1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended January 31, 2001.
[ ] Transition report under section 13 or 15(d) of the Exchange Act for
the transition period from _______ to ________.
Commission file number 0-29248
SmarTire Systems Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(Address of Principal Executive Offices)
(604) 276-9884
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) 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 report(s), and has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of February 28, 2001, the Company had 15,117,697 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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SMARTIRE SYSTEMS INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
JANUARY 31, 2001 (UNAUDITED) AND JULY 31, 2000
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED) -
THREE AND SIX MONTHS ENDED JANUARY 31, 2001 AND
JANUARY 31, 2000.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - THREE
AND SIX MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31,
2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS. THE COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN
OTHER FACTORS, EXCEPT AS REGULATED BY LAW.
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
wholly owned subsidiaries, SmarTire USA Inc., SmarTire (Europe) Limited and
SmarTire Technologies Inc. (the "Company" or "SmarTire") as of January 31, 2001
and for the three and six month periods ended January 31, 2001 and January 31,
2000 are attached hereto.
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SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
- ---------------------------------------------------------------------------------
January 31, July 31,
2001 2000
- ---------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 9,836,428 $ 14,512,558
Receivables 188,881 114,278
Inventory (note 3) 285,789 265,190
Prepaid expenses 218,329 155,178
- ---------------------------------------------------------------------------------
10,529,427 15,047,204
Capital assets (note 4) 936,427 919,169
Other asset (note 5) 2,573,624 --
- ---------------------------------------------------------------------------------
$ 14,039,478 $ 15,966,373
- ---------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 687,809 $ 739,155
Shareholders' equity
Share capital (note 6) 50,258,331 47,980,411
Contributed surplus 2,420,677 2,420,677
Deficit (39,327,339) (35,173,870)
- ---------------------------------------------------------------------------------
13,351,669 15,227,218
- ---------------------------------------------------------------------------------
$ 14,039,478 $ 15,966,373
=================================================================================
See accompanying notes to consolidated financial statements.
On behalf of the Board
/s/ Robert V. Rudman Director /s/ Kevin A. Carlson Director
- -------------------- --------------------
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Revenue $ 328,478 $ 294,227 $ 597,122 $ 589,153
Cost of goods sold 129,279 146,664 219,035 313,461
- ------------------------------------------------------------------------------------------------------------
199,199 147,563 378,087 275,692
- ------------------------------------------------------------------------------------------------------------
Expenses and other
Marketing 581,881 805,476 1,449,876 1,500,532
General and administrative 1,035,446 1,233,654 2,126,789 2,225,816
Engineering, research and
development 640,249 810,021 1,156,601 1,209,561
Depreciation and amortization 140,618 80,414 214,353 122,964
Foreign exchange loss (gain) 102,747 64,713 (45,034) 80,939
Interest income (174,026) (25,266) (371,029) (48,144)
- ------------------------------------------------------------------------------------------------------------
2,326,915 2,969,012 4,531,556 5,091,668
- ------------------------------------------------------------------------------------------------------------
Net loss 2,127,716 2,821,449 4,153,469 4,815,976
Deficit, beginning of period 37,199,623 40,480,751 35,173,870 38,486,224
- ------------------------------------------------------------------------------------------------------------
Deficit, end of period $ 39,327,339 $ 43,302,200 $ 39,327,339 $ 43,302,200
============================================================================================================
Basic and diluted loss per share $ 0.14 $ 0.22 $ 0.28 $ 0.42
============================================================================================================
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss $ (2,127,716) $ (2,821,449) $ (4,153,469) $ (4,815,976)
Items not affecting cash:
Depreciation and amortization 140,618 80,414 214,353 122,964
Remuneration in shares -- 22,680 -- 22,680
Changes in non-cash working capital:
Receivables 14,916 70,390 (74,603) 879,304
Inventory (26,137) 87,804 (20,599) 164,417
Prepaid expenses 37,934 5,046 (63,151) (316,045)
Accounts payable and accrued liabilities (360,219) 229,975 (51,346) (727,844)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,320,604) (2,325,140) (4,148,815) (4,670,500)
- ---------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of capital assets (71,789) (205,871) (167,802) (394,810)
Purchase of investment -- (238,380) -- (238,380)
Purchase of other asset (note 5) (749,750) -- (749,750) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities (821,539) (444,251) (917,552) (633,190)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Redemption of short-term investments -- -- -- 2,062,013
Issuance of common shares -- -- 390,237 4,104,077
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities -- -- 390,237 6,166,090
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (3,142,143) (2,769,391) (4,676,130) 862,400
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 12,978,571 4,054,773 14,512,558 422,982
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,836,428 $ 1,285,382 $ 9,836,428 $ 1,285,382
=================================================================================================================================
See accompanying notes to consolidated
financial statements
Non-cash investing and financing activities:
Purchase of other asset through
issuance of common shares (note 5) 1,887,683 -- 1,887,683 --
Purchase of investment through
issuance of common shares -- 55,445 -- 55,445
Remuneration in shares -- 22,680 -- 22,680
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 2001 and 2000
- --------------------------------------------------------------------------------
1. Basis of presentation
These interim consolidated financial statements have been prepared using
generally accepted accounting principles in Canada. The interim financial
statements include all adjustments, consisting solely of normal recurring
adjustments, which in management's opinion are necessary for a fair
presentation of the financial results for the interim periods presented.
The disclosures in these statements do not conform in all respects to the
requirements of generally accepted accounting principles for annual
financial statements. These statements follow the same accounting policies
and methods of their application as the most recent annual financial
statements. These statements should be read in conjunction with the
significant accounting policies and other information in the Company's most
recent annual financial statements.
2. Operations:
The Company and its subsidiaries develop and market products incorporating
wireless data transmission and processing technologies, primarily for the
automotive markets. The Company's primary product is a wireless tire
monitoring system which it currently markets for use on passenger vehicle
and other pneumatic tire applications. All sales of its product are made in
this industry segment.
The Company has incurred recurring operating losses and has a deficit of
$39,327,339 as at January 31, 2001. The Company will ultimately be required
to generate profitable operations in order to continue as a going concern.
3. Inventory:
- ----------------------------------------------------------------------------------------------
January 31, July 31,
2001 2000
(Unaudited)
- ----------------------------------------------------------------------------------------------
Raw materials $ 267,465 $ 239,852
Finished goods 18,324 25,338
- ----------------------------------------------------------------------------------------------
$ 285,789 $ 265,190
- ----------------------------------------------------------------------------------------------
4. Capital assets:
- ------------------------------------------------------------------------------------------------------------------------------
January 31, 2001 (Unaudited) July 31, 2000
------------------------------------------- -------------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
- ------------------------------------------------------------------------------------------------------------------------------
Computers and software $ 569,567 $ 328,519 $ 241,048 $ 509,052 $ 295,010 $ 214,042
Office and shop equipment 1,031,398 413,210 618,188 941,430 312,205 629,225
Leasehold improvements 146,321 69,130 77,191 129,002 53,100 75,902
- ------------------------------------------------------------------------------------------------------------------------------
$ 1,747,286 $ 810,859 $ 936,427 $ 1,579,484 $ 660,315 $ 919,169
- ------------------------------------------------------------------------------------------------------------------------------
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 2001 and 2000
- --------------------------------------------------------------------------------
5. OTHER ASSET
On December 13, 2000, the Company entered into an Assignment and Amendment
Agreement with TRW Inc. that transfers to the Company the exclusive license
to manufacture and sell tire monitoring systems to the original equipment
vehicle manufacturers of most medium and heavy duty trucks. Consideration
consisted of 450,000 shares of common stock valued at $1,887,683, based on
the market value of the Company's stock at the date of purchase, plus cash
of US$500,000 (Cdn$749,750). The license is being amortized over five years
on a straight line basis.
- ---------------------------------------------------------------------------------------------------
January 31, 2001
-----------------------------------------
Accumulated Net
Cost Amortization Book Value
- ---------------------------------------------------------------------------------------------------
License $ 2,637,433 $ 63,809 $ 2,573,624
- ---------------------------------------------------------------------------------------------------
6. SHARE CAPITAL:
(a) Authorized:
(i) Common shares 200,000,000 without par value
(ii) Preferred shares 20,000 with par value of $1,000 per share
(b) The subscribed and issued share capital of the Company is as follows:
- -----------------------------------------------------------------------------------------
Common
Shares Amount
- -----------------------------------------------------------------------------------------
Balance at July 31, 2000 14,497,797 $47,980,411
Issued during the period ended January 31, 2001
Exercise of stock options 9,900 29,532
Exercise of warrants 160,000 360,705
Purchase of other asset (note 5) 450,000 1,887,683
- -----------------------------------------------------------------------------------------
Balance at January 31, 2001 15,117,697 $50,258,331
=========================================================================================
(c) A summary of fixed stock option transactions and balances during the
period ended January 31, 2001 is as follows:
Weighted
average
Options exercise
Outstanding price
- --------------------------------------------------------------------
Balance at July 31, 2000 997,625 $ 4.58
Options granted 463,600 5.32
Options exercised (9,900) (3.05)
Options forfeited (15,200) (3.05)
- --------------------------------------------------------------------
Balance at January 31, 2001 1,436,125 $ 4.82
- --------------------------------------------------------------------
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 2001 and 2000
- --------------------------------------------------------------------------------
(d) Warrants: As at January 31, 2001, warrants were outstanding for 309,717
(July 31, 2000 - 469,717) common shares of the Company. The warrants
entitle the holders to purchase common shares of the Company at prices
ranging from US$1.50 to US$2.00 per share and expire on various dates
until March 31, 2003.
7. RELATED PARTY TRANSACTIONS:
During the six months ended January 31, the Company:
(a) Paid $64,039 (2000 - $271,391) for consulting services and financing
fees on the private sales of its common stock to a company in which a
director of the Company has significant influence.
(b) Paid $80,159 (2000 - $119,202) for legal fees to a legal firm in which a
director of the Company is a partner.
8. SEGMENTED INFORMATION:
The Company operates in the wireless tire monitoring technology industry.
Management of the Company makes decisions about allocating resources based
on this one operating segment. Substantially all revenue is derived from
sales to North American and European customers. Geographic information is as
follows:
Revenue from external customers
- -----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------
North America $ 238,502 $ 240,061 $ 446,249 $ 412,403
Europe 89,976 54,166 150,873 176,750
- -----------------------------------------------------------------------------------------
$ 328,478 $ 294,227 $ 597,122 $ 589,153
- -----------------------------------------------------------------------------------------
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 2001 and 2000
- --------------------------------------------------------------------------------
9. UNITED STATES ACCOUNTING PRINCIPLES:
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). See note 14 of
the annual audited financial statements for the year ended July 31, 2000 for
a qualitative description of material differences between Canadian and US
GAAP. A reconciliation of financial statement amounts from Canadian
generally accepted accounting principles to United States generally accepted
accounting principles is as follows:
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
January 31, January 31, January 31, January 31,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Net loss in accordance with Canadian GAAP and
United States GAAP $ 2,127 $ 2,821 $ 4,153 $ 4,816
Effects of differences in accounting for:
Compensation cost (a) 150 -- 150 --
------------------------------------------------------------------
Net loss in accordance with United States GAAP 2,277 2,821 4,303 4,816
Beginning deficit in accordance with United States GAAP 38,405 41,097 36,379 39,102
------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $ 40,682 $ 43,918 $ 40,682 $ 43,918
================================================================================================================================
(a) Compensation expense
For United States GAAP purposes, the Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations in accounting for its stock-based compensation
to employees. Accordingly, the Company's stock-based compensation expense
for employees is measured based on the intrinsic value of the option on the
date of grant. Under the intrinsic value method of APB 25, the stock option
compensation is the excess, if any, of the quoted market value of the stock
at the measurement date of the grant over the amount an optionee must pay to
acquire the stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the three and six months
ended January 31, 2001 and 2000 should be read in conjunction with the Company's
most recent annual financial statements.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP, except as described in note 9 to the interim consolidated financial
statements and note 14 to the annual consolidated financial statements.
Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
In this Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars. The Government of Canada permits a floating exchange rate to
determine the value of the Canadian Dollar against the U.S. Dollar.
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Set forth below is the rate of exchange for the Canadian Dollar at the end of
the most recent fiscal year ended July 31, 2000 and the six months ended January
31, 2001 and 2000, average rates for the periods, and the range of high and low
rates for the periods. For purposes of this table, the rate of exchange means
the noon buying rate in New York City for the cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York. The table below sets forth the number of Canadian Dollars required under
that formula to buy one U.S. dollar. The average rate means the average of the
exchange rates on the last day of each month during the period.
U.S. Dollar/Canadian Dollar
Average Close High Low
------- ----- ---- ---
Six Months Ended 01/31/01 1.51 1.50 1.56 1.47
Six Months Ended 01/31/00 1.47 1.45 1.48 1.43
Fiscal Year Ended 07/31/00 1.47 1.49 1.51 1.44
SmarTire Systems Inc. (together with its subsidiaries, the "Company" or
"SmarTire") is engaged in developing and marketing technically advanced tire
monitoring systems designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the six months ended January 31, 2001,
the Company earned revenues primarily from the sale of tire monitoring systems
for passenger cars and motorsport applications.
The Company, in conjunction with its strategic partners, is focused on
developing and marketing technically advanced tire monitoring systems in
response to an increasing demand from the transportation industry for improved
vehicle safety, performance, reliability and fuel efficiency. After developing
its proprietary tire monitoring technology for application in the industrial and
commercial vehicle markets plus a specialized tire monitoring system for
motorsports, the Company turned to developing its technology for use by the
automotive industry to address the escalating demand for passenger car tire
monitoring systems. In support of the tire industry's introduction of the
innovative run-flat or extended mobility tire, the Company developed the
SmarTire(R) system and established North American and European sales, marketing,
and distribution networks. The Company plans to complete the development and
launch of its next generation of tire monitoring systems, including new
passenger and commercial tire monitoring systems. The Company is also working on
the development of new technologies for tire monitoring systems.
The Company is promoting the SmarTire(R) system to both run-flat and
conventional tire aftermarkets worldwide. Additional target markets included in
the Company's plans are commercial, industrial and recreational vehicles. The
Company's alliance partner, TRW Inc., is marketing tire monitoring systems to
the original equipment vehicle manufacturers for passenger vehicles, light
trucks and some medium trucks.
RESULTS OF OPERATIONS
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THREE MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2000
Gross revenue for the three months ended January 31, 2001 was $328,478 compared
to $294,227 for the three months ended January 31, 2000. The increase in revenue
for the three months ended January 31, 2001 from the three months ended January
31, 2000 was a result of the following:
Sales of aftermarket passenger car systems increased to $179,309 for the three
months ended January 31, 2001 compared to $134,900 for the three months ended
January 31, 2000. Sales of OEM passenger car systems increased to $45,520 for
the three months ended January 31, 2001 compared to $39,562 for the three months
ended January 31, 2000. Sales of motorsport tire monitoring systems decreased to
$103,649 for the three months ended January 31, 2001 from $119,765 for the three
months ended January 31, 2000.
Gross margin on product sales increased to 61% for the three months ended
January 31, 2001 from 50% for the three months ended January 31, 2000. The
increase occurred as the product mix of aftermarket systems sold in 2001 had
higher gross margins than the product mix of aftermarket systems sold in 2000.
The gross margins continue to be significantly affected by the reduction in
carrying value of inventory in the 1999 fiscal year. Gross margins on sales of
aftermarket products would be substantially lower if the write down of inventory
had not occurred.
Expenses and other decreased to $2,326,915 for the three months ended January
31, 2001 from $2,969,012 for the three months ended January 31, 2000 as
decreased marketing, general and administration, engineering, research and
development expenses and increased interest income were partially offset by
higher depreciation and amortization and a larger foreign exchange loss.
Marketing expenses decreased to $581,881 for the three months ended January 31,
2001 from $805,476 for the three months ended January 31, 2001 due to lower
advertising and promotion costs and reduced wage expenditures.
General and administrative expenses decreased to $1,035,446 for the three months
ended January 31, 2001 as compared to $1,233,654 for the three month period
ended January 31, 2000. Decreased expenditures on wages, investor relations
activities, filing fees and professional fees were partially offset by increased
travel and computer costs.
Engineering, research and development expenses decreased to $640,249 for the
three months ended January 31, 2001 as compared to $810,021 for the three month
period ended January 31, 2000. Decreased expenditures on prototype development,
consulting and travel were partially offset by increased expenses for product
testing.
Depreciation and amortization expense increased to $140,618 for the three months
ended January 31, 2001 from $80,414 for the same period in the prior year. The
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increase was due to amortization of the license acquired from TRW Inc. as
described under Liquidity and Capital Resources.
The company earned interest income of $174,026 for the three months ended
January 31, 2001 as compared to $25,266 for the three months ended January 31,
2000. This increase was due to higher average cash balances during the current
fiscal period.
SIX MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2000
Gross revenue for the six months ended January 31, 2001 was $597,122 compared to
$589,153 for the six months ended January 31, 2000. The increase in revenue for
the six months ended January 31, 2001 over the six months ended January 31, 2000
was a result of the following:
Sales of aftermarket passenger car systems increased to $353,887 for the six
months ended January 31, 2001 compared to $334,681 for the six months ended
January 31, 2000. Sales of OEM passenger car systems increased to $107,657 for
the six months ended January 31, 2001 compared to $89,209 for the six months
ended January 31, 2000. Sales of motorsport tire monitoring systems decreased to
$135,578 for the six months ended January 31, 2001 from $165,263 in the six
months ended January 31, 2000.
Gross margin on product sales increased to 63% for the six months ended January
31, 2001 from 47% for the six months ended January 31, 2000. The increase
occurred as the product mix of aftermarket systems sold in 2001 had higher gross
margins than the product mix of aftermarket systems sold in 2000. The gross
margins continue to be significantly affected by the reduction in carrying value
of inventory in the 1999 fiscal year. Gross margins on sales of aftermarket
products would be substantially lower if the write down of inventory had not
occurred.
Expenses and other decreased to $4,531,556 for the six months ended January 31,
2001 from $5,091,668 for the six months ended January 31, 2000, as decreased
marketing, general and administration, engineering, research and development
expenses, higher foreign exchange gains and interest income were partially
offset by higher depreciation and amortization.
Marketing expenses decreased to $1,449,876 for the six months ended January 31,
2001 from $1,500,532 for the six months ended January 31, 2000. Lower wage
expenditures and travel costs were partially offset by increased expenditures on
promotional materials in anticipation of the launch of the Company's second
generation products and increased trade show expenditures as the Company
attended the Automechanika and SEMA trade shows.
General and administrative expenses decreased to $2,126,789 for the six months
ended January 31, 2001 from $2,225,816 for the six month period ended January
31, 2000. Lower professional fees, insurance and filing fees were partially
offset by increased investor relations, travel and computer expenditures.
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Engineering, research and development expenses decreased to $1,156,601 for the
six months ended January 31, 2001 as compared to $1,209,561 for the six month
period ended January 31, 2000. Decreased prototype development, consulting and
travel were partially offset by an increase in product testing and wage
expenditures.
Depreciation and amortization expense increased to $214,353 for the six months
ended January 31, 2001 from $122,964 for the same period in the prior year. The
increase was due to amortization of the license acquired from TRW Inc. as
described under Liquidity and Capital Resources.
The Company earned interest income of $371,029 for the six months ended January
31, 2001 as compared to $48,144 for the six months ended January 31, 2000. This
increase was due to higher average cash balances during the current fiscal
period.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its activities primarily through the issuance
and sale of securities. The Company has incurred net operating losses in each
year since inception and, as of January 31, 2001, had an accumulated deficit of
$39,327,339. Shareholders' equity was $13,351,669 and the Company's working
capital was $9,841,618 at January 31, 2001.
The Company's cash position at January 31, 2001 was $9,836,428 as compared to
$14,512,558 at July 31, 2000. This decrease was due to the Company's operating,
financing and investing activities described below.
For the six months ended January 31, 2001, the Company received proceeds of
$360,705 from the exercise of 160,000 warrants and $29,532 from the exercise of
9,900 stock options. The Company used $917,552 for investing activities during
the six months ended January 31, 2001. Of this amount $167,802 was for the
purchase of capital assets and $749,750 was used to purchase the license from
TRW Inc. as described below. The Company used $4,148,815 for operating
activities during the six months ended January 31, 2001. The net loss of
$4,153,469 was reduced by non-cash charges of $214,353 for depreciation and
amortization and was increased by $209,699 due to a change in non-cash working
capital.
Effective December 13, 2000 the Company entered into an Assignment and Amendment
Agreement with TRW Inc. that transfers to the Company the exclusive license to
manufacture and sell tire monitoring systems to the original equipment vehicle
manufacturers of most medium and heavy duty trucks. Consideration paid to TRW
Inc. consisted of 450,000 shares of common stock plus cash of US$500,000
($749,750).
PART II. OTHER INFORMATION
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ITEM 2. CHANGES IN SECURITIES
On December 18, 2000, the Company issued 450,000 shares of common stock to TRW
Inc. as primary consideration in the Assignment and Amendment Agreement with TRW
Inc. that transfers to the Company the license to manufacture and sell tire
monitoring systems to the original equipment manufacturers of most medium and
heavy trucks. These securities were issued in reliance on the exemptions from
registration under section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
As authorized under the Company Act (British Columbia) and the Company's
Articles, all Shareholder votes on actions taken at an annual or extraordinary
general meeting of the Company's Shareholders are conducted by a show of hands
of those Shareholders and proxy agents in attendance at the meeting, after the
scrutineer of the meeting has confirmed that the quorum requirements for the
meeting have been met. In the absence of a demand by a Shareholder or a proxy
agent for a vote by ballot, neither the Company Act (British Columbia) nor the
Company's Articles require the Company to count or record, with respect to a
vote on a particular action by a show of hands, the specific number of shares
held or represented by each voting Shareholder or proxy agent; any particular
action is recorded in the minutes of the meeting as having been duly passed if
the majority of those Shareholders or proxy agents present at the meeting voted
in favor of it. Moreover, neither the Company Act (British Columbia) nor the
Company's Articles permit the counting of broker non-votes.
At the Company's Annual and Extraordinary General Meeting of Shareholders, held
on December 5, 2000, the Company's Shareholders took the following actions. As
no Shareholder or proxy agent in attendance at the Meeting demanded that a vote
be taken by way of ballot, the number of votes shown below as cast in favor,
against or withheld represent the results of tabulation of proxies received by
the Company in advance of the Meeting, and do not reflect actual votes cast at
the Meeting by way of show of hands; but no Shareholders in attendance at the
Meeting voted against any of the resolutions:
(a) KPMG LLP was appointed as the Company's auditor; proxies returned to
the Company showed 8,084,289 shares in favor and 6,652 shares withheld.
(b) The shareholders authorized the Company's board of directors to fix
the remuneration to be paid to KPMG LLP in connection with their services as the
Company's auditors; proxies returned to the Company showed 8,080,057 shares in
favor and 10,884 shares against.
(c) The shareholders set the authorized number of directors at six (6);
proxies returned to the Company showed 8,072,612 shares in favor and 18,329
shares against.
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(d) The following directors, constituting the entire board of directors,
were elected to serve until the next annual general meeting or until their
successors are appointed:
Name Votes For Votes Withheld
- ---- --------- --------------
Lawrence Becerra 8,080,831 10,110
John Bolegoh 8,061,055 29,886
Kevin Carlson 8,085,317 5,624
Bernard Pinsky 8,074,484 16,457
Robert Rudman 8,083,210 7,731
Dana Stonerook 8,082,407 8,534
(e) The shareholders approved an increase in the authorized shares of
the Company's common stock, no par value, by 181,251 shares, (so that there are
a total of 200,000,000 authorized shares of common stock); proxies returned to
the Company showed 8,028,926 shares in favor and 57,153 shares against.
(f) The shareholders authorized the cancellation and substitution of the
Company's existing Articles; proxies returned to the Company showed 758,890
shares in favor, 50,913 shares against, 2,500 shares withheld and 1,000 shares
to be voted at the discretion of the appropriate proxy agent.
(g) The shareholders approved of the adoption of the 1999 Incentive
Compensation Plan; proxies returned to the Company showed 735,333 shares in
favor, 73,170 shares against, 3,800 shares withheld and 1,000 shares to be voted
at the discretion of the appropriate proxy agent.
(h) The shareholders approved of the adoption of the 2000 Stock
Incentive Plan- Non-United States Residents; proxies returned to the Company
showed 718,941 shares in favor, 91,862 shares against, 1,500 shares withheld and
1,000 shares to be voted at the discretion of the appropriate proxy agent.
(g) The shareholders approved of the adoption of the 2000 Stock
Incentive Plan- United States Residents; proxies returned to the Company showed
722,225 shares in favor, 88,178 shares against, 1,900 shares withheld and 1,000
shares to be voted at the discretion of the appropriate proxy agent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
10.1 Assignment and Amendment Agreement with TRW Inc.
11.1 Computation of loss per share
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(b) Reports of Form 8-K -- Three months ended January 31, 2000:
January 12, 2001 -- News release issued January 12, 2001 regarding Assignment
and Amendment Agreement with TRW Inc.
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SIGNATURES
In accordance with the requirements for the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTIRE SYSTEMS INC.
----------------------------
(Registrant)
Date March 15, 2001 /s/ ROBERT V. RUDMAN
------------------------- -----------------------
Robert V. Rudman
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Date March 15, 2001 /s/ KEVIN A. CARLSON
------------------------- -----------------------
Kevin A. Carlson
Director, Chief Financial Officer,
Managing Director and Corporate
Secretary (Principal Financial
Officer and Principal Accounting
Officer)
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