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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period Ended March 31, 1999
Commission File No. 0-16176
McLAREN AUTOMOTIVE GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 84-1016459
- ------------------------------ ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
600 C Ward Drive, Santa Barbara, California 93111
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(Address of Principal Executive Offices including zip code)
(805) 683-2331
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(Issuer's telephone number)
ASHA CORPORATION
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(Former Name or Former Address,
if changed since last Report)
Indicate by check mark whether the Issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
There were 9,135,313 shares of the Registrant's Common Stock outstanding as of
March 31, 1999.
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McLAREN AUTOMOTIVE GROUP, INC.
FORM 10-QSB
INDEX
Part I. Financial Information
Item 1. Financial Statements Page
Consolidated Balance Sheets - March 31, 1999 and
September 30, 1998 3-4
Consolidated Statement of Operations for the three
and six month periods ended March 31, 1999 and 1998 5
Consolidated Statement of Cash Flows for the six
month periods ended March 31, 1999 and 1997 6-7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II. Other Information and Signatures 16
Signatures 16
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McLAREN AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
1999 1998
(Unaudited)
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $2,406,300 $2,348,500
Marketable Securities 442,200 --
Accounts receivable 803,400 3,653,200
Inventory 13,800 --
Prepaid expenses and other 100,000 64,200
---------- ----------
TOTAL CURRENT ASSETS 3,765,700 6,065,900
---------- ----------
Property and equipment, at cost,
net of accumulated depreciation
and amortization 3,984,200 570,400
---------- ----------
Other Assets:
Investment in affiliate 409,600 609,600
Goodwill and other intangibles,
at cost, net of accumulated
amortization 729,400 --
Other assets 35,500 --
---------- ----------
TOTAL OTHER ASSETS 1,174,500 609,600
---------- ----------
TOTAL ASSETS $8,924,400 $7,245,900
========== ==========
See accompanying notes to consolidated condensed financial statements.
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McLAREN AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
1999 1998
(Unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 362,400 $ 78,000
Customer deposits 138,100 --
Accrued liabilities 393,900 259,300
Current portion of notes payable 254,000 63,600
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TOTAL CURRENT LIABILITIES 1,148,400 400,900
----------- -----------
NOTES PAYABLE - net of current portion 2,612,500 272,900
----------- -----------
TOTAL LIABILITIES 3,760,900 673,800
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Stockholders' Equity:
Preferred stock, $.0001 par value:
Authorized - 10,000,000 shares,
No shares issued or outstanding -- --
Common stock, $.00001 par value,
Authorized - 20,000,000 shares
Issued and outstanding - 9,135,313
shares at March 31, 1999 and
8,798,223 at September 30, 1998 100 100
Additional paid-in capital 12,937,700 11,884,000
Accumulated deficit (7,681,700) (5,230,100)
Less: Treasury Stock at cost (81,900) (81,900)
Less: Unrealized loss on marketable
securities (10,700) --
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,163,500 6,572,100
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $8,924,400 $7,245,900
========== ==========
See accompanying notes to consolidated condensed financial statements.
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McLAREN AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
For the three months For the six months
Ended March 31 Ended March 31
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<C> <S> <S> <S> <S>
REVENUES:
License and right of refusal $ -- $ 5,214,500 $ -- $ 5,652,200
Contract and other services 1,025,100 -- 1,128,100 2,700
----------- ----------- ----------- -----------
TOTAL REVENUE 1,025,100 5,214,500 1,128,100 5,654,900
OPERATING EXPENSES:
Research and development 596,100 434,000 1,129,200 751,000
Cost of goods sold 463,400 -- 463,400 --
Selling, General
and administrative 1,146,500 505,200 1,768,100 943,100
---------- ---------- ----------- -----------
2,206,000 939,200 3,360,700 1,694,100
---------- ---------- ----------- -----------
Income (loss) from operations (1,180,900) 4,275,300 (2,232,600) 3,960,800
OTHER (EXPENSE) (237,300) (85,000) (210,400) (217,400)
--------- ----------- ----------- -----------
Income (Loss) before provision
for income taxes (1,418,200) 4,190,300 (2,443,000) 3,743,400
PROVISION FOR INCOME TAXES 7,800 3,600 8,600 3,600
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,426,000) $ 4,186,700 $(2,451,600) $3,739,800
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,955,557 8,664,184 8,952,577 8,663,665
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED $ (.16) $ .48 $ (.27) $ .43
=========== =========== =========== ===========
COMPREHENSIVE INCOME (LOSS):
Net Income (Loss) $(1,426,000) $ 4,186,700 $(2,451,600) $3,739,800
Loss on marketable securities (10,700) -- (10,700) --
----------- ----------- ----------- ----------
Comprehensive income (loss) $(1,436,700) $ 4,186,700 $(2,462,300) $3,739,800
=========== =========== =========== ==========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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McLAREN AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
(unaudited) (unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,451,600) $3,739,800
Adjustments to reconcile
net income (loss) to net cash pro-
vided by operating activities:
Depreciation and amortization 141,100 39,800
Accrued interest on long-term
receivable -- (65,200)
Loss on investment in affiliate 200,000 330,500
Changes in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable 2,849,800 (2,870,300)
Inventory (13,800) --
Prepaid expenses and other (35,800) (278,000)
Other assets (35,500) --
Increase (decrease) in:
Accounts payable 284,400 38,400
Customer deposits 138,100 --
Accrued liabilities 134,600 191,400
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Net cash provided by
operating activities 1,211,300 1,126,400
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (452,900) --
Additions to property and equipment (3,557,100) (146,000)
Disposal of equipment 11,500 --
Additions to goodwill (738,700) --
Investment in affiliate -- (330,500)
---------- ----------
Net cash used in investing
activities (4,737,200) (476,500)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under line of credit (475,000) --
Borrowing under line of credit 475,000 --
Borrowing under notes payable 2,591,000 300,000
Repayments under notes payable (61,000) (3,200)
Proceeds from exercise of stock options 378,700 32,300
Proceeds from issuance of common stock 675,000 --
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Net cash provided by financing
activities 3,583,700 329,100
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See accompanying notes to consolidated condensed financial statements.
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McLAREN AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
(unaudited) (unaudited)
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Net increase in cash and
cash equivalents 57,800 979,000
Cash and cash equivalents at beginning
of period 2,348,500 2,617,400
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Cash and cash equivalents at end
of period $2,406,300 $3,596,400
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 72,800 $ 14,300
========== ==========
Cash paid for income tax $ 25,319 $ 3,600
========== ==========
See accompanying notes to consolidated condensed financial statements.
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McLAREN AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
PRESENTATION
The financial statements included herein have been prepared by McLaren
Automotive Group, Inc. (formerly ASHA Corporation, the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and include all adjustments which are in the opinion of management,
necessary for a fair presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make these financial statements not misleading;
however, it is suggested that these financial statements and the accompanying
notes be read in conjunction with the financial statements and notes thereto
in the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998. The financial data for the interim periods may not
necessarily be indicative of results to be expected for the year.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of McLaren Automotive Group, Inc. and
subsidiary as of March 31, 1999, and the results of their operations and their
cash flows for the three months and six months then ended.
BUSINESS ACQUISITION
On January 8, 1999, McLaren Automotive Group, Inc. (formerly ASHA Corporation)
(the "Company") acquired all of the outstanding stock of McLaren Engines, Inc.
("McLaren") in exchange for 150,000 shares of the Company's authorized but
unissued Common Stock. The acquisition was made pursuant to the terms of a
Stock Purchase Agreement among the Company, McLaren and the shareholders of
McLaren. Immediately prior to the acquisition, the Company assisted McLaren to
complete a reorganization in which McLaren redeemed the stock of its two
shareholders and issued new shares to McLaren's employees. The Company loaned
McLaren $1,355,000 from its operating funds for the reorganization. McLaren
also borrowed $2,454,000 from an unaffiliated bank to complete this
reorganization. The reason for the acquisition of McLaren Engines is that
McLaren and ASHA have many of the same car product development and drivetrain
clients. Through integrating sales, marketing, and R&D engineering staff, the
Company looks to better serve the worldwide licensee base, adding new
capabilities and core services, while improving net earnings.
The consolidated financial statements include the amounts of the Company and
McLaren since the date of acquisition. All intercompany balances and
transactions have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
As of March 31, 1999, four customers represented 40% and 61% of accounts
receivable and sales, respectively.
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STATEMENT OF CASH FLOWS
The Company recorded $10,700 decrease in fair value of marketable securities
as of March 31, 1999.
MARKETABLE SECURITIES
As of March 31, 1999, marketable securities consist of US Treasury Stripped
Zero Coupon Bond and NBD Bank Stock.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding. Common stock equivalents were not
considered in the calculation, as their effect would be antidilutive.
INCOME TAX
Provisions for income taxes consist of $800 minimum state income tax for
California and $10,000 for Michigan single business tax. The Company did not
provide for federal income taxes due to net operating loss carryforwards.
CONTINGENT LIABILITIES
The Company co-signed a $40,000 note with Montecito Bank and Trust for the
former Managing Director of Automotive Components in Research and Development.
The note is secured by the former employee's residence.
NEW AUTHORITATIVE PROUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement, which is effective for all
reporting periods beginning in 1998, requires the prominent disclosure of all
components of Comprehensive Income, as defined.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement, which is effective for all reporting periods beginning in 1998,
redefines the way publicly held companies report information about segments.
Based upon the Company's assessment of this pronouncement, it has determined
that it will continue to report on an integrated one segment basis.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current period's presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following should be read in conjunction with the Company's Annual Report
on Form 10-KSB and the attached consolidated condensed financial statements
and notes of the Company.
The following discussion contains forward-looking statements that involve a
number of risks and uncertainties. While this outlook represents the Company's
current judgment in the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested herein. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements, which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Factors that could cause
results to differ materially from those projected in the forward-looking
statements include: market acceptance of both Gerodisc and the World Car,
acquisition of McLaren Engines, Inc., variability of quarterly operations,
dependence on management, competition, political and economic risks of doing
business in China, and the bureaucratic nature of the automobile industry.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998
There was a net loss of $1,426,000 for the three months ended March 31, 1999
as compared to a net profit of $4,187,000 for the three months ended March 31,
1998. During the three months ended March 31, 1999, the Company had $1,025,000
in contract and service revenue as compared to $5,215,000 in licensing revenue
during the corresponding period last year. The contract and service revenue is
a direct result of the acquisition of McLaren Engines, Inc. The licensing
revenue during the corresponding period last year was from the license
agreement between the Company and New Venture Gear, a major tier one supplier.
Interest income for the period ended March 31, 1999 was $18,000 as compared to
$64,000 for three months ended March 31, 1998. The reduction in interest
income was due to the interest income that accrued on the advance against
royalties note from New Venture Gear that originated in 1997 and matured in
August, 1998. This note was paid in October 1998. McLaren leases office space
to small vendors on a month to month basis. The rental income for the three
months ending March 31, 1999 was $12,000.
Operating expenses for the three months ending March 31, 1999 was $2,206,000
as compared to $939,000 for the corresponding period ending March 31, 1998.
Direct cost of goods sold for the three months ended were $463,000. Additional
selling, general and administrative expenses incurred with the acquisition of
McLaren was $525,000. Operating expenses for the gerodisc business unit (now
called "ASHA Advanced Engineering") increased by $232,000 as result of
research and development costs increasing by $162,000, and $70,000 for
selling, general and administrative expenses. Interest expense increased by
$45,000 to service the additional debt incurred in connection with the
acquisition of McLaren.
As previously noted, research and development costs increased by $162,000.
Engineering salaries increased by $57,000 over the previous year because
additional engineers were employed within the past year to expedite the
development of prototypes for the Gerodisc technology. Recruiting expenses
related to the increased personnel resulted in an additional $30,000 of
expense.
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Selling, general and administrative costs increased by $460,000 as previously
noted, with $413,000 being attributed to the addition of McLaren. Wages and
expenses related to the After Market Program were approximately $48,000 for
the three months ended March 31, 1999. The Company retained an organizational
development specialist to develop marketing and corporate strategies. The
added expense for this program was approximately $30,000 for the current
quarter.
The Company elected to decrease the carrying value of its 18% investment in
the ASHA-TAISUN Joint Venture by $200,000 during the three months ended March
31, 1999. The Asian economic crisis has prompted the Company to re-evaluate
its investment in the automotive plant in China. Orders from the Chinese
automobile facility have not materialized to date as anticipated due to the
current economic condition in that region. The Company is currently
maintaining approximately $400,000 of its investment on the balance sheet in
anticipation of pending production and royalties.
SIX MONTHS ENDED MARCH 31, 1999 VERSUS SIX MONTHS ENDED MARCH 31, 1998
During the six months ended March 31, 1999, the Company had approximately
$1,128,000 in revenue compared to $5,655,000 in revenue during the
corresponding prior year period. The decrease in revenue was the result of no
license agreements being finalized during the current six months. A $5,100,000
license agreement with New Venture Gear, a major tier one supplier was signed
and earned during the six months ended March 31, 1998. Additional sales of
$1,025,000 earned by McLaren also contributed to income for the six months
ended March 31, 1999. The corresponding cost of labor and parts incurred was
approximately $463,000.
Operating expenses for the six months ended March 31, 1999, were approximately
$1,667,000 greater than the corresponding prior year period. Of these
expenses, approximately $988,000 was attributable to the operations of McLaren
which includes $463,000 for cost of goods sold. Research and development
expenses increased by approximately $378,000 for the six months ended March
31, 1999 as compared to the corresponding six months ended March 31, 1998. The
increases are related to several factors, the most significant being the New
Venture Gear license agreement which required substantial prototype
development.
Fabrication wages and overtime increased by approximately $66,000 from the
previous corresponding period due to the additional prototype development.
Engineering salaries increased approximately $194,000 for the current fiscal
period as compared to the previous period, due to the hiring of additional
experienced engineering staff with expertise in project management.
Selling, general and administrative expenses increased by approximately
$825,000 for the six months ended March 31, 1999 as compared to the six months
ended March 31, 1998. The Company retained an organizational development
specialist to develop marketing and corporate strategies. The added expense
for this program was approximately $87,000 for the six months ended March 31,
1999. Wages and expenses related to the After Market Program were
approximately $90,000 for the six months ended March 31, 1999.
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The Company recorded a loss of $200,000 from investment in affiliate during
the six months ended March 31, 1999 as compared to a loss of $330,000 for the
six months ended March 31, 1998. Actual expenditures for the joint venture
have ceased because the operational and production responsibility has been
transferred to the Chinese operation. The Company also reduced its ownership
to 18% in exchange for royalties to be given per unit produced. The Company is
currently maintaining approximately $400,000 of its investment on the balance
sheet in anticipation of pending production and royalties.
Interest income of $58,000 was substantially lower for the six months ended
March 31, 1999 as compared to the interest income of $127,000 for the six
months ended March 31, 1998. The available cash of $1,355,000 was used in
connection with the McLaren acquisition and therefore reduced interest earned.
Interest expense of $73,000 for the six months ended March 31, 1999 was
substantially higher than the $14,000 paid for the six months ended March 31,
1998. The most significant interest item for the current period is the
interest expense associated with the debt acquired by McLaren Engines, Inc.
during the purchase.
The net loss of $2,452,000 for the six months ended March 31, 1999 was a
significant variance from the net profit of $3,740,000 for the six months
ended March 31, 1998. The $5,100,000 revenue from the license agreement signed
in the second quarter of the prior fiscal year was the primary contributor to
prior year profits. The Company anticipates that the cash on hand from the
second installment of the New Venture Gear licensing agreement, the $750,000
line of credit with Montecito Bank and Trust, and the $700,000 line of
credit with NBD Bank will be sufficient to maintain an adequate cash position
for the fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had working capital of approximately
$2,617,000 as compared to working capital of approximately $5,665,000 at
September 30, 1998. The decrease was primarily due to the net operating loss
the Company recorded in the six months ended March 31, 1999. The Company's
working capital is primarily attributed to the $5,100,000 revenue recorded for
the New Venture Gear license agreement in January 1998 and the $1,000,000 note
receivable payment from New Venture Gear in October 1998.
Operating activities for the six months ended March 31, 1999 provided
$1,211,000 of net cash as compared to $1,126,000 cash provided in the six
months ended March 31, 1998. The increase in cash provided by operating
activities was primarily due to the first royalty installment of $1,000,000
from the New Venture Gear license agreement.
Investing activities for six months ended March 31, 1999 used $4,737,000 of
cash as compared to $476,000 used during the comparable period in 1998. The
Company invested $453,000 in securities during the current period. The Company
has invested approximately $4,281,000 with the purchase of McLaren Engines,
Inc. real estate and equipment. No investment was made in the ASHA-TAISUN
joint venture during the current year as compared to $330,000 invested during
the six months ended March 31, 1998. The carrying value of the investment in
ASHA-Taisun was reduced by $200,000 in the current year as production is not
at the anticipated level that management anticipated.
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On January 8, 1999, the Company acquired all of the outstanding stock of
McLaren Engines, Inc. in exchange for 150,000 shares of the Company's
authorized but unissued Common Stock. The shares were valued at $675,000.
Immediately prior to the acquisition, the Company assisted McLaren to complete
a reorganization in which McLaren redeemed the stock of its two shareholders
and issued new shares to McLaren's employees. The Company loaned McLaren
$1,355,000 from its operating funds for the reorganization. McLaren also
borrowed $2,454,000 from an unaffiliated bank to complete this reorganization.
McLaren and the Company have many of the same car product development and
drivetrain clients. By integrating sales, marketing, and R&D engineering
staff, the Company expects to better serve the worldwide licensee base, adding
new capabilities and core services, while improving net earnings.
COMMITMENTS AND CONTINGENCIES
In January 1999, McLaren Engines, Inc. entered into an employment agreement
with Wiley McCoy to employ Mr. McCoy in the position of President and Chief
Operating Officer of McLaren Engines, Inc. In April 1999, Mr. McCoy entered
into a new agreement directly with the Company to serve as the Company's
President which replaced the January 1999 agreement. The agreement is for an
initial term of two years, but will be automatically extended an additional
two year period unless either party notifies the other of its intent to end
the agreement at least 90 days prior to the end of the initial term. The
agreement may also be terminated by the Company "with cause" at any time, and
may be terminated by the Company "at will" by continuing payment of salary and
benefits for up to 12 months. Mr. McCoy is to receive a base salary of
$140,000 plus annual cost of living adjustments. Mr. McCoy's agreement also
entitles him to participate in all fringe benefits available to other
executive officers and provides that he is to be granted options to purchase
25,000 to 30,000 shares of the Company annually.
In April, 1999 the Company entered into an employment agreement with Louis
Infante to employ Mr. Infante in the position of Executive Vice-President and
Chief Operating Officer of the Company's ASHA Technologies Division. The
agreement is for an initial term of two years, but will be automatically
extended an additional two year period unless either party notifies the other
of its intent to end the agreement at least 90 days prior to the end of the
initial term. The agreement may also be terminated by the Company "with
cause" at any time, and may be terminated by the Company "at will" by
continuing payment of salary and benefits for up to 12 months. Mr. Infante is
to receive a base salary of $130,000 plus annual cost of living adjustments.
Mr. Infante's agreement also entitles him to participate in all fringe
benefits available to other executive officers and provides that he is to be
granted options to purchase 25,000 shares annually and a one-time grant of
stock equal in value to $100,000 during the term of the agreement at a time
determined by Mr. Infante.
In April, 1999 Jack McCormack resigned as President and Chief Executive
Officer of the Company. The Company entered into a consulting agreement with
Mr. McCormack whereby he will be retained as a corporate consultant until
April 14, 2000. The agreement calls for Mr. McCormack to receive compensation
of $147,000 per year.
In May, 1999 the Company entered into an employment agreement with Steve
Sanderson, the Company's Chief Financial Officer. The agreement is for an
initial term of two years, but will be automatically extended an additional
two year period unless either party notifies the other of its intent to end
the agreement at least 90 days prior to the end of the initial term. The
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agreement may also be terminated by the Company "with cause" at any time, and
may be terminated by the Company "at will" by continuing payment of salary and
benefits for the remainder of the initial term and for up to 12 months
thereafter. Mr. Sanderson is to receive a base salary of $130,000 plus annual
cost of living adjustments. Mr. Sanderson's agreement also entitles him to
participate in all fringe benefits available to other executive officers and
provides that he is to be granted options to purchase 25,000 shares annually.
In June, 1998, Dana terminated a license agreement with the Company to
manufacture and market the Company's GERODISC System Technology for front and
rear axles, just prior to the start of volume production for the 1999 Jeep
Grand Cherokee vehicle program. On September 9, 1998, the Company filed a
lawsuit against Dana in the United States District Court for the Eastern
District of Michigan, Southern Division. The Company's complaint, as amended,
alleges that Dana breached its obligations under the license agreement and
that Dana has been unjustly enriched by the information it obtained concerning
the GERODISC System. The Company is seeking compensatory and punitive damages
and attorneys' fees from Dana and preliminary and permanent injunctions
against Dana from using the GERODISC technology.
Dana filed a motion to dismiss certain claims included in the original
complaint to which the Company responded and amended its complaint. The Court
has not yet ruled on the motion, and Dana has not yet filed its answer in this
lawsuit.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-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 disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Systems at risk include
information technology (IT) and non-IT systems. The Company is addressing
potential Year 2000 Issues, and believes that significant additional costs
will not be incurred because of this circumstance.
THE COMPANY'S STATE OF READINESS
Based on a recent assessment, the Company has determined that it will be
required to modify or replace minor portions of its hardware and software so
that its computer systems will properly utilize dates beyond December 31,
1999. The Company is in the process of assessing the impact on McLaren as of
this filing and is prepared to modify or replace hardware and software as
necessary.
The Company is initiating formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have material adverse effect on the
Company.
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The Company will utilize both internal and external resources to reprogram, or
replace, and test systems for Year 2000 modifications. The Company plans to
complete the Year 2000 project not later than September 30, 1999.
THE COSTS OF ADDRESSING OF COMPANY'S Y2K ISSUES
The Company expects the Year 2000 project to be approximately $20,000. Of the
total project cost, approximately 80% is attributable to the purchase of new
hardware and/or software which will be capitalized. The remaining 20%, which
will be expensed as incurred over the current year, is not expected to have a
material effect on the results of operations. To date, the Company has
incurred insignificant expenses related to the assessment of and preliminary
efforts in connection with, its Year 2000 project and the development of a
remediation plan.
The costs of the project and the date on which the Company plans to complete
the 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 differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
THE RISKS OF THE COMPANY'S Y2K ISSUES
The Company is in the process of determining the impact of the Y2K issue.
Worst case scenarios have not yet been explored. The Company is uncertain
what, if any, material effects the Y2K issue will have on its financial
condition. A formal assessment of the Company's Y2K risks is expected to be
completed by mid-1999.
THE COMPANY'S CONTINGENCY PLANS
The Company will develop contingency plans as needed based on the examination
if Y2K issues and worst case scenarios.
OTHER INFORMATION
The Company has not invested any money in its ABC Technology for the six
months ending March 31, 1999. The expenditures for the prior year were for the
development of the ABC technology and to technically support the Chinese
factory in its testing of the pre-production vehicles. At the end of June
1998, the Company had finished transferring the technology for the ABC Taxi to
the Chinese factory. The Company has chosen to reduce its ABC activities in
relation to finding other ABC licensees due to the severe economic situations
in South East Asia. The factory will begin limited production at the
completion and evaluation of the 125-kilometer tests.
Original export expectations may be effected by recent economic events in
Southeast Asia. The Company has completed its build of the production tooling
and molds for JIAD. The Jiaxing facility has built 15 pre-production units.
These units are undergoing various dynamic tests to prove durability and
performance. Upon successful completion of such tests JIAD intends to commence
15
<PAGE>
<PAGE>
production. JIAD exhibited the ABC Taxi (called "BUDDY" in China) at the
Bejing auto exposition where it was favorably received. The Company has been
advised by JIAD that it has orders from Taxi companies in Jiaxing and other
provinces as well as from Mongolia.
On April, 1999 Mr. Larry Cohen was elected Chairman of the Board of Directors
of the Company. Mr. Cohen stepped down from his position on the Audit and
Compensation Committee. Mr. Nick Bartolini replaced Mr. Cohen on the Audit and
Compensation Committee.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. On January 8, 1999, the Company issued an
aggregate of 150,000 shares of its Common Stock to 19 persons who were
shareholders of McLaren Engines, Inc. in connection with the acquisition of
that company. In connection with this transaction, the Company relied on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
The investors represented that they were acquiring the shares for investment
purposes, restrictive legends were placed on certificates representing the
shares issued, and stop transfer orders were entered against their transfer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibit is filed herewith electronically:
EXHIBIT 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company filed one report on Form 8-K dated
January 8, 1999, reporting information under Items 2 and 7 of that form
concerning the acquisition of McLaren Engines, Inc.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
McLAREN AUTOMOTIVE GROUP, INC.
Date: May 13, 1999 By: /s/ Wiley R. McCoy
Wiley R. McCoy, President
By: /s/ Steve Sanderson
Steve Sanderson, Chief Financial
Officer
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statement of operations found on pages 3-5 of the Company's
Form 10-QSB for the quarter year ended March 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,406,300
<SECURITIES> 442,000
<RECEIVABLES> 803,400
<ALLOWANCES> 0
<INVENTORY> 13,800
<CURRENT-ASSETS> 3,765,700
<PP&E> 3,984,200
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,924,400
<CURRENT-LIABILITIES> 1,148,400
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 5,163,400
<TOTAL-LIABILITY-AND-EQUITY> 8,924,400
<SALES> 0
<TOTAL-REVENUES> 1,128,100
<CGS> 463,400
<TOTAL-COSTS> 463,400
<OTHER-EXPENSES> 2,897,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,000
<INCOME-PRETAX> (2,443,000)
<INCOME-TAX> 8,600
<INCOME-CONTINUING> (2,451,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,451,600)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
