shall deliver all such documents and materials, and all copies thereof and extracts there from, to Employer upon demand therefore and in any event upon expiration or earlier termination of this Agreement.
6.3 Inventions and Intellectual Property. The Company's rights in patents, ideas, inventions, and other intellectual property rights, including with respect to the CSRV engine, shall be as set forth in the License Agreement executed by the parties of even date herewith (the "License Agreement"). The Company shall have no rights to any intellectual property developed by Employee that (i) do not relate to and are not useful in the conduct of the Company's business; and (ii) were not developed with the use of any Company facilities.
6.4 Disclosure. During the Term, Employee will promptly disclose to the Board of Directors full information concerning any interest, direct or indirect, of Employee (as owner, shareholder, partner, lender or other investor, director, officer, executive, consultant or otherwise) or any member of his immediate family in any business that is reasonably known to Employee to purchase or otherwise obtain services or products from, or to sell or otherwise provide services or products to, Employer or any of their suppliers or customers.
ARTICLE 7
COVENANT NOT TO COMPETE
7.1 No Competitive Activities. Except as expressly permitted in Article 5 above, during the Term, Employee shall not engage in any activities that are competitive with the actual or prospective business of the Company, including without limitation: (a) engaging directly or indirectly in any business substantially similar to any business or activity engaged in (or proposed to be engaged in) by Employer, including and not limited to business that relates to internal combustion engines; (b) engaging directly or indirectly in any business or activity competitive with any business or activity engaged in (or proposed to be engaged in) by Employer; (c) soliciting or taking away any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor of Employer, or attempting to so solicit or take away; (d) interfering with any contractual or other relationship between Employer and any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor; or (e) using, for the benefit of any person or entity other than Employer any Confidential Information of Employer.
7.2 Results of Termination. In the event that the employment of Employee is terminated for Cause, or if Employee terminates his employment with Company without Good Reason prior to the Threshold Date (as defined in the License Agreement), then the foregoing covenant prohibiting competitive activities shall survive the termination of this Agreement, and shall extend, and shall remain enforceable against Employee, for the period of two (2) years following the date of termination of employment. In addition, during the two-year period following such termination, neither Employee nor Employer shall make or permit the making of any negative statement of any kind concerning Employer or their affiliates, or their directors, officers or agents or Employee.
ARTICLE 8
SURVIVAL
Except as otherwise provided, Employee agrees that the provisions of Articles 6, 7, 8 and 9 shall survive expiration or earlier termination of this Agreement for any reasons whether voluntary or involuntary, with or without Cause, and shall remain in full force and effect thereafter.
ARTICLE 9
INJUNCTIVE RELIEF
Employee acknowledges and agrees that the covenants and obligations of Employee set forth in Articles 6 and 7 with respect to non-competition, non-solicitation, confidentiality and Employer's property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause Employer irreparable injury for which adequate remedies are not available at law. Therefore, Employee agrees that if Employee breaches this Agreement than Employer shall be entitled to apply for an injunction, restraining order or such other equitable relief as a court of competent jurisdiction as limited by Section 13.3 may deem necessary or appropriate to restrain Employee from committing any violation of the covenants and obligations referred to in this Article 9. Employee shall have the right to appeal from such injunction or order and to seek reconsideration, These injunctive remedies are cumulative and in addition to any other rights and remedies Employer may have at law or in equity.
ARTICLE 10
TERMINATION
10.1 Termination by Employee. Employee shall be entitled to terminate this Agreement, for any, or no reason, upon providing a 60 days' written notice, only upon the earlier to occur of: (i) the fifth (5th) anniversary of this Agreement; or (ii) the Threshold Date. Employee may terminate this Agreement for Good Reason at any time upon 30 days' written notice to Employer, provided the Good Reason has not been cured within such period of time.
10.2 Good Reason. In this Agreement, "Good Reason" means, without Employee's
prior written consent, the occurrence of any of the following events, unless
Employer shall have fully cured all grounds for such termination within thirty
(30) days after Employee gives notice thereof:
(i) any reduction in his then-current Salary or benefits, other than in connection a percentage pay cut that is applicable to all senior executives and which is the same percentage for all such persons or in connection with a general reduction in benefits;
(ii) any material failure to timely grant, or timely honor, the Stock Option set forth in Article 4.1;
(iii) failure to pay or provide required expenses;
The written notice given for Good Reason by Employee to Employer shall specify in reasonable detail the cause for termination, and such termination notice shall not be effective until thirty (30) days after Employer's receipt of such notice, during which time Employer shall have the right to respond to Employee's notice and cure the breach or other event giving rise to the termination.
10.3 Termination by Employer. Employer may terminate its employment of Employee
under this Agreement only with Cause and only by written notice to Employee For
purposes of this Agreement, the term Cause for termination by Employer shall be
(a) a conviction of or plea of guilty or nolo contendere by Employee to a
felony, or any crime involving fraud, securities laws violations, embezzlement
or moral turpitude; (b) the refusal by Employee to perform his material duties
and obligations hereunder or to follow the proper instructions of the Board of
Directors after a written warning with respect thereto; (c) Employee's willful
or intentional misconduct in the performance of his duties and obligations; (d)
conduct that is known or that should have been known by Employee to be
detrimental to the best interests of the Company, as determined by the
independent members of the Board; (e) if Employee or any member of his family
makes any personal profit arising out of or in connection with a transaction to
which Employer is a party or with which it is associated without making
disclosure to and obtaining the prior written consent of the independent members
of the Board.; or (f) the entry by the Securities and Exchange Commission or a
self-regulatory organization of a consent decree relating to a securities law
violation by Employee. The written notice given hereunder by Employer to
Employee shall specify that it is with Cause shall specify in reasonable detail
the cause for termination. For purposes of this Agreement, "family" shall mean
"immediate family" as defined in the rules of the Securities and Exchange
Commission. In the case of a termination for the causes described in (a), (d)
and (e) above, such termination shall be effective upon receipt of the written
notice. In the case of the causes described in (b) and (c) above, such
termination notice shall not be effective until thirty (30) days after
Employee's receipt of such notice, during which time Employee shall have the
right to respond to Employer's notice and cure (if curable) the breach or other
event giving rise to the termination.
10.4 Severance. Upon a termination of this Agreement with Good Reason by Employee, Employer shall pay to Employee all accrued and unpaid compensation and expense reimbursement, as of the date of such termination and the "Severance Payment." The Severance Payment shall be payable in a lump sum, subject to Employer's statutory and customary withholdings. The Severance Payment shall be paid by Employer within thirty (30) business days of the expiration of any applicable cure period. The "Severance Payment" shall equal the total amount of the Salary payable to Employee under Section 4.1 of this Agreement for a period of one year, or if the Threshold Date has been achieved, two years.
10.5 Termination Upon Death. If Employee dies during the Term, this Agreement shall terminate, except that Employee's legal representatives shall be entitled to receive any earned but unpaid compensation or expense reimbursement due hereunder through the date of death. a
10.6 Termination Upon Disability. If, during the Term, Employee suffers and continues to suffer from a "Disability" (as defined below), then Employer may terminate this Agreement by delivering to Employee ten (10) calendar days' prior written notice of termination based on such Disability, setting forth with specificity the nature of such Disability and the determination of Disability by Employer. For purposes hereof, "Disability" means "permanent and total disability" as defined in Section 22(e)(3) of the Internal Revenue Code. Upon any such termination for Disability, Employee shall be entitled to receive any earned but unpaid compensation or expense reimbursement due hereunder through the date of termination and the Severance Payment.
ARTICLE 11
PERSONNEL POLICIES, CONDITIONS, AND BENEFITS
During the Term, Employee shall be entitled to vacation during each year of the Term at the rate of four (4) weeks per year. Within 30 days after the end of each year of the Term, Employer shall elect to (a) carry over and allow Employee the right to use any accrued and unused vacation of Employee, or (ii) pay Employee for such vacation in a lump sum in accordance with its standard payroll practices.
ARTICLE 12
BENEFICIARIES OF AGREEMENT
This Agreement shall inure to the benefit of the parties hereto, their respective heirs, successors and permitted assigns.
ARTICLE 13
GENERAL PROVISIONS
13.1 No Waiver. No failure by either party to declare a default based on any breach by the other party of any provisions of this Agreement, nor failure of such party to act quickly with regard thereto, shall be considered to be a waiver of any such breach , or of any future breach.
13.2 Modification. No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the parties to be charged therewith.
13.3 Submission to Jurisdiction; Consent to Service of Process. This Agreement shall be governed in all respects, by the laws of the State of New York, including validity, interpretation and effect, without regard to principles of conflicts of law. The parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts in the State of New Jersey for any lawsuits, actions or other proceedings arising out of or related to this Agreement and agree not to commence any lawsuit, action or other proceeding except in such courts. The parties hereto further agree that service of process, summons, notice or document by mail to their addresses set forth above shall be effective service of process for any lawsuit, action or other proceeding brought against them in any such court. The parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, action or other proceeding arising out of or related to this Agreement in such courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or proceeding brought in any such court has been brought in an inconvenient forum.
13.4 Entire Agreement. This Agreement embodies the whole agreement between the parties hereto regarding the subject matter hereof and there are no inducements, promises, terms, conditions, or obligations made or entered into by Employer or Employee other than contained herein and except for the License Agreement.
13.5 Severability. In the event a court of competent jurisdiction determines that a term or provision contained in this Agreement is overly broad in scope, time, geographical location or otherwise, the parties hereto authorize such Court to modify and reduce any such term or provision deemed overly broad in scope, time, geographic location or otherwise so that it complies with then applicable law.
13.6 Headings. The headings contained herein are for the convenience of reference and are not to be used in interpreting this Agreement.
13.7 Independent Legal Advice. Employer and Employee each acknowledge that he or it has obtained legal advice concerning this Agreement.
13.8 No Assignment. No party may pledge or encumber its respective interests in this Agreement nor assign any of its rights or duties under this Agreement without the prior written consent of the other party.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written.
By: __________________________
Name: _______________________
Title: ________________________
Exhibit 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated October 23, 2006
By and Between:
COATES INTERNATIONAL, LTD., a Delaware corporation (the "Company" or the "Employer"),
AND
GREGORY COATES , an individual having an address at 1811 Murray Drive, Wall Township, New Jersey 07719 ("Executive")
WHEREAS, the Company desires to hire the Executive and employ him in the position of a President Technology Division ; and
WHEREAS, Executive has agreed to serve as the President Technology Division of the Company and pursuant to the terms and conditions set forth herein.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises and the mutual covenants, agreements, representations and warranties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Executive and the Company hereby agree as follows:
ARTICLE 1
EMPLOYMENT
1.1 Employer hereby hires the Executive as a President Technology Division of the Company and Executive hereby affirms and accepts such position and employment by Employer for the Term (as defined in Article 3 below), upon the terms and conditions set forth herein.
1.2 The Employer shall utilize its best efforts to cause its Board of Directors to appoint the Executive as a member of the Employer's Board of Directors throughout the Term.
ARTICLE 2
DUTIES
During the Term, Executive shall serve Employer faithfully, diligently and to the best of his ability, under the direction and supervision of the Board of Directors of Employer ("Board of Directors") and the Company's Chief Executive Officer and shall use his best efforts to promote the interests and goodwill of Employer and any affiliates, successors, assigns, parent corporations, subsidiaries, and/or future purchasers of Employer. Executive shall render such services during the Term at Employer's principal place of business or at such other place of business as may be determined by the Board of Directors, as Employer may from time to time reasonably require of him, and shall devote all of his business time to the performance thereof. Executive shall have those duties and powers as generally pertain to each of the offices of which he holds, as the case may be, subject to the control of the Board of Directors. Employer and Executive also agree that Executive shall serve as a member of the Employer's Board of Directors during the Term.
ARTICLE 3
TERM
3.1 The term of this Agreement (the "Term") shall commence on the date hereof (the "Effective Date"), and continue thereafter for a term of five (5) years, as may be extended or earlier terminated pursuant to the terms and conditions of this Agreement. The Term is renewable upon the agreement of the parties hereto.
ARTICLE 4
GOVERNANCE AND COMPENSATION
4.1 Governance. During the Term, Executive agrees to vote all shares of the Company's Common Stock owned by him or as to which he had voting power to elect to the Company's Board of directors at least two directors who qualify as "independent directors" under the rules of the Securities Exchange Commission and Nasdaq.
4.2 Salary and Equity Compensation
(a) In consideration of Executive's services to Employer, Employer shall
pay to Executive an annual salary (the "Salary") of Two Hundred Thousand Dollars
($200,000.00), payable in equal installments at the end of each regular payroll
accounting period as established by Employer, or in such other installments upon
which the parties hereto shall mutually agree, and in accordance with Employer's
usual payroll procedures, but no less frequently than monthly. Notwithstanding
the above, payment of the Salary will be deferred until the earlier to occur of:
(I) the closing by the Company of an equity investment of at least $10,000,000;
or (II) December 31, 2006.
(b) In addition to the Salary, Employer shall issue to Executive a Stock Option to purchase 3,000,000 shares of the Employer's common stock, at an exercise price equal to Employer's common stock fair market value as of the date of issuance, as determined by the independent members of the Board (the "Stock Option"). The Stock Option shall vest (i.e., become exercisable) in three equal installments, as follows: One third of the Stock Options shall vest on the Effective Date; an additional third of the Stock Option shall vest on each of the first and second anniversaries of the Effective Date. Executive must be continuously a full-time employee of the Company through the time he exercises part or all of the Stock Option, except, however, in the event this Agreement is terminated by the Executive for a Good Reason, as defined in Article 10.1 and 10.2 below, or by the Employer without Cause, as defined in Article 10.3 below, in which cases the Stock Option shall immediately and fully vest upon such termination provided further that the events surrounding any such termination have not been the subject of any claim, proceeding or lawsuit by either the Executive or the Company in which further case the Stock Option shall only vest upon final adjudication, determining that such termination was a valid termination by the Executive for Good Reason or by the Employer without Cause pursuant to the applicable above referenced articles of this Agreement. The Stock Option shall be deemed a non-qualified stock option (i.e., not an ISO). The Stock Option will be issued out of the Employer's stock incentive plan, and subject to such incentive plan.
(c) Executive hereby acknowledges that the Stock Option and the shares issuable upon the exercise thereof shall be "restricted securities" as such term is defined under Rule 144, unless and until an effective registration covering these shares takes place, promulgated under the Securities Act of 1933, as amended (the "1933 Act"); that the Executive hereby represents that he shall accept such compensation and has no present intent to distribute or transfer such securities; that such securities shall bear the appropriate restrictive legend providing that they may not be transferred except pursuant to the registration requirements of the 1933 Act or pursuant to exemptions therefrom, and; the Executive further acknowledges that he may be required to hold such securities for an indeterminable amount of time.
(d) The Company undertakes, that it shall file a Form S-8, that will cover the shares issuable upon exercise of the Stock Option, within a reasonable time after a registration statement covering the securities issued in connection with the Investment becomes effective.
(e) Executive shall not be entitled to any other compensation from the Company unless they have been unanimously approved by the independent directors of the Board.
4.3 Benefits
Upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, and thereafter during the Term, Executive shall be entitled to participate in all medical and other executive benefit plans, including vacation, sick leave, retirement accounts and other executive benefits provided by Employer to any of the other senior officers of Employer on terms and conditions no less favorable than those offered to such senior officers. Such participation shall be subject to the terms of the applicable plan documents and Employer's generally applicable policies. In addition, upon the earlier to occur of: (I) the closing by the Company of an equity investment of at least $10,000,000; or (II) December 31, 2006, Employer shall pay the premiums for : (A) Executive's disability insurance; and (B) life insurance in the amount of $2,000,000, but only to the extent that the cost thereof is determined to be reasonable by the independent directors of the Board. The beneficiary of the life insurance policy shall be Executive's spouse, and if he has no spouse as directed by Executive. Executive also agrees to cooperate with the Company in obtaining for the benefit of the Company "key man" life insurance on Executive's life in the amount of at least $2,000,000. The amount of such insurance shall be approved by the independent directors of the Board.
4.4 Expense Reimbursement
Employer shall reimburse Executive for reasonable and necessary expenses incurred by him on behalf of Employer in the performance of his duties hereunder during the Term, including any and all travel and entertainment expenses related to the Employer's business in accordance with Employer's then customary policies, provided that such expenses are adequately documented.
4.5 Bonus
In addition to the compensation payable under Section 4.2, Executive shall be entitled to receive during the Term an annual bonus, the amount of which shall be determined by the unanimous vote of the independent members of the Board of Directors ("Bonus"). Each year's Bonus shall be paid to the Executive within 110 days of the Employer's calendar year end.
4.6 Other Compensation
Employer shall provide Executive with a leased automobile for his exclusive use throughout the Term, including costs for gasoline, maintenance and comprehensive insurance including an "umbrella" policy.
ARTICLE 5
OTHER EMPLOYMENT
During the Term, Executive shall devote all of his business and professional time and effort attention, knowledge, and skill to the management, supervision and direction of Employer's business and affairs as Executive's highest professional priority. Employer shall be entitled to all benefits, profits or other remuneration arising from or incidental to all work, services and advice performed or provided by Executive. Nothing in this Agreement shall preclude Executive from:
(a) serving as a director or member of a committee of any organization or corporation involving no conflict of interest with the interests of Employer, provided that Executive must obtain the prior written approval of the independent members of the Board;
(b) serving as a consultant in his area of expertise (in areas other than in connection with the business of Employer), to government, industrial, and academic panels provided that only de minimis time shall be devoted thereto and Executive must obtain the prior written approval of the independent members of the Board of Employer and where it does not conflict with the interests of Employer, provided that such written consent shall not be unreasonably withheld, delayed or conditioned; and
(c) managing his personal investments or engaging in any other non-competing business; provided that such activities do not materially interfere with the regular performance of his duties and responsibilities under this Agreement.
ARTICLE 6
CONFIDENTIAL INFORMATION/INVENTIONS
Confidential Information
6.1 Executive shall not, in any manner, for any reasons, either directly or indirectly, divulge or communicate to any person, firm or corporation, any confidential information concerning any matters not generally known in the internal combustion engine industry (the "Engine Industry") or otherwise made public by Employer which affects or relates to Employer's business, finances, marketing and/or operations, research, development, inventions, products, designs, plans, procedures, or other data (collectively, "Confidential Information") except in the ordinary course of business or as required by applicable law. Without regard to whether any item of Confidential Information is deemed or considered confidential, material, or important, the parties hereto stipulate that as between them, to the extent such item is not generally known in the Engine Industry, such item is important, material, and confidential and affects the successful conduct of Employer's business and goodwill, and that any breach of the terms of this Section 6.1 shall be a material and incurable breach of this Agreement. Confidential Information shall not include: information in the public domain other than because of a breach of this Agreement.
Documents
6.2 Executive further agrees that all documents and materials furnished to Executive by Employer and relating to Employer's business or prospective business are and shall remain the exclusive property of Employer. Executive shall deliver all such documents and materials, and all copies thereof and extracts therefrom, to Employer upon demand therefor and in any event upon expiration or earlier termination of this Agreement.
Inventions and Intellectual Property
6.3 Inventions and Intellectual Property. The Company's rights in patents, ideas, inventions, and other intellectual property rights, including with respect to the CSRV engine, shall be as set forth in the License Agreement executed by the parties of even date herewith (the "License Agreement"). The Company shall have no rights to any intellectual property developed by Employee that (i) do not relate to and are not useful in the conduct of the Company's business; and (ii) were not developed with the use of any Company facilities.
Disclosure
6.4 During the Term, Executive will promptly disclose to the Board of Directors full information concerning any interest, direct or indirect, of Executive (as owner, shareholder, partner, lender or other investor, director, officer, executive, consultant or otherwise) or any member of his immediate family in any business that is reasonably known to Executive to purchase or otherwise obtain services or products from, or to sell or otherwise provide services or products to, Employer or any of their suppliers or customers.
ARTICLE 7
COVENANT NOT TO COMPETE
7.1 No Competitive Activities. Except as expressly permitted in Article 5 above, during the Term, Executive shall not engage in any activities that are competitive with the actual or prospective business of the Company including without limitation: (a) engaging directly or indirectly in any business substantially similar to any business or activity engaged in (or proposed to be engaged in) by Employer, including and not limited to business that relates to internal combustion engines; (b) engaging directly or indirectly in any business or activity competitive with any business or activity engaged in (or proposed to be engaged in) by Employer; (c) soliciting or taking away any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor of Employer, or attempting to so solicit or take away; (d) interfering with any contractual or other relationship between Employer and any executive, employee, agent, representative, contractor, supplier, vendor, customer, franchisee, lender or investor; or (e) using, for the benefit of any person or entity other than Employer any Confidential Information of Employer.
7.2 Results of Termination. In the event that the employment of Executive is terminated for Cause, or if Executive terminates his employment with Company without Good Reason prior to the Threshold Date (as defined in the License Agreement), then the foregoing covenant prohibiting competitive activities shall survive the termination of this Agreement and shall extend, and shall remain enforceable against Executive, for the period of two (2) years following the date of termination of employment. In addition, during the two-year period following such termination, neither Executive nor Employer shall make or permit the making of any negative statement of any kind concerning Employer or their affiliates, or their directors, officers or agents or Executive.
ARTICLE 8
SURVIVAL
Except as otherwise provided, Executive agrees that the provisions of Articles 6, 7, 8 and 9 shall survive expiration or earlier termination of this Agreement for any reasons whether voluntary or involuntary, with or without Cause, and shall remain in full force and effect thereafter.
ARTICLE 9
INJUNCTIVE RELIEF
Executive acknowledges and agrees that the covenants and obligations of Executive set forth in Articles 6 and 7 with respect to non-competition, non-solicitation, confidentiality and Employer's property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause Employer irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that if Executive breaches this Agreement than Employer shall be entitled to apply for an injunction, restraining order or such other equitable relief as a court of competent jurisdiction as limited by Section 13.3 may deem necessary or appropriate to restrain Executive from committing any violation of the covenants and obligations referred to in this Article 9. Executive shall have the right to appeal from such injunction or order and to seek reconsideration, These injunctive remedies are cumulative and in addition to any other rights and remedies Employer may have at law or in equity.
ARTICLE 10
TERMINATION
Termination by Executive
10.1 Executive shall be entitled to terminate this Agreement, for any, or no reason, upon providing a 60 days' written notice, only upon the earlier to occur of: (i) the fifth (5th) anniversary of this Agreement; or (ii) the Threshold Date.
Executive may terminate this Agreement for Good Reason at any time upon 30 days' written notice to Employer, provided the Good Reason has not been cured within such period of time.
Good Reason
10.2 In this Agreement, "Good Reason" means, without Executive's prior written consent, the occurrence of any of the following events, unless Employer shall have fully cured all grounds for such termination within thirty (30) days after Executive gives notice thereof:
(i) any reduction in his then-current Salary or benefits, other than in connection a percentage pay cut that is applicable to all senior executives and which is the same percentage for all such persons or in connection with a general reduction in benefits;
(ii) any material failure to timely grant, or timely honor, the Stock Option set forth in Article 4.2;
(iii) failure to pay or provide required expenses;
(iv) Any diminution in authority or responsibility to a non-executive position;
The written notice given for Good Reason by Executive to Employer shall specify in reasonable detail the cause for termination, and such termination notice shall not be effective until thirty (30) days after Employer's receipt of such notice, during which time Employer shall have the right to respond to Executive's notice and cure the breach or other event giving rise to the termination.
Termination by Employer
10.3 Employer may terminate its employment of Executive under this Agreement
only with Cause and only by written notice to Executive. For purposes of this
Agreement, the term Cause for termination by Employer shall be (a) a conviction
of or plea of guilty or nolo contendere by Executive to a felony, or any crime
involving fraud, securities laws violations, embezzlement or moral turpitude;
(b) the refusal by Executive to perform his material duties and obligations
hereunder or to follow the proper instructions of the Board of Directors after a
written warning with respect thereto; (c) Executive's willful or intentional
misconduct in the performance of his duties and obligations; or (d) conduct that
is known or that should have been known by Executive to be detrimental to the
best interests of the Company, as determined by the independent members of the
Board; (e) if Executive or any member of his family makes any personal profit
arising out of or in connection with a transaction to which Employer is a party
or with which it is associated without making disclosure to and obtaining the
prior written consent of the independent members of the Board; or (f) the entry
by the Securities and Exchange Commission or a self-regulatory organization of a
consent decree relating to a securities law violation by Executive. The written
notice given hereunder by Employer to Executive shall specify that it is with
Cause shall specify in reasonable detail the cause for termination. For purposes
of this Agreement, "family" shall mean "immediate family" as defined in the
rules of the Securities and Exchange Commission. In the case of a termination
for the causes described in (a), (d) and (e) above, such termination shall be
effective upon receipt of the written notice. In the case of the causes
described in (b) and (c) above, such termination notice shall not be effective
until thirty (30) days after Executive's receipt of such notice, during which
time Executive shall have the right to respond to Employer's notice and cure (if
curable) the breach or other event giving rise to the termination.
Severance
10.4 Upon a termination of this Agreement with Good Reason by Executive, Employer shall pay to Executive all accrued and unpaid compensation and expense reimbursement, as of the date of such termination and the "Severance Payment." The Severance Payment shall be payable in a lump sum, subject to Employer's statutory and customary withholdings. The Severance Payment shall be paid by Employer within thirty (30) business days of the expiration of any applicable cure period. The "Severance Payment" shall equal the total amount of the Salary payable to Executive under Section 4.2 of this Agreement for a period of one year, or if the Threshold Date has been achieved, two years .
Termination Upon Death
10.5 If Executive dies during the Term, this Agreement shall terminate, except that Executive's legal representatives shall be entitled to receive any earned but unpaid compensation or expense reimbursement due hereunder through the date of death.
Termination Upon Disability
10.6 If, during the Term, Executive suffers and continues to suffer from a
"Disability" (as defined below), then Employer may terminate this Agreement by
delivering to Executive ten (10) calendar days' prior written notice of
termination based on such Disability, setting forth with specificity the nature
of such Disability and the determination of Disability by Employer. For purposes
hereof, "Disability" means "permanent and total disability" as defined in
Section 22(e)(3) of the Internal Revenue Code. Upon any such termination for
Disability, Executive shall be entitled to receive any earned but unpaid
compensation or expense reimbursement due hereunder through the date of
termination and the Severance Payment.
ARTICLE 11
PERSONNEL POLICIES, CONDITIONS, AND BENEFITS
During the Term, Executive shall be entitled to vacation during each year of the Term at the rate of four (4) weeks per year. Within 30 days after the end of each year of the Term, Employer shall elect to (a) carry over and allow Executive the right to use any accrued and unused vacation of Executive, or (ii) pay Executive for such vacation in a lump sum in accordance with its standard payroll practices.
ARTICLE 12
BENEFICIARIES OF AGREEMENT
This Agreement shall inure to the benefit of the parties hereto, their respective heirs, successors and permitted assigns.
ARTICLE 13
GENERAL PROVISIONS
No Waiver
13.1 No failure by either party to declare a default based on any breach by the other party of any provisions of this Agreement, nor failure of such party to act quickly with regard thereto, shall be considered to be a waiver of any such breach , or of any future breach.
Modification
13.2 No waiver or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the parties to be charged therewith.
Submission to Jurisdiction; Consent to Service of Process.
13.3 Submission to Jurisdiction; Consent to Service of Process. This Agreement shall be governed in all respects, by the laws of the State of New York, including validity, interpretation and effect, without regard to principles of conflicts of law. The parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts in the State of New Jersey for any lawsuits, actions or other proceedings arising out of or related to this Agreement and agree not to commence any lawsuit, action or other proceeding except in such courts. The parties hereto further agree that service of process, summons, notice or document by mail to their addresses set forth above shall be effective service of process for any lawsuit, action or other proceeding brought against them in any such court. The parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, action or other proceeding arising out of or related to this Agreement in such courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or proceeding brought in any such court has been brought in an inconvenient forum.
Entire Agreement
13.4 This Agreement embodies the whole agreement between the parties hereto regarding the subject matter hereof and there are no inducements, promises, terms, conditions, or obligations made or entered into by Employer or Executive other than contained herein and except for the License Agreement.
Severability
13.5 In the event a court of competent jurisdiction determines that a term or provision contained in this Agreement is overly broad in scope, time, geographical location or otherwise, the parties hereto authorize such Court to modify and reduce any such term or provision deemed overly broad in scope, time, geographic location or otherwise so that it complies with then applicable law.
Headings
13.6 The headings contained herein are for the convenience of reference and are not to be used in interpreting this Agreement.
Independent Legal Advice
13.7 Employer and Executive each acknowledge that he or it has obtained legal advice concerning this Agreement.
No Assignment
13.8 No party may pledge or encumber its respective interests in this Agreement nor assign any of its rights or duties under this Agreement without the prior written consent of the other party.
IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written.
By: __________________________
Name: _______________________
Title: ________________________
Exhibit 10.20
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made as of October 23, 2006 between George J. Coates and Gregory Coates, as licensors (separately and together, "Licensors") and Coates International, Ltd., a Delaware corporation ("Licensee"). This Agreement shall become effective as of the Effective Date, as defined herein.
Recitals:
1. Licensors and Licensee are parties to a license agreement, dated December 22, 1997 (Exhibit A), and George J. Coates and Licensee are parties to a license agreement, dated November 10, 2005 (Exhibit B) (together, the "Prior License Agreements").
2. Licensee intends to sell additional shares of its common stock to certain purchasers. As a precondition thereof the placement agent is requiring that the Prior License Agreements be amended and restated, and employment agreements, in the form of Exhibit C and Exhibit D be signed with George J. Coates and Gregory Coates, respectively (the "Employment Agreements"), and Licensors acknowledge that they will benefit therefrom.
NOW THEREFORE, for this and other valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows:
1. DEFINITIONS:
"Additional Licensed Intellectual Property Rights" means Intellectual Property Rights (not including the Licensed Intellectual Property Rights) and any related inventions that (i) do not relate to the CSRV and (ii) that are invented or developed by one of both Licensors or as to which a Licensor acquires the right to license or sublicense during the period of time that the applicable Licensor is employed by, or a consultant to, the Licensee and a period of five years thereafter.
"Cause" - with respect to each Licensor shall have the meaning ascribed to such term is such Licensor's Employment Agreement.
"Commitment Period" - with respect to each Licensor shall have the meaning ascribed to such term in such Licensor's Employment Agreement.
"CSRV" means the spherical rotary valve system developed by Licensors as it may be improved or modified from time to time.
"CSRV Engine" shall mean an internal combustion engine which incorporates the CSRV.
"Effective Date" means the closing by the Company of an equity investment of at least $10,000,000 (the "Investment") provided that such investment occurs on or before December 31, 2006.
"Field of Use" shall mean the development, manufacturing, sale and/or distribution of CSRV Engines.
"Good Reason" - with respect to each Licensor shall have the meaning ascribed to such term is such Licensor's Employment Agreement.
"Intellectual Property Rights" means patent rights, copyright rights (including, but not limited to, moral rights), Know-how, license rights, and any other intellectual property rights (other than trademarks) recognized by the law of any applicable jurisdiction.
"Know-How" means trade secrets (including trade secrets as defined in the United States Uniform Trade Secrets Act and under corresponding foreign statutory law and common law), concepts, knowledge, technical information, and data including, but not limited to, algorithms, engineering, scientific and practical information and formulae, equipment designs, information or materials and commercial sources thereof, technical information recorded in reports, on drawings, in specifications and in other writings, irrespective of the form of expression or media upon or in which it is recorded, or transmitted.
"Letter Agreement" shall mean a certain letter agreement dated July 7, 2006 by and between Licensee and WWE, a copy of which is attached hereto as Exhibit E.
"Licensed Intellectual Property Rights" shall mean (a) the patents and patent applications listed on Appendix 1.1 hereto, (b) any patents that shall issue on any of the patent applications listed on Appendix 1.1, (c) any patents derived from continuation, continuation-in-part, divisional, reissue or reexamination applications based on the patents and patent applications referred to in clauses (a) or (b) above to the extent related to the same subject matter, (d) foreign counterparts to any of the foregoing, and (e) any other patents or patent applications, in each case owned by one or both Licensors or as to which a Licensor has the right to license or sublicense that relate to the CSRV, Licensed Intellectual Property Rights shall include any Intellectual Property Rights relating to the CSRV invented or developed by one of both Licensors or as to which a Licensor acquires the right to license or sublicense during the period of time that the applicable Licensor is employed by, or a consultant to, the Licensee and a period of five years thereafter.
"Territory" shall mean the countries comprising North America, Central America and South America and their respective territories and possessions provided, that until the Threshold Date, "Territory" shall mean worldwide. After the Threshold Date "Territory" shall include all countries outside of North America, Central America and South America in which Licensee has sold products under this Agreement through the Threshold Date aggregating at least $5 million, but any licenses hereunder with respect to such countries shall be non-exclusive.
"Threshold Date" shall mean the end of any four consecutive fiscal quarters in which Licensee recognizes aggregate consolidated revenue determined in accordance with U.S. generally accepted accounting principles consistently applied of $200 million.
"WWE" shall mean Well to Wire Energy Inc., a Canada-based corporation.
2. GRANT
2.1 Licensors hereby grant to Licensee a sole and exclusive, fully paid-up and royalty-free, perpetual and irrevocable (subject to the termination of this Agreement) license in the Territory, with the right to sublicense, under the Licensed Intellectual Property Rights, solely in the Field of Use, to develop, make, have made, use, sell, offer to sell, lease and import products and to develop and perform processes that use any of the Licensed Intellectual Property Rights.
2.2 Licensors hereby grant to Licensee a fully paid-up and royalty-free, perpetual and irrevocable (subject to the termination of this Agreement) license in the Territory, with the right to sublicense, under the Additional Licensed Intellectual Property Rights, solely in the Field of Use, to develop, make, have made, use, sell, offer to sell, lease and import products and to develop and perform processes that use any of the Additional Licensed Intellectual Property Rights. The license described in this Section 2.2 shall be exclusive through the earlier of the Threshold Date or December 31, 2009, and non-exclusive thereafter.
2.3 Licensors hereby grant to Licensee during the term of this Agreement an exclusive license to use and display the trademarks owned by Licensors that are listed on Appendix 2.3 (the "Marks") as necessary or appropriate to conduct its business in the Field of Use within the Territory; provided that Licensors may require Licensee to cease or suspend use of particular Mark(s) for good cause (for example, because of Licensor's business decision to modify or abandon a Mark). Each use or display of Marks by Licensee will be in conformance with any trademark usage guidelines that Licensors may communicate to Licensee from time to time, will be subject to Licensor's prior written pproval, and will be accompanied by the appropriate service mark symbol (either "tm" or "sm") and a legend specifying that such Marks are trademarks or service marks of Licensors. Licensee will provide Licensors with a copy of any materials it has created or uses bearing any of Licensors' Marks. If Licensee's use of any Marks, or if any material bearing such Marks, is deficient in quality, as reasonably determined by Licensors, Licensee will promptly remedy such deficiencies upon receipt of written notice of such deficiencies from Licensors. Nothing herein will grant to Licensee any right, title or interest in the Marks. All goodwill resulting from Licensee's use of the Marks will inure solely to Licensors. Licensee will not, at any time during or after the term of this Agreement, register, attempt to register, claim any interest in, contest the use of, or otherwise adversely affect the validity of any of the Marks (including, without limitation any act or assistance to any act, which may infringe or lead to the infringement of any such Marks).
2.4 In the event that the employment of a Licensor by Licensee is terminated by Licensor for Cause or if a Licensor terminates his own employment with Licensee without Good Reason prior to the Threshold Date, then the term Territory shall be permanently defined as worldwide, provided, however, that the license granted under Section 2.1 above shall be exclusive within North, South and Central America and non-exclusive elsewhere.
2.5 The Licensors confirm that WWE is entitled to a right of first refusal from the Licensee to market the Coates electrical generation systems worldwide, and agree that, in the event WWE exercises such right anywhere outside of the Territory, Licensors, as applicable, hereby grant Licensee any additional Intellectual Property Rights, for the sole purpose of sublicensing them to WWE, necessary for WWE to market the Coates electrical generation systems anywhere it has acquired such marketing rights from Licensee.
3. NEGATIVE COVENANTS:
Each of the Licensors undertakes and covenants as follows:
(a) that until the Threshold Date, he shall not sell, assign, grant any license, lien or pledge any of the Licensed Intellectual Property Rights either within or outside the Territory other than to Licensee.
(b) in the event that his employment with Licensee is terminated by Licensee for Cause, or in the event he terminates his employment with Licensee without Good Reason, in each case prior to the Threshold Date, then such Licensor shall not sell, assign, grant any license, lien or pledge any of the Licensed Intellectual Property Rights or the Licensed Additional Intellectual Property Rights owned by him or under his control for a period of five (5) years.
(c) That until the earlier of the Threshold Date or December 31, 2009, he will not sell, assign, grant any license, lien or pledge any of the Additional Licensed Intellectual Property Rights, and thereafter that he will not grant any licenses to the Additional Licensed Intellectual Property Rights that are inconsistent with the rights of Licensee under this Agreement
(d) he shall not sell, assign, grant any license, lien or pledge with respect to the Intellectual Property Rights or the Additional Intellectual Property Rights that are inconsistent with the rights of the Licensee under this Agreement or that would preclude the grant of any rights to which the Licensee may be entitled under this Agreement. In the event that any of the provisions of this Section 3 are inconsistent with the provisions of Section 2, then the provision most favorable to the Licensee shall control.
4. TERM:
The term of this Agreement shall commence as of the Effective Date and shall remain in effect perpetually, unless terminated in accordance with the provisions of this Agreement.
5. PATENT PROTECTION AND INFRINGEMENT:
5.1 Licensee, during the term of this Agreement, is responsible for the filing and the prosecution of all Patent Rights in North, Central and South America at Licensee's expense. If Licensee determines that it is uneconomic to file and/or prosecute any such Patent Rights in a particular country, Licensee shall notify Licensors thereof and Licensors shall have the right to prosecute the same subject to the terms of this Agreement.
5.2 Each party shall notify the other of any instances of infringement of the Licensed Intellectual Property Rights of the Additional Licensed Intellectual Property Rights. Licensee shall have the right, but not the obligation, to bring suit at its own expense to restrain any infringement or to recover damages. If Licensee fails to challenge an instance of alleged infringement after notice to the Licensee's Board of Directors and the concurrence of a majority of the independent members of the Board of Directors, then Licensors shall have the right but not the obligation to take such action in their own name and at their own expense.
5.3 Each party shall cooperate as is reasonably necessary in any such action brought by the other party. The party bringing the action shall have the sole right to control prosecution. Damages shall be retained by the party bringing the action. In any event, no settlement, consent, judgment or other voluntary final disposition of the suit may be entered into without the consent of Licensor, which shall not be unreasonably withheld.
5.4 Licensee will bear all costs and expenses incurred in connection with the defense of any infringement claims against it or as a result of any settlement made or judgment rendered on the basis of such claims. Licensor will have the right, but not the obligation, to retain counsel and participate in the defense at its expense in connection with any such claim. 5.5 Subject to Section 2.5 above, Licensors shall have no responsibility with respect to Licensee's own trademarks and trade name, and Licensee in respect to the use thereof will defend, indemnify and hold harmless Licensor against any and all third party claims.
6. INDEMNIFICATION:
Licensee shall release, indemnify and hold harmless Licensors against any
and all losses, expenses, claims, actions, lawsuits and judgments thereon
(including attorney's fees, and expenses through the appellate levels)
("Losses") which may be brought against Licensors as a result of or
arising out of (i) any negligent or intentional act or omission of
Licensee, its agents, or employees, or arising out of the use, production,
manufacture, sale, lease, consumption or advertisement by Licensee or any
third party of any of the Intellectual Property Rights licensed under this
Agreement, or (ii) third party claims of infringement which may be
asserted against Licensor or the aforementioned persons because of the
manufacture, use, sale or lease, consumption or advertisement of products
using the Intellectual Property Rights licensed under this Agreement.
Licensee shall have the right, at its expense, to control the defense
against any such claim or action. Notwithstanding the foregoing, Licensee
shall not have any obligation under this subparagraph with respect to any
Losses that are directly related to any breach by a Licensor of this
Agreement.
7. WARRANTIES:
LICENSORS MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AND HEREBY DISCLAIM ALL SUCH WARRANTIES, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE CONDITION OF ANY INVENTION(S) OR PRODUCT, WHETHER TANGIBLE OR INTANGIBLE, LICENSED UNDER THIS AGREEMENT; OR THE MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE INVENTION OR PRODUCT; OR THAT THE USE OF THE LICENSED PRODUCT WILL NOT INFRINGE ANY PATENT, COPYRIGHTS, TRADEMARKS, OR OTHER RIGHTS. LICENSORS SHALL NOT BE LIABLE FOR ANY DIRECT, CONSEQUENTIAL, OR OTHER DAMAGES SUFFERED BY ANY LICENSEE OR ANY THIRD PARTIES RESULTING FROM THE USE, PRODUCTION, MANUFACTURE, SALE, LEASE, CONSUMPTION, OR ADVERTISEMENT OF THE PRODUCT.
Notwithstanding the foregoing, Licensors represent and warrant to Licensee that they have no actual knowledge of invalidity of any of the Intellectual Property Rights licensed to Licensee under this Agreement. Licensors further represent and warrant that they have the full power and authority, without any conflict with the rights of others, to grant the licenses to Licensee contained in this Agreement. Licensors will promptly bring to the attention of the Licensee any Licensed Intellectual Property Rights or Additional Licensed Intellectual Property Rights not theretofore disclosed to Licensee.
8. MARKING AND STANDARDS:
Licensee agrees to mark Products (or their containers or labels) made, sold, or otherwise disposed of by it under the license granted in this Agreement with a proper patent notice as specified under the patent laws of the United States and with a notice of the existence of this license and a proper patent notice as specified under the patent laws of (1) the United States; and, (11) to the extent applicable, the country, other than the United States, where the Products are made, sold or otherwise disposed of by Licensee.
9. ASSIGNMENT:
9.1 Licensee may assign its rights and obligations under this Agreement in connection with the sale of its business, by merger, sale of outstanding stock or sale or transfer of all or substantially all assets relating to the Patent Rights and the Products. Licensee may not otherwise assign this Agreement without the prior written consent of Licensor, which consent shall not be unreasonably withheld or delayed.
9.2 This Agreement shall extend to and be binding upon the successors and legal representatives and permitted assigns of Licensor and Licensee.
10. TERMINATION:
10.1 Licensors, together, and Licensee shall have the right to terminate this Agreement if the other party commits a material breach of an obligation under this Agreement and continues in default for more than sixty (60) days after receiving written notice of such default.
10.2 If any provision of this Agreement is declared invalid by a court of last resort, or by any court, the decision of which an appeal is not taken within the time provided by law, then and in such an event, this Agreement will be deemed to have been terminated only as to the portion thereof which relates to the provision invalidated by that judicial decision, but this Agreement, in all other respects, will remain in force.
10.3 This Agreement shall terminate automatically if Licensee ceases business operations, if Licensee files for bankruptcy or if an involuntary petition in bankruptcy is filed against Licensee and is not dismissed within 60 days.
10.4 Upon termination, Licensee shall have the right to dispose of CSRV Products then in their possession and to complete existing contracts for such CSRV products.
10.5 Any sublicenses granted by Licensee under this Agreement shall remain in effect after the termination of this Agreement, and shall be assigned without consideration to Licensor in the event this license terminates.
11. GOVERNING LAW:
This Agreement shall be governed in all respects, by the laws of the State of New Jersey, including validity, interpretation and effect, without regard to principles of conflicts of law. The parties hereto irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts in the State of New Jersey for any lawsuits, actions or other proceedings arising out of or related to this Agreement and agree not to commence any lawsuit, action or other proceeding except in such courts. The parties hereto further agree that service of process, summons, notice or document by mail to their addresses set forth above shall be effective service of process for any lawsuit, action or other proceeding brought against them in any such court. The parties hereto irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, action or other proceeding arising out of or related to this Agreement in such courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or proceeding brought in any such court has been brought in an inconvenient forum.
12. SURVIVAL:
12.1 The provisions of Sections 5, 6 and 7 shall survive the termination or expiration of this Agreement and shall remain in full force and effect.
12.2 The provisions of this Agreement which do not survive termination or expiration hereof (as the case may be) shall, nonetheless, be controlling on, and shall be used in construing and interpreting, the rights and obligations of the parties hereto with regard to any dispute, controversy or claim which may arise under, out of, in connection with, or relating to this Agreement.
13. AMENDMENT:
No amendment or modification of the terms of this Agreement shall be binding on either party unless reduced to writing and signed by an authorized officer of the party to be bound.
14. WAIVER:
No failure or delay on the part of a party in exercising any right hereunder will operate as a waiver of, or impair, any such right. No single or partial exercise of any such right will preclude any other or further exercise thereof or the exercise of any other right. No waiver of any such right will be deemed a waiver of any other right hereunder.
15. ENTIRE AGREEMENT:
This Agreement constitutes the entire agreement between the parties hereto respecting the subject matter hereof, and supercedes and terminates all prior agreements respecting the subject matter hereof, whether written or oral, including, and not limited to, the Prior License Agreements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized to be effective as of the Effective Date.
COATES INTERNATIONAL LTD.
By: __________________________ _______________________
Name: George J. Coates
Title:
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Gregory Coates
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Coates Trust, a trust formed under the laws of the Commonwealth of the Bahamas, having an address at Katherina Court 101, East Hill Place, Market Street, North, Nassau, the Bahamas (the "Coates Trust"), agrees that to the extent any of the Licensed Intellectual Property Rights or Additional Intellectual Property Rights licensed to Licensee hereunder are owned or under the control of the Coates Trust, the Coates Trust hereby makes the license grants contained herein as if if were the Licensors and will perform all of the covenants of the Licensors hereunder to the extent necessary to afford to Licensee the full benefits of this Agreement.
COATES TRUST
List of Exhibits and Appendixes:
Exhibit A: License agreement, dated December 22, 1997
Exhibit B: License agreement, dated November 10, 2005
Exhibit C: Employment Agreement by and between George J. Coates and Licensee
Exhibit D: Employment Agreement by and between Gregory Coates and Licensee
Exhibit E: the Letter Agreement with WWE
Appendix 1.1: Patents and patent applications
Appendix 2.3: List of trademarks
Exhibit 10.21
LICENSE AGREEMENT
(Coates Trust to CIL)
This License Agreement (the "Agreement") is made as of October 23, 2006 between Coates Trust, a trust formed under the laws of the Commonwealth of the Bahamas, having an address at Katherina Court 101, East Hill Place, Market Street, North, Nassau, the Bahamas ("Coates Trust") and Coates International, Ltd., a Delaware corporation ("CIL"). This Agreement shall become effective as of the Effective Date, as defined in CIL License Agreement referred to herein. Terms not defined herein shall have the meanings assigned to them in CIL License Agreement.
Recitals:
1. CIL is a party to a License Agreement dated October 23, 2006 with George Coates and Gregory Coates. (the "CIL License Agreement"). The CIL License Agreement is attached hereto as Exhibit A and shall be considered an integral part hereof.
2. CIL License Agreement contemplates the license to CIL of certain intellectual property rights that are owned by Coates Trust. 3. Coates Trust will benefit from the grant of such additional licenses.
NOW THEREFORE, for this and other valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows:
1. Definitions.
(a) Definitions.
"Affiliate" shall mean any corporation or other business entity controlled by CIL. For this purpose, "control" shall mean direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock of, or at least a fifty percent (50%) interest in the income of, such corporation or other business entity, or such other relationship as, in fact, constitutes actual control.
"Patent Rights" shall mean:
i. all U. S. and international patents and patent applications currently owned by the Coates Trust or as to which it has the right to grant a license to CIL;
ii. any additional U.S. and international patents and patent applications to the extent the claims are directed to subject matter described in a patent or patent application referred to in subparagraph (i); and
iii. any U.S. and international patents resulting from reissues, reexaminations, substitutes or extensions (and their relevant international equivalents) of the patents described in (i) and (ii).
"Product" shall mean any CSRV Engine which, absent the license granted hereby, would infringe an issued, unexpired claim or a pending claim contained in the Patent Rights in the country in which any Product is made, used or sold. For the avoidance of doubt, Product shall not include any CSRV Engine that CIL is able to make, use or sell under the intellectual property rights licensed to it by George Coates and Gregory Coates under CIL License without the benefit of the license granted by Coates Trust in this Agreement.
"Sublicensee" shall mean any third party to whom CIL has granted a license to make, have made, use, offer to sell, import and/or sell the Product under the Patent Rights, provided said third party has agreed in writing with CIL to accept the conditions and restrictions agreed to by CIL in this Agreement.
2. Grant. Coates Trust agrees that to the extent any of the Licensed Intellectual Property Rights or Additional Intellectual Property Rights or any other intellectual property rights licensed or purported to be licensed CIL under the CIL License Agreement are owned or under the control of the Coates Trust, Coates Trust hereby grants to CIL a royalty-bearing, perpetual and irrevocable license in the Territory, with the right to sublicense, under the Patent Rights, the Licensed Intellectual Property Rights and the Additional Licensed Intellectual Property and such other intellectual property rights, solely in the Field of Use, to develop, make, have made, use, sell, offer to sell, lease and import products and to develop and perform processes that use any of the Patent Rights, the Licensed Intellectual Property and Additional Licensed Intellectual Property Rights and such other intellectual property rights. This license is subject to the same restrictions and exclusivity/non-exclusivity provisions as those contained in the CIL License Agreement, and Coates Trust and CIL will perform all of the covenants of the Licensors and Licensee under the CIL License Agreement to the extent necessary. Coates Trust will not grant any licenses or sell any intellectual property rights that would be inconsistent with the CIL License or the grants and other obligations of Coates Trust hereunder.
3. Royalties.
(a) With respect to each Product sold or leased by CIL, its Affiliates and its Sublicensees to third parties, CIL shall pay to the Coates Trust a running royalty of $100 per Product. All payments shall be made hereunder in U.S. dollars; royalties on sales other than in U.S. dollars shall be computed by converting the royalty in the currency of the country in which the sales were made at the exchange rate for dollars prevailing at the close of the business day of CIL's quarter for which royalties are being calculated as published the following day in the Wall Street Journal, and with respect to those countries for which rates are not published in the Wall Street Journal, the exchange rate fixed for such date by the appropriate United States governmental agency.
(b) Fifty percent (50%) of all Non-Royalty Sublicense Income, as defined below ("NRSI"), received by CIL shall be shared with Coates Trust. For this purpose, "NRSI" means sublicense issue fees, sublicense maintenance fees, sublicense milestone payments and similar non-royalty payments made by Sublicensees (other than Affiliates) to CIL that are attributable to sublicenses granted of the Patent Rights of Coates Trust licensed to CIL pursuant to this Agreement. For the avoidance of doubt, if CIL sublicenses any rights under the CIL License Agreement (which includes the western hemisphere) alone and not rights acquired from Coates Trust pursuant to this Agreement, Coates Trust shall have no right to share in NRSI with respect thereto.
4. Provisions Incorporated by Reference. Unless the context clearly requires otherwise, the provisons of Sections 5 through 15 of the CIL License are incorporated herein by reference. The term of this Agreement is meant to be co-terminous with the term of the CIL License Agreement, and is meant to be interpreted consistently therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized to be effective as of the Effective Date (as defined in the CIL License Agreement).
COATES INTERNATIONAL LTD. COATES TRUST
By: By:
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Name: Name:
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Title: Title:
EXHIBIT 10.22
2006 Stock Option and Incentive Plan
COATES INTERNATIONAL LTD.
2006 Stock Option and Incentive Plan
1. Purpose and Eligibility
The purpose of this 2006 Stock Option and Incentive Plan (the "Plan") of Coates International Ltd. (the "Company") is to provide stock options and other equity interests in the Company (each an "Award") to employees, officers, directors, consultants and advisors of the Company and its Subsidiaries, all of whom are eligible to receive Awards under the Plan. Any person to whom an Award has been granted under the Plan is called a "Participant". Additional definitions are contained in Section 8.
2. Administration
a. Administration by Board of Directors. The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board, in its sole discretion, shall have the authority to grant and amend Awards, to adopt, amend and repeal rules relating to the Plan and to interpret and correct the provisions of the Plan and any Award. All decisions by the Board shall be final and binding on all interested persons. Neither the Company nor any member of the Board shall be liable for any action or determination relating to the Plan. Specifically, without limiting the foregoing, the Board shall have authority to adopt special rules and sub-plans for Participants in foreign jurisdictions to take advantage of favorable tax programs or for other legal objectives. The Board of Directors may further, with the consent of the affected optionee, affect the cancellation of any or all outstanding options and the grant of new options in substitution therefor covering the same or different numbers of shares of Common Stock having an option exercise price per share that may be higher or lower than the exercise price per share of the canceled options.
b. Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean such Committee or the Board.
c. Delegation to Officers. To the extent permitted by applicable law, the Board may delegate to one or more officers of the Company the power to grant Awards to employees or officers of the Company or any of its present or future subsidiary corporations and to exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the terms of the Awards to be granted by such officers (including the exercise or purchase price of such Awards, which may include a formula by which the price will be determined) and the maximum number of securities subject to Awards that the officers may grant; provided further that no officer shall be authorized to grant Awards to any "executive officer" of the Company (as defined by Rule 3b-7 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or to any "officer" of the Company (as defined by Rule 16a-1 under the Exchange Act).
3. Stock Available for Awards
a. Number of Shares. Subject to adjustment under Section 3(c), the aggregate number of shares of Common Stock of the Company (the "Common Stock") that may be issued pursuant to the Plan is 12,500,000 shares. If any Award expires, or is terminated, surrendered or forfeited, in whole or in part, the unissued Common Stock covered by such Award shall again be available for the grant of Awards under the Plan. If shares of Common Stock issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to, the Company at no more than cost, such shares of Common Stock shall again be available for the grant of Awards under the Plan; provided, however, that the cumulative number of such shares that may be so reissued under the Plan will not exceed 12,500,000 shares. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.
b. Per-Participant Limit. Subject to adjustment under Section 3(c), no Participant may be granted Awards during any one fiscal year to purchase more than 25% of the number of shares specified in Section 3(a).
c. Adjustment to Common Stock. In the event of any stock split, stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off, split-up, or other similar change in capitalization or event, (i) the number and class of securities available for Awards under the Plan and the per-Participant share limit, (ii) the number and class of securities, vesting schedule and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to repurchase, and (iv) the terms of each other outstanding stock-based Award shall be adjusted by the Company (or substituted Awards may be made) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is appropriate. If Section 7(e)(i) applies for any event, this Section 3(c) shall not be applicable.
4. Stock Options
a. General. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option and the Common Stock issued upon the exercise of each Option, including vesting provisions, repurchase provisions and restrictions relating to applicable federal or state securities laws, as it considers advisable.
b. Incentive Stock Options. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall be granted only to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Board and the Company shall have no liability if an Option or any part thereof that is intended to be an Incentive Stock Option does not qualify as such. An Option or any part thereof that does not qualify as an Incentive Stock Option is referred to herein as a "Nonstatutory Stock Option."
c. Exercise Price. The Board shall establish the exercise price (or determine the method by which the exercise price shall be determined) at the time each Option is granted and specify it in the applicable option agreement.
d. Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement.
e. Exercise of Option. Options may be exercised only by delivery to the Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 4(f) for the number of shares for which the Option is exercised.
f. Payment Upon Exercise. Common Stock purchased upon the exercise of an Option shall be paid for by one or any combination of the following forms of payment:
(i) by check payable to the order of the Company;
(ii) except as otherwise explicitly provided in the applicable option agreement, and only if the Common Stock is then publicly traded, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price, plus in each case any required tax withholding; or
(iii) to the extent explicitly provided in the applicable option agreement, by (x) delivery of shares of Common Stock owned by the Participant valued at fair market value (as determined by the Board or as determined pursuant to the applicable option agreement), (y) delivery of a promissory note of the Participant to the Company (and delivery to the Company by the Participant of a check in an amount equal to the par value of the shares purchased), or (z) payment of such other lawful consideration as the Board may determine.
g. Repricing. The Board may, without stockholder approval, amend any outstanding Option granted under the Plan to provide an exercise price per share that is lower than the then-current exercise price per share of such outstanding Option. The Board may also, without stockholder approval, cancel any outstanding Option and grant in substitution therefor new Options covering the same or a different number of shares of Common Stock and having an exercise price per share lower than the then-current exercise price per share of the cancelled Option.
5. Restricted Stock
a. Grants. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to (i) delivery to the Company by the Participant of cash or other lawful consideration in an amount at least equal to the par value of the shares purchased, and (ii) the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price from the Participant in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a "Restricted Stock Award").
b. Terms and Conditions. The Board shall determine the terms and conditions of any such Restricted Stock Award. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). After the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or, if the Participant has died, to the beneficiary designated by a Participant, in a manner determined by the Board, to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate.
6. Other Stock-Based Awards
The Board shall have the right to grant other Awards based upon the Common Stock or the trading price thereof and having such terms and conditions as the Board may determine, including, without limitation, the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights, phantom stock awards or stock units.
7. General Provisions Applicable to Awards
a. Transferability of Awards. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.
b. Documentation. Each Award under the Plan shall be evidenced by a written instrument in such form as the Board shall determine or as executed by an officer of the Company pursuant to authority delegated by the Board. Each Award may contain terms and conditions in addition to those set forth in the Plan provided that such terms and conditions do not contravene the provisions of the Plan.
c. Board Discretion. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly.
d. Termination of Status. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participant's legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award.
e. Acquisition of the Company
(i) Consequences of an Acquisition. Upon the consummation of an Acquisition, the Board or the board of directors of the surviving or acquiring entity (as used in this Section 7(e)(i), also the "Board"), shall, as to outstanding Awards (on the same basis or on different bases as the Board shall specify), make appropriate provision for the continuation of such Awards by the Company or the assumption of such Awards by the surviving or acquiring entity and by substituting on an equitable basis for the shares then subject to such Awards either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or acquiring corporation or (c) such other securities or other consideration as the Board deems appropriate, the fair market value of which (as determined by the Board in its sole discretion) shall not materially differ from the fair market value of the shares of Common Stock subject to such Awards immediately preceding the Acquisition. In addition to or in lieu of the foregoing, with respect to outstanding Options, the Board may, on the same basis or on different bases as the Board shall specify, upon written notice to the affected optionees, provide that one or more Options then outstanding must be exercised, in whole or in part, within a specified number of days of the date of such notice, at the end of which period such Options shall terminate, or provide that one or more Options then outstanding, in whole or in part, shall be terminated in exchange for a cash payment equal to the excess of the fair market value (as determined by the Board in its sole discretion) for the shares subject to such Options over the exercise price thereof. Unless otherwise determined by the Board (on the same basis or on different bases as the Board shall specify), any repurchase rights or other rights of the Company that relate to an Option or other Award shall continue to apply to consideration, including cash, that has been substituted, assumed or amended for an Option or other Award pursuant to this paragraph. The Company may hold in escrow all or any portion of any such consideration in order to effectuate any continuing restrictions.
(ii) Acquisition Defined. An "Acquisition" shall mean: (x) the sale of the Company by merger in which the shareholders of the Company in their capacity as such no longer own a majority of the outstanding equity securities of the Company (or its successor); or (y) any sale of all or substantially all of the assets or capital stock of the Company (other than in a spin-off or similar transaction) or (z) any other acquisition of the business of the Company, as determined by the Board.
(iii) Assumption of Options Upon Certain Events. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Awards under the Plan in substitution for stock and stock-based awards issued by such entity or an affiliate thereof. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances.
f. Withholding. Each Participant shall pay to the Company, or make provisions satisfactory to the Company for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part by transferring shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their fair market value (as determined by the Board or as determined pursuant to the applicable option agreement). The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.
g. Amendment of Awards. The Board may amend, modify or terminate any outstanding Award including, but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant.
h. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.
i. Acceleration. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of some or all restrictions, or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be, despite the fact that the foregoing actions may (i) cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs, or (ii) disqualify all or part of the Option as an Incentive Stock Option. In the event of the acceleration of the exercisability of one or more outstanding Options, including pursuant to paragraph (e)(i), the Board may provide, as a condition of full exercisability of any or all such Options, that the Common Stock or other substituted consideration, including cash, as to which exercisability has been accelerated shall be restricted and subject to forfeiture back to the Company at the option of the Company at the cost thereof upon termination of employment or other relationship, with the timing and other terms of the vesting of such restricted stock or other consideration being equivalent to the timing and other terms of the superseded exercise schedule of the related Option.
8. Miscellaneous
a. Definitions.
(i) "Company" for purposes of eligibility under the Plan, shall include any present or future subsidiary corporations of Coates International Ltd., as defined in Section 424(f) of the Code (a "Subsidiary"), and any present or future parent corporation of Coates International Ltd., as defined in Section 424(e) of the Code. For purposes of Awards other than Incentive Stock Options, the term "Company" shall include any other business venture in which the Company has a direct or indirect significant interest, as determined by the Board in its sole discretion.
(ii) "Code" means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder.
(iii) "employee" for purposes of eligibility under the Plan (but not for purposes of Section 4(b)) shall include a person to whom an offer of employment has been extended by the Company.
b. No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan.
c. No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder thereof.
d. Effect on Other Benefit Plans. The amount of any compensation deemed to be received by a Participant as a result of the receipt or exercise of an Award will not constitute "earnings" with respect to which any other benefits of such Participant are determined, including without limitation benefits under any pension, profit sharing, life insurance or salary continuation plan.
e. Authorization of Sub-Plans. The Board may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions. The Board shall establish such sub-plans by adopting supplements to this Plan containing (i) such limitations on the Board's discretion under the Plan as the Board deems necessary or desirable or (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable. All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.
f. Provisions for Foreign Participants. The Board may modify Awards granted to Participants who are foreign nationals or employed outside the United States or establish sub-plans or procedures under the Plan to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.
g. Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but Awards previously granted may extend beyond that date.
h. Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time.
i. Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of Delaware, without regard to any applicable conflicts of law.
COATES INTERNATIONAL LTD.
FORM OF STOCK OPTION AGREEMENT
UNDER
2006 STOCK OPTION AND INCENTIVE PLAN
[INCENTIVE] STOCK OPTION AGREEMENT
Coates International Ltd. (the "Company") hereby grants the following stock option pursuant to its 2006 Stock Option and Incentive Plan. The terms and conditions attached hereto are also a part hereof.
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Name of optionee (the "Optionee"):
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Date of this option grant:
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Number of shares of the Company's Common Stock
subject to this option ("Shares"):
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Option exercise price per share:
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Number, if any, of Shares that may be purchased on
or after the grant date:
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Shares that are subject to vesting schedule:
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Vesting Start Date:
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Vesting Schedule:
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___________ shares
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an additional _______ shares
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an additional _______ shares
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all remaining Shares
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This option satisfies in full all commitments that the Company has to the Optionee with respect to the issuance of stock, stock options or other equity securities.
Coates International Ltd.
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Signature of Optionee By:____________________________
____________________________________ Name of Officer:
Street Address Title:
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City/State/Zip Code
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[INCENTIVE] STOCK OPTION AGREEMENT
1. Grant Under Plan. This option is granted pursuant to and is governed by the Company's 2006 Stock Option and Incentive Plan (the "Plan") and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan.
2. Grant as Incentive Stock Option [Non-Qualified Stock Option]. This option is intended to qualify as an [This option is a non-statutory stock option and is not intended to qualify as an] incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code").
3. Vesting of Option.
(a) Vesting if Business Relationship Continues. The Optionee may exercise this option on or after the date of this option grant for the number of shares of Common Stock, if any, set forth on the cover page hereof. If the Optionee has continuously maintained a Business Relationship (as defined below) with the Company through the dates listed on the vesting schedule set forth on the cover page hereof, the Optionee may exercise this option for the additional number of shares of Common Stock set opposite the applicable vesting date. Notwithstanding the foregoing, the Board may, in its discretion, accelerate the date that any installment of this option becomes exercisable. The foregoing rights are cumulative and may be exercised only before the date which is [ten] years from the date of this option grant.
(b) Accelerated Vesting Due to Acquisition. In the event an
Acquisition that is not a Private Transaction occurs while the Optionee
maintains a Business Relationship with the Company and this option has not
fully vested, this option shall become exercisable for [?] of the then
number of Shares as to which it has not vested, such vesting to occur
immediately prior to the closing of the Acquisition, with vesting to
continue after the closing at [?] the rate/number set forth on the cover
page as to the remainder of the Shares subject to vesting and on the same
vesting dates, provided that the Optionee continuously maintains a
Business Relationship with the Company or its successor through the
applicable vesting dates. [If the Optionee after the Acquisition
terminates his or her Business Relationship for good reason (as defined
below) or the Company or the acquiror terminates the Business Relationship
without Cause (as defined below), then immediately upon such termination
date this option shall become exercisable as to all remaining Shares, and
this option shall expire (may no longer be exercised) after the passage of
[[?] months] from the date of termination, but in no event later than the
scheduled expiration date.] [alternative: but this option may be exercised
(to the extent otherwise exercisable on the date of termination) until its
scheduled expiration date.]
(c) Definitions. The following definitions shall apply: [As needed, depending on vesting scheme employed and whether the Plan contains any of these definitions]
"Acquisition" means (i) the sale of the Company by merger in which the shareholders of the Company in their capacity as such no longer own a majority of the outstanding equity securities of the Company (or its successor); or (ii) any sale of all or substantially all of the assets or capital stock of the Company (other than in a spin-off or similar transaction) or (iii) any other acquisition of the business of the Company, as determined by the Board.
"Business Relationship" means service to the Company or its successor in the capacity of an employee, officer, director or consultant.
"Cause" means: (i) gross negligence or willful malfeasance in the performance of the Optionee's work or a breach of fiduciary duty or confidentiality obligations to the Company by the Optionee; (ii) failure to follow the proper directions of the Optionee's direct or indirect supervisor after written notice of such failure; (iii) the commission by the Optionee of illegal conduct relating to the Company; (iv) disregard by the Optionee of the material rules or material policies of the Company which has not been cured within 15 days after notice thereof from the Company; or (v) intentional acts on the part of the Optionee that have generated material adverse publicity toward or about the Company.
"Good Reason" means, with respect to an Optionee who is an employee: (i) the failure of the Company to pay any wages due to the Optionee within five days after written notice thereof from the Optionee or (ii) a reduction in the Optionee's salary from that on the date of this agreement, other than as part of a salary reduction program among multiple employees [or (iii) a demotion of the Optionee to a non-executive position with the Company]. "Good Reason" means, with respect to an Optionee who is not an employee, a breach by the Company of the terms of its relationship with the Optionee that continues for five days after notice.
"Private Transaction" means any Acquisition where the
consideration received or retained by the holders of the then
outstanding capital stock of the Company does not consist of (i)
cash or cash equivalent consideration, (ii) securities which are
registered under the Securities Act and/or (iii) securities for
which the Company or any other issuer thereof has agreed, including
pursuant to a demand, to file a registration statement within ninety
(90) days of completion of the transaction for resale to the public
pursuant to the Securities Act.
4. Termination of Business Relationship.
(a) Termination. If the Optionee's Business Relationship with the Company ceases, voluntarily or involuntarily, with or without cause, no further installments of this option shall become exercisable, [and this option shall expire (may no longer be exercised) after the passage of [[?] months] from the date of termination, but in no event later than the scheduled expiration date.] [alternative: but this option may be exercised (to the extent otherwise exercisable on the date of termination) until its scheduled expiration date.] Any determination under this agreement as to the status of a Business Relationship or other matters referred to above shall be made in good faith by the Board of Directors of the Company.
(b) Employment Status. For purposes hereof, with respect to employees of the Company, employment shall not be considered as having terminated during any leave of absence if such leave of absence has been approved in writing by the Company and if such written approval contractually obligates the Company to continue the employment of the Optionee after the approved period of absence; in the event of such an approved leave of absence, vesting of this option shall be suspended (and the period of the leave of absence shall be added to all vesting dates) unless otherwise provided in the Company's written approval of the leave of absence.. For purposes hereof, a termination of employment followed by another Business Relationship shall be deemed a termination of the Business Relationship with all vesting to cease unless the Company enters into a written agreement related to such other Business Relationship in which it is specifically stated that there is no termination of the Business Relationship under this agreement. This option shall not be affected by any change of employment within or among the Company and its Subsidiaries so long as the Optionee continuously remains an employee of the Company or any Subsidiary.
[(c) Termination for Cause. If the Business Relationship of the Optionee is terminated for Cause (as defined above), this option may no longer be exercised from and after the Optionee's receipt of written notice of such termination. In such event, the Repurchase Option described in Section 6 shall also be applicable.]
5. Death; Disability.
(a) Death. Upon the death of the Optionee while the Optionee is maintaining a Business Relationship with the Company, this option may be exercised, to the extent otherwise exercisable on the date of the Optionee's death, by the Optionee's estate, personal representative or beneficiary to whom this option has been transferred pursuant to Section 10, only at any time within [[?] days] after the date of death, but not later than the scheduled expiration date.
(b) Disability. If the Optionee ceases to maintain a Business Relationship with the Company by reason of his or her disability, this option may be exercised, to the extent otherwise exercisable on the date of cessation of the Business Relationship, only at any time within [[?] days] after such cessation of the Business Relationship, but not later than the scheduled expiration date. For purposes hereof, "disability" means "permanent and total disability" as defined in Section 22(e)(3) of the Code.
6. Partial Exercise. This option may be exercised in part at any time and from time to time within the above limits, except that this option may not be exercised for a fraction of a share.
[Note: The following are the payment options that must be specified on the cover page. Payment alternatives may be eliminated in Section 7(a).]
7. Payment of Exercise Price.
(a) Payment Options. The exercise price shall be paid by one or any combination of the following forms of payment that are applicable to this option, as indicated on the cover page hereof:
(i) by check payable to the order of the Company; or
(ii) delivery of an irrevocable and unconditional undertaking, satisfactory in form and substance to the Company, by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Optionee to the Company of a copy of irrevocable and unconditional instructions, satisfactory in form and substance to the Company, to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or
(iii) subject to Section 7(b) below, if the Common Stock is then traded on a national securities exchange or on the Nasdaq National Market (or successor trading system), by delivery of shares of Common Stock having a fair market value equal as of the date of exercise to the option price; or
(iv) by check payable to the order of the Company for the par value
of the shares being purchased plus delivery of the Optionee's
[[?]]-year personal full recourse promissory note for the
balance of the exercise price, with such note bearing interest
payable not less than annually at the applicable Federal rate,
as defined in Section 1274(d) of the Code.
In the case of (iii) above, fair market value as of the date of exercise shall be determined as of the last business day for which such prices or quotes are available prior to the date of exercise and shall mean (i) the last reported sale price (on that date) of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market (or successor trading system), if the Common Stock is not then traded on a national securities exchange.
(b) Limitations on Payment by Delivery of Common Stock. If Section 7(a)(iii) is applicable, and if the Optionee delivers Common Stock held by the Optionee ("Old Stock") to the Company in full or partial payment of the exercise price and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Optionee and the Company, an equivalent number of Shares shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Optionee paid for the Shares by delivery of Old Stock, in addition to any restrictions or limitations imposed by this agreement. Notwithstanding the foregoing, the Optionee may not pay any part of the exercise price hereof by transferring Common Stock to the Company unless such Common Stock has been owned by the Optionee free of any substantial risk of forfeiture for at least six months.
8. Securities Laws Restrictions on Resale. Until registered under the Securities Act of 1933, as amended, or any successor statute (the "Securities Act"), the Shares will be illiquid and will be deemed to be "restricted securities" for purposes of the Securities Act. Accordingly, such shares must be sold in compliance with the registration requirements of the Securities Act or an exemption therefrom and may need to be held indefinitely. Unless the Shares have been registered under the Securities Act, each certificate evidencing any of the Shares shall bear a restrictive legend specified by the Company.
9. Method of Exercising Option. Subject to the terms and conditions of this agreement, this option may be exercised by written notice to the Company at its principal executive office, or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this option and the number of Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Optionee and if the Optionee shall so request in the notice exercising this option, shall be registered in the name of the Optionee and another person jointly, with right of survivorship). In the event this option shall be exercised, pursuant to Section 5 hereof, by any person or persons other than the Optionee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option.
10. Option Not Transferable. This option is not transferable or assignable except by will or by the laws of descent and distribution. During the Optionee's lifetime only the Optionee can exercise this option.
11. No Obligation to Exercise Option. The grant and acceptance of this option imposes no obligation on the Optionee to exercise it.
12. No Obligation to Continue Business Relationship. Neither the Plan, this agreement, nor the grant of this option imposes any obligation on the Company to continue the Optionee in employment or other Business Relationship.
13. Adjustments. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise.
14. Withholding Taxes. If the Company in its discretion determines that it is obligated to withhold any tax in connection with the exercise of this option, or in connection with the transfer of, or the lapse of restrictions on, any Common Stock or other property acquired pursuant to this option, the Optionee hereby agrees that the Company may withhold from the Optionee's wages or other remuneration the appropriate amount of tax. At the discretion of the Company, the amount required to be withheld may be withheld in cash from such wages or other remuneration or in kind from the Common Stock or other property otherwise deliverable to the Optionee on exercise of this option. The Optionee further agrees that, if the Company does not withhold an amount from the Optionee's wages or other remuneration sufficient to satisfy the withholding obligation of the Company, the Optionee will make reimbursement on demand, in cash, for the amount underwithheld.
15. Early Disposition. The Optionee agrees to notify the Company in writing immediately after the Optionee transfers any Shares, if such transfer occurs on or before the later of (a) the date that is two years after the date of this agreement or (b) the date that is one year after the date on which the Optionee acquired such Shares. The Optionee also agrees to provide the Company with any information concerning any such transfer required by the Company for tax purposes. [Note: The foregoing is for ISOs only.]
16. Lock-up Agreement. The Optionee agrees that in the event that the Company effects an initial underwritten public offering of Common Stock registered under the Securities Act, the Shares may not be sold, offered for sale or otherwise disposed of, directly or indirectly, without the prior written consent of the managing underwriter(s) of the offering, for such period of time after the execution of an underwriting agreement in connection with such offering that all of the Company's then directors and executive officers agree to be similarly bound.
17. Arbitration. Any dispute, controversy, or claim arising out of, in connection with, or relating to the performance of this agreement or its termination shall be settled by arbitration in Boston, Massachusetts, pursuant to the rules then obtaining of the American Arbitration Association. Any award shall be final, binding and conclusive upon the parties and a judgment rendered thereon may be entered in any court having jurisdiction thereof.
18. Provision of Documentation to Optionee. By signing this agreement the Optionee acknowledges receipt of a copy of this agreement and a copy of the Plan.
19. Miscellaneous.
(a) Notices. All notices hereunder shall be in writing and shall be deemed given when sent by mail, if to the Optionee, to the address set forth below or at the address shown on the records of the Company, and if to the Company, to the Company's principal executive offices, attention of the Corporate Secretary.
(b) Entire Agreement; Modification. This agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this agreement. This agreement may be modified, amended or rescinded only by a written agreement executed by both parties.
(c) Fractional Shares. If this option becomes exercisable for a fraction of a share because of the adjustment provisions contained in the Plan, such fraction shall be rounded down.
(d) Issuances of Securities; Changes in Capital Structure. Except as expressly provided herein or in the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to this option. No adjustments need be made for dividends paid in cash or in property other than securities of the Company. If there shall be any change in the Common Stock of the Company through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares, spin-off, split-up or other similar change in capitalization or event, the restrictions contained in this agreement shall apply with equal force to additional and/or substitute securities, if any, received by the Optionee in exchange for, or by virtue of his or her ownership of, Shares, except as otherwise determined by the Board.
(e) Severability. The invalidity, illegality or unenforceability of any provision of this agreement shall in no way affect the validity, legality or enforceability of any other provision.
(f) Successors and Assigns. This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 10 hereof.
(g) Governing Law. This agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without giving effect to the principles of the conflicts of laws thereof.