<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15 (d) of
Securities Exchange Act of 1934
For Year ended June 30, 1999
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) (IRS 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 [ ]
The issuer's revenues for the year ended June 30, 1999 were $ 122,500.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of August 13, 1999, based on the market was
$7,870,685. As of August 13, 1999, the registrant had 7,567,966 shares of common
stock, no stated par value, issued and outstanding.
<PAGE> 2
ITEM 1 BUSINESS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors that May Affect Future
Results and Market Price of Stock." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in fiscal year 2000.
HISTORY
Composite Automobile Research, Ltd. ("the Company") was incorporated in
the Province of Alberta, Canada 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 motor vehicle prototype.
The Company, through its wholly owned subsidiary, World Transport
Authority, Inc. ("WTA"), 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 Licensee 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 paid its license fee to the Company and performed
marketing services sufficient to sell at least one manufacturing and
distribution license. Revenues from the sale of a manufacturing and distribution
license, consisting of a percentage of the license fee, are recognized when the
licensee has made payment to the Company, and the Company has provided
substantially all of the factory components and training sufficient for the
licensee to begin vehicle production.
The Company also plans to generate revenue from the sales of
manufactured vehicle components. Such revenue will be recognized upon shipment
of the components. In addition, the Company may receive royalty payments on the
production and/or sale of vehicles. Such revenue will be recognized when earned.
COMPETITION
As of the date of this filing of this report, the Company is unaware of
any competition in the third world vehicle market.
EMPLOYEES
As of June 30, 1999, the Company had 10 employees. None of the Company's
employees is currently represented by a labor union or other labor organization.
Approximately 60% of these employees are involved in production, with the
remainder primarily involved in sales and administration.
2
<PAGE> 3
The Company believes that its employee relations are good.
ITEM 2 PROPERTIES
The Company's headquarters, located in El Cajon, California, are
leased and consist of approximately 20,000 square feet of office and
manufacturing space through March 2001. This operating lease provides that the
Company pay, in addition to the base rent, 83% of this space is leased common
area operating costs as determined by their prorated share of total square
footage of the building.
ITEM 3 LEGAL PROCEEDINGS
On April 1, 1999, the Company agreed to settle a dispute with B.A.T.
International, Inc. ("B.A.T."). Based on this settlement, the Company was to
issue $5,000 worth of the Company's Common Stock to B.A.T. upon completion of
the return of the Company's materials such as body molds and automobile bodies.
Given the nature of the issuance of the stock, it may contain certain trading
restrictions as required by the Securities and Exchange Commission.
Pursuant to the settlement, B.A.T. was required to return all vehicles
and/or vehicle components, body parts and associated pieces in its possession
which incorporate the World Star composite platform, either partially or
completely manufactured, to the Company's office in El Cajon, California by June
1, 1999. B.A.T. also acknowledged and recognized the rights to the World Star
Vehicle owned by WTA. B.A.T. also agreed to pay a royalty to the Company for all
vehicles B.A.T. produces in the future.
In July 1999, the Company filed suit against B.A.T in the Superior Court
of San Diego, California for not honoring the terms of the settlement agreement
dated April 1, 1999. The trial is set for December 1999.
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, 1999.
PART II
ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS.
On September 24, 1998, the Company's common stock began trading on the
OTC Electronic Bulletin which is sponsored by the National Association of
Securities Dealers (NASD). The following table sets forth the high and low
closing sales prices for the Common Stock for each quarterly period within the
Company's most recent fiscal year on the OTC Electronic Bulletin Board.
<TABLE>
<CAPTION>
Quarter ended: High Low
------- ------
<S> <C> <C>
September 30, 1998 2 3/4 1 1/4
December 31, 1998 1 3/4 7/16
March 31, 1999 2 1/2 9/16
June 30, 1999 1 47/50 9/16
</TABLE>
3
<PAGE> 4
As of September 15, 1999, the Company's stock has been traded on the
NASDAQ system in the over-the-counter market. The stock has been quoted on the
NASDAQ National Market System under the symbol "CARH".
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, restriction in future financing agreements, and other business and
financial considerations.
As of August 13, 1999 there were approximately 170 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following selected financial data should be read in conjunction with
the more detailed financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
As of and for the
Years Ended June 30
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Data:
Net Sales 122,498 160,000
Cost of Sales (22,960) (192,510)
Operating and Other Expenses (3,953,975) (1,492,896)
----------- -----------
Net Loss (3,854,437) (1,525,406)
=========== ===========
Balance Sheet Data:
Current Assets 420,334 490,054
Total Assets 1,243,934 1,595,515
Current Liabilities 212,639 582,721
Total Liabilities 305,624 613,971
Working Capital (Deficiency) 207,695 (92,667)
Stockholders' Equity 938,310 981,544
</TABLE>
The Company, since its inception, has declared no Common Stock
dividends.
RESULTS OF OPERATIONS
The Company's net sales were $122,500 during the year ended June 30,
1999, a decrease of 23.4% from its net sales of $ 160,000 in 1998. Revenues from
both years were primarily from license sales.
The Company had a net loss of $ 3,854,437 for the year ended June 30,
1999 compared to the Company's net loss for the year ended June 30, 1998 of
$1,525,406. The increased in net loss for 1999 was primarily due to the value of
common stock issued for services of $2,264,023.
Selling and general expenses for the year ended June 30, 1999 were
$3,702,590 compared to selling and general expenses of $1,050,531 for the year
ended June 30, 1998. The increased selling and general expenses in 1999 were
primarily due to the value of common stock issued for services.
4
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1999 was $207,695 as compared
to a deficit of $92,667 at June 30, 1998. Net cash used in operating activities
totaled $1,083,369 for the year ended June 30, 1999 compared to $672,234 for the
year ended June 30, 1998.
During the year ended June 30, 1999, the Company funded its operating
losses with advances from a related party, by selling shares of its common stock
to various investors and issuing common stock for services.
The Company does not have any available credit, bank financing or other
external sources of liquidity. Due to its historical operating losses, the
Company's operations have not been a source of liquidity. In order to obtain
capital, the Company may need to sell additional shares of its common stock or
borrow funds from private lenders and/or related parties. During the next twelve
months, the Company expects to suffer losses, in which case the Company will
need to obtain additional sources of capital in order to continue operations.
There can be no assurance, however, that the Company will be successful in
obtaining additional funding.
YEAR 2000 ISSUE
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.
As of June 30, 1999, the Company has upgraded its accounting system to resolve
the year 2000 issues. The Company has requested that its major independent
suppliers and support providers confirm that they will be Year 2000 compliant.
ITEM 7 FINANCIAL STATEMENTS
The financial statements required by this report are set forth in the
index on page F-1.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants
(i) On May 3, 1999, Harlan & Boettger, LLP resigned as the
Registrant's independent accountants. (ii) The reports of Harlan
& Boettger on the Registrant's financial statements for fiscal
years June 30, 1998 and 1997, respectively, contained no adverse
opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty audit scope or accounting principles.
(iii) During the Registrant's two most recent fiscal years and
through May 3, 1999, there have been no disagreements with Harlan
& Boettger, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the
satisfaction of Harlan & Boettger would have caused them to make
reference thereto in their report on financial statements for
such years. (iv) During the two most recent fiscal years and
through May 3, 1999, there have been no reportable events (as
defined in Regulation S-K Item 304(a) (1)). (v) The Registrant
requested that Harlan & Boettger, LLP furnish it with a letter
addressed to the Securities and Exchange Commission (the "SEC")
stating whether or not it agrees with the above statements. A
copy of such letter, dated May 17, 1999, was previously filed as
Exhibit 16 to Form 8-K.
(b) New Independent Accountants
5
<PAGE> 6
(i) The Registrant engaged J.H. Cohn LLP as its new independent
public accountants as of September 8, 1999. During the most
recent fiscal year and through September 8, 1999, the Registrant
has not consulted with J.H. Cohn LLP on items which (1) are
described in Regulation S-K Item 304 (a) (2) (I) or (2) concerned
the subject matter of a disagreement or reportable event with the
former independent public accountants (as described in Regulation
S-K item 304 (a) (2) (ii)).
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board Of Directors
The following table sets forth certain information concerning each member of the
Board of Directors of Composite Automobile Research, Ltd. as of June 30, 1999.
Directors:
<TABLE>
<CAPTION>
- ------------------------ ---------- --------------- -----------------
Name Age Date Elected Position
- ------------------------ ---------- --------------- -----------------
<S> <C> <C> <C>
Thomas Bowers 57 07/01/98 President & CEO
Paul Hewitt 45 07/01/98 Director
Rodger Ward 79 06/01/96 Vice President
Lyle Wardrop 58 03/19/96 Director
</TABLE>
Mr. Bowers has served as a director and Chief Executive Officer of the
Company since July 1998. He has been an officer and/or director of many public
companies since 1974. Most recently, Mr. Bowers acted as Chairman/CEO of an
international project management firm whose activities primarily centered around
joint ventures with Sovereign nations in East Asia, Southeast Asia and Africa.
Prior to the International Joint Ventures, Mr. Bowers held positions with Ely
Scientific Corporation, Memorex and IBM in various marketing, sales and
management positions. On September 27, 1999, Mr. Bowers resigned as director and
Chief Executive Officer of the Company.
Mr. Wardrop has served as a director of the Company since March 1996. On
September 27, 1999, Mr. Wardrop has been Chief Executive Officer of the Company.
Since 1963, Mr. Wardrop, a resident of British Columbia, Canada has been
involved in the automotive market as President of Golden Mile Motors and United
Auto Brokers. He is also actively involved in the Automotive Retailers
Association of British Columbia, which represents the automotive retail sector
in dealing with government and private agencies.
Mr. Paul S. Hewitt has served as a director of the Company since July 1,
1998. Since 1979, Mr. Hewitt has been involved in the Washington political
arena. A resident of Bethseda, Maryland, Mr. Hewitt has served as Executive
Director of the National Taxpayers' Union Foundation, one of Washington's most
effective and widely publicized non-profit research and public education
programs. He has also served as Staff Director for the U.S. Subcommittee on
Intergovernmental Regulations, and is founder and former President of the
Americans for Generational Equity, focusing on the interests of younger and
future generations on long-term policy issues such as budget deficits, savings
policy and retirement. Mr. Hewitt holds a BA in Economics from University
California, Berkley and a Masters of Public Administration from American
University in Washington, DC.
6
<PAGE> 7
Mr. Ward has served as a Vice President, Public Relation of the Company
since June 1996. Mr. Ward brings fifty years of public relations experience to
the Company. As a two-time Indianapolis 500 winner, Mr. Ward's extensive
contacts in the auto racing arena, as well as his association with the media and
his public speaking engagements provide Mr. Ward numerous opportunities to
promote the Company. Since his retirement as a professional race car driver, Mr.
Ward has served as Director of Public Relations at Ontario Motor Speedway in
California, Team Manager for the Unlimited Hydroplane Race Team at Circus Circus
Hotel in Las Vegas, Nevada, and is currently a member of the Board of Directors
for the San Diego Automotive Museum.
ITEM 10 EXECUTIVE COMPENSATION
Summary Compensation Table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Name & Restricted Options LTIP
principle Salary Bonus Other compen- Stock SARs
position Year $ $ Annual sation awards (#)
- ------------------- ------ -------- -------- --------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas Bowers 1998 0 0 0 0 0 0
President & CEO 1999 85,440(3) 30,000(1) 4,515(2) 0 0 0
Paul Hewitt 1998 0 0 0 0 0 0
Director 1999 0 0 0 0 0 0
Rodger Ward 1998 0 0 0 0 0 0
V.P. Public Relation 1999 0 0 0 0 0 0
Lyle Wardrop 1998 0 0 0 0 0 0
Director 1999 0 0 0 0 0 0
</TABLE>
(1) The Commission accrued based on the sales of the Master Licenses to
WorldStar Andino/Panama for the nations of Colombia, Venezuela, Ecuador and
Panama.
(2) Six months car allowance of $752.50 each month.
(3) Included $26,890.00 payroll accrued.
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.
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.
7
<PAGE> 8
ITEM 11 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 Thomas Bower 38,000 0.50%
Carpinteria, CA 93013
Common Rodger Ward 2,000 0.03%
El Cajon, CA 92019
Common Lyle Wardrop 22,143 0.29%
Langley BC, V3A 3R5
Officers and Directors as a Group (4 persons) 62,143 0.82%
======== ======
Common Maritime International, Ltd. 726,667(a) 9.60%
Grand Cayman, Cayman Islands
</TABLE>
(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 the Company, as trustee. The
trust requires that the Company's Board of Directors must approve any sale or
transfer of the trust's shares. Trustee retains legal right to vote the shares
of the Trust in all required shareholder votes.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At June 30, 1998, the Company had an outstanding payable to a
stockholder of $68,852, which was unsecured, non-interest bearing, and due on
demand. During 1999, the stockholder advanced an additional $534,942 to the
Company. The Company then issued 398,259 shares of common stock at market prices
ranging from $.56 to $1.56 per share. As a result of the common stock issuance,
the Company had an outstanding receivable from this same stockholder of $33,027
at June 30, 1999. This receivable was unsecured, non-interest bearing and due on
demand.
Also during 1999, the Company issued 795,362 shares of Company's common
stock in payment for service performed by the same stockholder.
8
<PAGE> 9
ITEM 13 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K. On May 17, 1999 and September 8, 1999, the
Company filed a report on Form 8-K reporting changes in independent accountants
as discussed in Item 8.
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: October 15, 1999 /s/ LYLE A. WARDROP
----------------------------------------
Lyle A. Wardrop,
President and Chief Executive Officer
Dated: October 15, 1999 /s/ RODGER WARD
----------------------------------------
Rodger Ward,
Vice President, Public Relation and
Acting Chief Financial Officer
9
<PAGE> 10
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
INDEX
[ATTACHMENT TO ITEM 7]
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2/3
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998 F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8/15
</TABLE>
* * *
F-1
<PAGE> 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
Composite Automobile Research, Ltd.
We have audited the accompanying consolidated balance sheet of COMPOSITE
AUTOMOBILE RESEARCH, LTD. AND SUBSIDIARY as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1999, and their results of
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying 1999 consolidated financial statements have been prepared
assuming that Composite Automobile Research, Ltd. will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company has not generated any sustained revenues from its operations and, as a
result, it has had recurring losses and operating activities that have used
cash. These matters 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 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
J.H. COHN LLP
San Diego, California
October 8, 1999
F-2
<PAGE> 12
INDEPENDENT AUDITORS 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.
HARLAN & BOETTGER, LLP
San Diego, California
September 1, 1998
F-3
<PAGE> 13
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,612 $ 246,163
Inventories 368,695 243,096
Related party receivable 33,027
Prepaid expenses and other current assets 795
----------- -----------
Total current assets 420,334 490,054
Property and equipment, net 817,164 1,074,943
Other assets 6,436 30,518
----------- -----------
Totals $ 1,243,934 $ 1,595,515
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 123,386 $ 89,739
Related party payable 5,000
Accrued expenses 89,253 79,647
Advances from related party 68,852
Deposits for purchases of common stock 339,483
----------- -----------
Total current liabilities 212,639 582,721
Deferred license fees 92,985 31,250
----------- -----------
Total liabilities 305,624 613,971
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock - unlimited shares authorized, no
par value; 7,377,466 and 4,736,400 shares issued
and outstanding 7,697,607 3,886,404
Accumulated deficit (6,759,297) (2,904,860)
----------- -----------
Total stockholders' equity 938,310 981,544
----------- -----------
Totals $ 1,243,934 $ 1,595,515
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 14
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 122,498 $ 160,000
Cost of sales 22,960 192,510
----------- -----------
Gross profit (loss) 99,538 (32,510)
----------- -----------
Operating expenses:
Selling and general 3,702,590 1,050,531
Write-offs of note and accounts receivable
from related party 300,000
Depreciation 257,779 145,106
----------- -----------
Totals 3,960,369 1,495,637
----------- -----------
Operating loss (3,860,831) (1,528,147)
Other income 6,394 5,255
Interest expense (2,514)
----------- -----------
Net loss $(3,854,437) $(1,525,406)
=========== ===========
Basic loss per share $ (.62) $ (.39)
=========== ===========
Basic weighted average number of shares outstanding 6,220,627 3,953,278
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 15
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------- Accumulated
Shares Amount Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, July 1, 1997 3,333,975 $ 1,933,001 $(1,379,454) $ 553,547
Common stock sold
for cash 950,790 1,444,052 1,444,052
Common stock issued
to pay for services 403,635 458,951 458,951
Common stock issued
for employee bonuses 48,000 50,400 50,400
Net loss (1,525,406) (1,525,406)
----------- ----------- ----------- -----------
Balance, June 30, 1998 4,736,400 3,886,404 (2,904,860) 981,544
Common stock sold
for cash - proceeds
received in:
1998 170,960 339,483 339,483
1999 509,458 409,394 409,394
Common stock issued
to pay for services 1,462,389 2,264,023 2,264,023
Common stock issued
in connection with
termination of Mexican
joint venture 100,000 250,000 250,000
Common stock issued to
pay related party advances 398,259 548,303 548,303
Net loss (3,854,437) (3,854,437)
----------- ----------- ----------- -----------
Balance, June 30, 1999 7,377,466 $ 7,697,607 $(6,759,297) $ 938,310
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 16
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(3,854,437) $(1,525,406)
Adjustments to reconcile net loss to net
cash used in operating activities:
Bad debts 71,520 300,000
Depreciation 257,779 145,106
Common stock issued for services 2,264,023 458,951
Common stock issued for employee bonuses 50,400
Common stock issued in connection with
termination of joint venture 250,000
Changes in operating assets and liabilities:
Accounts receivable (71,520)
Inventories (125,599) (243,096)
Prepaid expenses and other current assets 795 (120)
Other assets 24,082 (1,500)
Accounts payable 33,647 34,658
Related party payable (5,000) 5,000
Accrued expenses 9,606 72,523
Deferred license fees 61,735 31,250
----------- -----------
Net cash used in operating activities (1,083,369) (672,234)
----------- -----------
Investing activities - purchases of property and
equipment (918,834)
-----------
Financing activities:
Advances from related party 534,942 28,416
Payments of advances from related party (88,518)
Proceeds from and deposits related to
sales of common stock 409,394 1,783,535
----------- -----------
Net cash provided by financing activities 855,818 1,811,951
----------- -----------
Net increase (decrease) in cash and cash equivalents (227,551) 220,883
Cash and cash equivalents at beginning of year 246,163 25,280
----------- -----------
Cash and cash equivalents at end of year $ 18,612 $ 246,163
=========== ===========
Supplemental cash flow information:
Interest paid $ 295 $ 2,514
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 17
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies:
Business activities:
Composite Automobile Research, Ltd. ("CAR Ltd.") was
incorporated pursuant to the Alberta Business Corporations Act
in January 1996. CAR Ltd. is a holding company. Its
wholly-owned subsidiary, World Transport Authority, Inc.
("WTA"), is in the business of designing and licensing turn-key
automobile manufacturing facilities to licensees in developing
nations. As of June 30, 1999, all of the Company's revenues had
been derived from payments from the sales of master and
manufacturing and distribution licenses. The Company is also
attempting to generate revenues from royalties under the
license agreements based on the production and/or sale of
vehicles and from sales to the licensees of all of the
components necessary to manufacture vehicles. CAR Ltd. and WTA
are referred to collectively herein as the "Company".
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of CAR Ltd. and WTA. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results may differ
from those estimates.
Cash and cash equivalents:
The Company considers all highly-liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
Property and equipment:
Property and equipment are stated at cost and are depreciated
over their estimated useful lives of five years using the
straight-line method.
Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful life of the
asset or the remaining term of the related lease.
Advertising and marketing costs:
The Company expenses the cost of advertising and marketing as
incurred. Advertising and marketing costs charged to operations
in 1999 and 1998 amounted to $181,569 and $435,371,
respectively.
F-8
<PAGE> 18
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (continued):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed annually for temporary differences
between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts
in future periods based on enacted laws and rates applicable to
the periods in which the temporary differences are expected to
affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount
expected to be realized. The income tax provision or credit is
the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and
liabilities.
Revenue recognition:
Revenues have been generated from the sales of master and
manufacturing and distribution licenses. A master license
grants the licensee a geographical area in which the master
licensee may sell a number of manufacturing and distribution
licenses. Each manufacturing and distribution licensee may
operate one automobile manufacturing facility.
Revenues from the sale of a master license are recognized when
the master license holder has paid its license fee to the
Company and performed marketing services sufficient to sell at
least one manufacturing and distribution license. Revenues from
the sale of a manufacturing and distribution license,
consisting of a percentage of the license fee, are recognized
when the licensee has made payment to the Company, and the
Company has provided substantially all of the factory
components and training sufficient for the licensee to begin
vehicle production.
The Company also plans to generate revenues from the sales of
manufactured vehicle components. Such revenues will be
recognized upon shipment of the components. In addition, the
Company may receive royalty payments on the production and/or
sale of vehicles. Such revenues will be recognized when earned.
Deferred license fees:
Deferred license fees consist of proceeds from manufacturing
and distribution license agreements and master license
agreements. At June 30, 1999, deferred license fees consisted
of proceeds from a manufacturing and distribution license
agreement with WorldStar Paez in Columbia and Global
Industries, Inc. in Nevada.
F-9
<PAGE> 19
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (continued):
Earnings (loss) per share:
Basic earnings (loss) per common share is calculated by
dividing net income or loss by the weighted average number of
common shares outstanding during the period. The calculation of
diluted earnings per common share is similar to that of basic
earnings per common share, except that the denominator is
increased to include the number of additional common shares
that would have been outstanding if all potentially dilutive
common shares, principally those issuable upon the exercise of
stock options, were issued during the period.
Since the Company had a net loss in 1998, the assumed effects
of the exercise of stock options that were outstanding during
part of 1998 (see Note 9) were anti-dilutive and, accordingly,
dilutive per share amounts have not been presented in the
accompanying consolidated statements of operations.
Impairment of long-lived assets:
Impairment losses on long-lived assets are recognized when
events or changes in circumstances indicate that the
undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all
or a portion of such carrying value may not be recoverable.
Impairment losses are then measured by comparing the fair value
of assets to their carrying amounts. No impairment losses were
recorded in 1999 and 1998.
Stock options:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25"), the Company will recognize compensation costs as a
result of the issuance of stock options to employees based on
the excess, if any, of the fair value of the underlying stock
at the date of grant or award (or at an appropriate subsequent
measurement date) over the amount the employee must pay to
acquire the stock. Therefore, the Company will not be required
to recognize compensation expense as a result of any grants of
stock options to employees at an exercise price that is
equivalent to or greater than fair value. The Company will also
make pro forma disclosures, as required by Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), of net income or loss as
if a fair value based method of accounting for stock options
had been applied instead if such amounts differ materially from
the historical amounts.
F-10
<PAGE> 20
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (concluded):
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants had issued certain accounting
pronouncements as of June 30, 1999 that will become effective in
subsequent periods; however, management of the Company does not
believe that any of those pronouncements would have
significantly affected the Company's financial accounting
measurements or disclosures had they been in effect during 1999
and 1998.
Reclassifications:
Certain accounts in the 1998 consolidated financial statements
have been reclassified to conform to 1999 presentations.
Note 2 - Basis of presentation:
As shown in the accompanying financial statements, the Company had
net losses of $3,854,437 and $1,525,406 and net cash used in
operating activities of $1,083,369 and $672,234 in 1999 and 1998,
respectively. The Company has not been able to sell licenses,
facilities or component parts or generate royalty income on a
sustained basis. These matters raise substantial doubt about the
ability of the Company to continue as a going concern.
Historically, the Company has funded its operations through sales
of common stock to private investors and borrowings from a
stockholder. Management plans to obtain the funds needed to enable
the Company to continue as a going concern through the private
sales of common stock and sales of master licenses and
manufacturing and distribution licenses. However, management cannot
provide any assurance that the Company will be successful in
consummating any private sales of common stock or generating
sufficient sales of master and manufacturing and distribution
licenses.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern
which contemplates continuity of operations, realization of assets
and satisfaction of liabilities in the ordinary course of business.
If the Company is unable to raise additional capital or generate
sales of licenses it may be required to liquidate assets or take
actions which may not be favorable to the Company in order to
continue operations. The accompanying consolidated financial
statements do not include any adjustments related to the
recoverability and classification of assets or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue its operations as a going concern.
F-11
<PAGE> 21
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Concentration of credit risk:
The Company maintains all of its cash balances in two financial
institutions. At times, these balances exceed the Federal Deposit
Insurance Corporation limitation for coverage of $100,000 thereby
exposing the Company to credit risk. The Company reduces its
exposure to credit risk by maintaining such deposits with high
quality financial institutions.
All revenues for the years ended June 30, 1999 and 1998 were
attributable to a licensee conducting operations in Tijuana,
Mexico. Operations in Tijuana, Mexico were discontinued during
1999.
Note 4 - Inventories:
Inventories consisted of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials $ 23,497
Work in process $243,096
Finished goods 345,198
-------- --------
Totals $368,695 $243,096
======== ========
</TABLE>
Note 5 - Property and equipment, net:
Property and equipment at June 30, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Molds $ 897,420 $ 897,420
Demo equipment and vehicles 234,702 234,702
Machinery and equipment 116,612 116,612
Office furniture and equipment 17,164 17,164
Leasehold improvements 10,614 10,614
---------- ----------
Totals 1,276,512 1,276,512
Less accumulated depreciation and amortization 459,348 201,569
---------- ----------
Property and equipment, net $ 817,164 $1,074,943
========== ==========
</TABLE>
Note 6 - Lease commitments:
The Company leases office facilities and equipment under operating
leases that expire on various dates through July 2002. The office
facility lease also requires the payment of the Company's pro rata
share of the real estate taxes and insurance, maintenance and other
operating expenses related to the facilities. Rent expense was
$133,029 in 1999 and $131,382 in 1998.
F-12
<PAGE> 22
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Lease commitments (concluded):
Future minimum rental commitments under the operating leases for
years subsequent to June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
----------- --------
<S> <C>
2000 $105,568
2001 82,320
2002 3,771
--------
Total $191,659
========
</TABLE>
Note 7 - Income taxes:
As of June 30, 1999, the Company had net operating loss
carryforwards available for Federal income tax purposes of
approximately $6,276,000, which expire at various dates through
2019. There were no other temporary differences as of that date.
Due to the uncertainties related to, among other things, the extent
and timing of its future taxable income, the Company has offset the
deferred tax assets attributable to the potential benefits of
approximately $2,122,000 from the net operating loss carryforwards
by an equivalent valuation allowance at June 30, 1999. The Company
had also offset the potential benefits of approximately $616,000
from net operating loss carryforwards by an equivalent valuation
allowance at June 30, 1998. As a result of the increase in the
valuation allowance of $1,506,000 during 1999, no credit for income
taxes is included in the accompanying 1999 consolidated statement
of operations.
Note 8 - Related party transactions and balances:
The Company had an outstanding receivable from a stockholder of
$33,027 at June 30, 1999 which was unsecured, non-interest bearing
and due on demand. At June 30, 1998, the Company had an outstanding
payable to the same stockholder of $68,852 which was unsecured,
non-interest bearing and due on demand.
During 1999, the same stockholder advanced an additional $534,942
to the Company and the Company reduced the principal balance of the
payable due to the stockholder by issuing 398,259 shares of common
stock with fair market values ranging from $.56 to $1.56 per share
and an aggregate fair value of $548,303, and paying $88,518 in
cash. The issuance of the shares to reduce debt was a noncash
transaction that is not reflected in the accompanying 1999
consolidated statement of cash flows.
During 1998, the Company wrote-off a $200,000 note receivable and a
$100,000 account receivable from a former stockholder.
During 1999, the Company also issued common stock in payment of
services performed by a stockholder (see Note 10).
F-13
<PAGE> 23
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock options:
In March 1998, options to purchase 368,334 shares of common stock
that had been granted to employees in 1997 expired. No other stock
options have ever been granted by the Company.
Note 10- Common stock:
During the year ended June 30, 1999, the Company sold or completed
the sale of 680,418 shares of common stock at prices ranging from
$.33 to $2.50 per share to private investors and received net
proceeds of $748,877 (including $339,483 received as deposits in
1998). In 1998, the Company sold 950,790 shares of common stock to
private investors and received net proceeds of $1,444,052.
During the year ended June 30, 1999, the Company issued 529,250
shares of common stock at times when the market prices ranged from
$.50 to $2.50 per share to consultants and other organizations for
various services it received. In addition, the Company issued
137,777 shares of common stock at times when the market prices
ranged from $.50 to $1.63 per share to various employees as
compensation. Charges to expense attributable to consulting and
other services received and to employee compensation arising from
these issuances amounted to $1,051,908 and $163,624, respectively.
During the year ended June 30, 1999, the Company also issued
795,362 shares of common stock at times when the market prices
ranged from $.50 to $1.94 per share to a stockholder for services
performed. Compensation expense associated with this issuance
amounted to $1,048,491.
During the year ended June 30, 1998, the Company issued 342,151 and
42,150 shares of common stock for $1.05 and $2.00, respectively,
for services in accordance with various consulting agreements. The
Company also issued 16,334 and 3,000 shares of common stock for
$.75 and $1.05, respectively, for other services received. In
addition, the Company issued 48,000 shares of common stock for
$1.05 per share to various employees as bonuses.
During 1998, the Company and a Mexican company agreed to become
joint venturers in the construction of a manufacturing facility in
Tecate, Mexico. During 1999, construction on this facility ceased.
The Company issued 100,000 shares of common stock with a fair value
of $250,000 to settle claims made by the Mexican joint venturer
related to the reimbursement of costs it had incurred.
F-14
<PAGE> 24
COMPOSITE AUTOMOBILE RESEARCH, LTD.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- Other contingencies:
The Company and its subsidiaries are from time to time involved in
litigation as both plaintiff and defendant arising in the ordinary
course of their business. In the opinion of management, the results
of the pending litigation should not have a material adverse effect
on the Company's consolidated financial position or results of
operations.
* * *
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 18,612
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 368,695
<CURRENT-ASSETS> 420,334
<PP&E> 1,276,512
<DEPRECIATION> (459,348)
<TOTAL-ASSETS> 1,243,934
<CURRENT-LIABILITIES> 212,639
<BONDS> 0
0
0
<COMMON> 7,697,607
<OTHER-SE> (6,759,297)
<TOTAL-LIABILITY-AND-EQUITY> 1,243,934
<SALES> 122,498
<TOTAL-REVENUES> 122,498
<CGS> 22,960
<TOTAL-COSTS> 22,960
<OTHER-EXPENSES> 3,953,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,854,437)
<EPS-BASIC> (.62)
<EPS-DILUTED> 0
</TABLE>
