<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d) of
Securities Exchange Act of 1934
For Quarter ended September 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)
(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 the number of shares outstanding of each of the issuer's classes
of common stock at the latest practicable date.
As of September 30, 1998, the registrant had 5,738,037 shares of common
stock, no stated par value, issued and outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ........................................................ $ 11,630 $ 9,610
Accounts receivable ......................................... 36,459 --
Inventory (Note 2) .......................................... 306,958 --
Prepaid expenses and other .................................. 1,325 675
------------ ------------
TOTAL CURRENT ASSETS ........................................ 356,372 10,285
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$ 307,215 and $78,149, respectively (Note 3) ................ 1,850,784 395,601
OTHER ASSETS
Note receivable - former stockholder (Note 5) ............... -- 200,000
Prepaid consulting (Note 5) ................................. -- 100,000
Due from affiliate - Mexico ................................. 7,435 --
Other ....................................................... 30,518 31,015
------------ ------------
TOTAL OTHER ASSETS .......................................... 37,953 331,015
------------ ------------
TOTAL ASSETS ................................................ $ 2,245,109 $ 736,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................ $ 51,680 $ 104,223
Accrued liabilities ......................................... 13,267 7,395
Accrued management fees-related party (Note 5) .............. 70,000 --
Advances from related parties (Note 5) ...................... 68,852 44,436
Stock subscriptions (Note 4) ................................ 63,000 --
------------ ------------
TOTAL CURRENT LIABILITIES ................................... 266,799 156,054
DEFERRED LICENSE FEES (Note 6) ................................... 10,000 --
------------ ------------
TOTAL LIABILITIES ........................................... 276,799 156,054
------------ ------------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY
Common stock, no par value, unlimited shares authorized,
5,738,037 and 3,702,624 shares issued and outstanding,
respectively ............................................. 5,325,236 2,341,826
Accumulated deficit ......................................... 3,356,926) (1,760,979)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................................. 1,968,310 580,847
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................. $ 2,245,109 $ 736,901
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 3
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Sales - products ................................ $ 36,047 $ --
Sales - license fees ............................ 96,250 10,000
------------ ------------
Total revenue ................................... 132,297 10,000
Cost of goods sold:
Production costs ................................ 44,618 11,588
Factory set up costs ............................ 15,524 --
------------ ------------
Total cost of goods sold ........................ 60,142 11,588
------------ ------------
Gross profit (loss) .................................. 72,155 (1,588)
Operating expenses:
Selling, general and administrative expenses .... 418,395 358,119
Depreciation & amortization ..................... 105,646 21,722
------------ ------------
Total operating expenses ........................ 524,041 379,841
------------ ------------
Loss from operations ................................. (451,886) (381,429)
Other income (expenses):
Interest expense ................................ (135) --
Interest income ................................. 19 (96)
Other (expense) income .......................... (64) --
------------ ------------
Total other (expenses) income ................... (180) (96)
------------ ------------
Loss before income taxes ............................. (452,066) (381,525)
============ ============
Income taxes .................................... -- --
Net loss ............................................. (452,066) (381,525)
============ ============
Loss per share (Note 1) .............................. $ (0.09) $ (0.11)
============ ============
Weighted average number of shares outstanding ........ 5,227,195 3,414,997
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
COMPOSITE AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS END
SEPTEMBER 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................ $ (452,066) $ (381,525)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation .............................................. 105,646 21,722
Loss on sale of equipment ................................. 27,504 --
Common stock issued for services .......................... 187,349 --
Changes in assets and liabilities:
Increase in accounts receivable ........................... (36,459) --
Increase in inventory ..................................... (63,862) --
Increase in due from affiliate -- Mexico .................. (7,435) --
Increase in note receivable-former stockholder ............ (530) (1,997)
(Decrease) increase in accounts payable ................... (38,059) 49,141
(Decrease) increase in accounts payable - related party ... (5,000) 4,000
Increase in accrued liabilities ........................... 3,620 271
Decrease in deferred license fees ......................... (21,250) --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES .................................... (300,542) (308,388)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Common stock issued for equipment ................................... (890,000) --
Purchase of property and equipment .................................. (18,991) (116,108)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................................... (908,991) (116,108)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock .............................. 22,000 408,826
Proceeds from stock subscriptions ................................... 63,000 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................................ 85,000 408,826
------------ ------------
NET DECREASE IN CASH ..................................................... (234,533) (15,670)
CASH AT BEGINNING OF PERIOD .............................................. 246,163 25,280
============ ============
CASH AT END OF PERIOD .................................................... $ 11,630 $ 9,610
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
The consolidated balance sheets as of September 30, 1998 and 1997, the
related statements of operations for the three month periods ended September 30,
1998 and 1997 and the statements of cash flows for the three month periods ended
September 30, 1998 and 1997 are unaudited; in the opinion of management, they
include all adjustments necessary for a fair presentation of such financial
statements.
While management believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's latest annual report on Form
10-KSB.
Organization and Nature of Operations
In January 1996, Composite Automobile Research, Ltd. ("the Company") 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.
Subsequently, the Thunder Ranch transactions was reversed. 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.
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.
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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 September 30,1998 and
September 30, 1997.
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 lives 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 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.
Revenue Recognition
The Company offers 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 supply manufacturing
facilities, including 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.
Net 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
6
<PAGE> 7
have resulted if dilutive common stock equivalents had been converted to common
stock. As of September 30, 1998 and 1997, the Company had stock options
outstanding, each convertible into one share of common stock. The stock options
were not included in the computation of diluted earnings per share for any
periods presented due to their anti-dilutive effects based on net loss reported
each period. Accordingly, basic and fully diluted loss per share is the same for
all periods presented.
Income Taxes
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 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.
NOTE 2. INVENTORY:
Inventory as of September 30, 1998 and 1997 is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
============ ============
<S> <C> <C>
Stocked inventory .... $ -- $ --
Work in process ...... 306,958 --
Finished goods ....... -- --
------------ ------------
$ 306,958 $ --
============ ============
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment as of September 30, 1998 and 1997 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
============ ============
<S> <C> <C>
Molds .............................................. $ 1,785,685 $ 161,669
Demo equipment and vehicles ........................ 234,702 231,671
Machinery and equipment ............................ 109,834 54,617
Office furniture and equipment ..................... 17,164 17,164
Leasehold improvements ............................. 10,614 8,629
------------ ------------
Total ..................................... 2,157,999 473,750
Less accumulated depreciation and amortization .... (307,215) (78,149)
------------ ------------
Property and equipment, net ........................ $ 1,850,784 $ 395,601
============ ============
</TABLE>
7
<PAGE> 8
NOTE 4. STOCK SUBSCRIPTIONS:
As of September 30, 1998, the Company had received $ 63,000 in cash from
various investors to purchase 31,500 shares of the Company's common stock at
$2.00 per share. All shares for these subscriptions were issued subsequent to
September 30, 1998.
NOTE 5. RELATED PARTY TRANSACTIONS:
Note Receivable and Prepaid Consulting
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 would not receive payment on the $200,000 note receivable or
$100,000 of consulting services. Accordingly, the Company adjusted the balances
to bad debts during the year ended June 30, 1998.
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 September 30, 1998 and 1997 consist of
amounts loaned to the Company by stockholders. Advances are non-interest
bearing, unsecured, and due on demand.
NOTE 6. DEFERRED LICENSE FEES:
Deferred license fees as of September 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.
NOTE 7. COMMITMENTS:
The Company leases its office facilities and office equipment under
operating leases that expires in 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
$34,250 and $18,388 for the three months ended September 30, 1998 and 1997,
respectively. Future minimum lease payments due under these operating leases are
as follows:
8
<PAGE> 9
<TABLE>
<CAPTION>
Year ending September 30,
<S> <C>
1998 $ 107,856
1999 107,856
2000 107,856
------------
Total $ 323,568
============
</TABLE>
NOTE 8. STOCKHOLDERS' EQUITY:
Stock for Services
For the three months ended September 30, 1998, the Company issued
374,677 shares of common stock at $.50 per share to various employees as
bonuses. Additionally, the Company issued 445,000 shares of common stock at
$2.00 per share for certain fixed assets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
Revenue of $132,297 for the three months ended September 30, 1998 were
from license sales and parts shipped to Mexico for production. Revenue recorded
for the three months ended September 30, 1997 were from license sales. The
Company sustained a net loss of $452,066 for the period ended September 30, 1998
and a net loss of $ 381,525 for the period ended September 30, 1997. Loses were
primarily attributable to expenditures for research and development of the
WorldStar(R) vehicle.
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.
Liquidity and Capital Resources:
As of September 30, 1998 the Company had $11,630 cash on hand and in the bank.
The primary costs and operating expenses for the period ended September 30, 1998
were: advertising and marketing expenses $260,906, salaries & wages $64,335,
outside services $34,650, and other operating expenses $164,150.
As of September 30, 1997, the Company had $9,610 cash on hand and in the bank.
The primary costs and operating expenses for the period ended September 30, 1997
were: marketing expenses $193,110, salaries & wages $ 40,555, outside services
$42,240, and other operating expenses $103,936.
9
<PAGE> 10
Currently, the Company maintains a sufficient positive cash balance for
production and working capital. The substantial losses through September 30,
1998 were due to product development expenses. Subsequent Licensee payments and
additional sales of the Company's equity securities have allowed the Company to
complete production and increase marketing efforts.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
10
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
COMPOSITE AUTOMOBILE RESEARCH, LTD
Date: November 16, 1998 /s/ THOMAS BOWERS
- --------------------------- ------------------------------------------
Thomas Bowers
President and Chief Executive Officer
Date: November 16, 1998 /s/ SHARON LANG
- --------------------------- ------------------------------------------
Sharon Lang
Corporate Controller and Acting Chief
Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,630
<SECURITIES> 0
<RECEIVABLES> 36,459
<ALLOWANCES> 0
<INVENTORY> 306,958
<CURRENT-ASSETS> 356,372
<PP&E> 2,157,999
<DEPRECIATION> (307,215)
<TOTAL-ASSETS> 2,245,109
<CURRENT-LIABILITIES> 266,799
<BONDS> 0
0
0
<COMMON> 5,325,236
<OTHER-SE> (3,356,926)
<TOTAL-LIABILITY-AND-EQUITY> 2,245,109
<SALES> 132,297
<TOTAL-REVENUES> 132,297
<CGS> 60,142
<TOTAL-COSTS> 451,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135)
<INCOME-PRETAX> (452,066)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,066)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
