<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Quarterly Report Under Section 13 or 15 (d) of
Securities Exchange Act of 1934
For Year ended June 30, 1998
Commission File Number 0-23693
COMPOSITE AUTOMOBILE RESEARCH, LTD.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Alberta, BC 93-1202663
----------------- --------------
(State of Incorporation) (I.R.S. Employer Identification No.)
635 Front Street, El Cajon, California 92020
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 444-7254 FAX (619) 444-9026
- ------------------ --------------------------
(Registrant's telephone and fax number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'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.
Yes [X] No [ ]
<PAGE> 2
The issuer's revenues for the year ended June 30, 1998 were $160,000.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 1998, based on the average
selling price of the Company's private placement was $6,093,780. As of June 30,
1998, the registrant had 4,736,400 shares of common stock, no stated par value,
issued and outstanding.
<PAGE> 3
ITEM 1 BUSINESS
History
Composite Automobile Research, Inc. ("the Company") was incorporated
in January 1996 pursuant to the Alberta Business Corporations Act.
The Company was incorporated to facilitate an initial public offering
in order to provide funding for a new motorvehicle prototype.
Subsequent to incorporation, the Company acquired Thunder Ranch,
Inc., and World Transport Authority, Inc. These acquisitions have
been accounted for under the purchase method with any difference
between fair market value of assets purchased and liabilities assumed
being reflected as goodwill.
In September 1996, the Company sold certain Thunder Ranch, Inc.
assets and liabilities to a former stockholder in exchange for common
stock of the Company and promises to pay. The transaction has been
accounted for by the purchase method. During 1997, common stock
issued in accordance with this agreement was canceled.
General
The Company, through its wholly owned subsidiary, is in the business
of designing vehicles, and selling licenses to others to produce
these vehicles in markets around the world.
The Company sells a Master License for each predetermined geographic
region or each country, depending on the estimated vehicle sales in
each market. The price for this Master License varies depending upon
the population of the geographic region or country served. The Master
License holder is responsible for selling Manufacturing and
Distribution Licenses for individual factories throughout their
country or region. The Master Licensee provides all support for each
factory, including training and marketing utilizing local customs and
language.
Revenues from the sale of a Master License are recognized when the
Master License holder has made payment to the Company and performed
marketing services sufficient to sell at least one Manufacturing &
Distribution License. Revenues from the sale of a Manufacturing &
Distribution License are recognized when the Licensee has made
payment to the Company, and the Company has provided substantially
all factory components and training sufficient for the Licensee to
begin vehicle production.
<PAGE> 4
ITEM 2 PROPERTIES
The Company leases its office and design facilities under an
operating lease that expires in March 2001. This lease was entered
into on March 1, 1996. This operating lease provides that the Company
pay, in addition to the base rent, 83% of common area operating
expenses as determined by a prorated share of total square footage of
the building. For the years ended June 30, 1998, 1997, and 1996
respectfully, rent expense amounted to $131,382, 121,978, and
$18,649.
Future minimum lease payments due under the operating lease for
office and design facilities are as follows:
<TABLE>
<CAPTION>
Year ending June 30
-------------------
<S> <C>
1999 98,160
2000 102,087
2001 78,839
-------
Total 279,086
=======
</TABLE>
ITEM 3 LEGAL PROCEEDINGS
The Company entered into binding arbitration with a former business
partner, Thomas McBurnie regarding the consideration to be paid for
the sale of Thunder Ranch, Inc. to Mr. McBurnie in an Agreement dated
September 27, 1996. The arbitration was summarily dismissed in favor
of the Company on November 24, 1997. Mr. McBurnie filed a complaint
in Superior Court of San Diego, California against the Company on
December 10, 1997 concerning the same Agreement dated September 27,
1996. On April 10, 1998, the Superior Court dismissed the entire
complaint. The Company previously had agreed to issue 1,793,000
shares of common stock to this individual. However, as of June 30,
1997, the stock had been canceled as recorded by the stock transfer
agent, Pacific Corporate Trust. These shares will remain canceled per
the Superior Court decision of April 10, 1998.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no such submissions, as the Company did not have a shareholders
meeting in the year ended June 30, 1998.
<PAGE> 5
PART II
ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDERS MATTERS.
General
On September 24, 1998 the Company's common stock began trading on the OTC
Electronic Bulletin Board which is sponsored by the National Association of
Securities Dealers (NASD). As of the date of this filing there is insufficient
trading information and trading days needed to establish a representative high
and low bid price for the quarter ended September 30, 1998.
The Company has outstanding options, which, if all exercised, will result in the
issuance of 368,334 shares of common stock.
The Company's Board of Directors determines any payment of dividends. The Board
of Directors does not expect to authorize the payment of cash dividends in the
foreseeable future. Any future decision with respect to dividends will depend on
future earnings, operations, capital requirements and availability, restrictions
in future financing agreements, and other business and financial considerations.
As of June 30, 1998, there were approximately 214 holders of record of the
Company's Common Stock. The Board of Directors believe the number of beneficial
owners is greater than the number of record holders because a portion of the
Company's outstanding Common Stock is held of record in broker "street names"
for the benefit of individual investors.
ITEM 6 SELECTED FINANCIAL DATA
Financial Condition
The Company's financial condition improved from 1997 to 1998. In 1998, the
Company's working capital would have been $246,816 except for recording $339,483
of stock subscriptions as a current liability due to the pending issuance of
stock. The following table presents the key measures of financial condition as
of June 30, 1998, and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- ---------------------
% %
$ of assets $ of assets
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Cash 246,163 15.4 25,280 3.9
Current Assets 490,054 30.7 25,955 4.0
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C>
Current Liabilities 582,721 36.5 102,641 15.6
Working Capital -92,667 ------ -76,686 ------
Property & Equip (net) 1,074,943 67.4 301,215 45.9
Total Assets 1,595,515 100 656,188 100
Long Term Debt ------ ------ ------ ------
Shareholders' Equity 981,544 61.5 553,547 84.4
</TABLE>
As of June 30, 1998, the Company had $246,163 cash on hand and in the bank. The
primary sources of cash and financing for the Company for the year ended June
30, 1998 were $160,000 from sales, $1,783,535 from issuance of stock and stock
subscriptions, $458,951 of stock was issued for services, and shareholders'
loans to the Company of $28,416. The primary uses of cash during the year ended
June 30, 1998 were $672,234 to finance the Company's operations, $839,098 for
vehicle molds, and $79,736 for plant and equipment. The Company had an average
of twelve full time employees during the year ended June 30, 1998.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenues of $160,000 for the year ended June 30, 1998 were from
license sales. Deposits of $31,250 from licensees were recorded as
deferred license sales for the year ended June 30, 1998. Sales
recorded for the year ended June 30, 1997 consisted of sales from
discontinued operations of Thunder Ranch of $67,278. Sales recorded
for the year ended June 30, 1996 consisted of sales from discontinued
operations of Thunder Ranch of $27,140. The Company sustained a net
loss of $ 1,525,406 for the year ended June 30, 1998, a net loss of
$1,059,818 for the year ended June 30, 1997, and a net loss of
$319,636 for the period ended June 30, 1996. Losses were primarily
attributable to expenditures for research and development of the
WorldStar(R) vehicle and write-offs attributable to the sale of
Thunder Ranch of $220,089 for the year ended June 30, 1997, and
$253,503 for the year ended June 30, 1996.
The Company sold two Master Licenses and one Manufacturing &
Distribution License for WorldStar(R) factories, with additional
license sales pending in Mexico and the Philippines.
The Company produced and delivered the first set of production molds
for a Tijuana, Mexico factory owned by the Mexico Master License
holder. The Tijuana factory began vehicle production in June 1998. As
of the date of this filing, the Tijuana factory has increased vehicle
production to four vehicles per week. All vehicles produced by that
facility have been sold to commercial businesses.
<PAGE> 7
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements of the Company with related Notes are
attached hereto:
Balance Sheets as of June 30, 1998 and 1997
Statements of Operations for the years ended June 30, 1998, 1997 and 1996
Statements of Stockholders' Equity for the years ended June 30, 1998, 1997
and 1996
Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors:
<TABLE>
<CAPTION>
Age Date Elected Position
--- ------------ --------
<S> <C> <C> <C>
Dean Amaru 55 6/1/96 President
Steven R. Wright 54 6/1/96 Director, Secretary & Treasurer
Rodger Ward 78 6/1/96 Vice President
Lyle Wardrop 57 3/19/96 Director
</TABLE>
<PAGE> 8
Resumes:
Dean Amaru, President
<TABLE>
<S> <C>
1989 - Current Owner - URAMA SALES & MARKETING, HESPERIA CA - Company
provides all aspects of sales and marketing to small businesses
including consultation, product development, market analysis,
sponsorships, advertising and graphic design from concept to
design & printing.
1994 - Current Founder, President, Treasurer - VICTOR VALLEY MARKETING
GROUP, VICTORVILLE CA - Network of local business owners and
professionals who use ethical business practices and fair market
prices for honest work and goods. Organized as an Advertising Club
to increase quality and quantity of member's business through
networking, referrals, group-buying power, publication and
promotions.
1988 - 1989 Sales & Marketing Manager - TRIM-LOK INC., PARAMOUNT CA
Responsible for all aspects of sales and marketing for vinyl extrusion
edge trim for United States OEM and wholesale market. Opened
international distribution.
1986 - 1988 Sales Manager / Special Products & Projects - FORD WHOLESALE
COMPANY INC., SANTA ANA CA - Responsible for sales program
for roofing wholesaler with seven California locations for all
special products. Designed, implemented and evaluated sales
training & marketing methods promoting new products in market.
1966 - 1986 Regional Sales Manager - GENSTAR / FLINTKOTE COMPANY, LOS
ANGELES CA - Responsible for regional sales of roofing products and
supervision of employees in production, warehouse, office and sales.
Established policies, procedures and training promoting leadership
skills.
Education
UNIVERSITY OF LAS VEGAS
Major: Business Administration
Steven R. Wright, Secretary Treasurer & Director
1978 - Present Owner - WRIGHT & GEIS, INC. CERTIFIED PUBLIC ACCOUNTANTS,
SAN DIEGO, CA - Serve as director and financial officer for two
public companies. Responsible for all aspects of accounting,
Securities & Exchange filing, taxes and strategic planning. Corporate
</TABLE>
<PAGE> 9
<TABLE>
<S> <C>
tax specialist responsible for
corporation, individual, partnership
and fiduciary federal and multi-state
income tax returns. Manage client
contact, quality control, tax review
and planning, research, and audit
representation. Provide management
advisory services in design and
installation of data processing
systems, budgets, job costing,
estimating, financial planning,
analysis and personnel management.
Extensive experience with financial
institutions, creditors and investors
for financing and cash management.
1976 - 1978 Manager of Financial Planning - CAMPBELL INDUSTRIES, INC.,
SAN DIEGO, CA - Responsible for financial projections and
strategic planning for board of directors. Developed project
budgets with projected cash flow, estimating, and cost accounting
for new construction and ship repair work. Supervised cost
accounting and financial planning staff.
1974 - 1976 Senior Accountant - ROHR INDUSTRIES, INC., CHULA VISTA, CA
Responsible for accounting for three subsidiaries. Prepared accounting
entries, subsidiary ledgers, general ledgers, financial statements, cash
and sales forecasts and account analysis.
Education
SAN DIEGO STATE UNIVERSITY
B.S. Accounting, 1974
SAN DIEGO STATE UNIVERSITY
B.A. Public Administration, 1970
Lyle P. Wardrop, Director
1963 - Present President - GOLDEN MILE MOTORS, LTD. & UNITED AUTO BROKERS,
LTD. - Both companies are involved in the sale of used trucks and
autos.
1972 - Present President - SURREY LAND CENTER, VANCOUVER, B.C. - This
company is involved in the sale, development, and rental of industrial
land and warehouse space.
1976 - 1986 President - INTERNATIONAL WATERBED DISTRIBUTORS - This
company was involved in the manufacture, distribution, and retail
sale of waterbeds and bedroom furniture and became Canada's largest
waterbed wholesaler.
1978 - 1983 Treasurer - CANADIAN WATERBED MANUFACTURING ASSOCIATION -
</TABLE>
<PAGE> 10
<TABLE>
<S> <C>
This association represented the
manufacturing companies in the
waterbed industry.
1993 - Present Chairman Used Car Division - AUTOMOTIVE RETAILERS
ASSOCIATION OF BRITISH COLUMBIA - This association represents the
automotive retail sector in dealing with government and private
agencies.
1994 - Present Director and Board Member - AUTOMOTIVE RETAILERS
ASSOCIATION OF BRITISH COLUMBIA - This association represents
1300 member companies in six divisions employing over 25,000
people.
Rodger Ward, Vice President of Public Relations
1990 - Present Chief Steward - AMERICAN INDYCAR SERIES
1986 - Present Owner - RODGER WARD & ASSOCIATES - Auto and race car restoration
business, President Vintage Racing.
1983 - 1985 President - CITIZENS SECURITY SYSTEMS, DALLAS TX
1979 - 1982 Team Manager - CIRCUS CIRCUS HOTEL, LAS VEGAS NV - Manager
of the Unlimited Hydroplane Race Team.
1972 - 1976 Owner - RODGER WARD TIRE CENTERS, ROSEMEAD & MONROVIA CA
1969 - 1972 Director of Public Relations - ONTARIO MOTOR SPEEDWAY, ONTARIO
CA
1967 - 1970 Owner - FIRESTONE TIRE CENTER, SPEEDWAY IN
1946 - 1966 PROFESSIONAL RACE CAR DRIVER - Accomplishments include
National Stock Car Championship 1951, Indianapolis 500 Winner
1959 & 1962, and USAC Champion 1959 & 1962.
1990 - Present BOARD OF DIRECTORS - SAN DIEGO AUTOMOTIVE MUSEUM
1972 - 1976 BOARD OF DIRECTORS - SUPERIOR INDUSTRIES
1958 - 1968 CHAMPION SPARK PLUG CO. HIGHWAY SAFETY PROGRAM
1958 - 1966 BOARD OF DIRECTORS - USAC
1941 - 1946 U.S. AIR FORCE
</TABLE>
<PAGE> 11
ITEM 11 EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Summary Compensation Table
Name & Restricted Options LTIP All other
principle Year Salary Bonus Other compen- Stock SARs payouts
position ($) ($) Annual sation awards (#) ($)
- --------- ---- ------ ------ ------ ----------- ------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dean Amaru 1997 38,000 -0- -0- -0- 50,000 -0- -0-
Pres. 1998 -0- -0- -0- -0- -0- -0- -0-
Steven 1997 -0- -0- -0- -0- 33,333 -0- -0-
Wright 1998 -0- -0- -0- -0- -0- -0- -0-
Sec/Tres
Lyle 1997 -0- -0- -0- -0- 33,333 -0- -0-
Wardrop 1998 -0- -0- -0- -0- -0- -0- -0-
Director
Rodger 1997 -0- -0- -0- -0- 33,333 -0- -0-
Ward 1998 -0- -0- -0- -0- -0- -0- -0-
V.P.
</TABLE>
The Directors and Principal Officers have worked with minimum or deferred
remuneration until such time as the Company receives sufficient revenues
necessary to provide proper salaries to all Officers and compensation for
Directors' participation. The Officers and the Board of Directors have the
responsibility to determine the timing of remuneration based upon a positive
cash flow to include stock sales, license sales, estimated cash expenditures,
accounts receivable, accounts payable, notes payable, and a cash balance of not
less than $50,000 at each month end. The President and Treasurer have agreed to
a minimum salary of $90,000, and $75,000 per year, respectfully at the time
sufficient revenues and cash flow permit.
There are no annuity, pension or retirement benefits proposed to be paid to
officers, directors or employees of the Corporation in the event of retirement
at normal retirement date pursuant to any presently existing plan provided or
contributed to by the Corporation or any of its subsidiaries, if any.
<PAGE> 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information on the ownership of the Company's
voting securities by Officers, Directors and major shareholders as well as those
who own beneficially more than five percent of the Company's common stock:
<TABLE>
<CAPTION>
Title Of Name & Amount & Percent
Class Address Nature of owner Owned
- -------- ------- --------------- -------
<S> <C> <C> <C>
Common Dean Amaru, 20212 Modoc Rd. 63,334 1.4%
Apple Valley, CA 92308
Common Jahan Eftekhar, 8627 Cinnamon 311,667 (b) 6.6%
# 301, San Antonio, Texas 78240
Common Maritime International, Ltd. 726,667 (a) 15.3%
Trevor Lloyd, 635 Front St
El Cajon, CA 92020
Common Majid Mehrafza, 8627 Cinnamon 301,666 (b) 6.4%
# 301, San Antonio, Texas 78240
Common Rodger Ward, 1329 Craigmont 28,667 .6%
El Cajon, CA 92019
Common Lyle Wardrop, 19879 49th Ave 13,810 .3%
Langley, BC V3A 3R5
Common Steven Wright, 2635 30,619 .6%
Camino del Rio South, Ste 211
San Diego, CA 92108
Common Douglas Norman 213,080 4.5%
1103 Topper Lane
El Cajon, Ca 92021
Total Shares 1,689,510 35.7%
</TABLE>
<PAGE> 13
(a) Effective December 1, 1997, the 726,667 shares owned by Maritime
International, Ltd. (Beneficial Owner & Control Person - Trevor Lloyd) were
placed in an irrevocable trust dated December 1, 1997. Due to the size of the
stock ownership by one owner, the Shareholders, including Maritime
International, voted on June 3, 1997 to grant the Board additional control of
the amount of shares that Maritime International could offer for sale. On
December 1, 1997, the Board voted to accept an irrevocable stock trust set up
for three years, with Lyle Wardrop, a director of CAR, as trustee. The trust
requires that any sale or transfer of the trust's shares must be approved by
CAR's Board of Directors. Trustee retains legal right to vote the shares of the
Trust in all required shareholder votes.
(b) Includes shares totaling 133,333 jointly held by Jahan Eftekhar and Majid
Mehrafza.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following individuals received compensation during the years indicated for
services on behalf of the Company:
<TABLE>
<CAPTION>
Name Title Amount Description Year Ended June 30
- ---- ----- ------ ----------- -----------------
<S> <C> <C> <C> <C>
Steven Wright Treasurer $19,555 Accounting & tax 1998
Rodger Ward Vice Pres. $21,400 Marketing 1998
Rodger Ward Vice Pres. $29,580 Mold production 1998
Steven Wright Treasurer $ 3,000 Accounting & tax 1997
Rodger Ward Vice Pres. $39,000 Marketing 1997
Steven Wright Treasurer $ 2,400 Accounting & tax 1996
</TABLE>
Per SAB 1.b, management fees have been accrued, payable to the Company's
Treasurer for past management services. The accrual is non-interest bearing,
unsecured, and due on demand.
Advances form related parties at June 30, 1998 and 1997 represent amounts loaned
to the Company by shareholders. Advances are non-interest bearing, unsecured,
and due on demand.
As referenced in Item 3, Legal Proceedings, in September 1996, the Company sold
certain assets and liabilities to a former shareholder, Thomas McBurnie. As part
of that sale, Mr. McBurnie agreed to pay the Company $200,000 and provide the
Company with $100,000 of consulting services. As a result of legal proceedings,
the Company has determined that the amounts owed by Mr. McBurnie will not be
paid, and, accordingly, has written off the above amounts to bad debts for the
year ended June 30, 1998.
<PAGE> 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Balance Sheet as of June 30, 1998, and 1997
Statements of Operations for the years ended June 30, 1998, 1997, and
1996
Statements of Stockholders' Equity for the years ended June 30, 1998,
1997 and 1996
Statements of Cash Flows for the years ended June 30, 1998, 1997 and
1996
Reports filed on Form 8-K: None
Reports required to be filed by Regulation S-X: None
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time- sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of normal business activities.
Based on a recent and ongoing assessment, the Company has determined that it
will be required to modify or replace portions of its software and software that
has been sold to customers so that computer systems will function properly with
respect to dates in the year 2000 and thereafter. The Company presently believes
that with modifications to existing software or conversions to new software, the
Year 2000 issue will not pose significant operational problems and will not
materially affect future financial results.
The Company has initiated communications with its significant suppliers and
major customers to determine the extent to which the Company is vulnerable to
any third party's failure to remedy their own Year 2000 issues. The Company will
utilize both internal and external resources to modify, or replace, and test
software for Year 2000 compliance. The Company currently anticipates completing
the Year 2000 project within one year, but not later than June 30, 1999, which
is prior to any anticipated impact on its operating systems. The costs of the
project, which at the current time are projected to be immaterial, and the date
on which the Company believes it will complete Year 2000 modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
materially differ from those anticipated.
<PAGE> 15
SIGNATURES
-----------------
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by undersigned, thereunto duly authorized.
Composite Automobile Research, Ltd.
Dated: September 29, 1998 /S/ DEAN AMARU
-----------------------------------------
Dean Amaru,
President
Dated: September 29, 1998 /S/ STEVEN R. WRIGHT
-----------------------------------------
Steven R. Wright,
Treasurer and Principal Financial Officer
<PAGE> 16
[HARLAN & BOETTGER LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
COMPOSITE AUTOMOBILE RESEARCH, LTD.:
We have audited the accompanying consolidated balance sheets of Composite
Automobile Research, Ltd. and Subsidiary (a Canadian corporation) as of June 30,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years ended June 30, 1998 and 1997
and the period from January 5, 1996 (date of inception) to June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Composite Automobile
Research, Ltd. and Subsidiary as of June 30, 1998 and 1997, and the results of
their operations and cash flows for the years ended June 30, 1998 and 1997 and
for the period from January 5, 1996 (date of inception) to June 30, 1996 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note L to the
consolidated financial statements, the Company's recurring losses and decreases
in working capital raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note L to the consolidated financial statements. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
/s/ HARLAN & BOETTGER, LLP
- ---------------------------
San Diego, California
September 1, 1998
F-2
<PAGE> 17
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 246,163 $ 25,280
Inventory (Note C) 243,096 --
Prepaid expenses and other 795 675
----------- -----------
TOTAL CURRENT ASSETS 490,054 25,955
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $201,569 and $56,463, respectively (Note D) 1,074,943 301,215
----------- -----------
OTHER ASSETS
Note receivable - former stockholder (Note G) -- 200,000
Prepaid consulting (Note G) -- 100,000
Other 30,518 29,018
----------- -----------
TOTAL OTHER ASSETS 30,518 329,018
----------- -----------
TOTAL ASSETS $ 1,595,515 $ 656,188
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 89,739 $ 55,081
Accounts payable-related party (Note G) 5,000 --
Accrued liabilities 9,647 7,124
Accrued management fees-related party (Note G) 70,000 --
Advances from related parties (Note G) 68,852 40,436
Stock subscriptions (Note E) 339,483 --
----------- -----------
TOTAL CURRENT LIABILITIES 582,721 102,641
DEFERRED LICENSE FEES (Note H) 31,250 --
----------- -----------
TOTAL LIABILITIES 613,971 102,641
----------- -----------
COMMITMENTS (Note I) -- --
STOCKHOLDERS' EQUITY (Note J)
Common stock, no par value, unlimited shares
authorized; 4,736,400 and 3,333,975 shares issued and
outstanding, respectively 3,886,404 1,933,001
Accumulated deficit (2,904,860) (1,379,454)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 981,544 553,547
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,595,515 $ 656,188
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 18
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year For the year January 5, 1996
ended June 30, ended June 30, (date of inception)
1998 1997 to June 30,1996
----------- ----------- -----------------
<S> <C> <C> <C>
REVENUES $ 160,000 $ 67,278 $ 27,140
COSTS OF REVENUES 192,510 17,800 9,450
----------- ----------- -----------
GROSS PROFIT (LOSS) (32,510) 49,478 17,690
----------- ----------- -----------
OPERATING EXPENSES
Selling, general, and administrative 1,003,776 803,628 54,150
Accounting-related party (Note G) 24,555 3,000 2,400
Marketing-related party (Note G) 21,400 39,000 --
Bad debts-related party (Note G) 300,000 -- --
Depreciation and amortization 145,106 42,779 23,974
Loss on sale of equipment -- 198,646 --
Loss on write-off of capitalized costs -- -- 253,503
Loss on write-off of goodwill (Note B) -- 21,443 --
----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,494,837 1,108,496 334,027
----------- ----------- -----------
LOSS FROM OPERATIONS (1,527,347) (1,059,018) (316,337)
----------- ----------- -----------
OTHER INCOME (EXPENSES)
Rental income 4,800 -- --
Interest expense (2,514) -- (2,499)
Interest income 455 -- --
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSES) 2,741 -- (2,499)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,524,606) (1,059,018) (318,836)
INCOME TAXES (Note F) 800 800 800
----------- ----------- -----------
NET LOSS $(1,525,406) $(1,059,818) $ (319,636)
=========== =========== ===========
LOSS PER SHARE (Note A) $ (.39) $ (.39) $ (.09)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 3,953,278 2,736,194 3,450,441
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 19
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND
THE PERIOD FROM JANUARY 5, 1996 (DATE OF INCEPTION)
TO JUNE 30, 1996
<TABLE>
<CAPTION>
Common Stock and
Special Warrants Total
----------------------------- Accumulated Stockholders'
Shares Amount Deficit Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DATE OF INCEPTION, JANUARY 5, 1996 -- $ -- $ -- $ --
Common stock issued in acquisition
(Note B) 1,652,326 167,614 -- 167,614
Special warrants issued for cash (Note J) 2,693,815 576,610 -- 576,610
Net loss for the year -- -- (319,636) (319,636)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 4,346,141 744,224 (319,636) 424,588
Special warrants issued for cash (Note J) 3,280,834 1,298,434 -- 1,298,434
Common stock reacquired (Notes A and J) (2,500,000) (52,397) -- (52,397)
Common stock canceled (Note A) (1,793,000) (57,260) -- (57,260)
Net loss for the year -- -- (1,059,818) (1,059,818)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1997 3,333,975 1,933,001 (1,379,454) 553,547
Issued shares of common
stock for cash 950,790 1,444,052 -- 1,444,052
Issued shares of common
stock for services (Note J) 403,635 458,951 -- 458,951
Issued shares of common stock for
employee bonuses (Note J) 48,000 50,400 -- 50,400
Net loss for the year -- -- (1,525,406) (1,525,406)
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1998 4,736,400 $ 3,886,404 $(2,904,860) $ 981,544
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 20
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period from
For the year For the year January 5, 1996
ended June 30, ended June 30, (date of inception)
1998 1997 to June 30, 1996
----------- ----------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,525,406) $(1,059,818) $ (319,636)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 145,106 42,779 5,890
Amortization -- -- 18,084
Loss on sale of equipment -- 198,646 --
Common stock issued for services 458,951 -- --
Common stock issued for employee bonuses 50,400 -- --
Bad debts-related party 300,000 -- --
Changes in assets and liabilities:
Accounts receivable -- 3,149 (3,149)
Inventory (243,096) 132,953 (132,953)
Prepaid consulting -- (100,000) --
Note receivable-former stockholder -- (200,000) --
Prepaid expenses and other (120) -- (675)
Goodwill from acquisition -- 82,751 (82,751)
Other assets (1,500) (14,671) (14,347)
Accounts payable 34,658 5,227 49,854
Accounts payable-related party 5,000 -- --
Accrued liabilities 2,523 (70,767) 77,891
Accrued management fees-related party 70,000 -- --
Customer advance payments on orders -- (131,460) 131,460
Deferred license fees 31,250 -- --
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (672,234) (1,111,211) (270,332)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (918,834) (209,916) (356,698)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (918,834) (209,916) (356,698)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties 28,416 40,436 --
Repurchase of common stock -- (52,397) --
Common stock issued in acquisition -- -- 167,614
Proceeds from stock subscriptions 339,483 -- --
Proceeds from issuance of common stock and special warrants 1,444,052 1,241,174 576,610
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,811,951 1,229,213 744,224
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 220,883 (91,914) 117,194
CASH AT BEGINNING OF YEAR 25,280 117,194 --
----------- ----------- -----------
CASH AT END OF YEAR $ 246,163 $ 25,280 $ 117,194
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 21
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
In January 1996, Composite Automobile Research, Ltd. was incorporated
pursuant to the Alberta Business Corporations Act. The Company was
incorporated to facilitate an initial public offering. Subsequent to
incorporation, the Company acquired Thunder Ranch, Inc. ("Thunder")
and World Transport Authority, Inc. ("WTA"). These acquisitions have
been accounted for under the purchase method with any difference
between fair market value of assets purchased and liabilities assumed
being reflected as goodwill. The Company, through its wholly owned
subsidiary, is in the business of designing and licensing turn-key
automobile manufacturing facilities to developing nations and
supplying licenses with all components necessary to manufacture
vehicles.
On September 27, 1996, the Company sold certain assets and
liabilities to a former stockholder in exchange for common stock of
the Company and promises to pay. During 1997, common stock issued in
accordance with this agreement was canceled as a result of a court
judgement (Note G).
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of Composite Automobile Research, Ltd. and its wholly owned
subsidiary, World Transport Authority, Inc.
For purposes of these consolidated financial statements, Composite
Automobile Research Ltd. and its subsidiary will be referred to
collectively as the "Company". All material intercompany transactions
and account balances have been eliminated.
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, disclosure of contingent assets and liabilities, and
reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Cash and Equivalents
For purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered to
be cash equivalents. There were no cash equivalents as of June 30,
1998, 1997 and 1996.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value because of the
short period to maturity. It is not practicable to estimate the fair
value of advances to related parties due to the uncertainty as to
when the obligations would be paid.
F-7
<PAGE> 22
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Inventory
The inventory is valued at the lower of cost or market. Cost is
determined under the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment is provided using the straight
line method over the estimated useful life of five years. The
Company's policy is to evaluate the remaining lives and
recoverability in light of current conditions. It is reasonably
possible that the Company's estimate to recover the carrying amount
of property and equipment will change.
Stock Options
The Company adopted a method of accounting for stock-based
compensation as required by Statement of Financial Accounting
Standards No. 123 (SFAS No. 123) which allows for two methods of
valuing stock-based compensation. The first method allows for
the continuing application of Accounting Principles Board
Opinion No. 25 (APB No. 25) in measuring stock- based
compensation, while complying with the disclosure requirements
of SFAS No. 123. The second method uses an option pricing model
to value stock compensation and record as such within the
financial statements. The Company will continue to apply APB No.
25, while complying with SFAS No. 123 disclosure requirements
(Note J).
Revenue Recognition
Revenues for the year ended June 30, 1997 and the period from January
5, 1996 (date of inception) to June 30, 1996 were derived from the
sale of specialty automobile body kits and were recorded upon
completion of the kits. Customer advance payments on orders were
deferred and shown in the accompanying consolidated financial
statements as part of current liabilities.
During the year ended June 30, 1998, the Company began offering two
types of licenses to manufacture vehicles, a Manufacturing and
Distribution License and a Master License. The Manufacturing and
Distribution License requires the Company to design manufacturing
facilities and provide and pay for all components necessary to
manufacture vehicles. Revenue from this type of license is recognized
when the Company has performed or satisfied substantially all
material services and conditions relating to the agreement, which
generally occurs when manufacturing facilities begin operations.
The Master License provides the licensee with the right to sell
Manufacturing and Distribution Licenses. Under this agreement, the
licensee pays all costs associated with any license sold in addition
to payment for the Master License. Revenue from this type of license
is recognized when the licensee sells its first Manufacturing and
Distribution License.
F-8
<PAGE> 23
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Loss Per Share
Net loss per share is provided in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings Per
Share". Basic loss per share is computed by dividing losses available
to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per share reflects
per share amounts that would have resulted if dilutive common stock
equivalents had been converted to common stock. As of June 30, 1998
and 1997, the Company had stock options outstanding (Note J), each
convertible into one share of common stock. The stock options were
not included in the computation of diluted earnings per share for any
years presented due to their anti-dilutive effects based on net loss
reported each period. Accordingly, basic and fully diluted loss per
share are the same for all periods presented.
Advertising and Marketing Costs
Advertising and marketing costs are generally expensed as incurred.
Advertising and marketing expenses included in selling, general and
administrative expenses was $435,371, $41,933, and $14,190 for the
years ended June 30, 1998 and 1997 and the period from January 5,
1996 (date of inception) to June 30, 1996, respectively.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". A deferred tax asset or liability is recorded for net
operating loss carryforwards and all temporary differences between
financial and tax reporting. Deferred tax expense (benefit) results
from the net change during the year of deferred tax assets and
liabilities. The components of the deferred tax asset and liability
are individually classified as current and non-current based on their
characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Reclassifications
Certain amounts included in the consolidated financial statements for
1997 and 1996 have been reclassified to conform to the 1998
consolidated financial statement presentation. These
reclassifications have no effect on previously reported net loss.
F-9
<PAGE> 24
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
B. ACQUISITION:
During 1996, the Company completed the purchase of Thunder and WTA,
which have been accounted for by the purchase method as follows:
<TABLE>
<S> <C>
Assets $ 533,199
Liabilities relieved (448,336)
---------
Net assets 84,863
Purchase price 167,614
---------
Excess of purchase price over net assets $ 82,751
=========
</TABLE>
The excess of purchase price over net assets has been allocated as
follows:
<TABLE>
<S> <C>
Goodwill $ 82,751
=========
</TABLE>
The fair values of the net assets acquired were allocated in
accordance with generally accepted accounting principles. As a result
of the sale of assets and liabilities to a former stockholder on
September 27, 1996, the goodwill related to this acquisition was
charged to operations.
C. INVENTORY:
Inventory as of June 30, 1998 and 1997 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Stocked inventory $ - $ -
Work in process 243,096 -
Finished goods - -
-------- ---------
$243,096 $ -
======== =========
</TABLE>
During the year ended June 30, 1997, the Company sold all inventory
to a former stockholder (Note A).
D. PROPERTY AND EQUIPMENT:
Property and equipment as of June 30, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Molds $ 897,420 $ 58,322
Demo equipment and vehicles 234,702 218,945
Machinery and equipment 116,612 54,617
Office furniture and equipment 17,164 17,164
Leasehold improvements 10,614 8,630
---------- --------
Total 1,276,512 357,678
Less accumulated depreciation and amortization (201,569) (56,463)
---------- --------
Property and equipment, net $1,074,943 $301,215
========== ========
</TABLE>
F-10
<PAGE> 25
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E. STOCK SUBSCRIPTIONS:
As of June 30, 1998, the Company had received $339,483 in cash from
various investors to purchase 170,960 shares of the Company's common
stock at prices ranging from $1.91 to $2.00 per share. All shares for
these subscriptions were issued subsequent to June 30, 1998.
F. INCOME TAXES:
The provision for income taxes for the years ended June 30, 1998 and
1997 and the period from January 5, 1996 (date of inception) to June
30, 1996 consists solely of the $800 minimum California franchise
tax.
The Company's total deferred tax asset as of June 30, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Net operating loss carryforward $ 616,000 $ 257,536
Valuation allowance (616,000) (257,536)
---------- ---------
Net deferred tax asset $ - $ -
========== ========
</TABLE>
The valuation allowance increased $358,464 , $161,509, and $96,027
for the years ended June 30, 1998 and 1997 and for the period from
January 5, 1996 (date of inception) to June 30, 1996, respectively.
It is reasonably possible that the Company's estimate of the
valuation allowance will change.
As of June 30, 1998, the Company had net operating loss carryforwards
before any limitations which, if not utilized, will expire as
follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Federal State
----------- ---------- -----------
<S> <C> <C>
2004 $ - $2,583,498
2011 60,892 -
2012 1,028,450 -
2013 1,494,156 -
</TABLE>
G. RELATED PARTY TRANSACTIONS:
Accrued Management Fees
Accrued management fees, related party, represents a payable to the
Company's treasurer for management services. The accrual is
non-interest bearing, unsecured, and due on demand.
Advances
Advances from related parties at June 30, 1998 and 1997 consist of
amounts loaned to the Company by stockholders. Advances are
non-interest bearing, unsecured, and due on demand.
F-11
<PAGE> 26
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
G. RELATED PARTY TRANSACTIONS: (CONTINUED)
Bad Debts
On September 27, 1996, the Company sold certain assets and
liabilities to a former stockholder in exchange for a $200,000 note
receivable and $100,000 of consulting services. As a result of a
court judgement, the Company has determined it will not receive
payment on the $200,000 note receivable or $100,000 of consulting
services. Accordingly, the Company has adjusted the balances to bad
debts for the year ended June 30, 1998.
Accounting Services
For the years ended June 30, 1998 and 1997, and the period from
January 5, 1996 (date of inception) to June 30, 1996, the Company
paid $19,555, $3,000, and $2,400, respectively, for accounting and
tax services provided by a company which is co-owned by the Treasurer
of the Company. As of June 30, 1998 and 1997, the balance payable to
the accounting services company was $5,000 and $0, respectively.
Other
During the years ended June 30, 1998 and 1997, the Company paid
$21,400 and $39,000, respectively to a stockholder and officer of the
Company for marketing services. Additionally, during the year ended
June 30, 1998, the Company paid $29,580 to this individual for
services related to master mold production which is included in
property and equipment as of June 30, 1998 (Note D).
H. DEFERRED LICENSE FEES:
Deferred license fees as of June 30, 1998 consists of license revenue
received from a Manufacturing and Distribution License agreement with
an unrelated party in Honduras, as well as amounts received under two
Master Licenses with unrelated parties in Mexico and the Philippines.
The Manufacturing and Distribution License fees for Honduras have
been deferred until manufacturing facilities in Honduras become
operational which is expected in late 1998. The Master License fees
for the Philippines have been deferred until the licensee sells its
first Manufacturing and Distribution License.
F-12
<PAGE> 27
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
I. COMMITMENTS:
The Company leases its office facilities and office equipment under
operating leases that expire through July 2002. The office facilities
operating lease provides that the Company pay, in addition to the
base rent, 83% of common area operating expenses as determined by a
prorated share of total square footage of the building. The agreement
generally requires the payment of utilities, real estate taxes,
insurance and repairs. Rent expense amounted to $131,382 , $121,978,
and $18,649 for the years ended June 30, 1998 and 1997, and the
period from January 5, 1996 (date of inception) to June 30, 1996,
respectively. Future minimum lease payments due under these operating
leases are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Total
----------- --------
<S> <C>
1999 $101,641
2000 105,568
2001 82,320
2002 3,481
2003 290
--------
Total $293,300
========
</TABLE>
J. STOCKHOLDERS' EQUITY:
All equity disclosures have been retroactively restated to effect a 3
for 1 reverse stock split as of June 30, 1997.
Common Stock Warrants
From inception through the year ended June 30, 1997, the Company has
issued shares of common stock warrants in exchange for $1,875,044 in
cash.
Changes in common stock warrants during the years ended June 30, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
Warrants Price Range
----------- ------------
<S> <C> <C>
Outstanding at January 5, 1996 (date of inception) - -
Issued 2,693,815 $.10-$0.35
Exercised - -
Outstanding at June 30, 1996 2,693,815 $.10-$0.35
Issued 3,280,834 $.10-$1.04
Exercised (5,974,649) $.10-$1.04
Outstanding at June 30, 1997, June 30, 1998 - -
</TABLE>
F-13
<PAGE> 28
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. STOCKHOLDERS' EQUITY: (CONTINUED)
Stock Reacquired
Under the terms of the purchase of Thunder and WTA (Notes A and B),
the Company reacquired 2,500,000 shares of its common stock as
consideration. The value of these shares was determined by the
difference between the assets given up and liabilities relieved and
recorded as a reduction in stockholders' equity.
Stock for Services
During the year ended June 30, 1998, the Company issued 48,000 shares
of common stock at $1.05 per share to various employees as bonuses.
Additionally, the Company issued 342,151 and 42,150 shares of common
stock at $1.05 and $2.00 per share, respectively, for services in
accordance with seven consulting agreements entered into during the
year (Note K) as well as 16,334 and 3,000 shares of common stock at
$.75 and $1.05, respectively, for other services received. There was
no stock issued for services during the year ended June 30, 1997 and
for the period from January 5, 1996 (date of inception) to June 30,
1996. The valuation of the stock issued for services was based on the
price the stock was being sold for on the dates the stock was issued.
Stock Options
In March 1997, the Company granted its employees 368,334 immediately
vested options to purchase the Company's common stock at exercise
prices ranging from $1.15 to $2.63 per share. The fair value of the
stock on the date of grant was approximately $.50 per share.
During the year ended June 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock Based Compensation". In accordance
with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in
accounting for its stock options and does not recognize
compensation expense for stock options granted.
If the Company had elected to recognize compensation expense in the
years ended June 30, 1997 and 1998, based on the fair value of the
stock options at the grant date, consistent with the methodology
prescribed by SFAS No. 123, net loss would not have changed as the
estimated fair value of the options, using the Black-Scholes Option
Pricing Model, would not have exceeded the exercise price of the
options. The following assumptions were used with the Black-Scholes
Option Pricing Model to determine the fair value of the options: no
dividend yields, no volatility, risk free interest rate of 6% using
the bond equivalent yield at June 30, 1998, and expected life of the
options of two years, which is based on the average time the stock
options have been outstanding.
F-14
<PAGE> 29
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. STOCKHOLDERS' EQUITY: (CONTINUED)
The transactions relating to stock options for the years ended June
30, 1998 and 1997 and the period from January 5, 1996 (date of
inception) to June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Weighted
Average Price
Shares per Share
------- ----------
<S> <C> <C>
Balance, January 5, 1996 (date of inception) - $ -
Granted - -
Exercised - -
Canceled - -
------- -----
Balance, June 30, 1996 - $ -
Granted 368,334 $1.28
Exercised - -
Canceled - -
------- -----
Balance, June 30, 1997 368,334 $1.28
Granted - -
Exercised - -
Canceled - -
------- -----
Balance, June 30, 1998 368,334 $1.28
======= =====
</TABLE>
At June 30, 1998 and 1997, options for 368,334 shares of common stock
were exercisable at prices ranging from $1.15 to $2.63 per share.
K. CONSULTING AND LICENSE AGREEMENTS:
During the year ended June 30, 1998, the Company entered into three
consulting agreements with independent contractors (the
"Consultants") for marketing services relating to the distribution of
the Company's products and services in Mexico, Latin America and
Mexico, and Baja California, Mexico. The agreements cover a period of
one year and are dated July 1, 1997, December 1, 1997, and December
1, 1997 and may be terminated at any time by written notice. The
terms of the agreements provide for the issuance of 175,007, 72,144,
and 75,000 shares of the Company's common stock, respectively, for
services provided by the Consultants. On March 1, 1998, one of the
agreements dated December 1, 1997 was modified to increase the number
of shares of common stock to be issued from 75,000 shares to no more
than 260,000 shares (an additional 185,000 shares) over the term of
the agreement which is one year from the modification date. As of
June 30, 1998, the agreements dated December 31, 1997 were still in
effect and all shares of common stock pursuant to all three
agreements had been issued at $1.05 per share. Subsequent to June 30,
1998, all 185,000 shares pursuant to the modification agreement were
issued at $2.00 per share.
F-15
<PAGE> 30
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
K. CONSULTING AND LICENSE AGREEMENTS: (CONTINUED)
In February and March 1998, the Company entered into two consulting
agreements with independent contractors (the "Contractors") for
assistance in the completion of the Company's proprietary vehicle
manufacturing master molds and the production and installation of
production molds at licensed sites world-wide, including Mexico. The
agreements cover a period of one year and may be terminated at any
time with thirty day written notice by either party. As consideration
for services provided by the Contractors, the Company shall pay
monthly fees not to exceed $200,000 and 300,000 shares of the
Company's common stock under the agreement dated February 1, 1998 and
no more than $100,000 under the agreement dated March 1, 1998. As of
June 30, 1998, these agreements were still in effect and 24,150
shares of common stock pursuant to the February agreement had been
issued at $2.00 per share and a total of $75,925 had been paid under
the March agreement.
The Company also entered into three additional consulting agreements
during the year ended June 30, 1998, two dated March 1, 1998 and the
third dated June 1, 1998, with three independent individuals (the
"Individuals") for assistance with the sale of the Company's
proprietary vehicle manufacturing licenses in developing nations
world-wide. Each agreement covers a period of one year and may be
terminated at any time with thirty days written notice by either
party. The terms of the agreements provide for the issuance of up to
20,000, 20,000 and 2,500 shares of the Company's common stock,
respectively, for services provided by the Individuals. As of June
30, 1998, the agreements were still in effect and 15,500, 20,000 and
2,500 shares of common stock had been issued at $2.00, $1.05 and
$2.00 per share, respectively.
L. GOING CONCERN:
As shown in the consolidated financial statements, the Company has
had recurring losses from operations including net losses of
$1,525,406, $1,059,818 and $319,636 for the years ended June 30, 1998
1997 and for the period from January 5, 1996 (date of inception) to
June 30, 1996, respectively. Additionally, as of June 30, 1998, the
Company's current liabilities exceed its current assets by $92,667.
Further, the Company does not have the ability to obtain financing.
These factors create an uncertainty as to the Company's ability to
continue as a going concern.
The Company's first Manufacturing license holder in Tijuana, Mexico
produced and sold its first two vehicles in June 1998. In September
1998 the manufacturing factory increased its production to four
vehicles per week. The Company is negotiating with the Tijuana
factory for a new set of production molds to enable them to produce
ten vehicles per week in October 1998. All current production
vehicles scheduled for September 1998 at the Tijuana factory have
been sold. Management anticipates that current negotiations with
potential factory license holders in Mexico and the Philippines will
result in a minimum of one factory license sale per month in the
second quarter of the next fiscal year. Through September 1998, the
Company has received sufficient capital from stock sales and license
sales in order to provide necessary positive cash flow. Management
believes license sales will be sufficient to provide future revenues
and profits.
The ability of the Company to continue as a going concern is
dependent upon its ability in its endeavors to seek additional
sources of capital, and its attaining future profitable operations.
The accompanying consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.
F-16
<PAGE> 31
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
M. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information for the years ended
June 30, 1998 and 1997 and the period from January 5, 1996 (date of
inception) to June 30, 1996 are summarized as follows:
Cash paid for interest and income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Interest $2,514 $ - $2,499
Income taxes 800 - -
</TABLE>
N. CONCENTRATIONS:
Cash
The Company maintains its cash in bank deposit accounts at high
quality financial institutions. The Company, at times, may have
deposits with financial institutions that exceed federally insured
limits. At June 30, 1998, deposits exceeded the insured limit of
$100,000 by approximately $156,000.
Revenue
All revenue for the year ended June 30, 1998 was from one license
holder located in Tijuana, Mexico.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR YEAR ENDING JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH COMPOSITE AUTOMOBILE RESEARCH, LTD.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 246,163
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 243,096
<CURRENT-ASSETS> 490,054
<PP&E> 1,276,512
<DEPRECIATION> 201,569
<TOTAL-ASSETS> 1,595,515
<CURRENT-LIABILITIES> 582,721
<BONDS> 0
0
0
<COMMON> 3,886,404
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,595,515
<SALES> 160,000
<TOTAL-REVENUES> 160,000
<CGS> 192,510
<TOTAL-COSTS> 192,510
<OTHER-EXPENSES> 1,494,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,514
<INCOME-PRETAX> (1,524,606)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,525,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,525,406)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
