UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SMARTIRE SYSTEMS INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Yukon Territory 3714 n/a
- ---------------------------------------- -------------------------------------- --------------------------------
State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(604) 276-9884
- --------------------------------------------------------------------------------
(Address and telephone number of registrant's principal executive offices)
Robert Rudman, President and CEO
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(604) 276-9884
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Copy of communications to:
Darrin M. Ocasio, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of Americas
New York, NY 10018
Telephone: 212-930-9700
Facsimile: 212-930-9725
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
1
CALCULATION OF REGISTRATION FEE
- ---------------------------- ------------------- ----------------------- ---------------------- ----------------------
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price aggregate offering Amount of
registered(1) registered per share price registration fee(2)
- ---------------------------- ------------------- ----------------------- ---------------------- ----------------------
Common stock 90,000,000(3) $0.094 $8,460,000.00 $1,071.88
- ---------------------------- ------------------- ----------------------- ---------------------- ----------------------
Common stock 3,605,769(4) $0.094 $338,942.29 $42.94
- ---------------------------- ------------------------------------------------------------------ ----------------------
Total Registration Fee $1,114.82
- ---------------------------- ------------------------------------------------------------------ ----------------------
(1) In the event of a stock split, stock dividend, or similar transactions
involving our common stock, the number of shares registered shall automatically
be increased to cover the additional shares of common stock issuable pursuant to
Rule 416 under the Securities Act of 1933, as amended.
(2) Fee calculated in accordance with Rule 457(c) of the Securities Act.
Estimated for the sole purpose of calculating the registration fee and based
upon the average quotation of the high and low price of our common stock on May
28, 2004, as reported on the OTC Bulletin Board.
(3) Represents shares of common stock issuable pursuant to a Standby Equity
Distribution Agreement dated May 19, 2004 between our company and Cornell
Capital Partners, LP. The Standby Equity Distribution Agreement contemplates the
potential future issuance and sale of up to $15.0 million of our common stock to
Cornell Capital Partners, LP, subject to certain restrictions and other
obligations. Under this arrangement, we, at our sole discretion, may draw down
on this facility, sometimes termed an equity line, from time to time over a
period of twenty four months after the effective date of this registration
statement or until Cornell Capital Partners, LP purchases $15.0 million worth of
shares of our common stock, whichever comes first. (See "The Standby Equity
Distribution Agreement" beginning on page 30.) Given our company's current
capital needs and the market price of our common stock, we presently have no
intention of drawing down the entire $15.0 million amount. Accordingly, our
company's good faith estimate of the number of shares that we will issue
pursuant to the equity line is 90,000,000 shares. However, if our circumstances
change and we have no other source of financing, we may ultimately have to draw
down the entire $15.0 million assuming that we will then be in a position to
meet all of the conditions to effect draw downs under this facility.
(4) Represents shares of common stock issuable as a commitment fee and placement
agent fee pursuant to the Standby Equity Distribution Agreement dated May 19,
2004 between our company and Cornell Capital Partners, LP.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
2
PROSPECTUS
Subject to Completion
June __, 2004
SMARTIRE SYSTEMS INC.
A YUKON CORPORATION
93,605,769 SHARES OF COMMON STOCK OF SMARTIRE SYSTEMS INC.
_________________________________
This prospectus relates to the resale by Cornell Capital Partners, LP
Limited, a Delaware limited partnership, of up to 90,000,000 shares of common
stock that may be issued through a Standby Equity Distribution Agreement between
us and Cornell Capital Partners, LP dated May 19, 2004, as further described in
this prospectus. See "The Standby Equity Distribution Agreement" beginning on
page 30.
Cornell Capital Partners, LP may resell the shares issued to it under
the Standby Equity Distribution Agreement using this prospectus. We will not
receive any proceeds from the resale of shares of our common stock by Cornell
Capital Partners, LP, but will bear the costs relating to the registration of
the shares.
Newbridge Securities Corporation, a broker dealer registered pursuant
to section 15 of the Securities Exchange Act of 1934, was instrumental in
arranging for the $15.0 million equity line of credit facility provided by
Cornell Capital Partners, LP pursuant to the Standby Equity Distribution
Agreement. With the exception of Cornell Capital Partners, LP and Newbridge
Securities Corporation, each of which will be an "underwriter" within the
meaning of the Securities Act of 1933 in connection with the resale of our
common stock under the equity line of credit facility, no underwriter or any
other person has been engaged to facilitate the sale of shares of common stock
in this offering.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"SMTR.OB". On May 25, 2004 the closing bid price for one share of our common
stock was $0.094. We do not have any securities that are currently traded on any
other exchange or quotation system.
Our business is subject to many risks and an investment in our common
stock will also involve a high degree of risk. You should invest in our common
stock only if you can afford to lose your entire investment. You should
carefully consider the various Risk Factors described beginning on page 9 before
investing in our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offence.
The information in this prospectus is not complete and may be changed.
The selling stockholder may not sell or offer these securities until this
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
The date of this prospectus is June __, 2004.
3
The following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus.
TABLE OF CONTENTS
PAGE NUMBER
-----------
PROSPECTUS SUMMARY 7
RISK FACTORS 10
RISKS RELATED TO SOME OF OUR OUTSTANDING SECURITIES
We have issued convertible debentures and share purchase warrants, and our obligations under
the convertible debentures and the warrants pose risks to the price of our common stock and
our continuing operations. 10
The holders of the discounted and 8% convertible debentures have the option of converting
the convertible debentures into shares of our common stock, and we may elect to make the
monthly redemption payments under the discounted convertible debentures in shares of our
common stock. The holders of the convertible debentures may also exercise their common
share purchase warrants. If the convertible debentures are converted or the warrants are
exercised, there will be dilution of your shares of our common stock. 10
The convertible debentures provide for various events of default that would entitle the
holders to require us to immediately repay 120% of the outstanding principal amount, plus
accrued and unpaid interest, in cash. If an event of default occurs, we may be unable to
immediately repay the amount owed, and any repayment may leave us with little or no working
capital in our business. 12
There are a large number of shares underlying our standby equity distribution
agreement that are being registered in this prospectus and the sale of these
shares may depress the market price of our common stock, cause dilution to the
existing stockholders and may result in a change of control. 13
Under the standby equity distribution agreement, Cornell Capital Partners will
pay less than the then-prevailing market price of our common stock and this
discounted sale could cause the price of our common stock to decline. 13
Assuming the issuance of 90,000,000 shares of our common stock pursuant to our equity line
of credit facility at an issue price of $0.094 per share, the effective price paid for each
share would exceed the net tangible book value of each share as at January 31, 2004 by
$0.03, representing a dilution factor of 32.4%. 14
The sale of our stock under our equity line could encourage short sales by third
parties, which could contribute to the future decline of our stock price. 14
Trading on the OTC Bulletin Board may be sporadic because it is not a stock exchange, and
stockholders may have difficulty reselling their shares. 15
4
PAGE NUMBER
-----------
RISKS RELATED TO OUR BUSINESS AND COMPANY 15
We require additional financing in order to continue in business as a going concern, the
availability of which is uncertain. We may be forced by business and economic conditions to
accept financing terms which will require us to issue our securities at a discount, which
could result in further dilution to our existing stockholders. 15
Our Standby Equity Distribution Agreement with Cornell Capital Partners, LP limits the
number of shares of common stock that we can require Cornell Capital Partners, LP to
purchase to not more than 9.99% of our then issued and outstanding shares of common stock in
connection with each draw down, which may further limit our ability to draw down amounts
that we request and which may cause us to significantly curtail the scope of our operations
and alter our business plan. 15
We have a history of operating losses and fluctuating operating results, which raise
substantial doubt about our ability to continue as a going concern. 16
We may experience significant and rapid growth if we are able to capitalize on the expansion
of the tire monitoring market. If we are unable to hire and train staff to handle sales and
marketing of our products and manage our operations, such growth could materially and
adversely affect us. 16
Technological changes in our industry could render our products non-competitive or obsolete
and consequently affect our ability to generate revenues. 16
We do carry a reasonable amount of product liability insurance . However there can be no
assurance that our existing insurance coverage would be adequate in term and scope to
protect us against material financial effects in the event of a successful claim. 16
Substantially all of our assets and a majority of our directors and officers are outside the
United States, with the result that it may be difficult for investors to enforce within the
United States any judgments obtained against us or any of our directors or officers. 17
The loss of any one of our three major customers would materially and adversely affect us. 17
We may experience difficulty in obtaining components and raw materials, and we could be
materially and adversely affected as a result. 17
The loss of any of our contract manufacturers would materially and adversely affect us. 17
We depend to a significant extent on certain key personnel, the loss of any of whom may
materially and adversely affect our company. 17
FORWARD-LOOKING STATEMENTS 18
SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE 18
THE OFFERING 18
DILUTION 18
USE OF PROCEEDS 19
SELLING STOCKHOLDER 21
PLAN OF DISTRIBUTION 23
THE STANDBY EQUITY DISTRIBUTION AGREEMENT 26
LEGAL PROCEEDINGS 29
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 32
DESCRIPTION OF COMMON STOCK 34
LEGAL MATTERS 34
5
PAGE NUMBER
-----------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 35
INTEREST OF NAMED EXPERTS AND COUNSEL 35
EXPERTS 35
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 35
DESCRIPTION OF BUSINESS 36
MANAGEMENT'S DISCUSSION AND ANALYSIS 47
LIQUIDITY AND CAPITAL RESOURCES 58
APPLICATION OF CRITICAL ACCOUNTING POLICIES 64
DESCRIPTION OF PROPERTY 66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 66
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 66
DIVIDEND POLICY 67
EXECUTIVE COMPENSATION 67
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS 72
FINANCIAL STATEMENTS 74
WHERE YOU CAN FIND MORE INFORMATION 130
As used in this prospectus, the terms "we", "us", "our", and "SmarTire"
mean SmarTire Systems Inc. and its subsidiaries, unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
6
PROSPECTUS SUMMARY
Our Business
We (together with our subsidiaries) are engaged in the development and
marketing of tire monitoring systems designed for improved vehicle safety,
performance, reliability and fuel efficiency. During the fiscal years ended July
31, 2003 and July 31, 2002, we earned revenues primarily from the sale of tire
monitoring systems for passenger cars. Our principal executive offices are
located at #150 - 13151 Vanier Place, Richmond, British Columbia, Canada, V6V
2J1. We were incorporated under the laws of the Province of British Columbia on
September 8, 1987, and were continued under the laws of the Yukon Territory to
become a Yukon corporation effective February 6, 2003. Our telephone number is
(604) 276-9884.
We have three wholly-owned subsidiaries: SmarTire Technologies Inc.,
SmarTire USA Inc. and SmarTire Europe Limited. SmarTire Technologies Inc. was
incorporated on June 3, 1988 under the laws of the Province of British Columbia,
and was the original developer of our patented technology. SmarTire USA Inc., a
Delaware corporation incorporated on May 16, 1997, is our exclusive marketing
agency for SmarTire in North America. SmarTire Europe Limited, a United Kingdom
corporation incorporated on February 25, 1998, is our exclusive sales and
distribution operation for Europe. SmarTire Europe's head office is located at
Park 34, Southmead Industrial Park, Didcot, Oxfordshire, England, OX11 7WB.
Number of Shares Being Offered
This prospectus covers the resale by Cornell Capital Partners, LP of up
to 90,000,000 shares of common stock issuable pursuant to a Standby Equity
Distribution Agreement dated May 19, 2004 between our company and Cornell
Capital Partners, LP. The Standby Equity Distribution Agreement contemplates the
potential future issuance and sale of up to $15.0 million of our common stock to
Cornell Capital Partners, LP, subject to restrictions and other obligations that
are described throughout this prospectus. Under this arrangement, we, at our
sole discretion, may draw down on this facility, sometimes termed an equity
line, from time to time over a period of twenty-four months after the effective
date of this registration statement or until Cornell Capital Partners, LP
purchases $15.0 million worth of shares of our common stock, whichever comes
first. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay 98% of the lowest
closing bid price of our common stock on the Over-The-Counter Bulletin Board for
the five trading days immediately following the notice date. The amount of each
advance is subject to a maximum of $500,000 per advance, with a minimum of seven
trading days between advances. Cornell Capital Partners intends to sell any
shares purchased under the Standby Equity Distribution Agreement at the then
prevailing market price. In addition, Cornell Capital Partners will retain 5% of
each advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners will receive 3,509,615 shares of common stock as a one-time commitment
fee, which will be available for resale pursuant to this prospectus.
We have engaged Newbridge Securities Corporation, an unaffiliated
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. Newbridge Securities Corporation is owed a fee of 96,154
shares of our common stock. This prospectus also relates to the resale by
Newbridge Securities Corporation of these shares of common stock.
There is no cap on the number of shares that can be issued under the
Standby Equity Distribution Agreement. Given our company's current capital needs
and the market price of our common stock, we presently have no intention of
drawing down the entire $15.0 million amount. Accordingly, our company's good
faith estimate of the number of shares that we will issue pursuant to the equity
line is 90,000,000 shares. However, if our circumstances change and we have no
other source of financing, we may ultimately have to draw down the entire $15.0
million assuming that we will then be in a position to meet all of the
conditions to effect draw downs under this facility
There is a large number of shares of common stock underlying the
Standby Equity Distribution Agreement that will be available for future sale and
the sale of these shares will cause dilution to our existing shareholders.
7
We are limited with respect to how often we can exercise a draw down
and the amount of each draw down. For more details on the equity line, see "The
Standby Equity Distribution Agreement" elsewhere in this prospectus.
Brokers or dealers effecting transactions in the shares being
registered in this offering should confirm that the shares are registered under
applicable state law or that an exemption from registration is available.
The selling stockholders may sell the shares of common stock in the
public market or through privately negotiated transactions or otherwise. Cornell
Capital Partners, LP may sell these shares of common stock through ordinary
brokerage transactions, directly to market makers or through any other means
described in the section entitled "Plan of Distribution".
Number of Shares Outstanding
There were 89,013,091 shares of our common stock issued and outstanding
as at May 25, 2004.
Use of Proceeds
We will not receive any of the proceeds from the sale of the shares of
common stock being offered for sale by the selling stockholder. We will,
however, incur all costs associated with this registration statement and
prospectus.
Summary of Financial Data
The summarized financial data presented below is derived from and
should be read in conjunction with our audited consolidated financial statements
for the years ended July 31, 2003 and July 31, 2002, and our unaudited
consolidated financial statements for the six-month period ended January 31,
2004, (in each case including the notes to those financial statements) which are
included elsewhere in this prospectus along with the section entitled
"Management's Discussion and Analysis" beginning on page 48 of this prospectus
- -------------------------------------------------- ------------------------ -------------------------
For the 6-month For the 6-month
period ended period ended
January 31, 2004 January 31, 2003
(unaudited) (unaudited)
- -------------------------------------------------- ------------------------ -------------------------
Revenue $857,717 $544,351
- -------------------------------------------------- ------------------------ -------------------------
Net Loss for the Period $(5,168,322) $(4,200,245)
- -------------------------------------------------- ------------------------ -------------------------
Loss Per Share - basic and diluted $(0.08) $(0.21)
- -------------------------------------------------- ------------------------ -------------------------
As at As at
January 31, 2004 January 31, 2003
(unaudited) (unaudited)
- -------------------------------------------------- ------------------------ -------------------------
Working Capital (Deficiency) $3,852,457 $(693,461)
- -------------------------------------------------- ------------------------ -------------------------
Total Assets $9,412,369 $6,074,827
- -------------------------------------------------- ------------------------ -------------------------
Total Share Capital $53,188,932 $45,432,055
- -------------------------------------------------- ------------------------ -------------------------
Deficit $(53,199,552) $(42,316,846)
- -------------------------------------------------- ------------------------ -------------------------
Total Stockholders' Equity $7,477,654 $3,409,073
- -------------------------------------------------- ------------------------ -------------------------
8
- --------------------------------------- ------------------------ ------------------------ --------------------------
For the year ended For the year ended
For the year ended
July 31, 2003 July 31, 2002 July 31, 2001
- --------------------------------------- ------------------------ ------------------------ --------------------------
Revenue $1,802,596 $1,012,344 $779,611
- --------------------------------------- ------------------------ ------------------------ --------------------------
Net Loss for the Period $(9,914,629) $(6,829,176) $(5,507,019)
- --------------------------------------- ------------------------ ------------------------ --------------------------
Loss Per Share - basic and diluted $(0.37) $(0.41) $(0.39)
- --------------------------------------- ------------------------ ------------------------ --------------------------
- --------------------------------------------------- ----------------------- -------------------------
As at As at
July 31, 2003 July 31, 2002
- --------------------------------------------------- ----------------------- -------------------------
Working Capital (Deficiency) $2,423,932 $(93,609)
- --------------------------------------------------- ----------------------- -------------------------
Total Assets $7,085,592 $6,749,601
- --------------------------------------------------- ----------------------- -------------------------
Total Share Capital $48,204,995 $42,514,482
- --------------------------------------------------- ----------------------- -------------------------
Deficit $(48,031,230) $(38,116,601)
- --------------------------------------------------- ----------------------- -------------------------
Total Stockholders' Equity $6,287,304 $4,289,046
- --------------------------------------------------- ----------------------- -------------------------
9
RISK FACTORS
An investment in our common stock involves a number of very significant
risks. You should carefully consider the following risks and uncertainties in
addition to other information in this prospectus in evaluating our company and
our business before purchasing shares of common stock. Our business, operating
results and financial condition could be seriously harmed due to any of the
following risks. The risks described below are not the only ones facing our
company. Additional risks not presently known to us may also impair our business
operations. You could lose all or part of your investment due to any of these
risks.
RISKS RELATED TO SOME OF OUR OUTSTANDING SECURITIES
We have issued convertible debentures and share purchase warrants, and our
obligations under the convertible debentures and the warrants pose risks to the
price of our common stock and our continuing operations.
We have issued discounted convertible debentures, in the aggregate
principal amount of $3,493,590, maturing on April 1, 2006 of which amount
$2,911,325 remain outstanding as at May 19, 2004. In addition to the discounted
convertible debentures, we have also issued 8% convertible debentures in the
aggregate principal amount of $1,700,000 maturing July 16, 2006, of which amount
$325,000 remain outstanding as at May 19, 2004. The discounted and 8%
convertible debentures provide that in certain circumstances the holder of the
debentures may convert the outstanding principal and, in the case of the 8%
convertible debentures, accrued interest, into shares of our common stock. The
purchasers of the discounted convertible debentures and 8% convertible
debentures also hold an aggregate of 32,536,131 warrants.
The terms and conditions of the convertible debentures and the warrants
pose unique and special risks to our continuing operations and the price of our
common stock. Some of those risks are outlined below.
The holders of the discounted and 8% convertible debentures have the option of
converting the convertible debentures into shares of our common stock, and we
may elect to make the monthly redemption payments under the discounted
convertible debentures in shares of our common stock . The holders of the
convertible debentures may also exercise their common share purchase warrants.
If the convertible debentures are converted or the warrants are exercised, there
will be dilution of your shares of our common stock.
The issuance of shares of our common stock upon conversion or
redemption of the discounted convertible debentures, and upon the conversion of
the 8% convertible debentures, will result in dilution to the interests of other
holders of our common stock, since the holders of the convertible debentures may
sell all of the resulting shares into the public market.
The principal amount of the discounted convertible debentures may be
converted at the option of the holders into shares of our common stock at a set
price of $0.22 per share, subject to adjustment pursuant to the anti-dilution
provisions as set forth in the convertible debentures. In addition, we may elect
to make the monthly redemption payments in shares of our common stock at a
conversion price equal to the lesser of (a) the set price of $0.22 per share
(subject to adjustment pursuant to the anti-dilution provisions contained in the
debentures), and (b) 85% of the average of the 20 closing prices of our common
stock.
As at May 19, 2004, we had issued 4,545,271 shares of our common stock
for monthly payments on our discounted convertible debenture and holders of 8%
convertible debentures had converted a total of $1,401,420 of principal, and
related interest, resulting in the issuance of 10,989,635 shares of our common
stock. The balance of the 8% convertible debentures in the aggregate amount of
$325,000 may be converted at a conversion price of $0.104 per share, subject to
adjustment as set forth in the convertible debentures. Accrued interest on any
principal amount that is so converted will be converted into shares of our
common stock at a conversion price equal to 90% of the 20-day average closing
bid price.
The purchasers of the discounted convertible debentures received
warrants to acquire up to an aggregate of 7,939,978 shares of our common stock,
exercisable for a period of two years.
10
The purchasers of the 8% convertible debentures received warrants to
acquire up to an aggregate of 13,076,922 shares of our common stock, exercisable
for a period of five years. They also hold additional warrants to acquire up to
an aggregate of 10,269,231 shares of our common stock, exercisable for a period
of five years.
Each convertible debenture and each warrant is subject to anti-dilution
protection upon the occurrence of certain events. If, among other things, we or
any of our subsidiaries offers, sells or otherwise disposes of or issues any of
our common stock (or any equity, debt or other instrument that is at any time
over its life convertible into or exchangeable for our common stock) at an
effective price per share that is less than the conversion price of the
convertible debenture or the exercise price of the warrant, the conversion price
or the exercise price of the warrant will be reduced to equal such effective
price.
The following table sets forth the number and percentage of shares of
our common stock that would be issuable if:
-- the entire principal amount of the discounted convertible
debentures of $2,911,325 is converted or redeemed at the set
price of $0.22 and the 8% convertible debentures are converted
at $.104
-- the entire principal amount of the discounted and 8%
convertible debentures of $3,236,325 is converted or redeemed
at $0.104
- --------------------------------------- ----------------- ------------------ ------------------- -------------------
Number of
Shares Issuable
on Conversion/
Redemption of Shares Issued or
Discounted and Issuable on
8% Convertible Exercise of Percentage of
Description Debentures(1) Warrants Total Shares Class(2)(3)
- --------------------------------------- ----------------- ------------------ ------------------- -------------------
Scenario 1:
Debentures in the
aggregate principal amount
of $2,911,325 are
converted/redeemed at a
conversion price of $0.22,
and debentures in the
aggregate principal amount
of $325,000 are converted
at a
conversion price of $0.104. 16,358,295 32,536,131 48,894,426 35.45%
- --------------------------------------- ----------------- ------------------ ------------------- -------------------
Scenario 2:
Debentures in the aggregate principal
amount of $3,236,325 are
converted/redeemed at a conversion
price of $0.104 41,491,346 32,536,131 63,654,641 41.69%
- --------------------------------------- ----------------- ------------------ ------------------- -------------------
(1) Represents the number of shares issuable if all of the outstanding principal
under all of the discounted convertible debentures and the 8% convertible
debentures were converted/redeemed at the indicated conversion price. For ease
of reference, any shares of common stock that may be issued upon conversion of
interest under the 8% convertible debentures have been excluded. The outstanding
principal under the 8% convertible debentures bears interest at the rate of 8%
per annum, calculated on the basis of a 360-day year.
11
(2) Based on 89,013,091 common shares issued and outstanding on May 25, 2004.
(3) Percentage of the total outstanding common stock represented by the shares
issuable on conversion/redemption of the discounted convertible debentures and
the 8% convertible debentures, and upon exercise of the warrants, without regard
to any contractual or other restriction on the number of securities the selling
stockholders may own at any point in time. The actual number of shares of common
stock issued or issuable upon the conversion/redemption of the discounted
convertible debentures is subject to adjustment pursuant to anti-dilution
provisions contained in the debentures which may or may not be triggered,
depending upon factors which cannot be predicted by us at this time.
The convertible debentures provide for various events of default that would
entitle the holders to require us to immediately repay 120% of the outstanding
principal amount, plus accrued and unpaid interest, in cash. If an event of
default occurs, we may be unable to immediately repay the amount owed, and any
repayment may leave us with little or no working capital in our business.
We will be considered in default of the discounted convertible
debentures and the 8% convertible debentures if any of the following events,
among others, occurs:
(a) we fail to pay any amount due under a convertible debenture within
five days of any notice sent to us by the holder of the convertible
debenture that we are in default of our obligation to pay the amount;
(b) we fail to comply with any of the other agreements contained in the
convertible debenture after we are given fifteen days written notice of
such non-compliance;
(c) we breach any of our obligations under the related securities
purchase agreement or the related registration rights agreement and the
breach is not cured by us within fifteen days after our receipt of
written notice of such breach;
(d) we or any of our subsidiaries become bankrupt or insolvent;
(e) we breach any of our obligations under any other debt or credit
agreements involving an amount exceeding $150,000, unless the breach is
cured by us within fifteen days and the breach is waived by the other
party to the debt or credit agreement;
(f) our common stock ceases to be eligible for quotation on the
principal market for our common stock (currently the OTC Bulletin
Board), and fails to be quoted or listed for trading on another
principal market (defined to mean the OTC Bulletin Board, the New York
Stock Exchange, American Stock Exchange, the NASDAQ Small-Cap Market or
the NASDAQ National Market) within five trading days;
(g) we agree to sell or dispose of more than 33% of our assets in one
or more transactions, or we agree to redeem or repurchase more than an
insignificant number of shares of our outstanding common stock or any
other equity securities of our company; or
(h) we fail to issue shares of our common stock to the holder within
five trading days of the conversion date specified in any conversion
notice delivered in respect of a convertible debenture by the holder.
If an event of default occurs, the holder of a convertible debenture
can elect to require us to pay a mandatory prepayment amount generally equal to
120% of the outstanding principal amount, plus all other accrued and unpaid
amounts under the convertible debenture.
Some of the events of default include matters over which we may have
some, little or no control. If a default occurs and we cannot pay the amounts
payable under the convertible debentures in cash (including any interest on such
amounts and any applicable late fees under the convertible debentures), the
holders of the debentures may protect and enforce their rights or remedies
either by suit in equity or by action at law, or both, whether for the specific
performance of any covenant, agreement or other provision contained in the
convertible debentures, in the related securities purchase agreement or in any
document or instrument delivered in connection with or pursuant to the
convertible debentures, or to enforce the payment of the outstanding convertible
debentures or any other legal or equitable right or remedy. In addition, any
repayment that we are required to make may leave us with little or no working
capital in our business. This would have an adverse effect on our continuing
operations.
12
RISKS RELATING TO OUR STANDBY EQUITY DISTRIBUTION AGREEMENT:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR STANDBY EQUITY DISTRIBUTION
AGREEMENT THAT ARE BEING REGISTERED IN THIS PROSPECTUS AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK, CAUSE DILUTION TO THE
EXISTING STOCKHOLDERS AND MAY RESULT IN A CHANGE OF CONTROL.
The issuance and sale of shares upon delivery of an advance by Cornell Capital
Partners pursuant to the Standby Equity Distribution Agreement in the amount up
to $15,000,000 are likely to result in substantial dilution to the interests of
other stockholders. There is no upper limit on the number of shares that we may
be required to issue. This will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock
and may result in a change of control of our company. The following is an
example of the amount of shares of our common stock that are issuable pursuant
to the equity line, if we were to utilize $15,000,000 and $7,500,000 based on
market prices 25%, 50% and 75% below the closing bid price, as of May 25, 2004
of $0.094.
$15,000,000:
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share of 2% Issuable Stock
- ----- -------- ------------- ------------- ---------
At Market $0.094 $0.0921 162,866,450 64.66%
25% $0.0705 $0.0691 212,765,957 70.50%
50% $0.0470 $0.0461 319,148,936 78.19%
75% $0.0235 $0.0235 638,297,872 87.76%
$7,500,000:
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share of 2% Issuable Stock
- ----- -------- ------------- ------------- ---------
At Market $0.094 $0.0921 81,433,235 47.78%
25% $0.0705 $0.0691 108,538,350 54.94%
50% $0.0470 $0.0461 162,689,805 64.64%
75% $0.0235 $0.0235 326,086,957 78.56%
UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT, CORNELL CAPITAL PARTNERS WILL
PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK AND THIS
DISCOUNTED SALE COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
The common stock to be issued under the equity line of credit will be issued at
a 2% discount to the lowest closing bid price for the 5 days immediately
following the notice date of an advance. These discounted sales could cause the
price of our common stock to decline.
THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT SALES BY THIRD
PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE.
In many circumstances the provision of an equity line of credit for companies
that are traded on the OTCBB has the potential to cause a significant downward
pressure on the price of common stock. This is especially the case if the shares
being placed into the market exceed the market's ability to take up the
increased stock or if the company has not performed in such a manner to show
that the equity funds raised will be used to grow the company. Such an event
could place further downward pressure on the price of common stock. Under the
terms of our equity line the company may request numerous draw downs pursuant to
the terms of the equity line. Even if the company uses the equity line to grow
its revenues and profits or invest in assets which are materially beneficial to
the company the opportunity exists for short sellers and others to contribute to
the future decline of our stock price. Although Cornell Capital has
contractually agreed to refrain from short selling. If there are significant
short sales of stock, the price decline that would result from this activity
will cause the share price to decline more so which in turn may cause long
holders of the stock to sell their shares thereby contributing to sales of stock
in the market. If there is an imbalance on the sell side of the market for the
stock the price will decline.
13
Assuming the issuance of 90,000,000 shares of our common stock pursuant to our
equity line of credit facility at an issue price of $0.094 per share, the
effective price paid for each share would exceed the net tangible book value of
each share as at January 31, 2004 by $0.03, representing a dilution factor of
32.4%.
Assuming the issuance of 90,000,000 shares of our common stock pursuant
to our equity line of credit facility with Cornell Capital Partners, LP at a
discounted issue price of $0.094 per share, the effective price paid for each
share would exceed the net tangible book value of each share as at January 31,
2004 by $0.03, representing a dilution factor of 32.4%. The following table sets
forth the dilution for the common stock that will be issuable based upon the net
tangible book value attributable to each share of our common stock as at January
31, 2004.
Issue price $0.094(1)
Net tangible book value before the issue of the common stock(2) $0.039
Increase in net tangible book value attributable to the issue of the
common stock 0.025
Net tangible book value after the issue of the common stock(3) 0.064
Dilution per share $0.030
Percentage of dilution in relation to the net tangible book value per
share prior to the issue of the common stock 32.4%
(1) After taking into account the 2% discount that Cornell Capital Partners, LP
is entitled to receive under the Standby Equity Distribution Agreement. It is
assumed for illustrative purposes that the price of our common stock is $0.094
per share at all material times.
(2) As at January 31, 2004.
(3) Represents aggregate proceeds from the issue of the common stock, less the
5% fee paid to Cornell Capital Partners, LP.
14
Trading on the OTC Bulletin Board may be sporadic because it is not a stock
exchange, and stockholders may have difficulty reselling their shares.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock
quoted on the OTC Bulletin Board is often thin and characterised by wide
fluctuations in trading prices, due to many factors that may have little to do
with the company's operations or business prospects. Moreover, the OTC Bulletin
Board is not a stock exchange, and trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on the Nasdaq
SmallCap. Accordingly, you may have difficulty reselling any of the shares you
purchase from the selling stockholders. In addition, since our common stock was
traded on the Nasdaq SmallCap Market until May 28, 2003, past trading activity
in our common stock should not be relied upon as necessarily being indicative of
future trading activity in our common stock.
RISKS RELATED TO OUR BUSINESS AND COMPANY
We require additional financing in order to continue in business as a going
concern, the availability of which is uncertain. We may be forced by business
and economic conditions to accept financing terms which will require us to issue
our securities at a discount, which could result in further dilution to our
existing stockholders.
As discussed under the heading, "Management's Discussion and Analysis -
Liquidity and Capital Resources," we require additional financing to fund our
operations. We are taking the steps necessary to draw down amounts under the
$15,000,000 equity line of credit facility that we have arranged with Cornell
Capital Partners, LP. However, business and economic conditions may make it
unfeasible or undesirable for us to draw down amounts under the equity line of
credit at every opportunity,
In conjunction with our investment bankers, Cornell Capital Partners,
LP. , we are pursuing various financing alternatives to meet our immediate and
long-term financial requirements. There can be no assurance that additional
financing will be available to us when needed or, if available, that it can be
obtained on commercially reasonable terms. In addition, any additional equity
financing may involve substantial dilution to our stockholders. If we fail to
raise sufficient financing to meet our immediate cash needs, we will be forced
to scale down or perhaps even cease the operation of our business, which may
result in the loss of some or all of your investment in our common stock.
In addition, in seeking debt or equity private placement financing, we
may be forced by business and economic conditions to accept terms which will
require us to issue our securities at a discount from the prevailing market
price or face amount, which could result in further dilution to our existing
stockholders.
Our Standby Equity Distribution Agreement with Cornell Capital Partners, LP
limits the number of shares of common stock that we can require Cornell Capital
Partners, LP to purchase to not more than 9.99% of our then issued and
outstanding shares of common stock in connection with each draw down, which may
further limit our ability to draw down amounts that we request and which may
cause us to significantly curtail the scope of our operations and alter our
business plan.
Our Standby Equity Distribution Agreement with Cornell Capital
Partners, LP provides that we may not sell shares of our common stock pursuant
to our draw down right under the agreement if the draw down would result in the
issuance of more than 9.99% of our then issued and outstanding common stock to
Cornell Capital Partners, LP. For example, on May 25, 2004, 89,013,091 shares of
our common stock were issued and outstanding. Assuming that we would have
otherwise been in a position to effect a draw down under the equity line of
credit facility, the 9.99% restriction would have prevented us from selling more
than 9,880,000 shares to Cornell Capital Partners, LP at that time. We would
have realized net proceeds from the draw down of approximately $881,784, after
deduction of 5% fee payable to Cornell Capital Partners, LP and a $500 escrow
fee payable to the escrow agent.
Since trading in stock quoted on the OTC Bulletin Board is often thin
and characterised by wide fluctuations in trading prices, Cornell Capital
Partners, LP may have difficulty reselling the shares that it purchases under
the Standby Equity Distribution Agreement. For example, between October 1, 2003
and December 31, 2003, the average daily trading volume of our common stock on
the OTC Bulletin Board was 1,418,460 shares, and the closing price of one share
of our common stock during this period ranged from $0.179 to $0.265. This, in
turn, may require that draw downs be delayed until Cornell Capital Partners, LP
has sold a sufficient number of shares to stay within the 9.99% restriction. We
may have to significantly curtail the scope of our operations and alter our
business plan if, at the time of any draw down under the equity line, this 9.99%
restriction results in our inability to draw down some or all of the amounts
requested in any draw down notice.
15
We have a history of operating losses and fluctuating operating results, which
raise substantial doubt about our ability to continue as a going concern.
Since inception through January 31, 2004, we have incurred aggregate
losses of $53,199,552. Our loss from operations for the six month period ended
January 31, 2004 was $3,453,172; our loss from operations for the fiscal years
ended July 31, 2003 and July 31, 2002 were, respectively, $6,387,160 and
$6,726,454. There is no assurance that we will operate profitably or will
generate positive cash flow in the future. In addition, our operating results in
the future may be subject to significant fluctuations due to many factors not
within our control, such as the unpredictability of when customers will order
products, the size of customers' orders, the demand for our products, and the
level of competition and general economic conditions.
Although we are confident that revenues will increase, we also expect
an increase in development costs and operating costs. Consequently, we expect to
incur operating losses and negative cash flow until our products gain market
acceptance sufficient to generate a commercially viable and sustainable level of
sales, and/or additional products are developed and commercially released and
sales of such products made so that we are operating in a profitable manner.
We may experience significant and rapid growth if we are able to capitalize on
the expansion of the tire monitoring market. If we are unable to hire and train
staff to handle sales and marketing of our products and manage our operations,
such growth could materially and adversely affect us.
We intend to proceed with initiatives intended to capitalize on the
expansion of the tire monitoring market that is occurring as a result of the
enactment by the TREAD Act. This could potentially lead to significant and rapid
growth in the scope and complexity of our business. Any inability on our part to
manage such growth effectively will have a material adverse effect on our
product development, business, financial condition and results of operations.
Our ability to manage and sustain growth effectively will depend, in part, on
the ability of our management to implement appropriate management, operational
and financial systems and controls, and the ability of our management to
successfully hire, train, motivate and manage employees.
Technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate revenues.
The markets in which we operate are subject to technological change,
evolving industry standards and changes in customer demands. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable, including ours. Although
we are confident that our tire monitoring systems (TMS) technology and products
are technologically advanced and currently competitive, we believe that our
long-term success will depend upon our ability to continuously develop new
products and to enhance our current products and introduce them promptly into
the market. If we are not able to develop and introduce new products, our
business, financial condition and results of operations could be adversely
affected.
We do carry a reasonable amount of product liability insurance. However there
can be no assurance that our existing insurance coverage would be adequate in
term and scope to protect us against material financial effects in the event of
a successful claim.
We could be subject to claims in connection with the products that we
sell. There can be no assurance that we would have sufficient resources to
satisfy any liability resulting from any such claim, or that we would be able to
have our customers indemnify or insure us against any such liability. Although
we have product and directors and officers liability insurance, there can be no
assurance that our insurance coverage would be adequate in term and scope to
protect us against material financial effects in the event of a successful
claim. We currently do not carry commercial general liability insurance
providing comprehensive product liability coverage in all instances. We may in
the future obtain such insurance provided it can be obtained at reasonable
prices. However, there can be no assurance that such coverage, if obtained,
would be adequate in term and scope to protect us.
16
Substantially all of our assets and a majority of our directors and officers are
outside the United States, with the result that it may be difficult for
investors to enforce within the United States any judgments obtained against us
or any of our directors or officers.
Substantially all of our assets are located outside the United States
and we do not currently maintain a permanent place of business within the United
States. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States, and all or a
substantial portion of such persons' assets are located outside the United
States. As a result, it may be difficult for investors to enforce within the
United States any judgments obtained against us or our officers or directors,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof.
The loss of any one of our three major customers would materially and adversely
affect us.
During the year ended July 31, 2003, we earned 35% of our revenue from
three major customers. Accordingly, the loss of one of these major customers
would materially and adversely affect us. The loss of any major customer, or
significant reductions by either of them in buying our products, or any
inability on our part to collect accounts receivable from them, would materially
and adversely affect our business and results of operations.
We may experience difficulty in obtaining components and raw materials, and we
could be materially and adversely affected as a result.
Our current products, and the products that we may provide in the
future, embody new technologies. Certain of the components and raw materials
used in our products are difficult to obtain and/or require purchase commitments
to be made by us far in advance of the manufacturing date. The inability to
obtain sufficient quantities of components or raw materials, or the inability to
forecast purchase requirements accurately, could adversely affect our business
and results of operations. Similarly, commitments to purchase components and raw
materials in excess of customer demand for our products could materially and
adversely affect our results of operations.
The loss of any of our contract manufacturers would materially and adversely
affect us.
We contract the manufacture of our products to third parties. In
certain cases, we do not have an alternative source of manufacturing, and a
suitable replacement would be time-consuming and expensive to obtain. If, for
any reason, one of our third party manufacturers is unable or refuses to produce
our products, our business, financial condition and results of operations would
be materially and adversely affected.
We depend to a significant extent on certain key personnel, the loss of any of
whom may materially and adversely affect our company.
Our success depends to a significant extent on the continued service of
certain key management personnel, including Robert Rudman, our President and
Chief Executive Officer, Al Kozak, our Chief Operating Officer, Jeff
Finkelstein, our Chief Financial Officer, Erwin Bartz, our Director of Technical
Operations, John Taylor-Wilson, our Vice-President of Marketing, and Shawn
Lammers, our Vice-President, Engineering. The loss or interruption of services
from one or more of these personnel, for whatever reason, could have a material
adverse effect on us. In the event of the loss of services of such personnel, no
assurances can be given that we will be able to obtain the services of adequate
replacement personnel. We do not maintain key person insurance on the lives of
any of our officers or employees.
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
17
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors" on pages 9 to 20, that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
While these forward-looking statements, and any assumptions upon which
they are based, are made in good faith and reflect our current judgment
regarding the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections, assumptions
or other future performance suggested herein. Except as required by applicable
law, including the securities laws of the United States, we do not intend to
update any of the forward-looking statements to conform these statements to
actual results. The safe harbor for forward-looking statements provided in the
Private Securities Litigation Reform Act of 1995 does not apply to the offering
made in this prospectus.
SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE
Any member of the public may read and copy any materials filed by us
with the Securities and Exchange Commission at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet web site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
THE OFFERING
This prospectus covers the resale by Cornell Capital Partners, LP, a
Delaware limited partnership, of up to 90,000,000 shares of common stock that
may be issued through a Standby Equity Distribution Agreement between us and
Cornell Capital Partners, LP dated May 19, 2004, as further described in this
prospectus. See "The Standby Equity Distribution Agreement" beginning on page
30. In addition, this prospectus relates to the resale by Newbridge Securities
Corporation of up to 96,154 shares of common stock.
Cornell Capital Partners, LP and our placement agent, Newbridge
Securities Corporation, will each be an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of the common stock.
DILUTION
Assuming the issuance of 90,000,000 shares of our common stock pursuant
to our equity line of credit facility with Cornell Capital Partners, LP at a
discounted issue price of $0.094 per share, the effective price paid for each
share would exceed the net tangible book value of each share as at January 31,
2004 by $0.03, representing a dilution factor of 32.4%. The following table sets
forth the dilution for the common stock that will be issuable based upon the net
tangible book value attributable to each share of our common stock as at January
31, 2004.
Issue price $0.094(1)
Net tangible book value before the issue of the common stock(2) $0.039
Increase in net tangible book value attributable to the issue of the
common stock 0.025
Net tangible book value after the issue of the common stock(3) 0.064
Dilution per share $0.030
Percentage of dilution in relation to the net tangible book value per
share prior to the issue of the common stock 32.4%
The offering price of our common stock is based on the then-existing market
price. In order to give prospective investors an idea of the dilution per share
they may experience, we have prepared the following tables showing the dilution
per share at various assumed offering prices:
DILUTION PER
ASSUMED NO. OF SHARES TO SHARE TO NEW
OFFERING PRICE BE ISSUED INVESTORS
-------------- ---------------- ------------
$0.094 90,000,000(1) $0.03
$0.080 90,000,000(1) $0.016
$0.070 90,000,000(1) $0.006
$0.065 90,000,000(1) $0.001
(1) This represents the maximum number of shares of common stock that will be
registered under the equity line of credit.
Original Original
Shareholders Shareholders
Revised Total % Total %
Shares Outstanding Outstanding Dilution
----------- ------------- ------------ -----------
Current Shareholders 89,013,091
Maximum Offering 90,000,000 179,013,091 49.72% 101.11%
50% issued 45,000,000 134,013,091 66.42% 50.55%
25% issued 22,500,000 111,513,091 79.82% 25.28%
Original shareholders % dilution is determined by dividing the various amounts
of new shares issued by the current shareholders outstanding. The first example
is under the maximum offering of 90,000,000 divided by current shareholders of
89,013,091 equals a dilution to original shareholders of 101.11%.
Maximum Offering of $15,000,000:
Original Original
Current Revised Shareholders Shareholders
Shares $ Issued Shares % Total %
Outstanding per Share Shares Outstanding Outstanding Dilution
----------- --------- ------ ----------- ------------ ------------
Current Shareholders 89,013,091
Issuing Share Price $0.050 300,000,000 389,013,091 22.9% 337.0%
$0.070 214,285,714 303,298,805 29.3% 240.7%
$0.094 159,574,468 248,587,559 35.8% 179.3%
$0.120 125,000,000 214,013,091 41.6% 140.4%
$0.150 100,000,000 189,013,091 47.1% 112.3%
$0.200 75,000,000 164,013,091 54.3% 84.3%
$0.250 60,000,000 149,013,091 59.7% 67.4%
18
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Cornell Capital Partners, LP that it has obtained under the Standby Equity
Distribution Agreement. However, if we exercise, in our sole discretion, any
draw downs under the equity line of credit, we will receive the net sale price
of any common stock we sell to Cornell Capital Partners, LP under the terms of
the Standby Equity Distribution Agreement described in this prospectus.
Because we are not obligated to, and may decide not to, exercise any
draw downs under the equity line of credit agreement, we may not receive any
proceeds under the equity line of credit agreement.
Given our current capital needs and the market price of our common
stock we presently have no intention of drawing down the entire $15.0 million
equity line of credit. As described above under the heading "Risk Factors," our
existing stockholders may face substantial dilution if we draw down amounts
under the equity line of credit facility, and the number of shares that we will
be required to issue under the equity line of credit will increase if the stock
price decreases during the pricing period in respect of a draw down.
Accordingly, if at all possible, our company's management would like to avoid
effecting any draw downs under the equity line of credit, particularly if our
stock price is low. However, as discussed under the heading, "Management's
Discussion and Analysis - Liquidity and Capital Resources," we anticipate that
we will require a minimum of $8.0 - $9.5 million in financing to fund our
ongoing debt repayments, operating expenses and working capital requirements
through July 31, 2005. If alternative sources of financing are not available to
us, and assuming that we meet the various conditions to effect draw downs
totalling $8.0 - $9.5 million under our equity line of credit facility, we
intend to use the net proceeds from any sales of our common stock to Cornell
Capital Partners, LP primarily for the continued development, manufacture and
sale of our tire pressure monitoring products, advertising and marketing
activities, and for general corporate purposes. Our management will have
significant flexibility and discretion in applying the net proceeds of any
common stock sold to Cornell Capital Partners, LP.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
equity line of credit.
GROSS PROCEEDS $10,000,000 $15,000,000
NET PROCEEDS $9,500,000 (1) $14,250,000 (2)
USE OF PROCEEDS: AMOUNT AMOUNT
- --------------------------------------------------------------------------------
Marketing $ 1,750,000 $ 2,625,000
Engineering, research and development 1,600,000 2,400,000
General and administrative 2,200,000 3,300,000
Capital Purchases 250,000 375,000
Debt repayment 3,537,924(3) 3,537,924(3)
General Working Capital 162,076 2,012,076
----------- -----------
TOTAL $ 9,500,000 $14,250,000
=========== ===========
(1) Assumes estimated offering expenses of $500,000 to be retained by Cornell
Capital Partners. We cannot predict the total amount of proceeds to be
raised under the equity line because we have not determined the total
amount of the advances we intend to draw. Accordingly, there is no
guarantee that we can receive the net proceeds amount provided in this
section.
(2) Assumes estimated offering expenses of $750,000 to be retained by Cornell
Capital Partners. We cannot predict the total amount of proceeds to be
raised under the equity line because we have not determined the total
amount of the advances we intend to draw. Accordingly, there is no
guarantee that we can receive the net proceeds amount provided in this
section.
(3) Assumes repayment of $2,911,325 of discounted convertible debentures in
cash. The amount of cash used to redeem the discounted convertible
debentures may be less than $2,911,325 as the debenture holders have the
option, at any time, of converting the convertible debenture in whole or
in part into shares of our common our common stock at $0.104 per share
(subject to adjustment pursuant to the anti-dilution provisions contained
in the debentures).
19
Presently, our revenues are not sufficient to meet operating and
capital expenses. Given the recent introduction of our low pressure tire
monitoring systems (TPMS) for recreational vehicles , our second generation of
motorcycle tire pressure monitoring systems (TPMS) for motorcycles and our
planned release of high pressure tire monitoring systems (TPMS) for the
recreational and commercial vehicle markets, it is extremely difficult for our
management to predict what our revenues, and their timing, might be. We rely on
our revenues to offset a portion of our expenses. In addition, our working
capital requirements are impacted by our inventory needs which, in turn, will be
dictated in part by market acceptance of our new products, which is extremely
difficult to predict. Accordingly, it also difficult to predict how the net
proceeds of any draw downs under our equity line of credit will be spent.
If business and economic conditions require us to rely on the equity
line of credit facility to provide all of the financing that we have estimated
we might need to fund our ongoing operating expenses and working capital
requirements through July 31, 2005, we may have to draw down a minimum of
$8,613,000 under the equity line of credit. We would realize net proceeds of
$8,000,090, after deduction of the 5% fee payable to Cornell Capital Partners in
the amount of $430,650. For illustrative purposes, based on a price of $.094, we
would sell 91,627,660 shares of our common stock to Cornell Capital Partners,
LP, representing 51% of our issued and outstanding common stock (based on
89,013,091 shares of our common stock issued and outstanding on May 25, 2004).
In the event that the current number of shares registered is insufficient, we
will submit a new registration statement to register the additional shares
required to draw down on the equity line.
20
SELLING STOCKHOLDERS
Overview
The following table presents information regarding the selling
stockholders. The selling stockholders have not held a position or office, or
had any other material relationship, with us, except as follows:
Cornell Capital Partners, L.P. is the investor under the equity line of
credit. In addition, we will issue Cornell 3,509,615 shares of common stock as a
one-time commitment fee for entering into this equity line of credit. All
investment decisions of Cornell Capital Partners, L.P. are made by its general
partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville
Advisors, makes the investment decisions on behalf of Yorkville Advisors.
Neither Cornell Capital Partners, L.P. or general partners are registered
broker-dealers under the Securities Exchange Act, or affiliates of
broker-dealers.
Pursuant to the equity line of credit, dated as of May 19, 2004, we
may, at our discretion, periodically issue and sell to Cornell Capital Partners,
L.P. shares of common stock for a total purchase price of $15,000,000. The
amount of each advance is subject to a maximum advance amount of $500,000.
Cornell Capital Partners, L.P. will purchase the shares of common stock at a 2%
discount to the lowest closing bid prices for the 5 trading days after an
advance notice. In addition, Cornell Capital Partners will retain 5% of each
advance under the equity line of credit. Cornell Capital Partners, L.P. intends
to sell any shares purchased under the equity line of credit at the then
prevailing market price. This prospectus relates to the shares of common stock
to be issued and resold under the equity line of credit.
Newbridge Securities Corporation, an unaffiliated third party with no
prior relationship to us, is a registered-broker dealer and is controlled by Guy
S. Amico, its president.
The common stock offered for resale under this prospectus constitutes
51% of our issued and outstanding common stock (based on 89,013,091 issued and
outstanding shares of common stock as at May 25, 2004). The number of shares we
are registering is based on our good faith estimate of the maximum number of
shares we may issue to Cornell Capital Partners, LP under its Standby Equity
Distribution Agreement with our company dated May 19, 2004. We are under no
obligation to draw down any amounts under the Standby Equity Distribution
Agreement, and to thereby require Cornell Capital Partners, LP to purchase any
shares of our common stock. Accordingly, the number of shares we are registering
for issuance under the Standby Equity Distribution Agreement may be higher than
the number we actually issue under the Standby Equity Distribution Agreement.
The following table sets forth certain information regarding the
beneficial ownership of shares of common stock by Cornell Capital Partners, LP,
as of May 19, 2004, and the number of shares of common stock covered by this
prospectus. The numbers of shares in the table represents a good faith estimate
of the number of shares of common stock to be offered by Cornell Capital
Partners, LP.
- ------------------------------- ------------------ -------------------- --------------- ------------------------------
Number of
Shares
Issuable
Common Under Standby
Name of Selling Shares Owned by Equity
Stockholder and Position, the Selling Distribution Number of Shares Owned
Office or Material Stockholder Not Agreement and by Selling Stockholder After
Relationship with SmarTire Part of This Forming Part Of Total Shares Offering and Percent of Total
Systems Inc. Offering(1) This Offering Registered Issued and Outstanding(2)
- ------------------------------- ------------------ -------------------- --------------- ---------------- -------------
# of % of
Shares Class(3)
- ------------------------------- ------------------ -------------------- --------------- ---------------- -------------
Cornell Capital Partners, LP(4) (5)Nil (6)93,509,615 (6) 93,509,615 0 0%
- ------------------------------- ------------------ -------------------- --------------- ---------------- -------------
Newbridge Securities
Corporation Nil 96,154 96,154 0 0%
- ------------------------------- ------------------ -------------------- --------------- ---------------- -------------
21
(1) For these purposes, beneficial ownership is to be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the
rules promulgated thereunder. Beneficial ownership includes shares over which
the named stockholder exercises voting control or investment power. Shares of
common stock subject to options or warrants that are currently exercisable or
will become exercisable within sixty days from May 19, 2004 are deemed
outstanding for purposes of the ownership of the person holding the option or
warrant, but are not deemed outstanding for purposes of computing the ownership
percentage of any other person.
(2) Because Cornell Capital Partners, LP may offer all or only some portion of
the 90,000,000 shares of common stock to be registered, no estimate can be given
as to the amount or percentage of these shares of common stock that will be held
by Cornell Capital Partners, LP upon termination of the offering. Accordingly,
it is assumed that all of the shares of common stock offered pursuant to this
prospectus will be sold.
(3) A total of 89,013,091 shares of common stock were issued and outstanding as
of May 25, 2004.
(4) Other than its obligation to purchase common shares under its Standby Equity
Distribution Agreement with us, Cornell Capital Partners, LP has no other
commitments or arrangements to purchase or sell any of our securities. There are
no business relationships between Cornell Capital Partners, LP and us other than
as contemplated by the Standby Equity Distribution Agreement.
(5) Represents common stock that potentially may be issued to Cornell Capital
Partners, LP pursuant to the $15.0 million equity line of credit facility
provided for in the common stock agreement between our company and Cornell
Capital Partners, LP dated May 19, 2004. Our Standby Equity Distribution
Agreement with Cornell Capital Partners, LP provides that we may not sell shares
of our common stock pursuant to our draw down right under the agreement if the
draw down would result in the issuance of more than 9.99% of our then issued and
outstanding common stock. For the purposes of this table, any contractual
restriction on the number of securities the selling stockholder may own at any
point in time has been disregarded. See "Description of Securities to be
Registered" for further details.
22
PLAN OF DISTRIBUTION
General
The selling stockholders are offering the common shares for their
account as statutory underwriters, and not for our account. We will not receive
any proceeds from the sale of common shares by the selling stockholders. The
selling stockholders may be offering for sale up to 93,605,769 common shares.
The selling stockholders are statutory underwriters within the meaning of the
Securities Act of 1933 in connection with such sales of common shares and will
be acting as underwriters in their resales of the common shares under this
prospectus. The selling stockholders have agreed they will, whenever required by
federal securities laws, deliver this prospectus to any purchaser of such common
shares in such manner as is required under such laws. We will pay the costs of
registering the shares under this prospectus, including legal fees.
To permit the selling stockholders to resell the common shares issued
to them under the stock purchase agreement, we agreed to register those shares
and to maintain that registration. To that end, we have agreed with the selling
stockholders that we will prepare and file such amendments and supplements to
the registration statement and the prospectus as may be necessary in accordance
with the Securities Act of 1933 and the rules and regulations promulgated
thereunder, to keep it effective until the earliest of any of the following
dates:
o the date that all of the common shares held by the selling
stockholders or their transferees that are covered by the
registration statement have been sold by the selling
stockholders or their transferees pursuant to such
registration statement;
o 360 days from the last date on which any common shares covered
by the registration statement are issued; o the date that all
of the common shares covered by the registration statement may
be sold under the provisions of Rule 144 of the Securities Act
of 1933;
o the date after which all of the common shares held by the
selling stockholders or their transferees that are covered by
the registration statement may be sold without restriction
under the Securities Act of 1933, and we have delivered a new
certificate for such shares not bearing a restrictive legend;
or
o the date that all of the common shares covered by the
registration statement may be sold without any time, volume or
manner limitations pursuant to Rule 144(k) or any similar
provision then in effect under the Securities Act of 1933.
In spite of the provisions of the registration rights agreement
referred to in the third and fifth bulleted paragraphs immediately above, Rule
144 of the Securities Act of 1933 is not available to the selling stockholders
to resell any of the shares covered by the registration statement since it is an
underwriter.
Shares of common stock offered through this prospectus may be sold from
time to time by the selling stockholders, or by pledgees, donees, transferees or
other successor in interest to the selling stockholders. We will supplement this
prospectus to disclose the names of any pledges, donees, transferees, or other
successors in interest that intend to offer common stock through this
prospectus.
Sales may be made on the OTC Bulletin Board or otherwise at prices and
at terms then prevailing or at prices related to the then current market price,
or in negotiated private transactions, or in a combination of these methods. The
selling stockholders will act independently of us in making decisions with
respect to the form, timing, manner and size of each sale. We have been informed
by the selling stockholders, through their counsel, that there are no existing
arrangements between it and any other stockholder, broker, dealer, underwriter
or agent relating to the distribution of this prospectus.
The common shares may be sold in one or more of the following manners:
23
o a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker or dealer for its account under this
prospectus; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the common
shares by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating in
such transactions as agent may receive commissions from the selling
stockholders, and, if they act as agent for the purchaser of such common shares,
from such purchaser.
Broker-dealers who acquire common shares as principal may thereafter
resell such common shares from time to time in transactions, which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common
shares commissions computed as described above. Brokers or dealers who acquire
common shares as principal and any other participating brokers or dealers may be
deemed to be underwriters in connection with resales of the common shares.
The selling stockholders are subject to the applicable provisions of
the Securities Exchange Act of 1934, as amended, including without limitation,
Rule 10b-5 thereunder. Under applicable rules and regulations under the
Securities Exchange Act, any person engaged in a distribution of the common
shares may not simultaneously purchase such securities for a period beginning
when such person becomes a distribution participant and ending upon such
person's completion of participation in a distribution. In addition, in
connection with the transactions in the common shares, the selling stockholders
will be subject to applicable provisions of the Securities Exchange Act and the
rules and regulations under that Act, including, without limitation, the rules
set forth above. These restrictions may affect the marketability of the common
shares.
The selling stockholders will pay all commissions and their own
expenses, if any, associated with the sale of the common shares, other than the
expenses associated with preparing this prospectus and the registration
statement of which it is a part.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934 will apply
to purchases and sales of shares of common stock by the selling stockholders, as
the selling stockholders, and that there are restrictions on market-making
activities by persons engaged in the distribution of the shares. Under
Regulation M, the selling stockholders or their agents may not bid for,
purchase, or attempt to induce any person to bid for or purchase, shares of our
common stock while they are distributing shares covered by this prospectus.
Accordingly, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. We will advise the
selling stockholders that if a particular offer of common stock is to be made on
terms materially different from the information set forth in this Plan of
Distribution, then a post-effective amendment to the accompanying registration
statement must be filed with the Securities and Exchange Commission.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are properly registered to sell securities. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
24
We will make copies of this prospectus available to the selling
shareholders and we have informed them of the need for delivery of copies of
this prospectus to purchasers at or prior to the time of any sale of the shares.
Underwriting Compensation and Expenses
The underwriting compensation for Cornell Capital Partners, L.P. will
depend on the amount of financing that we are able to obtain under the Standby
Equity Distribution Agreement. Our Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. contemplates the potential future issuance and
sale of up to $15.0 million of our common stock to Cornell Capital Partners,
L.P., subject to restrictions and other obligations that are described
throughout this prospectus. Upon receipt of a draw down notice from us, Cornell
Capital Partners, L.P. is obligated to purchase shares of our common stock at a
2% discount and will remit to us 95% of the purchase price.
25
THE STANDBY EQUITY DISTRIBUTION AGREEMENT
On May 19, 2004, we entered into a Standby Equity Distribution
Agreement with Selling stockholder, a Delaware limited partnership, for the
future issuance and purchase of shares of our common stock. This Standby Equity
Distribution Agreement establishes what is sometimes termed an equity line of
credit or an equity draw down facility.
In general, the draw down facility operates like this: the investor,
Selling stockholder, has committed to provide us up to $15.0 million as we
request it over a 24-month period, in return for common stock that we will issue
to Selling stockholder. In addition, we engaged Newbridge Securities
Corporation, a registered broker-dealer, to advise us in connection with the
equity line of credit. For its services, Newbridge Securities Corporation will
receive 96,154 shares of our common stock.
We are under no obligation to request a draw down during any period. In
determining whether we will request a draw down, our company's management
intends to primarily take into account our company's working capital
requirements, and whether we have access to other sources of working capital. As
described above under the heading "Risk Factors," our existing stockholders may
face substantial dilution if we are compelled by circumstances to draw down
amounts under the equity line of credit facility. Further, as described below
and elsewhere in this prospectus, the number of shares that we will be required
to issue under the equity line of credit will increase if the stock price
decreases during the pricing period in respect of a draw down. Accordingly, if
at all possible, our company's management would like to avoid effecting any draw
downs under the equity line of credit, and particularly if our stock price is
low. However, there can be no assurances in this regard, since our capital
requirements may change dramatically.
As discussed under the heading, "Management's Discussion and Analysis -
Future Operations," our working capital requirements are impacted by our
inventory requirements. Therefore, any increase in sales of our products will be
accompanied not only by an increase in revenues, but also by an increase in our
working capital requirements. Since our inventory needs will be dictated in part
by market acceptance of our new products, which is extremely difficult to
predict, our debt repayments, budgeted operating expenses and working capital
requirements through July 31, 2005 range from $8,000,000 to $9,500,000.
Pursuant to the equity line of credit, we may, at our discretion,
periodically sell to Cornell Capital Partners, L.P. shares of common stock for a
total purchase price of up to $15,000,000. We may request an advance every 7
trading days. A closing will be held 6 trading days after such written notice at
which time we will deliver shares of common stock and Cornell Capital Partners,
L.P. will pay the advance amount. For each share of common stock purchased under
the equity line of credit, Cornell Capital Partners, L.P. will pay 98% of the
lowest closing bid price on the Over-the-Counter Bulletin Board or other
principal market on which our common stock is traded for the 5 days immediately
following the notice date. Cornell Capital Partners, L.P. is a private limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. Further, Cornell Capital Partners, L.P. will retain 5%
of each advance under the equity line of credit. The issuance of these shares is
conditioned upon us registering these shares with the Securities and Exchange
Commission. We may request advances under the equity line of credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners,
L.P. has advanced $15,000,000 or two years after the effective date of the
accompanying registration statement, whichever occurs first.
We may periodically sell shares of common stock to Cornell Capital
Partners, L.P. to raise capital to fund our working capital needs. The periodic
sale of shares is known as an advance or drawdown.
The amount of each advance is subject to a maximum amount of $500,000
every 7 Trading days. The amount of capital available under the equity line of
credit is not dependent on the price or volume of our common stock. Cornell
Capital Partners, L.P. may not own more than 9.9% of our outstanding common
stock at any time. Because Cornell Capital Partners, L.P. can repeatedly acquire
and sell shares, this limitation does not limit the potential dilutive effect or
the total number of shares that Cornell Capital Partners, L.P. may receive under
the equity line of credit.
26
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the equity line of credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. For example, we would need to issue 162,831,090
shares of common stock in order to raise the maximum amount under the equity
line of credit at a purchase price of $.094.
The issuance of shares under the equity line of credit may result in a
change of control. That is, up to 90,000,000 shares of common stock could be
issued under the equity line of credit (i.e., the maximum number of shares being
registered in the accompanying registration statement for the equity line of
credit). If all or a significant block of these shares are held by one or more
stockholders working together, then such stockholder or stockholders would have
enough shares to assume control of us by electing its or their own directors.
This could happen, for example, if Cornell Capital Partners, L.P. sold the
shares purchased under the equity line of credit to the same purchaser.
Proceeds used under the equity line of credit will be used in the
manner set forth in the "Use of Proceeds" section of this prospectus. We cannot
predict the total amount of proceeds to be raised in this transaction because we
have not determined the total amount of the advances we intend to draw.
The amount of the discount that Selling stockholder is entitled to
receive under our Standby Equity Distribution Agreement was determined in arms
length negotiations between our company and Selling stockholder. In considering
its acceptability, our management took into account, among other things, our
negotiated right to designate a threshold price in our draw down notice as the
lowest price at which we will sell the shares to Selling stockholder in
connection with the draw down, and the lack of alternative sources of similar
financing at the time of the negotiations.
Our Standby Equity Distribution Agreement with Selling stockholder
provides that we may not sell shares of our common stock pursuant to our draw
down right under the agreement if the draw down would result in the issuance of
more than 9.99% of our then issued and outstanding common stock. In such cases,
we will not be permitted to issue the shares otherwise issuable pursuant to the
draw down and Selling stockholder will not be obligated to purchase those
shares.
Necessary Conditions Before Selling stockholder Is Obligated to Purchase Our
Shares
The following conditions must be satisfied before Selling stockholder
is obligated to purchase any common shares under any draw down notice that we
may deliver from time to time under our Standby Equity Distribution Agreement
with Selling stockholder:
(a) a registration statement for the shares must be declared effective by
the Securities and Exchange Commission and must remain effective and
available as of the draw down settlement date for making resales of the
common shares purchased by Selling stockholder;
(b) there must be no statute, rule, regulation, executive order, decree,
ruling or injunction which would prohibit the consummation of any of
the transactions contemplated by the Standby Equity Distribution
Agreement;
(c) there must be no material action, suit or proceeding before any
arbitrator or any governmental authority against us or any of our
subsidiaries, or against any of the officers, directors or affiliates
of our company or any of our subsidiaries, in respect of the Standby
Equity Distribution Agreement or in respect of the transactions
contemplated by the agreement;
(d) trading in our common stock must not have been suspended by the
Securities and Exchange Commission or by the regulators of the
principal market for our common stock (currently the OTC Bulletin
Board); and
27
(e) the principal market for our common stock must not have instituted, or
otherwise been made subject to, a general suspension or limitation on
the trading of securities through its facilities at any time prior to
delivery of our draw down notice.
Indemnification of Selling stockholder
Selling stockholder, and each of directors, officers, shareholders,
partners, employees and agents, is entitled to customary indemnification from us
for any losses or liabilities suffered by any such person based upon material
misstatements or omissions from the Standby Equity Distribution Agreement,
registration statement and the prospectus, except as they relate to information
supplied by Selling stockholder to us for inclusion in the registration
statement and prospectus.
Governing Law of the Standby Equity Distribution Agreement
The Standby Equity Distribution Agreement, and the related transaction
documents, are governed by the internal laws of the State of New Jersey and all
legal proceedings in connection with the Standby Equity Distribution Agreement
must be commenced exclusively in the state and federal courts sitting in the
City of Newark. Thus, all questions concerning the validity, enforcement and
interpretation of the Standby Equity Distribution Agreement and the related
transaction documents, will be determined by reference to New Jersey law.
28
LEGAL PROCEEDINGS
We know of no material, active or pending legal proceedings against us,
nor are we involved as a plaintiff in any material proceedings or pending
litigation. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholders are an adverse party or
has a material interest adverse to us.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Date First
Name Position Held with the Company Age Elected or Appointed
- ------------------------------ ---------------------------------------- ------- ------------------------------------
John Bolegoh Director 58 Director since December 2, 1993.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
William Cronin Director 55 Director since June 7, 2001.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Martin Gannon Director 50 Director since February 3, 2003.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Johnny Christiansen Director 48 Director since August 14, 2003.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Robert Rudman Director, President, CEO and Chairman 56 Director since September 22, 1993,
President and CEO since January
19, 1996, and Chairman since June
4, 1999.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Al Kozak Director, Chief Operating Officer 53 Director since November 20, 2002,
and Chief Operating Officer since
May 1, 2002.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Jeff Finkelstein Chief Financial Officer 43 Chief Financial Officer since
October 23, 2002.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Erwin Bartz Director of Technical Operations 43 Vice President of Business
Development since January 3, 2001.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Shawn Lammers Vice President, Engineering 36 Vice President, Engineering since
January 1, 1997.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
John Taylor-Wilson Vice President Sales and Marketing 47 Vice President Sales and Marketing
since August 11, 2003.
- ------------------------------ ---------------------------------------- ------- ------------------------------------
Business Experience
The following is a brief account of the education and business
experience during at least the past five years of each director, executive
officer and key employee, indicating the principal occupation during that
period, and the name and principal business of the organization in which such
occupation and employment were carried out.
John Bolegoh:
Mr. Bolegoh has held a number of positions with our company, and, until
his recent appointment as our Commercial Product Manager, has served as our
Technical Support Manager since August 1, 1999. Mr. Bolegoh has served as a
29
director since 1993. Mr. Bolegoh has an extensive background in tire product
engineering, including twenty years with Michelin Technical Services Canada
Limited in positions of increasing responsibility. Mr. Bolegoh joined our
company in 1991. His responsibilities include defining necessary product
capabilities and designs for entering various markets; establishing contacts to
promote awareness of our technologies; locating and exploring business
possibilities with potential distributors; and providing customer relations,
problem solving, training and sales assistance.
William Cronin:
Mr. Cronin has been a director since June, 2001 and previously served
as a director from November 17, 1995 to April 25, 1998. Since 1986, Mr. Cronin
has been the owner of Madison Financial Services, a registered investment
adviser firm located in Madison, Connecticut, specializing in tax, pension
investing planning strategies and portfolio management.
Martin Gannon
Mr. Gannon joined our company as a director on February 3, 2003. Mr.
Gannon has been a Certified Public Accountant since 1973. He has been a partner
and the vice president of the accounting firm of Barron Gannon & Co., P.C. since
1982. In his advisory role to his clientele, he has assisted companies from
their inception to maturity.
Johnny Christiansen
Mr. Christiansen joined our company as a director on August 14, 2003.
Mr. Christiansen resides in Norway. He has a strong knowledge of our business
and industry as he served as the President of SensoNor asa from 1999-2002.
SensoNor is a Norwegian company and a leading provider of tire monitoring,
airbag and rollover sensors for the automotive industry. During Mr.
Christiansen's tenure as its President, SensoNor raised more than $100 million
in financing and signed contracts for more than $400 million. Before 1999, Mr.
Christiansen served as a director of various companies, including Davis AS,
Kongsberg Norcontrol Systems, Norcontrol Training AS and Norcontrol Automation
AS.
Robert Rudman:
Mr. Rudman has been a director since September, 1993. Mr. Rudman joined
our company in March, 1993 as the Chief Financial Officer after serving as an
independent financial consultant for several months. He was appointed Chief
Executive Officer of our company on January 19, 1996, and served as President
from January 19, 1996 to June 4, 1999, when he was appointed Chairman of the
Board. Mr. Rudman was reappointed President of our company effective April 1,
2000. He is a Chartered Accountant with 15 years of experience assisting public
companies listed primarily on the Vancouver Stock Exchange (now the TSX Venture
Exchange). Prior to joining our company, Mr. Rudman was manager of a
California-based sales contract financing firm. Previously, he was a partner in
a consulting firm providing professional assistance to publicly traded
companies. Mr. Rudman became a Chartered Accountant in 1974 and worked with
Laventhol & Horwath and Price Waterhouse & Co. in Winnipeg, Manitoba.
Jeff Finkelstein
Mr. Finkelstein was formally appointed as our Chief Financial Officer
in October 2002. He is a Chartered Accountant and is responsible for all
financial and related functions for our company, including finance, treasury,
accounting, taxation, legal, management information systems and administration.
Mr. Finkelstein was promoted to Acting Chief Financial Officer of our company in
May 2002, and served as our controller since February 22, 1999. From 1996 to
1999, he served as controller of Golden Knight Resources Inc., a Toronto Stock
Exchange listed public company, and Silver Standard Resources, a Nasdaq listed
public company. From 1993 to 1995, he served as controller of a private
distribution company after eight years as a public accountant.
30
Erwin Bartz
Mr. Bartz has recently been appointed Vice President of Business
Development. He has overall responsibility for defining product strategies and
roadmaps as well as developing strategic alliances. He was formerly our
Director, Technical Operations since January 2001 with responsibility for
overall technical operations including engineering and manufacturing. Mr. Bartz
is a Professional Engineer with 19 years of engineering experience. Prior to
joining our company, Mr. Bartz spent ten years as Manager of Engineering and
Manufacturing at Finning (Canada), the Caterpillar dealer for British Columbia,
Alberta, United Kingdom and Chile, with corporate responsibility for
engineering, product review, heavy manufacturing and new equipment preparation.
Previously, he held the Engineering Manager role at Weldco Beales, a custom
attachment manufacturer for the mobile equipment market, and also worked as a
design engineer for the Chapman Industries, a Hitachi distributor and general
manufacturer of purpose-built machinery and equipment.
Al Kozak:
Mr. Kozak joined us as Chief Operating Officer on May 1, 2002. He was
subsequently appointed to our board of directors on November 20, 2002. Mr. Kozak
is a seasoned executive with strong operational management and business
development experience in fast-paced, high growth, technology companies. From
May 2000 to April 2001, Mr. Kozak was the President and founder of Siwash
Ventures where he assembled an advisory board of senior executives from the
Vancouver area to analyze and recommend investment and business development
strategies to technology companies. From 1992 to 1998 he held the position of
President with Digital Courier International, Inc., an industry extranet that
networked over 7,000 radio stations, 1500 advertising and 400 production
facilities. Following the sale by Digital Courier International of its assets
and technology to Digital Generations Systems Inc. in 1998, Mr. Kozak was
appointed by Digital Generations Systems as its VP, Marketing and Business
Development and served in that capacity for two years.
Shawn Lammers:
Mr. Lammers has been with us since our inception. He currently serves
as the Vice President Engineering and is responsible for the development of the
patented remote sensing technology utilized in SmarTire's products. He has been
the chief engineer in respect to the design, development and production of our
passenger car tire monitoring system, the commercial vehicle tire monitoring
system and the industrial equipment tire monitoring systems. He has developed
software for MS-DOS, Windows, UNIX Workstations and Amiga platforms.
John Taylor-Wilson
Mr. Taylor-Wilson joined us as Vice President Sales and Marketing on
August 11, 2003. Mr. Taylor-Wilson is a seasoned executive with strong sales and
marketing experience in start-up, turnaround and mature organizations focused on
generating revenue and increasing profit performance. Mr. Taylor-Wilson has
proven capabilities in building and managing sales and business development
programs, distribution channels, strategic alliances and product marketing,
planning and management on a worldwide basis. From September 1999 to June 2002,
Mr. Wilson was the Director of Business Development and Strategic Alliances for
Witness Systems. While working for Witness Systems, Mr. Taylor-Wilson was
instrumental in developing and executing sales and marketing programs that
helped grow the company from $6.5 million when he started to more than $70
million just two and one-half years later. From July, 1996 to August, 1999, Mr.
Taylor-Wilson was Director Business Development & Business Alliances for NICE
Systems, where he assumed all North American business development and key
product marketing responsibilities and managed a sales team whose primary
mission was to sell NICE products through a distribution relationship with
Lucent Technologies. From March, 1998 to June, 1996, Mr. Wilson was the Director
of Marketing at Dees Communications where he was responsible for the creation
and implementation of business and product development programs that facilitated
that company's acquisition by NICE Systems.
Family Relationships
There are no family relationships between any of our company's
directors or executive officers.
31
Involvement In Certain Legal Proceedings
None of our directors, executive officers, promoters or control persons
have been involved in any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other
minor offences);
3. being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or banking
activities; or
4. being found by a court of competent jurisdiction (in a civil
action), the Commission or the Commodity Futures Trading Commission to
have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth, as of May 25, 2004, certain information
with respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Beneficial ownership consists of a direct interest in
the shares of common stock, except as otherwise indicated.
- ------------------------------------------------- --------------------------------- --------------------------------
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------------------------------------- --------------------------------- --------------------------------
John Bolegoh
5571 Moncton Street
Richmond, BC V7E 3B2 193,404(2) *
- ------------------------------------------------- --------------------------------- --------------------------------
William Cronin
180 Concord Drive
Madison, Connecticut, USA 06443 684,746(3) *
- ------------------------------------------------- --------------------------------- --------------------------------
Martin Gannon
1275 Post Road
Fairfield, Connecticut, USA 06824 410,000(4) *
- ------------------------------------------------- --------------------------------- --------------------------------
Johnny Christiansen
Spurvestien 24
3189 Horten, Norway 250,000 *
- ------------------------------------------------- --------------------------------- --------------------------------
Robert Rudman
#40 - 5740 Garrison Road
Richmond, BC V7C 5E7 1,461,167(5) 1.60%
- ------------------------------------------------- --------------------------------- --------------------------------
32
- ------------------------------------------------- --------------------------------- --------------------------------
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------------------------------------- --------------------------------- --------------------------------
Al Kozak
25841 116 Avenue
Maple Ridge, BC V4R 1Z6 852,000(6) *
- ------------------------------------------------- --------------------------------- --------------------------------
Jeff Finkelstein
3460 Regent Street
Richmond, BC V7E 2N1 397,751(7) *
- ------------------------------------------------- --------------------------------- --------------------------------
Erwin Bartz
21 Arrow-Wood Place
Port Moody, BC V3H 4E9 536,666(8) *
- ------------------------------------------------- --------------------------------- --------------------------------
Shawn Lammers
3460 Regent Street
Richmond, BC V7E 2N1 418,152(9) *
- ------------------------------------------------- --------------------------------- --------------------------------
John Taylor-Wilson
1545 Lodgepole Place
Coquitlam, BC V3E 2Z8 450,000(10) *
- ------------------------------------------------- --------------------------------- --------------------------------
Directors and Executive Officers as a Group 5,653,886 common shares(11) 5.97%
- ------------------------------------------------- --------------------------------- --------------------------------
* Represents less than 1% of our company's outstanding stock
(1) Based on 89,013,091shares of common stock issued and outstanding as of May
25, 2004. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as otherwise indicated, we believe that
the beneficial owners of the common stock listed above, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
(2) Includes 12,990 shares of common stock owned by Mr. Bolegoh's wife and
children. Mr. Bolegoh has sole voting and dispositive power over such shares but
disclaims beneficial ownership of such shares. Also includes stock options to
purchase 156,800 shares of common stock exercisable within sixty days.
(3) Includes options to acquire up to 597,500 shares of common stock,
exercisable within sixty days.
(4) Includes options to acquire up to 400,100 shares of common stock,
exercisable within sixty days.
(5) Includes 10,257 shares of common stock owned by Mr. Rudman's wife. Mr.
Rudman has sole voting and dispositive power over such shares. Includes options
to acquire up to 1,429,500 shares of common stock, exercisable within sixty
days.
(6) Consists of options to acquire up to 852,000 shares of common stock,
exercisable within 60 days.
(7) Includes options to acquire up to 391,751 shares of common stock,
exercisable within 60 days.
(8) Consists of options to acquire up to 536,666 shares of common stock,
exercisable within 60 days.
(9) Includes options to acquire up to 416,633 shares of common stock,
exercisable within 60 days.
(10) Includes options to acquire up to 450,000 shares of common stock,
exercisable within 60 days.
(11) Includes options to acquire up to 5,480,450 shares of common stock,
exercisable within 60 days.
33
Changes in Control
We are unaware of any contract or other arrangement the operation of
which may at a subsequent date result in a change of control of SmarTire, other
than the conversion of our outstanding convertible debentures and the exercise
of our outstanding warrants in certain circumstances.
DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 300,000,000 shares of common
stock without par value, and 100,000 shares of preferred stock with a par value
of CDN$1,000 per share. As of May 25, 2004, there are 89,013,091 shares of our
common stock issued and outstanding. Each stockholder is entitled to one vote
for each share of common stock held on all matters submitted to a vote of
stockholders, including the election of directors.
Each stockholder is entitled to receive the dividends as may be
declared by our board of directors out of funds legally available for dividends
and, in the event of liquidation, to share pro rata in any distribution of our
assets after payment of liabilities. Our board of directors is not obligated to
declare a dividend. Any future dividends will be subject to the discretion of
our board of directors and will depend upon, among other things, future
earnings, the operating and financial condition of SmarTire, its capital
requirements, general business conditions and other pertinent factors. It is not
anticipated that dividends will be paid in the foreseeable future.
Stockholders do not have pre-emptive rights to subscribe for additional
shares of common stock if issued by us. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock.
Shares of our common stock are subject to rules adopted by the
Securities and Exchange Commission that regulate broker-dealer practices in
connection with transactions in "penny stocks". "Penny stock" is defined to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. For the foreseeable future, our common stock will most likely
continue to be covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and "accredited investors." The term "accredited investor"
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse.
The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standarized
risk disclosure document in a form prepared by the Securities and Exchange
Commission which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities.
LEGAL MATTERS
The validity of the shares of common stock offered by the selling
stockholders was passed upon by the law firm of Sichenzia Ross Friedman Ference
LLP.
34
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion upon the
validity of the securities being registered or upon other legal matters in
connection with the registration or offering of the common stock was employed on
a contingency basis or had, or is to receive, in connection with the offering, a
substantial interest, directly or indirectly, in the registrant or any of its
parents or subsidiaries. Nor was any such person connected with the registrant
or any of its parents, subsidiaries as a promoter, managing or principal
underwriter, voting trustee, director, officer or employee.
EXPERTS
Our consolidated financial statements as at July 31, 2003 and 2002, and
for each of the years in the three-year period ended July 31, 2003, filed with
this prospectus and registration statement have been audited by KPMG LLP,
independent chartered accountants, as set forth in their report accompanying the
consolidated financial statements and are included herein in reliance upon the
report, and upon the authority of the firm as experts in accounting and
auditing. The audit report covering the July 31, 2003 consolidated financial
statements includes additional comments for United States readers that states
that conditions and events exist that cast substantial doubt about our ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
DISCLOSURE OF SEC POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Under our Bylaw, subject to the Business Corporations Act (Yukon
Territory) and subject to court approval in certain circumstances, we must
indemnify:
(a) each of our current or former directors and officers,
(b) any person who acts or has acted at our request as a director or
officer of a corporation of which we are or were a shareholder or
creditor, and
(c) any such indemnified person's heirs and legal representatives,
against all costs, charges and expenses, including any amount paid to settle an
action or satisfy a judgment, reasonably incurred by him or her in respect of
any civil, criminal or administrative action or proceeding to which he or she is
made a party by reason of serving or having served as a director or officer of
our company or such corporation, if: (i) he or she acted honestly and in good
faith with a view to the best interests of our company; and (ii) in the case of
a criminal or administrative action or proceeding that is enforced by a monetary
penalty, he or she had reasonable grounds for believing his or her conduct was
lawful.
Section 126 of the Business Corporations Act (Yukon Territory) provides
that, in any event, any of the foregoing persons is entitled to be indemnified
by us in respect of all costs, charges and expenses reasonably incurred by him
or her in connection with the defence of any civil, criminal or administrative
action or proceeding to which he or she is made a party by reason of being or
having been a director or officer of our company or a corporation of which we
are or were a shareholder or creditor, if he or she: (a) was substantially
successful on the merits in his or her defence of the action or proceeding; (b)
is fairly and reasonably entitled to indemnity, (c) acted honestly and in good
faith with a view to the best interests of our company; and (b) in the case of a
criminal or administrative action or proceeding that is enforced by a monetary
penalty, he or she had reasonable grounds for believing his or her conduct was
lawful.
35
Insofar as indemnification for liabilities arising under the Securities
Act might be permitted to directors, officers or persons controlling our company
under the provisions described above, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
DESCRIPTION OF BUSINESS
General Overview
We (together with our subsidiaries) are engaged in the development and
marketing of tire monitoring systems (TMS) designed for improved vehicle safety,
performance, reliability and fuel efficiency. During the fiscal year ended July
31, 2003, we earned revenues primarily from the sale of tire monitoring systems
(TMS) for passenger cars. Our principal executive offices are located at #150 -
13151 Vanier Place, Richmond, British Columbia, Canada, V6V 2J1. We were
incorporated under the laws of the Province of British Columbia on September 8,
1987, and were continued under the laws of the Yukon Territory to become a Yukon
corporation effective February 6, 2003. Our telephone number is (604) 276-9884.
We have three wholly owned subsidiaries: SmarTire Technologies Inc.,
SmarTire USA Inc. and SmarTire Europe Limited. SmarTire Technologies Inc. was
incorporated on June 3, 1988 under the laws of the Province of British Columbia,
and was the original developer of our patented technology. SmarTire USA Inc., a
Delaware corporation incorporated on May 16, 1997, is our exclusive marketing
agency for SmarTire in North America. SmarTire Europe Limited, a United Kingdom
corporation incorporated on February 25, 1998, is our exclusive sales and
distribution operation for Europe. SmarTire Europe's head office is located at
Park 34, Southmead Industrial Park, Didcot, Oxfordshire, England, OX11 7WB.
We are a "foreign private issuer", as such term is defined in Rule 3b-4
under the Securities Exchange Act of 1934. However, we have elected to file with
the Securities and Exchange Commission the same reports that a domestic
registrant would be required to file under section 13(a) of the Securities
Exchange Act of 1934.
Corporate History
We were incorporated under the laws of the Province of British Columbia
as TTC/Truck Tech Corp. on September 8, 1987. We were formed to develop and
market remote data sensing, transmission and processing products incorporating
patented technologies to satisfy emerging market requirements in the
transportation industry.
Our company was continued under the Business Corporations Act (Yukon
Territory) effective February 6, 2003. As a result, our Memorandum and Articles
which constituted our constitutional documents while we were a British Columbia
company have been superseded and replaced by Articles of Continuance filed with
the Yukon Registrar of Corporations under section 190 of the Business
Corporations Act (Yukon Territory) and By-law No. 1, being a by-law adopted by
our board of directors relating generally to the transaction of the business and
affairs of our company. Our continuance as a Yukon corporation was approved by
special resolution adopted by our shareholders at the annual and extraordinary
general meeting held on December 12, 2002.
On July 29, 1988, we acquired all of the issued and outstanding shares
of Delta Transportation Products Ltd., and subsequently caused it to change its
name to SmarTire Technologies Inc. effective June 3, 1998. Our initial product,
based on technology developed by Delta Transportation Products Ltd., consisted
of a wireless tire monitoring systems (TMS) designed for large ore hauling
trucks and wheeled loaders that are utilized in the mining industry.
We completed our initial public offering on the Vancouver Stock
Exchange (now the TSX Venture Exchange) on September 11, 1989. On April 13,
1995, we changed our name to UniComm Signal Inc. On December 24, 1997, we
changed our name to SmarTire Systems Inc. and effected a reverse stock split
pursuant to which our common stock was consolidated on a 1 for 8 basis. On
December 16, 1998, our common stock commenced trading on the Nasdaq SmallCap
Market. On March 12, 1999, we voluntarily delisted our common stock from trading
on the Vancouver Stock Exchange. On May 28, 2003, our common stock ceased
trading on the Nasdaq SmallCap Market and is now quoted on the OTC Bulletin
Board.
36
On December 6, 1996, we acquired the Low Tire Pressure Warning Division
of EPIC Technologies, Inc. of Norwalk, Ohio. The assets that we acquired from
EPIC included specialized testing equipment, patents and certain contractual
rights, including the rights under a production program that EPIC had
established with Ford Motor Company. Under that production program, the Low Tire
Pressure Warning System that we acquired from EPIC was offered by Ford as an
option on Lincoln Continentals until the end of December 2001 when that
particular model was discontinued.
Our acquisition of EPIC's Low Tire Pressure Warning Division
accelerated our entry into the passenger car market. Recognizing the emerging
demand for tire monitoring systems (TMS) in passenger cars and light trucks, we
modified the new car version of the technology that we had acquired from EPIC
for use in existing vehicles. This product was launched into the automotive
aftermarket in June 1997 to support the market introduction of run-flat tires.
Automotive aftermarket products are sold as optional add-on products for
automobiles and are produced by third-party suppliers such as our company. The
aftermarket consists of retailers including tire retailers, automotive
electronic stores and accessory shops, which sell products directly to
consumers. Aftermarket products are distinguishable from original equipment
manufacturers - or so-called "OEM" - products which are sold as options offered
directly by or through the manufacturer of the automobile. OEM products may be
produced by third party suppliers as well, but are sold to automobile
manufacturers rather than to end-users. The tire monitoring systems (TMS) that
we supplied to Ford for use on Lincoln Continentals is an example of an OEM
product.
During 1997, Goodyear, Michelin and Bridgestone/Firestone approved our
company's first generation tire monitoring systems (TMS) for sale with run-flat
or extended mobility tires. Run-flat tires allow drivers to drive up to 50 miles
on a tire that has lost all of its air pressure. These tires perform so well
without any air pressure that an approved tire monitoring systems (TMS) is
required with the purchase of each set. Otherwise the operator may unknowingly
drive on the tire until it fails or is no longer repairable. Tire monitoring
systems (TMS) for both run-flat and conventional tires are distributed as
aftermarket products, primarily through independent tire dealers and
distributors and automobile service centers.
Our acquisition of EPIC's Low Tire Pressure Warning Division also
facilitated our entry into the motorsport market. Originally developed by EPIC
and Penske Racing, our motorsport tire monitoring systems (TMS) was distributed
exclusively by Pi Research of Cambridge, England. It is widely used by Indy
racing teams. We do not anticipate further sales of our motorsport tire
monitoring systems (TMS) to Pi Research as they now manufacture and market their
own system.
On April 20, 1998, we established a strategic alliance with TRW Inc., a
large U.S.-based automotive parts supplier. The strategic alliance was founded
on four agreements between the parties: an Equity Agreement, a Cooperation
Engineering Agreement, an Original Equipment Manufacturer License Agreement and
a Manufacturing Agreement. The agreements provided for joint engineering and
development activities between the parties, and TRW was granted exclusive
marketing and distribution rights for some of our company's products. In
addition, TRW had exclusive rights in the original equipment market for any tire
monitoring products that it developed jointly with us and we had exclusive
rights in the automotive aftermarket.
Effective August 31, 2001, we restructured our strategic alliance with
TRW. As a result of the restructuring, most of the agreements that we had
entered into with TRW in 1998 were cancelled. However, TRW retained its equity
position in our company. By ending our collaboration with TRW in product
development and by providing that neither we nor TRW will have exclusive rights
to any products, the restructuring effectively provided us with immediate access
to all levels of the global automotive and transportation industries.
During May 2002 we entered into a non-binding Memorandum of
Understanding with Visteon Corporation, a global supplier of products to the
automotive industry, to develop and market tire monitoring solutions for the OEM
market. Our Memorandum of Understanding matured into a formal agreement dated
December 10, 2002 which contemplated collaboration between our company and
Visteon to develop and market more advanced tire monitoring systems (TMS)
systems for passenger vehicles and light trucks, and to jointly explore other
opportunities for tire monitoring products such as the commercial vehicle
market. Under the agreement, we also granted Visteon rights to manufacture some
of our products. On July 16, 2003, we formally ended our relationship with
Visteon Corporation.
37
On September 24, 2002, we and Pirelli Pneumatici signed a Supply
Agreement for tire monitoring systems (TMS) that measure the pressure and
temperature of car, truck and motorcycle tires. The tire monitoring systems
(TMS) are produced and tested by our company, and marketed and sold by Pirelli
under the name X-PressureTM. The systems went on sale by the end of 2002 through
Pirelli's tire distribution channels in Italy, Germany, United Kingdom, Spain
and Switzerland. During October 2002, we made our first shipment to Pirelli
under the Supply Agreement.
In December 2002, we entered into an eight-year supply commitment
letter for tire monitoring systems (TMS) to be offered as part of the OEM
package on certain vehicles produced by Aston Martin. We are committed to supply
the systems in response to purchase orders submitted by Aston Martin from time
to time.
We completed the development and launch of our second generation tire
monitoring systems (TMS) for the passenger car and light truck market during the
fiscal year ended July 31, 2001, and launched a tire monitoring system (TMS) for
motorcycles during the quarter ended October 31, 2002. We introduced two
low-pressure tire pressure monitoring systems (TPMS) for the recreational
vehicle market during the quarter ended October 31, 2003, and are continuing the
development of systems for the commercial and industrial vehicle markets. We
shipped our second generation of motorcycle tire pressure monitoring system
(TPMS) to customers in May, 2004.
On February 6, 2003, we signed a manufacturing, co-marketing and
development agreement with Hyundai Autonet Company, Ltd., an established Korean
automotive electronics supplier. Under this agreement, Hyundai Autonet and we
will co-develop, manufacture and distribute tire monitoring products to Hyundai
Autonet original equipment vehicle manufacturers and the automotive aftermarket
in Korea. The agreement provides for the payment to us by Hyundai Autonet of a
total of $300,000 in fees, to cover the cost to develop a receiver and
transmitter that can be used in the Korean and Japanese markets. Initial
payments totaling $165,000 were made by Hyundai Autonet upon execution of our
agreement, and the balance of $135,000 is payable upon the attainment of certain
milestones including the completion of validation testing of these products and
the launch of these products in South Korea. We expect to receive an ongoing
revenue stream through the sales of proprietary components to Hyundai Autonet
beginning in early 2004.
On September 8, 2003, we entered into an agreement in principle
appointing Beijing Boom Technology Co. Ltd. as the Master Distributor of our
tire pressure monitoring systems (TPMS) in mainland China. The agreement in
principle led to a formal Master Distributor Agreement between us and Beijing
Boom Technology dated October 17, 2003, which provides for an initial two year
term ending on October 9, 2005 and automatic renewal for successive one-year
terms subject to termination by either party on giving 90 days' advance notice
in writing. Beijing Boom Technology has agreed to purchase over $1.5 million in
aftermarket passenger car tire pressure monitoring systems (TPMS) at fixed
intervals during the first year of the agreement. Beijing Boom Technology must
submit purchase orders to us for these products in accordance with a fixed
delivery schedule covering the first year of the agreement, and must pay for
each shipment before the products are shipped until March, 2004. Beijing Boom
Technology may return products to us, but any products which are returned
without our prior written consent are subject to a charge equal to 50% of the
invoiced value of such products.
In order to maintain its status as our Master Distributor in China,
Beijing Boom Technology must also purchase approximately $3.9 million in
additional aftermarket passenger car tire pressure monitoring systems (TPMS)
during the second year of the agreement. Beijing Boom Technology must also
establish a network of certified dealers in all provinces of China by May 1,
2004; it has met its first milestone of establishing certified dealers in at
least eleven specified provinces or municipalities of mainland China by December
31, 2003. Subject to Beijing Boom Technology meeting these milestones, we have
agreed not to appoint any other master distributor for mainland China during the
initial two-year term of the Master Distributor Agreement.
Government Regulations
Our products are subject to regulation by the government agencies
responsible for radio frequencies in each country that our tire monitoring
systems (TMS) will be sold. For example, in the United States approval must be
38
received from the Federal Communications Commission for each product. Some
countries require additional governmental approvals in certain circumstances.
For example, in the United Kingdom, all electronic equipment to be installed in
emergency and police vehicles must be approved by the Vehicle Installation
Development Group, a governmental body. And, as a practical matter, certain
non-governmental approvals may be necessary for market acceptance of our
products in certain countries. For example, the approval of TUV (an independent
testing company) is considered necessary to market our tire monitoring systems
(TMS) in Germany.
We believe that we have all of the necessary governmental approvals for
our current tire monitoring systems (TMS) in our intended market countries. As
each new tire monitoring systems (TMS) product is introduced to the market, we
intend to apply for the necessary approvals.
During our fiscal year ended July 31, 2001, the United States
Government enacted the Transportation Recall Enhancement, Accountability, and
Documentation Act of 2000, commonly known as the TREAD Act. The TREAD Act was
implemented to address perceived safety concerns resulting from poor tire
maintenance, tread separation and tire blowouts. The TREAD Act, among other
things, requires that the National Highway Traffic Safety Administration (NHTSA)
develop rules and regulations which require all new passenger cars, light trucks
and multipurpose passenger vans sold after November 1, 2003 to have tire
monitoring systems (TMS) installed as standard equipment. The tire monitoring
systems (TMS) must be capable of warning drivers if a tire is significantly
under-inflated. The mandated rules and regulations were scheduled to be
finalized in November 2001 for implementation in 2003.
In July 2001, National Highway Traffic Safety Administration (commonly
referred to by its acronym, NHTSA) published and circulated a Notice of Proposed
Rule Making which included provisions related to the tire monitoring
requirements of the TREAD Act. The Notice of Proposed Rule Making outlined the
parameters of systems that the National Highway Traffic Safety Administration
would consider compliant with the legislation and the proposed periods for
complying with the regulations. Two forms of tire monitoring technologies were
to be considered:
1) Direct tire monitoring technologies are based on dedicated sensor /
transmitters located within the cavity of the tire that are usually
mounted on the wheel. The transmitter monitors and measures contained
air pressure and temperature within each tire and transmits this
information to a receiver located in or around the instrument panel of
the vehicle. Our products are an example of a direct system.
2) Indirect tire monitoring technologies typically work with the
vehicle's anti-lock brake system. Most indirect tire monitoring systems
(TMS) compare each wheel's rotational speed with the rotational speed
of other wheels. If one tire becomes significantly under-inflated while
the others remain at proper pressure, the indirect system eventually
detects the problem because that wheel's rotational speed is on average
slightly higher than that of other wheels.
In the Notice of Proposed Rule Making, the National Highway Traffic
Safety Administration concluded that direct measurement systems have major
advantages over indirect systems as they:
o actually measure the pressure in each tire and can detect when
any tire or combination of tires is under-inflated, including
when all tires are under-inflated,
o operate while the vehicle is stationary,
o are highly accurate and can detect small pressure losses, some
even as low as 1 pound per square inch,
o provide full time monitoring even when the vehicle is driven
on bumpy roads, has mismatched tires or has a tire out of
balance or alignment,
o do not need substantial time to calibrate the system and
reduce the very real possibility for human error, and
o can alert the operator when tire is under-inflated.
39
On May 31, 2002, the National Highway Traffic Safety Administration
(NHTSA) issued part one of a two-part final rule. Part one established a new
Federal Motor Vehicle Safety Standard that requires that tire pressure
monitoring systems (TPMS) be installed in passenger vehicles and light trucks to
warn the driver when a tire is below specified pressure levels. During the first
year of the implementation schedule, beginning November 1, 2003, at least 10% of
each auto manufacturer's total production must be equipped with tire pressure
monitoring systems (TPMS). This requirement increases to 35% during the second
year, 65% by the third and 100% after October 31, 2006.
Part one of the National Highway Traffic Safety Administration's
(NHTSA) final rule contemplated two compliance options during the period from
November 1, 2003 to October 31, 2006. Under the first compliance option, a
vehicle's tire pressure monitoring system (TPMS) must alert the driver if one or
more tires, up to four tires, is 25% or more under-inflated. Under the second
compliance option, a vehicle's tire pressure monitoring system (TPMS) must alert
the driver if any of the vehicle's tires is 30% or more under-inflated. The
second compliance option was adopted by National Highway Traffic Safety
Administration (NHTSA) because indirect tire pressure monitoring systems (TPMS)
are currently not capable of meeting the stricter four-tire, 25% requirement
under the first compliance option, and it was deemed appropriate to permit
manufacturers to continue to use current indirect tire pressure monitoring
systems (TPMS) while they work to improve those systems.
At the time that it issued the first part of its final rule, the
National Highway Traffic Safety Administration (NHTSA) announced that it would
be closely monitoring the performance of indirect measurement tire pressure
monitoring systems (TPMS) under the second compliance option. We initially
expected that the National Highway Traffic Safety Administration (NHTSA) would
issue the second part of its final rule on or before March 1, 2005, and that it
would, at that time, announce whether indirect tire pressure monitoring systems
(TPMS) based on anti-lock brake systems would be a permissible compliance option
under the TREAD Act after October 31, 2006. However, due to the recent Court of
Appeals ruling discussed below, we no longer hold these expectations as to the
timing and content of the second part of the final rule.
Three not-for-profit advocacy organizations, Public Citizen, Inc., New
York Public Interest Research Group and The Center for Auto Safety subsequently
filed a petition in United States Court of Appeals for the Second Circuit
seeking review of the National Highway Traffic Safety Administration's (NHTSA)
final rule. The Secretary of Transportation was named as the respondent in the
matter, and Alliance of Automobile Manufacturers was an intervenor. On August 6,
2003, the United States Court of Appeals, Second Circuit, granted the petition
for review, vacated the National Highway Traffic Safety Administration's (NHTSA)
final rule, and remanded the matter to the National Highway Traffic Safety
Administration (NHTSA) for further rulemaking proceedings in a manner consistent
with the court decision.
The petitioners had argued before the court that the final rule was
contrary to the intent of Congress when it enacted the relevant provisions of
the TREAD Act, and further that it was arbitrary and capricious under the
federal Administrative Procedure Act. The court agreed, holding that National
Highway Traffic Safety Administration's decision to adopt the second compliance
option was both contrary to law and arbitrary, but that the adoption of the
first compliance option and the three-year phase-in period was not. In coming to
this conclusion, the court found that, according to the rule-making record, the
one-tire, 30 percent under-inflation standard contemplated by the second
compliance option would allow automakers to install indirect tire monitoring
systems (TMS) that fail to warn drivers in approximately half of the instances
in which tires are significantly under-inflated, and that the four-tire, 25
percent under-inflation standard contemplated by the first compliance option
would prevent more injuries, save more lives and be more cost-effective.
Our company's management anticipates that National Highway Traffic
Safety Administration, in reformulating its final rule, will leave intact the
four-tire, 25 percent under-inflation standard as well as the three-year
implementation schedule mandated under the original rule. Our direct measurement
tire monitoring systems (TMS) products meet this higher standard. We, together
with our strategic partners such as Hyundai Autonet Co. Ltd., have developed a
joint marketing program designed to exploit the significant product demand that
is anticipated to be created by the TREAD Act.
40
Strategic Relationships
Our strategy includes the establishment of alliances to assist in the
development and marketing of our products and technologies. Key strategic
alliances include:
(a) Hyundai Autonet Co. Ltd.
On February 6, 2003, we signed an agreement with Hyundai Autonet,
pursuant to which we and Hyundai Autonet have agreed to co-develop, manufacture
and distribute tire monitoring systems (TMS) products to the OEM market and the
automotive aftermarket in Korea. Originally founded in 1985 as Hyundai
Automotive Electronics Division, Hyundai Autonet is a subsidiary of the Hyundai
Auto Group, a large Korean conglomerate of companies. Hyundai Autonet has been
contracted by its sister company, Hyundai Motor Corporation, to develop
commercial vehicle tire monitoring systems (TMS).
On October 17, 2003, we entered into a contract manufacturing services
agreement with Hyundai Autonet, pursuant to which Hyundai Autonet has agreed to
manufacture certain tire monitoring systems (TMS) and components to our
specifications. Hyundai Autonet will manufacture and supply the products to us
for sale and distribution in our various markets, in response to purchase orders
that we will submit from time to time during the term of the agreement. The
agreement provides for an initial 24-month term, subject to extension for an
additional one year period.
(b) Alligator Ventilfabrik GmbH
On December 10, 1999, we entered into an agreement to develop valve
stem designs and tire monitoring electronic packaging for new market
applications and new tire monitoring technologies with Alligator Ventilfabrik
GmbH. Based in Giengen, Germany, Alligator Ventilfabrik GmbH is a producer of
valve stems that allow the attachment of tire monitoring sensors inside the
tire.
(c) Transense Technologies plc
On December 2, 1999, we entered into a licensing agreement with
Transense Technologies of Oxfordshire, England, pursuant to which we were
granted a non-exclusive, worldwide right to develop and market Transense's
Surface Acoustic Wave technology for use in tire monitoring. Transense
researches, develops and markets the use of its patented technology in the
automotive industry.
Product Development
Our technology provides drivers with real time information regarding
tire pressure and temperature changes. This information provides the consumer
and commercial markets with improved vehicle safety, performance and fuel
economy. Our products have been engineered and designed for universal
application. The sensor / transmitter can be installed on virtually any tire and
wheel combination. Each sensor / transmitter contains a custom application
specific integrated sensor (ASIS). A receiver unit mounted in the vehicle
provides appropriate alarm indications with optional digital readout.
The custom application specific integrated sensor (ASIS) is a single
micro-electronic package containing pressure and temperature sensing elements
and a digital logic state machine that functions as the brains of the sensor /
transmitter. This chip is robust in design, optimizes battery life and provides
various modes of sensing and communicating which ensure faster transmission of
data when problems occur. Packaged on a miniaturized circuit board with the
application specific integrated sensor (ASIS) are various components and our
radio frequency technology. Using this wireless radio frequency technology, the
data is transmitted through the tire to a remote receiver.
41
Our company's products feature transmitter options providing different
installation choices for various automotive applications. A strap-mounted
transmitter attached to the wheel offers the most universal installation for a
wide range of tire and wheel assemblies. A valve-mounted transmitter attached to
the base of the valve offers an adjustable, secure in-tire installation for
specific wheel / rim profiles. Once installed, the sensor / transmitters do not
require ongoing maintenance. The sensor / transmitters communicate to remote
receivers and the data is displayed inside the vehicle. We have developed three
display options for the aftermarket (basic, integrated full function and remote
full function) as well as telltale lights, switch blanks and digital displays
for OEM and port of entry applications.
We have recently developed OEM passenger car solutions to support the
level of demand that our management anticipates from potential customers in this
market sector. The OEM transmitter features a 50% size and weight reduction over
our current generation transmitter, as well as innovative new mounting options
including bonding directly to the wheel as well as a more innovative valve mount
approach. We are currently marketing our existing products to small and medium
sized original equipment manufacturers.
We introduced our motorcycle tire pressure monitoring system (TPMS) for
sale into the aftermarket in September 2002. We recently introduced a
substantially improved second generation motorcycle tire pressure monitoring
system (TPMS) at the Indy Motorcycle Dealers Show, held in Indianapolis, Indiana
in mid-February 2004. During May, 2004 this product became commercially
available and we began shipping it to our customers.
On September 12, 2003 we entered into a development agreement with
Vansco Ltd. This agreement provides for the merging of Vansco's vehicle
communication expertise with SmarTire's proven radio frequency (RF) technology
to create a high sensitivity, weatherproof, controller area network (CAN),
chassis-mounted receiver. The controller area network (CAN) is the most widely
used communication standard in vehicles today, allowing for multiplexing,
receiving and transmitting of signals from various sources. When controller area
network (CAN) technology is combined with our high pressure sensors, we
anticipate that this joint development effort will result in a new tire pressure
monitoring system (TPMS) targeted directly at OEMs of commercial trucks, buses,
agricultural, construction and recreational vehicles. As our joint development
objectives with Vansco have been on schedule, we anticipate launching the new
CAN receiver before the end of our fiscal 2004 year. Pursuant to our agreement
with Vansco, Vansco will market the product directly to its customers in the
agricultural vehicle sector and on a case-by-case basis to the commercial truck,
bus and construction industries. We will market the jointly developed product to
the OEM commercial truck and recreational vehicle markets.
We are in the final stages of development of a high pressure tire
monitoring system (TPMS) for the commercial vehicle market that includes the
recreational vehicle, tractor and trailer, bus, monorail, off-the-road and
specialty vehicle markets. We have had some early sales to the recreational
vehicle and monorail markets. We are also continuing development of future tire
monitoring technologies, including development of concepts and prototypes for
the OEM market and tire companies. In addition, we have continued to make
progress on the development of transmitters that do not require batteries.
On October 10, 2003 we entered into a Co-Marketing and Development
agreement with Haldex Brake Products Ltd., and a related Supply Agreement with
Haldex. Under the terms of this agreement, we will engage in a joint development
program to integrate our tire pressure monitoring systems (TPMS) with Haldex's
brake systems, with the view to creating commercial high pressure tire pressure
monitoring systems (TPMS) for marketing and resale by Haldex. We anticipate that
any new products that result from our collaboration with Haldex will be targeted
at both OEM and aftermarket applications for trucks and trailers. Once
development is complete, we plan to execute on the Supply Agreement with Haldex.
Marketing
Our subsidiaries, SmarTire USA and SmarTire Europe, were established to
market our tire monitoring systems (TMS) products. SmarTire USA and SmarTire
Europe were initially mandated to establish a distribution network for the
automotive aftermarket. Another objective of establishing this network has been
to train and certify dealers and retailers to install our products in vehicles.
42
As a result of the enactment of the TREAD Act and the restructuring of
our strategic alliance with TRW, we have substantially changed our marketing
strategy. We expect that, as tire monitoring systems (TMS) becomes standard
equipment for new passenger vehicles in the United States over the next few
years, demand for tire monitoring systems (TMS) will increase on a worldwide
basis.
With the implementation of the TREAD Act, we expect that demand for
tire monitoring technology will be initiated by the big three United States
automakers: General Motors, DaimlerChrysler and Ford. Some European automotive
groups have already used tire monitoring as a means to add value and
differentiate models. Due to the large volume of import vehicles to the United
States, it is expected that the thirty different automakers in Europe plus the
twelve from Asia will meet the TREAD Act requirements for North America. Adding
tire monitoring to domestic European and Asian vehicles would trigger a much
larger demand for tire monitoring systems (TMS) than was anticipated prior to
introduction of the TREAD Act.
Our company's current marketing strategy is to focus on sales of our
tire monitoring systems (TMS) for OEM applications in all market sectors:
passenger cars, light trucks, motorcycles, recreational vehicles, commercial and
industrial applications. In approaching the OEM market, we expect to position
ourselves as a complete system and associated technology provider. Our strategy
is to provide high quality products to the OEM market which incorporate the
highest level of technology possible, at a competitive price. Our strategy
requires that, among other things, we minimize our manufacturing costs.
We intend to achieve this in conjunction with Hyundai Autonet, a Tier
One supplier of automotive parts in Korea. Tier One suppliers produce systems
and subsystems for original equipment manufacturers. We believe that Hyundai
Autonet possesses competitive world-class manufacturing capabilities which will
directly complement our specialized technical know-how, and thereby help to give
us an improved industry presence. We also hope to work closely together with
Hyundai Autonet to secure Asian contracts with certain automobile manufacturers,
for the supply of fully-integrated tire monitoring solutions for selected
automobile platforms.
While we expect that the greatest demand for tire monitoring systems
(TMS) in the United States will be at the original equipment manufacturer level
for passenger vehicles and commercial vehicles, we will continue to market our
products through installation at either the new car dealer or port-of-entry
level. We refer to this opportunity as car accessory programs and motorcycle
accessory programs. These programs may be used to provide an OEM quality product
that is not installed at the factory. Car and motorcycle accessory programs
opportunities also exist in Europe due to the number and diversity of
automakers.
During the fiscal year ended July 31, 2001 we completed development of
our second generation tire monitoring systems (TMS) and released our line of
products for sale into the aftermarket. In September 2002, we introduced our
motorcycle tire monitoring systems (TMS) for sale into the aftermarket. The
aftermarket opportunity currently consists of a niche market in the enthusiast
and high performance segment. To access this niche, we have worked to establish
a wholesale distribution network in Europe, while in North America we have
sought to work directly with major retail distributors.
Competition
As a whole, the tire monitoring systems (TMS) industry is still in its
early stages. There have been very few products available in the market. Tire
monitoring products can generally be divided among two basic types, direct
technology and indirect monitoring technologies. As described in the NHTSA's
(National Highway Traffic Safety Administration) report, and discussed above
under the heading "Business of our company - Government Regulations," direct
tire monitoring technology such as that employed in our company's products
currently provide substantial advantages over indirect monitoring technology.
However, several of our competitors and potential competitors have long and
established relationships with automobile OEMs and suppliers, which may make it
difficult for us to compete in the OEM market. Additionally, automobile
manufacturers may elect to develop their own tire monitoring systems (TMS) to
comply with the TREAD Act.
43
Our main competitors with respect to direct tire monitoring systems
(TMS) include the following:
o Schrader Bridgeport, claims to be the world's largest producer
of tire valves and tire-pressure measurement equipment with
over $140 million in annual sales. The tire monitoring systems
(TMS) developed by Schrader has been used on Chevrolet
Corvettes since 1996. The Schrader tire monitoring systems
(TMS) was also used on the Plymouth Prowler during its
five-year production run from 1997 to 2002. The product is
being aggressively marketed at the OEM level. As a transmitter
supplier, Schrader has teamed with receiver suppliers to
recently win OEM contracts. In the aftermarket, Schrader has
joined with Johnson Controls in the launch of their
PSI-branded product.
o German based BERU has acquired Doduco and its tire monitoring
technology. That company is presently working with and
approved by a consortium of five German vehicle manufacturers.
To our knowledge, the system requires the use of transmitters
attached to the valve stem (inside the tire / wheel assembly),
receiving antennas at each of the wheel wells, wiring harness
for conveying data to the receiver and some form of in-dash
display. This system has been developed for the OEM market
only.
o Pacific Industrial Co. Ltd., a Japanese company, has developed
a product that measures the air pressure in each tire and
sends the data to a receiver mounted inside a vehicle. The
products are available on a few Asian vehicles and, to date,
are not commercially available in North America. We believe
that the Pacific products resemble the BERU approach to tire
monitoring with additional antennas and wiring harnesses. o
TRW Automotive U.S. LLC is a producer of safety and security
systems for the global automotive market. It supplies advanced
technology products and services to the automotive markets.
From December 1998 to August 2001, we and TRW jointly
developed advanced tire monitoring technology and each has
access to this technology, which encompasses our current
products. During this period, we and TRW jointly developed a
common application specific integrated sensor (ASIS) chip for
existing products.
o Siemens Automotive merged with Atecs Mannesmann AG to create
Siemens Automotive AG, a large supplier of high-tech
automotive electronic systems. The combined company's product
portfolio focuses on electronic modules and systems including
anti-lock brake system and airbag electronics. Siemens
Automotive has entered the market, and offers direct tire
monitoring systems (TMS) to OEMs.
There are several indirect monitoring or anti-lock brake systems,
either available on the market or in prototype stages. To the knowledge of our
company's management, none of these prototype systems currently meet the
proposed guidelines set out in the National Highway Traffic Safety
Administration's Notice of Proposed Rule Making. Given the substantial
advantages of direct monitoring technology and the recent decision of the United
States Court of Appeals, Second Circuit, allowing a petition for review of
National Highway Traffic Safety Administration's final rule under the TREAD Act,
we do not believe that indirect monitoring technology will be a significant
competitor in the short term. However, it is likely that the performance of
indirect measurement tire monitoring systems (TMS) will continue to improve, and
they will likely benefit from the fact that they are the least expensive way of
complying with the tire monitoring systems (TMS) standard for vehicles already
equipped with anti-lock braking systems.
With respect to commercial vehicle tire monitoring systems (TMS), the
major tire companies have been developing medium truck tires incorporating
electronic chips in the sidewall to provide tire tracking information possibly
including pressure, temperature and identification. Their disadvantage is the
inability to provide real-time, dynamic values to the driver, which eliminates
any early warning capability while operating the vehicle. Further, it seems that
currently there are no additional functions that can be programmed into these
static systems, limiting their integration into other fleet management programs.
There are a number of companies that are marketing tire inflation
systems into the commercial trailer market. While these systems do not provide
tire monitoring systems (TMS) information to the driver, they utilize the air
lines in the trailer to supply air pressure to a tire that is experiencing an
air loss. This allows the driver to continue to operate the vehicle. This system
is not available on the tractor or truck unit itself.
One potential future development that could affect the market for both
passenger car and commercial vehicle tire monitoring is the development of a
"smart chip". This is a computer chip that could transmit data and would be
manufactured into tires. We believe that Goodyear and Bridgestone / Firestone
have both completed some development of such a computer chip.
44
Raw Materials and Principal Suppliers
We contract the manufacture of our products to third parties, such as
Hyundai Autonet. These manufacturers normally provide turnkey operations whereby
the manufacturer is responsible for purchasing the component parts for our tire
monitoring systems (TMS). Presently, we purchase component parts and deliver
them to our contract manufacturers. However, Hyundai Autonet will be producing
some of the plastic enclosures and using tooling supplied by or paid for by us.
We also purchase component parts on our own account for engineering and
prototype development purposes. Certain of the components and raw materials used
in our products are difficult to obtain and/or require purchase commitments far
in advance of the manufacturing date. At present, our relationships with our
current suppliers are generally good and we expect that the suppliers will be
able to meet the anticipated demand for our products through fiscal year 2004.
Dependence on Certain Customers
Due to the early stage development of the tire monitoring systems (TMS)
market in general and for our company's, we are still dependent on major
customers. During the year ended July 31, 2003 we earned 35% of our revenue from
three major customers. We expect that this dependence will be reduced as we
start to realize sales through our relationships with new customers and through
our strategic alliances, including our alliance with Hyundai Autonet.
On September 8, 2003, we entered into an agreement in principle
appointing Beijing Boom Technology Co. Ltd. as the Master Distributor of our
tire pressure monitoring systems (TPMS) in mainland China. The agreement in
principle led to a formal Master Distributor Agreement between us and Beijing
Boom Technology dated October 17, 2003, which provides for an initial two year
term ending on October 9, 2005 and automatic renewal for successive one-year
terms subject to termination by either party on giving 90 days' advance notice
in writing. Beijing Boom Technology has agreed to purchase over $1.5 million in
aftermarket passenger car tire pressure monitoring systems (TPMS) at fixed
intervals during the first year of the agreement. Beijing Boom Technology must
submit purchase orders to us for these products in accordance with a fixed
delivery schedule covering the first year of the agreement, and must pay for
each shipment before the products are shipped until March, 2004. Beijing Boom
Technology may return products to us, but any products which are returned
without our prior written consent are subject to a charge equal to 50% of the
invoiced value of such products.
In order to maintain its status as our Master Distributor in China,
Beijing Boom Technology must also purchase approximately $3.9 million in
additional aftermarket passenger car tire pressure monitoring systems (TPMS)
during the second year of the agreement. Beijing Boom Technology must also
establish a network of certified dealers in all provinces of China by May 1,
2004; it has met its first milestone of establishing certified dealers in at
least eleven specified provinces or municipalities of mainland China by December
31, 2003. Subject to Beijing Boom Technology meeting these milestones, we have
agreed not to appoint any other master distributor for mainland China during the
initial two-year term of the Master Distributor Agreement.
Proprietary Protection
Our intellectual property is important to protecting our competitive
advantage and expanding our tire monitoring systems (TMS) market share. We rely
on a combination of patents, trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property.
We hold several patents for our current technologies, which are listed
below:
o United States Patent 5,231,872 addresses the technology in our
tire monitoring product. It was issued on August 3, 1993 and
expires August 3, 2010.
45
o United States Patent 5,285,189 addresses the technology in our
abnormal tire condition warning system. It was issued on
February 8, 1994 and expires February 8, 2011. We purchased
this patent from EPIC Technologies, Inc. in December 1996.
o United States Patent 5,335,540 addresses the technology in our
tire monitoring product. It was issued on August 9, 1994 and
expires August 9, 2011.
o United States Patent 5,559,484 addresses certain technology in
our data logging tire monitor with condition predictive
capabilities and integrity checking. It was issued on
September 24, 1996 and expires September 24, 2013. We
purchased this patent from EPIC Technologies, Inc. in December
1996.
o United States Patent 5,945,908 addresses certain other
technology in our data logging tire monitor with condition
predictive capabilities and integrity checking. It was issued
on August 31, 1999 and expires on August 31, 2016. We
purchased this patent from EPIC Technologies, Inc. in December
1996.
o United States Patent 4,653,445 addresses the technology in an
Engine Protection System product. It was issued on March 31,
1987 and expires March 31, 2004.
o United States Patent 6,357,883 addresses the technology for a
wheel component with a cavity for mounting a housing for
measurement apparatus. It was issued on March 19, 2002 and
expires March 19, 2019.
In addition to our patents, we also have access to a number of other
patents under our license agreements with Transense and TRW.
TRW and our company entered into a license agreement on September 30,
1999 with Transense based in Oxfordshire, United Kingdom. Transense researches,
develops and exploits the use of its patented Surface Acoustic Wave technology
in the automotive industry. The license agreement grants SmarTire a
non-exclusive, worldwide right to develop and market Transense's Surface
Acoustic Wave technology for use in tire monitoring systems (TMS).
As discussed elsewhere in this registration statement, we restructured
our strategic alliance with TRW effective August 31, 2001. As part of the
restructuring, we received a royalty-free license from TRW to utilize technology
developed during the term of the Cooperative Engineering Agreement that is
patented, now or in the future, by TRW. We have granted a parallel royalty-free
license to TRW.
The technology covered by one of the patents that we have licensed from
TRW is used in our current and proposed tire monitoring systems (TMS). A clause
of the license agreement states that our license shall automatically terminate
if we breach any of our obligations under certain other agreements, including
our promissory note to TRW Inc. dated August 31, 2001. During the year, we made
two $250,000 payments to TRW Inc. under the promissory note and as a result of
subsequent negotiations with TRW Automotive U.S. LLC, as assignee of TRW Inc.,
TRW Automotive agreed to accept $850,000 as full and final payment of all
amounts due and owing under the promissory note, provided that it was paid on or
before September 1, 2003. We have fully paid this amount to TRW Automotive.
Research and Development
We spent the following amounts on engineering, research and development
activities during the fiscal years ended July 31, 2003 and 2002:
2003 - $1,177,935
2002 - $1,727,606
46
These expenses were incurred in the development of our second
generation tire monitoring systems (TMS). We expect that our annual research and
development expenses will continue to increase as we work to integrate our
current products into automobile platforms of various OEMs seeking to satisfy
the TREAD Act requirements, and as we complete work on other products that are
currently in development.
Number of Total Employees and Number of Full-time Employees
At May 25, 2004, we had 43 full-time employees, 14 of whom are in
marketing, 20 of whom are in engineering, research and development and 9 of whom
are administrative and executive personnel. There is no collective bargaining
agreement in place. We also had one engineer on a contract basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our financial condition, changes in financial
condition and results of operations for the three and six months ended January
31, 2004 and 2003 should be read in conjunction with our most recent audited
annual financial statements for the financial year ended July 31, 2003, the
unaudited interim financial statements included herein, and, in each case, the
related notes.
Our consolidated financial statements are stated in United States
Dollars and are prepared in accordance with United States Generally Accepted
Accounting Principles.
We carry on business directly and through our three wholly-owned
subsidiaries: SmarTire USA Inc., SmarTire Europe Limited and SmarTire
Technologies Inc. SmarTire Technologies Inc., formerly Delta Transportation
Products Ltd., was incorporated under the laws of British Columbia on August 27,
1987, and is the original developer of our patented technology. We were
continued (reincorporated) under the laws of the Yukon Territory, Canada, to
become a Yukon corporation effective February 6, 2003.
We are engaged in developing and marketing technically advanced tire
monitoring systems designed for improved vehicle safety, performance,
reliability and fuel efficiency. We currently earn revenues primarily from the
sale of tire pressure monitoring systems (TPMS) for passenger cars. We are
focused on developing and marketing technically advanced tire pressure
monitoring systems (TPMS) for the transportation and automotive industries.
Our products are subject to regulation by the government agencies
responsible for radio frequencies in each country that our tire pressure
monitoring systems (TPMS) will be sold. For example, in the United States
approval must be received from the Federal Communications Commission for each
product. Some countries require additional governmental approvals in certain
circumstances. For example, in the United Kingdom, all electronic equipment to
be installed in emergency and police vehicles must be approved by the Vehicle
Installation Development Group, a governmental body. And, as a practical matter,
certain non-governmental approvals may be necessary for market acceptance of our
products in certain countries. For example, the approval of TUV (an independent
testing company) is considered necessary to market our tire pressure monitoring
systems (TPMS) in Germany.
We believe that we have all of the necessary governmental approvals for
our current tire pressure monitoring systems (TPMS) in our intended market
countries. As each new tire pressure monitoring system (TPMS) is introduced to
the market, we intend to apply for the necessary approvals.
During our fiscal year ended July 31, 2001, the United States
Government enacted the Transportation Recall Enhancement, Accountability, and
Documentation Act of 2000, commonly known as the TREAD Act. The TREAD Act was
implemented to address perceived safety concerns resulting from poor tire
maintenance, tread separation and tire blowouts. The TREAD Act, among other
things, requires that the National Highway Traffic Safety Administration,
commonly referred to by its acronym, NHTSA, develop rules and regulations which
require all new passenger cars, light trucks and multipurpose passenger vans
sold after November 1, 2003 to have tire pressure monitoring systems (TPMS)
installed as standard equipment. The TREAD Act requires that tire pressure
monitoring systems (TPMS) must be capable of warning drivers if a tire is
significantly under-inflated. The mandated rules and regulations were scheduled
to be finalized in November 2001 for implementation in 2003.
47
In July 2001, the National Highway Traffic Safety Administration
(NHTSA) published and circulated a Notice of Proposed Rule Making which included
provisions related to the tire monitoring requirements of the TREAD Act. The
Notice of Proposed Rule Making outlined the parameters of systems that the
National Highway Traffic Safety Administration (NHTSA) would consider compliant
with the legislation and the proposed periods for complying with the
regulations. Two forms of tire monitoring technologies were to be considered:
1) Direct tire monitoring technologies are based on dedicated sensor /
transmitters located within the cavity of the tire that are usually
mounted on the wheel. The transmitter monitors and measures contained
air pressure and temperature within each tire and transmits this
information to a receiver located in or around the instrument panel of
the vehicle. Our products are an example of a direct system.
2) Indirect tire monitoring technologies typically work with the
vehicle's anti-lock brake system. Most indirect tire pressure
monitoring systems (TPMS) compare each wheel's rotational speed with
the rotational speed of other wheels. If one tire becomes significantly
under-inflated while the others remain at proper pressure, the indirect
system eventually detects the problem because that wheel's rotational
speed is on average slightly higher than that of other wheels.
In the Notice of Proposed Rule Making, the National Highway Traffic
Safety Administration (NHTSA) concluded that direct measurement systems have
major advantages over indirect systems as they:
o actually measure the pressure in each tire and can detect when
any tire or combination of tires is under-inflated, including
when all tires are under-inflated;
o operate while the vehicle is stationary;
o are highly accurate and can detect small pressure losses, some
even as low as 1 pound per square inch;
o provide full time monitoring even when the vehicle is driven
on bumpy roads, has mismatched tires or has a tire out of
balance or alignment;
o do not need substantial time to calibrate the system and
reduce the very real possibility for human error; and
o can tell the operator which tire is under-inflated.
On May 31, 2002, the National Highway Traffic Safety Administration
(NHTSA) issued part one of a two-part final rule. Part one established a new
Federal Motor Vehicle Safety Standard that requires that tire pressure
monitoring systems (TPMS) be installed in passenger vehicles and light trucks to
warn the driver when a tire is below specified pressure levels. During the first
year of the implementation schedule, beginning November 1, 2003, at least 10% of
each auto manufacturer's total production must be equipped with tire pressure
monitoring systems (TPMS). This requirement increases to 35% during the second
year, 65% by the third and 100% after October 31, 2006.
Part one of the National Highway Traffic Safety Administration's
(NHTSA) final rule contemplated two compliance options during the period from
November 1, 2003 to October 31, 2006. Under the first compliance option, a
vehicle's tire pressure monitoring system (TPMS) must alert the driver if one or
more tires, up to four tires, is 25% or more under-inflated. Under the second
compliance option, a vehicle's tire pressure monitoring system (TPMS) must alert
the driver if any of the vehicle's tires is 30% or more under-inflated. The
second compliance option was adopted by National Highway Traffic Safety
Administration (NHTSA) because indirect tire pressure monitoring systems (TPMS)
are currently not capable of meeting the stricter four-tire, 25% requirement
under the first compliance option, and it was deemed appropriate to permit
manufacturers to continue to use current indirect tire pressure monitoring
systems (TPMS) while they work to improve those systems.
At the time that it issued the first part of its final rule, the
National Highway Traffic Safety Administration (NHTSA) announced that it would
be closely monitoring the performance of indirect measurement tire pressure
monitoring systems (TPMS) under the second compliance option. We initially
expected that the National Highway Traffic Safety Administration (NHTSA) would
issue the second part of its final rule on or before March 1, 2005, and that it
48
would, at that time, announce whether indirect tire pressure monitoring systems
(TPMS) based on anti-lock brake systems would be a permissible compliance option
under the TREAD Act after October 31, 2006. However, due to the recent Court of
Appeals ruling discussed below, we no longer hold these expectations as to the
timing and content of the second part of the final rule.
Three not-for-profit advocacy organizations, Public Citizen, Inc., New
York Public Interest Research Group and The Center for Auto Safety filed a
petition in United States Court of Appeals for the Second Circuit seeking review
of the National Highway Traffic Safety Administration's (NHTSA) final rule. The
Secretary of Transportation was named as the respondent in the matter, and
Alliance of Automobile Manufacturers was an intervenor. On August 6, 2003, the
United States Court of Appeals, Second Circuit, granted the petition for review,
vacated the National Highway Traffic Safety Administration's (NHTSA) final rule,
and remanded the matter to the National Highway Traffic Safety Administration
(NHTSA) for further rulemaking proceedings in a manner consistent with the court
decision.
The court stated that the National Highway Traffic Safety
Administration (NHTSA) decision to adopt the second compliance option was both
contrary to law and arbitrary, but that the adoption of the first compliance
option was appropriate. In coming to this conclusion, the court found that,
according to the rule-making record, the one-tire, 30 percent under-inflation
standard contemplated by the second compliance option would allow automakers to
install indirect tire pressure monitoring systems (TPMS) that fail to warn
drivers in approximately half of the instances in which tires are significantly
under-inflated, and that the four-tire, 25 percent under-inflation standard
contemplated by the first compliance option would prevent more injuries, save
more lives and be more cost-effective.
We anticipate that the National Highway Traffic Safety Administration
(NHTSA), in reformulating its final rule, will leave intact the four-tire, 25
percent under-inflation standard as well as the three-year implementation
schedule mandated under the original rule. Our direct measurement tire pressure
monitoring systems (TPMS) meet this higher standard. Accordingly, we believe
that the Court of Appeal decision will create additional opportunities to market
our products to original equipment manufacturers, which are commonly referred to
as OEMs, in the automobile industry. In addition, although the TREAD Act only
applies to passenger automobiles, we believe that other motor vehicles,
including medium and heavy trucks, buses and motorcycles will be impacted by
this legislation in subsequent years. We also believe that compliance with the
TREAD Act by European, Japanese, Chinese and other automakers will accelerate
the adoption of tire pressure monitoring systems (TPMS) globally.
It is difficult to predict the magnitude of the expected sales increase
or the exact timing of the increase since our products will continue to face
competition from other tire pressure monitoring systems (TPMS) manufactured by
our competitors, and the timing of additional legislative initiatives on tire
safety, if any, in the United States and abroad remains uncertain. Our
management expects that, as tire pressure monitoring systems (TPMS) become
standard equipment for new passenger vehicles, demand for tire pressure
monitoring systems (TPMS) as dealer installed options and aftermarket products
will gradually decline.
Our current strategy involves generating short-term revenue from
products available to meet today's demand for dealer-installed options and
aftermarket tire pressure monitoring systems (TPMS) combined with the pursuit of
OEM business. However, the pursuit of large OEM contracts will involve
challenges for management, including overcoming existing relationships that
certain of our competitors currently enjoy with automakers.
We introduced our motorcycle tire pressure monitoring system (TPMS) for
sale into the aftermarket in September 2002. We recently introduced a
substantially improved second generation motorcycle tire pressure monitoring
system (TPMS) at the Indy Motorcycle Dealers Show, held in Indianapolis, Indiana
in mid-February 2004.
In early October 2003, we announced the introduction of a low pressure
tire monitoring system (TPMS) for the recreational vehicle market.
We are in the final stages of development of a high pressure tire
monitoring system (TPMS) for the commercial vehicle market that includes the
recreational vehicle, tractor and trailer, bus, monorail, off-the-road and
49
specialty vehicle markets. We are also continuing development of future tire
monitoring technologies, including development of concepts and prototypes for
the OEM market and tire companies. In addition, we have continued to make
progress on the development of transmitters that do not require batteries.
In February 2003, we signed a manufacturing, co-marketing and
development agreement with Hyundai Autonet Company, Ltd., an established Korean
automotive electronics supplier. Under this agreement, Hyundai Autonet and we
will co-develop, manufacture and distribute tire monitoring products to Hyundai
Autonet original equipment vehicle manufacturers and the automotive aftermarket
in Korea. The agreement provides for the payment to us by Hyundai Autonet of a
total of $300,000 in fees, to cover the cost to develop a receiver and
transmitter that can be used in the Korean and Japanese markets. Initial
payments totaling $165,000 were made by Hyundai Autonet upon execution of our
agreement, and the balance of $135,000 is payable upon the attainment of certain
milestones including the completion of validation testing of these products and
the launch of these products in South Korea. During our 2004 fiscal year, we
anticipate these milestones will be attained and expect to receive an ongoing
revenue stream through the sales of proprietary components to Hyundai Autonet.
On September 8, 2003, we entered into an agreement in principle
appointing Beijing Boom Technology Co. Ltd. as the Master Distributor of our
tire pressure monitoring systems (TPMS) in mainland China. The agreement in
principle led to a formal Master Distributor Agreement between us and Beijing
Boom Technology dated October 17, 2003, which provides for an initial two year
term ending on October 9, 2005 and automatic renewal for successive one-year
terms subject to termination by either party on giving 90 days' advance notice
in writing. Beijing Boom Technology has agreed to purchase over $1.5 million in
aftermarket passenger car tire pressure monitoring systems (TPMS) at fixed
intervals during the first year of the agreement. Beijing Boom Technology must
submit purchase orders to us for these products in accordance with a fixed
delivery schedule covering the first year of the agreement, and must pay for
each shipment before the products are shipped until March, 2004. Beijing Boom
Technology may return products to us, but any products which are returned
without our prior written consent are subject to a charge equal to 50% of the
invoiced value of such products.
In order to maintain its status as our Master Distributor in China,
Beijing Boom Technology must also purchase approximately $3.9 million in
additional aftermarket passenger car tire pressure monitoring systems (TPMS)
during the second year of the agreement. Beijing Boom Technology must also
establish a network of certified dealers in all provinces of China by May 1,
2004; it has met its first milestone of establishing certified dealers in at
least eleven specified provinces or municipalities of mainland China by December
31, 2003. Subject to Beijing Boom Technology meeting these milestones, we have
agreed not to appoint any other master distributor for mainland China during the
initial two-year term of the Master Distributor Agreement.
On September 12, 2003 we entered into a development agreement with
Vansco Ltd. This agreement provides for the merging of Vansco's vehicle
communication expertise with SmarTire's proven radio frequency (RF) technology
to create a high sensitivity, weatherproof, controller area network (CAN),
chassis-mounted receiver. The controller area network (CAN) is the most widely
used communication standard in vehicles today, allowing for multiplexing,
receiving and transmitting of signals from various sources. When controller area
network (CAN) technology is combined with our high pressure sensors, we
anticipate that this joint development effort will result in a new tire pressure
monitoring system (TPMS) targeted directly at OEMs of commercial trucks, buses,
agricultural, construction and recreational vehicles. If our joint development
objectives with Vansco are achieved, we plan to launch the new tire pressure
monitoring system (TPMS) during our fiscal 2004. Pursuant to our agreement with
Vansco, Vansco will market the product directly to its customers in the
agricultural vehicle sector and on a case-by-case basis to the commercial truck,
bus and construction industries. We will market the jointly developed product to
the OEM commercial truck and recreational vehicle markets.
On October 10, 2003 we entered into a Co-Marketing and Development
agreement with Haldex Brake Products Ltd., and a related Supply Agreement with
Haldex. Under the terms of this agreement, we will engage in a joint development
program to integrate our tire pressure monitoring systems (TPMS) with Haldex's
brake systems, with the view to creating commercial high pressure tire pressure
monitoring systems (TPMS) for marketing and resale by Haldex. We anticipate that
any new products that result from our collaboration with Haldex will be targeted
at both OEM and aftermarket applications for trucks and trailers. Once
development is complete, we plan to execute on the Supply Agreement with Haldex.
50
RESULTS OF OPERATIONS
Quarter ended January 31, 2004 and January 31, 2003
Revenue
Gross revenue for the quarter ended January 31, 2004 increased to
$430,191 from $146,762 for the quarter ended January 31, 2003. The breakdown of
the sources of our gross revenue is as follows:
o Sales of aftermarket passenger car systems increased to
$314,891 for the quarter ended January 31, 2004 from $115,784
for the quarter ended January 31, 2003.
o Sales of OEM passenger car systems increased to $62,255 for
the quarter ended January 31, 2004 from $27,377 for the
quarter ended January 31, 2003.
o Sales of aftermarket motorcycle systems were $1,332 for the
six months ended January 31, 2004 compared to nil for the six
months ended January 31, 2003. We anticipate a ramp up in
sales of this product during the remainder of our fiscal year
with the introduction of our second generation motorcycle
system during our third quarter.
o Sales of aftermarket recreational low pressure vehicle systems
were $5,700 for the quarter ended January 31, 2004. The
"RoadVoice" and "TrailerVoice", which represent the first tire
monitoring systems targeted specifically at the recreational
vehicle, towed vehicle and trailer markets was introduced in
the quarter ended October 31, 2003.
o Sales of off-the-road (OTR) tire monitoring systems were $nil
for the quarter ended January 31, 2004 compared to $3,601 for
the quarter ended January 31, 2003. Our off-the-road (OTR)
tire pressure monitoring system (TPMS) utilizes a
high-pressure transmitter and is designed primarily for
off-the-road (OTR) heavy industrial applications and
commercial applications. The system may potentially be used
not only on large mining trucks, but also heavy mobile
equipment (such as tractors, wheeled loaders, graders and the
like). Sales of our off-the-road (OTR) tire monitoring systems
to date have been limited to those systems which are designed
for use on large mining trucks. We anticipate that an increase
in sales of this product will follow if we are successful in
commercializing the receiver that we are currently developing
with Vansco, and in launching our high pressure transmitters
which are in the final stages of development.
o Revenue of $37,279 was recorded for engineering changes to
modify our products pursuant to the Hyundai Autonet agreement
for the quarter ended January 31, 2004 compared to $nil for
the quarter ended January 31, 2003. Revenue from engineering
services is recognized on services as they are rendered and
pre-defined milestones are achieved.
o Sales of miscellaneous products were $8,734 for the quarter
ended January 31, 2004 compared to $nil for the quarter ended
January 31, 2003.
Gross Margin
Gross margin on product sales increased to 12% for the quarter ended
January 31, 2004 from 11% for the quarter ended January 31, 2003. We anticipate
that our gross margin will begin to increase in our third quarter as we migrate
the majority of our production to Hyundai Autonet.
Expenses
Expenses increased to $1,709,413 for the quarter ended January 31, 2004
from $1,562,069 for the quarter ended January 31, 2003, as increases in
marketing, engineering, research and development expenses and depreciation and
amortization were partially offset by a decreases in general and administration
expenses.
51
Engineering, research and development expenses increased to $360,353
for the quarter ended January 31, 2004 from $260,519 for the quarter ended
January 31, 2003. The increase was primarily attributed to an increase in both
the number of engineering employees and engineering-related wages. The expenses
were primarily incurred to advance the development of our second generation
motorcycle product and commercial products.
Marketing expenses increased to $418,363 for the quarter ended January
31, 2004 from $303,093 for the quarter ended January 31, 2003. The increase was
primarily the result of both higher marketing-related wages, which increased as
a result of the recruitment of a V.P. of Sales and Marketing in August, 2003 and
an increase in travel.
General and administrative expenses decreased to $571,159 for the
quarter ended January 31, 2004 from $705,638 for the quarter ended January 31,
2003. The decrease was primarily attributed to the reversal of a compensation
charge during the quarter ended October 31, 2003, a decrease in professional
fees, lower travel expenses and lower administration wages. The compensation
charge was originally recorded in our quarter ended October 31, 2003 as we
recognize compensation expense as the majority of our employee stock options are
accounted for as variable awards as the employee stock options are granted in US
dollars, yet the majority of our employees are paid in Canadian dollars and
Pounds Sterling and the functional currency of our Company is Canadian dollars.
Administrative wages decreased as there were less administrative employees
during the quarter ended January 31, 2004. The decrease was partially offset by
an increase in investor relation costs.
Depreciation and amortization expense increased to $359,538 for the
quarter ended January 31, 2004 from $292,819 for the quarter ended January 31,
2003.
Interest and finance charges decreased to $315,609 for the quarter
ended January 31, 2004 from $620,884 for the quarter ended January 31, 2003.
Interest and finance charges for the quarter ended January 31, 2004 included
$308,591 in interest and finance charges on our 7% and 8% convertible debentures
issued in fiscal 2003 and our discounted unsecured convertible debentures issued
during the quarter ended January 31, 2003.
Interest and finance charges for the quarter ended January 31, 2003
included $633,431 in interest and finance charges on our 10% redeemable
convertible notes issued during the quarter ended January 31, 2003, $33,115 in
interest on a promissory note created as part of the consideration for
restructuring our strategic relationship with TRW Inc. and a reversal of $45,662
due to interest forgiven on the $500,000 non-recoverable development liability
incurred with a key component supplier during the three months ended January 31,
2002.
Interest Income
Interest income of $1,827 was earned for the quarter ended January 31,
2004 as compared to $336 for the quarter ended January 31, 2003 and was the
result of higher average cash balances during the quarter ended January 31,
2004.
Foreign exchange gain
A foreign exchange gain of $64,571 was incurred for the quarter ended
January 31, 2004 as compared to a gain of $36,643 for the quarter ended January
31, 2003. Foreign exchange gains or losses are due to fluctuations in currency
exchange rates and are impossible to predict.
Six months ended January 31, 2004 and January 31, 2003
Revenue
Gross revenue for the six months ended January 31, 2004 increased to
$857,717 from $544,351 for the six months ended January 31, 2003. The breakdown
of the sources of our gross revenue is as follows:
o Sales of aftermarket passenger car systems increased to
$591,055 for the six months ended January 31, 2004 from
$416,503 for the six months ended January 31, 2003.
52
o Sales of OEM passenger car systems increased to $98,903 for the six
months ended January 31, 2004 from $68,180 for the six months ended
January 31, 2003.
o Sales of the aftermarket motorcycle system were $1,555 for the six
months ended January 31, 2004 compared to nil for the six months ended
January 31, 2003. We anticipate a ramp up in sales of this product
during the remainder of our fiscal year, as a result of the
introduction of our second generation motorcycle system in mid-February
2004. However, it is difficult for us to predict what the volume of
sales might be, as this will depend primarily on market acceptance of
our second generation motorcycle system.
o Sales of aftermarket recreational low pressure vehicle systems were
$16,037 for the six months ended January 31, 2004. The "RoadVoice" and
"TrailerVoice", which represent the first tire monitoring systems
targeted specifically at the recreational vehicle, towed vehicle and
trailer markets was introduced in the six months ended October 31,
2003.
o Sales of OEM recreational low pressure vehicle systems were $10,682 for
the six months ended January 31, 2004. This system was introduced in
the six months ended January 31, 2004.
o Sales of the motorsport tire pressure monitoring system (TPMS)
decreased to $nil for the six months ended January 31, 2004 from
$44,739 for the six months ended January 31, 2003. We do not anticipate
further sales of our motorsport tire pressure monitoring system (TPMS)
as our exclusive motorsport distributor, Pi Research of Cambridge,
England, now manufactures and markets their own system. Accordingly, we
have discontinued production of our motorsport tire pressure monitoring
system (TPMS).
o Sales of off-the-road (OTR) tire monitoring systems were $1,088 for the
six months ended January 31, 2004 compared to $14,929 for the six
months ended January 31, 2003. Our off-the-road (OTR) tire pressure
monitoring system (TPMS) utilizes a high-pressure transmitter and is
designed primarily for off-the-road (OTR) heavy industrial applications
and commercial applications. The system may potentially be used not
only on large mining trucks, but also heavy mobile equipment (such as
tractors, wheeled loaders, graders and the like). Sales of our
off-the-road (OTR) tire monitoring systems to date have been limited to
those systems which are designed for use on large mining trucks. We
anticipate an increase in sales of this product upon commercialization
of the receiver currently under development with Vansco and the launch
of our high pressure transmitters.
o Revenue of $96,079 was recorded for engineering changes to modify our
products pursuant to the Hyundai Autonet agreement for the six months
ended January 31, 2004 compared to $nil for the six months ended
January 31, 2003. Revenue from engineering services is recognized on
services as they are rendered and pre-defined milestones are achieved.
o Sales of miscellaneous products were $42,318 for the six months ended
January 31, 2004 compared to $nil for the six months ended January 31,
2003.
The miscellaneous products that accounted for $42,318 of our revenue
during the six months ended January 31, 2004 consisted primarily of dataloggers,
which are used to facilitate testing by our OEM customers.
Gross Margin
Gross margin on product sales decreased to 13% for the six months ended
January 31, 2004 from 18% for the six months ended January 31, 2003. The
decrease occurred as the product mix of systems sold in the six months ended
January 31, 2004 had lower gross margins than the product mix of systems sold in
the six months ended January 31, 2003. As we have only recently shifted the
majority of our production to Hyundai Autonet, we expect that our gross margin
will increase in subsequent quarters.
53
Expenses
Expenses increased to $3,563,739 for the six months ended January 31,
2004 from $3,548,916 for the six months ended January 31, 2003, as a decrease in
general and administration expenses was partially offset by increases in
marketing, engineering, research and development and depreciation and
amortization expenses.
Engineering, research and development expenses increased to $746,919
for the six months ended January 31, 2004 from $523,079 for the six months ended
January 31, 2003. The increase was primarily attributed to higher prototype
development costs, an increase in product testing on products that we plan to
released in the current fiscal year and an increase in the number of engineering
employees and engineering-related wages.
Marketing expenses increased to $861,324 for the six months ended
January 31, 2004 from $823,225 for the six months ended January 31, 2003. The
increase was a primarily a result of an increase in travel and higher
marketing-related wages, which increased as a result of the recruitment of a
V.P. of Sales and Marketing. This increase was partially offset by lower
tradeshow expenditures. Trade show expenses in the six months ended January 31,
2003 included the cost of attending the Automechanika show, which is held in
Europe every two years. The six months ended January 31, 2003 also included
expenses of $130,000 in connection with the termination of a management
agreement; 50% of this amount or $65,000 was booked as marketing expenses and
50% was booked as general and administrative expenses.
General and administrative expenses decreased to $1,281,006 for the six
months ended January 31, 2004 from $1,615,362 for the six months ended January
31, 2003. The decrease was primarily attributed to lower investor relation
costs, professional fees administration wages and travel expenses. Investor
relation costs were higher during the six months ended January 31, 2003 as an
expense of a non-refundable deposit on a public relations program that did not
proceed and the expense of a non-refundable retainer paid to a financial
advisory firm was incurred. Administrative wages decreased as there were less
administrative employees during the six months ended January 31, 2004 and as
explained above, our general and administrative expenses for the six months
ended January 31, 2003 include $65,000 that was incurred in connection with the
termination of a management contract. The decrease was partially offset by an
increase in insurance costs.
Depreciation and amortization expense increased to $674,490 for the six
months ended January 31, 2004 from $587,250 for the six months ended January 31,
2003.
Interest and finance charges increased to $1,746,053 for the six months
ended January 31, 2004 from $811,782 for the six months ended January 31, 2003.
The charges for the six months ended January 31, 2004 included $1,659,036 in
interest and finance charges on our 7% and 8% convertible debentures, our
discounted convertible debenture, plus an accrual for a payment in November 2003
of $75,355 to Palisades Master Fund, L.P. as an early participation bonus. As
discussed below under the heading "Liquidity and Capital Resources," on October
27, 2003, in order to encourage early exercise of certain outstanding warrants
by Palisades Master Fund and three additional warrant holders, we offered to
reduce the exercise price of the warrants from $0.2645 per share to $0.20 per
share. Palisades Master Fund elected to accept our offer, but on November 6,
2003, in order to encourage early exercise of the warrants by the remaining
three warrant holders, we offered to reduce the exercise price of the remaining
7,478,635 warrants from $0.2645 per share to $0.1771 per share. As a result, we
agreed to pay the $75,355 early participation bonus to Palisades Master Fund,
being an amount equal to the difference between the aggregate exercise price
that Palisades Master Fund paid upon the exercise of 3,290,596 outstanding
warrants at $0.20 per share and the aggregate exercise price that Palisades
Master Fund would have paid if it had the benefit of the reduced exercise price
of $0.1771 per share. The fair value of this inducement is included in interest
expense.
Interest and finance charges for the six months ended January 31, 2003
included $745,826 in interest and finance charges on our 10% redeemable
convertible notes issued during the six months ended January 31, 2003, $65,956
in interest on a promissory note created as part of the consideration for
restructuring our strategic relationship with TRW Inc. and a reversal of $45,662
due to interest forgiven on the $500,000 non-recoverable development liability
incurred with a key component supplier during the three months ended January 31,
2002.
54
Interest Income
Interest income of $4,567 was earned for the six months ended January
31, 2004 as compared to $1,662 for the six months ended January 31, 2003 and was
the result of higher average cash balances during the six months ended January
31, 2004.
Foreign exchange gain
A foreign exchange gain of $26,336 was incurred for the six months
ended January 31, 2004 as compared to a gain of $62,845 for the six months ended
January 31, 2003. Foreign exchange gains or losses are due to fluctuations in
currency exchange rates and are impossible to predict.
Fiscal Year Ended July 31, 2003 and Fiscal Year Ended July 31, 2002
Revenue
Gross revenue for the fiscal year ended July 31, 2003 increased to
$1,802,596 from $1,012,344 for the fiscal year ended July 31, 2002. This
increase in revenue was a result of the following:
o Sales of aftermarket passenger car tire monitoring systems
(TMS) increased to $1,141,210 for fiscal 2003 from $791,217
for fiscal 2002.
o Sales of OEM passenger car systems increased to $174,880 for
fiscal 2003 from $164,588 for fiscal 2002. Fiscal 2002
included sales under the Lincoln Continental program of our
company's first generation product that were discontinued by
Ford Motor Company at the end of December 31, 2001. Without
the sales of $43,711 under the Lincoln Continental program for
fiscal 2002, sales for fiscal 2002 would have been $120,847.
o Sales of motorcycle tire monitoring systems (TMS) were
$183,589 for fiscal 2003 compared to $nil for fiscal 2002.
o Sales of off-the-road (OTR) tire monitoring systems (TMS)
designed for mining vehicle applications were $58,395 for
fiscal 2003 compared to $nil for fiscal 2002. These tire
monitoring systems (TMS) are currently undergoing on-vehicle
validation.
o Revenue of $173,400 was recorded for engineering changes to
modify our products pursuant to our Manufacturing,
Co-Marketing and Development Agreement with Hyundai Autonet
Co. Ltd. for fiscal 2003 compared to $nil for the fiscal 2002.
Revenue is determined by the percentage of completion method.
o Sales of the motorsport tire monitoring systems (TMS)
decreased to $44,739 for fiscal 2003 from $56,539 for fiscal
2002. As indicated above, we do not anticipate further sales
of our motorsport tire monitoring systems (TMS) as our
exclusive motorsport distributor, Pi Research of Cambridge,
England, now manufactures and markets their own system.
Accordingly, we have discontinued production of our motorsport
tire monitoring systems (TMS).
o Sales of recreational vehicle products were $26,383 for fiscal
2003 compared to $nil for fiscal 2002. We expect sales of
these products to increase in fiscal 2004 after the
anticipated launch of our high pressure transmitter.
Gross Margin
Gross margin on product sales decreased to 23% for the year ended July
31, 2003 from 31% for the year ended July 31, 2002. The decrease occurred as the
product mix of systems sold in the year ended July 31, 2003 had lower gross
margins than the product mix of systems sold in the year ended July 31, 2002.
The gross margins continued to be affected by the reduction in carrying value of
first generation product inventory in the 1999 fiscal year.
55
Expenses
Expenses decreased to $6,802,391 for the year ended July 31, 2003 from
$7,038,843 for the year ended July 31, 2002, as a result of decreases in
engineering, research and development expenses and marketing expenses.
Reductions in these expenses (discussed in greater detail below) were partially
offset by higher general and administration expenses and depreciation and
amortization expenses.
Engineering, research and development expenses decreased to $1,177,935
for the year ended July 31, 2003 from $1,727,606 for the year ended July 31,
2002. The higher engineering, research and development expenses for fiscal 2002
were attributable primarily to a $500,000 expenditure for non-recoverable
development costs incurred with a key component supplier for future product
development activities in that fiscal year. This expenditure was a one-time
expense with this supplier. The nature of our activities could result in other
future non-recurring engineering, research and development expenditures. A
decrease in prototype development expenses, lower travel costs and lower
expenditures on patents and approvals also contributed to the decrease in
engineering, research and development expenses between fiscal 2002 and fiscal
2003, although these cost savings were partially offset by an increase in
engineering-related-wages due to an increase in the number of engineering
employees.
Marketing expenses decreased to $1,448,326 for the year ended July 31,
2003 from $1,527,644 for the year ended July 31, 2002. This decrease was mainly
due to lower advertising and promotion costs, as well as lower travel costs.
This decrease was partially offset by higher marketing-related wages and
tradeshow expenditures. Wages were higher as we incurred expenses of $130,000 in
connection with the termination of a management agreement; 50% of this amount,
or $65,000, is included in the marketing expenses for the year ended July 31,
2003, and 50% was included in general and administrative expenses for the year.
The balance of the increase in our marketing expenses was a result of trade show
expenses, including the cost of attending the Automechanika show, which is held
in Europe every two years.
General and administrative expenses increased to $2,939,260 for the
year ended July 31, 2003 from $2,631,215 for the year ended July 31, 2002. The
increase is attributable to an increase in professional fees, filing fees,
insurance premiums and an expense of $315,044 to settle certain potential
unquantified claims threatened by certain offshore investors against our
company. Professional fees increased as a result of filing registration
statements with the Securities and Exchange Commission. As explained above,
general and administrative expenses include $65,000 that was incurred in
connection with the termination of a management contract. The increase was
partially offset by lower travel and capital expenses.
Depreciation and amortization expense increased to $1,236,870 for the
year ended July 31, 2003 from $1,152,378 for the year ended July 31, 2002.
Depreciation and amortization expense is expected to remain at approximately its
current level for the foreseeable future.
Interest and finance charges of $3,722,505 were incurred during the
year ended July 31, 2003, including $3,720,250 in interest and finance charges
on 10%, 5%, 7% and 8% redeemable convertible debentures, a 12% promissory note
and a $5 million equity line of credit issued during the year ended July 31,
2003.
During the year ended July 31, 2003, we also purchased certain capital
assets at an aggregate cost of $62,978.
Interest Income
Interest income of $2,835 was earned for the year ended July 31, 2003
as compared to $18,735 for the year ended July 31, 2002. This decrease was due
to lower average cash balances maintained and lower interest rates during the
year ended July 31, 2003.
Foreign exchange gain
A foreign exchange gain of $192,201 was earned for the year ended July
31, 2003 as compared to $24,015 for the year ended July 31, 2002. The increase
was primarily due to the decrease in the value of the US dollar against the
Canadian dollar during the year, which resulted in foreign exchange gains on the
settlement of US dollar liabilities outstanding at July 31, 2002 during fiscal
2003.
56
Fiscal Year Ended July 31, 2002 vs. Fiscal Year Ended July 31, 2001
Revenue
Gross revenue for the fiscal year ended July 31, 2002 increased to
$1,012,344 from $779,611 for the fiscal year ended July 31, 2001. This increase
in revenue was a result of the following:
Sales of aftermarket passenger car systems increased to $791,217 for
fiscal 2002 from $389,020 for fiscal 2001 due to sales of $633,846 of our second
generation product that was launched at the end of fiscal 2001.
Sales of original equipment manufacturer passenger car systems
increased to $164,588 for fiscal 2002 from $143,788 for fiscal 2001 due to sales
of $95,547 of our second generation product offset by reduced sales of our first
generation product under the Lincoln Continental program. The Lincoln
Continental program was discontinued by Ford at the end of December 31, 2001.
Sales of the motorsport tire monitoring systems (TMS) decreased to
$56,539 for fiscal 2002 from $246,803 for fiscal 2001. We do not anticipate
further sales of our motorsport tire monitoring system as Pi Research, formerly
our exclusive motorsport distributor, now manufactures this product.
Despite the increase in sales for fiscal 2002, sales of our second
generation products for fiscal 2002 were below management's expectations.
Management believes that the primary cause for sales not meeting expectations
relates to the delays by National Highway Traffic Safety Administration (NHTSA)
in issuing its final rule under the TREAD Act, which was originally due in
November 2001 but not actually issued until May 31, 2002. In particular,
management believes that the delays in finalizing the regulations have had a
significant negative impact on our aftermarket sales.
Gross Margin
Gross margin on product sales decreased to 31% for fiscal 2002 from 50%
for fiscal 2001. The decrease occurred as the product mix of systems sold in
fiscal 2002 had lower gross margins than the product mix of systems sold in
fiscal 2001. The gross margins continue to be affected by the reduction in
carrying value of first generation product inventory in the 1999 fiscal year.
Expenses
Expenses increased to $7,038,843 for fiscal 2002 from $6,377,595 for
fiscal 2001 as increases in engineering, research and development expenses, and
an increase in depreciation and amortization expense, were only partially offset
by lower marketing, general and administrative expenses.
Engineering, research and development expenses increased to $1,727,606
for fiscal 2002 from $1,485,874 for fiscal 2001. The increase was attributed
primarily to the one-time $500,000 expenditure for non-recoverable development
costs disclosed above, which was incurred with a key component supplier for
future product development activities. The engineering, research and development
expenses for fiscal 2002 included higher wage expenditures but lower
expenditures on consulting fees and on product testing and prototype development
due to completion of our second generation passenger car products in fiscal
2001.
Marketing expenses decreased to $1,527,644 for fiscal 2002 from
$1,744,004 for fiscal 2001. The decrease was a result of lower advertising and
promotion expenditures as well as lower travel, consulting, and trade show
expenditures. Trade show expenses decreased as we did not attend the SEMA trade
show in fiscal 2002 as we did in fiscal 2001 and the expenses for fiscal 2001,
included costs associated with attending the Automechanika trade show. This
decrease was partially offset by the cost of market research associated with
entry into the original equipment manufacturer automotive market.
57
General and administrative expenses decreased to $2,631,215 for fiscal
2002 from $2,701,621 for fiscal 2001. The decrease was attributed to a recovery
of a bad debt and lower travel, investor relations, computer and office costs.
This decrease was partially offset by higher insurance premiums and wage
expenditures.
Depreciation and amortization expense increased to $1,152,378 for
fiscal 2002 from $446,096 for fiscal 2001 due to the amortization of other
assets acquired in December 2000 and August 2001.
Interest expense of $145,472 was incurred during fiscal 2002 mainly due
to interest on a promissory note created as part of the consideration for
restructuring the strategic relationship with TRW as described under the heading
"Liquidity and Capital Resources."
Interest Income
We earned interest income of $18,735 for fiscal 2002 as compared to
$359,799 for fiscal 2001. This decrease was due to lower average cash balances
maintained and lower interest rates during fiscal 2002.
Foreign exchange gain
A foreign exchange gain of $24,015 was earned for the year ended July
31, 2002 as compared to $117,063 for the year ended July 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended January 31, 2004
We have continued to finance our activities primarily through the
issuance and sale of securities. We have incurred losses from operations in each
year since inception. As at January 31, 2004, we had an accumulated deficit of
$53,199,552. Our net loss for the quarter ended January 31, 2004 was $1,905,179
and for the six months ended January 31, 2004 was $5,168,322 compared to
$2,129,872 for the quarter ended January 31, 2003 and $4,200,245 for the six
months ended January 31, 2003. As of January 31, 2004, our stockholders' equity
was $7,477,654 and we had working capital of $3,852,457.
Our cash position at January 31, 2004 was $1,367,190 as compared to
$1,843,694 at July 31, 2003. This decrease was due to the net cash used in
operations partially offset by financing and investing activities, each as
described below.
Our net loss of $5,168,322 for the six months ended January 31, 2004
includes non-cash charges of $674,490 for depreciation and amortization,
$1,659,036 for finance and interest expense and $82,838 for shares and warrants
issued for services received. Decreases in non-cash working capital during this
period amounted to $1,879,845. Non-cash working capital changes included
decreases in receivables, inventory, prepaid expenses and accounts payable and
accrued liabilities and a decrease in deferred revenue. An increase in inventory
accounted for the most significant decrease in non-cash working capital, as it
increased by $1,755,435. This was primarily due to the procurement of components
for the production build at Hyundai Autonet.
During the six months ended January 31, 2004, we realized aggregate
gross cash proceeds of $2,725,000 from the placement of discounted unsecured
convertible debentures, $2,007,385 from the exercise of warrants and $15,880
from the exercise of employee stock options as follows:
o On October 27, 2003, in order to encourage early exercise of a
total of 10,769,231 warrants issued to the purchasers of our
7% convertible debentures, we offered to reduce the exercise
price of the warrants from $0.2645 per share to $0.20 per
share. The offer was open for acceptance by the warrant
holders until November 4, 2003. In consideration of the
warrant holders' agreement to immediately exercise their
respective warrants, we offered to issue to the participating
warrant holders one additional warrant for each warrant that
was exercised. One of the warrant holders, Palisades Master
Fund, L.P. accepted our offer and exercised a total of
3,290,596 outstanding warrants at the reduced exercise price
of $0.20 per share. On October 27, 2003, we issued a total of
3,290,596 five-year warrants to Palisades Master Fund,
exercisable at an exercise price of $0.20 per share, resulting
in gross proceeds of $658,119. The additional warrants were to
be exercisable for a period of five years at an exercise price
of $0.20 per share.
58
o On October 27, 2003, our investment banker, HPC Capital
Management, also agreed to immediately exercise 194,000
outstanding common stock purchase warrants dated May 16, 2003,
in consideration of receiving one additional five-year warrant
with an exercise price of $0.20 per share for each warrant so
exercised. Of the 194,000 warrants exercised by HPC Capital
Management under this arrangement, 180,000 were exercised at
an exercise price of US$0.13 per share and 14,000 were
exercised at an exercise price of US$0.10 per share, resulting
in gross proceeds of $24,800.
o On November 6, 2003, in order to encourage early exercise of
the warrants by the remaining three warrant holders, we
offered to reduce the exercise price of the remaining
7,478,635 warrants from $0.2645 per share to $0.1771 per
share. The offer was open for acceptance by the warrant
holders until November 19, 2003. In consideration of the
warrant holders' agreement to immediately exercise their
respective warrants, we offered to issue to the participating
warrant holders one additional warrant for each warrant that
is exercised. The additional warrants are exercisable for a
period of five years at an exercise price of $0.1771 per
share.
o On November 10, 2003, all of the remaining warrant holders,
Crescent International Ltd., Alpha Capital AG and Goldplate
Investment Partners, accepted our offer and exercised a total
of 7,478,635 outstanding warrants at the reduced exercise
price of $0.1771 per share.
o On December 24, 2004 we closed a private placement of
discounted unsecured convertible debentures in the aggregate
principal amount of $3,493,590 . We issued the convertible
debentures at a 22% original issue discount from the face
principal amount (based on a notional interest rate of 11% per
annum for each year of the two-year term of the debentures),
resulting in gross proceeds of $2,725,000, before the
deduction of a $218,000 cash placement fee subsequently paid
to HPC Capital Management and other expenses of the offering.
The discounted convertible debentures do not otherwise bear
interest, and will mature on April 1, 2006. The outstanding
principal amount of each debenture may be converted at any
time into shares of our common stock, in whole or in part, at
the option of the holder of the debenture at a set price of
$0.22 per share. The discounted convertible debentures are
subject to mandatory redemption in equal monthly payments,
payable in cash. We may elect to make the monthly redemption
payments in shares of our common stock at a conversion price
equal to the lesser of:
(a) the set price of $0.22 per share (subject to adjustment
pursuant to the anti-dilution provisions contained in the
debentures), and
(b) 85% of the average of the closing prices of the Company's
common stock for twenty days immediately preceding the
applicable monthly redemption date,
provided that certain conditions are met, including the condition
that the underlying shares of common stock shall have been
registered under the Securities Act of 1933, as amended.
o On February 5, 2004 we notified the holders of the discounted
convertible debentures that we had elected to effect the first
monthly redemption payment in shares, and that the election
should continue for subsequent redemption periods until
revised. One of the holders of the discounted convertible
debentures exercised its right to receive its first monthly
redemption payment, in the amount of $14,583, in cash.
o On October 14, 2003 an employee exercised 79,400 employee
stock options at $0.20 per stock option.
The net proceeds realized by us from these transactions have and are to
be used for working capital and the purchase of capital assets. In addition, we
have applied $100,000 of the net proceeds to make the final two payments to
SensoNor asa under our Memorandum of Agreement with SensoNor dated May 7, 2003,
each in the amount of $50,000 and payable on, respectively, November 1, 2003 and
December 1, 2003.
59
During the six months ended January 31, 2004, we also purchased certain
capital assets at an aggregate cost of $235,481. The majority of these capital
assets were sent to Hyundai Autonet in Korea to facilitate production of our
aftermarket tire pressure monitoring systems (TPMS) for passenger cars and
motorcycles.
Year Ended July 31, 2003
During the fiscal years ended July 31, 2003 and July 31, 2002, we
financed our activities primarily through the issuance and sale of securities.
As at July 31, 2003, we had an accumulated deficit of $48,031,230. Our net loss
for the year ended July 31, 2003 was $9,914,629 compared to $6,829,176 for the
year ended July 31, 2002. As of July 31, 2003, our stockholders' equity was
$6,287,304 and we had working capital of $2,423,932.
Our cash position at July 31, 2003 was $1,843,694 as compared to
$525,968 at July 31, 2002. This increase was due to the net increase from our
operating, financing and investing activities described below.
Our net loss of $9,914,629 for the year ended July 31, 2003 includes
non-cash charges of $1,236,870 for depreciation and amortization, $17,005 for
compensation expense, $3,394,914 for finance and interest expense, $315,044 for
administration expense that consisted of the issuance of 850,000 common shares,
and the repricing of 4,614,286 warrants and $300,000 for common shares issued to
pay commitment and placement fees incurred in connection with setting up a $5.0
million equity line of credit facility. Increases in non-cash working capital
during this period amounted to $222,695. Non-cash working capital changes
included decreases in receivables, accounts payable and accrued liabilities and
deferred charges, and increases in inventory, deferred revenue, and prepaid
expenses.
During the year ended July 31, 2003, we realized aggregate gross cash
proceeds of $8,328,000 as follows:
o On September 26, 2002 and October 4, 2002, we closed two
tranches of an offshore private placement of 10% redeemable
convertible notes maturing December 20, 2002, and 150,000
share purchase warrants. We realized gross proceeds of
$750,000 and aggregate net proceeds from this placement of
$673,823. Additional details on the convertible notes are
disclosed in note 8 to the consolidated financial statements
for the year ended July 31, 2003.
o On November 4, 2002, we effected a private placement of two
million units at a price of $0.50 per unit. We realized gross
cash proceeds of $250,000 from the private placement ($230,000
net of offering expenses); the balance of the aggregate
purchase price for the units was applied in repayment of
$750,000 of principal under the 10% redeemable convertible
notes maturing December 20, 2002. Each unit consists of one
common share and one share purchase warrant. Each warrant
entitles the holder to purchase one additional common share at
an exercise price of $0.50 per share until November 4, 2005.
An additional 17,672 common shares were issued in payment of
accrued interest under the Notes at a deemed price of $0.50
per share. In connection with these private placements we paid
a placement fee of $80,000 plus 160,000 share purchase
warrants exercisable at $0.50 per share.
o On November 21, 2002, we closed the first tranche of a private
placement of convertible debentures to Selling stockholder, an
accredited investor, and we realized gross proceeds of
$184,000 ($122,000 net of offering expenses). A single
debenture having a face principal amount of $200,000 was
issued at an 8% discount, bearing interest at 5% per annum,
and was secured by a security interest granted by us in all of
our present and after-acquired assets. This security interest
was subordinated to the security interest granted by us to TRW
Inc., and subsequently assigned to TRW Automotive U.S. LLC, in
all of our present and after-acquired assets. On January 31,
2003, we closed the second tranche under the private placement
and realized gross proceeds of $184,000 ($152,000 net of
offering expenses). The second tranche also involved the sale
of a debenture having a face principal amount of $200,000, and
was issued at an 8% discount. A condition of the offering was
that we file a registration statement under the Securities Act
of 1933 to register for resale the shares of our common stock
issuable upon conversion of these securities. The closing of
the second tranche was subject to the condition that the
United States Securities and Exchange Commission declare the
registration statement effective, which it did on January 31,
2003. Post-effective amendments to the registration statement
were filed with the Securities and Exchange Commission on
March 14, 2003, April 17, 2003 and May 2, 2003.
60
o On December 20, 2002, we effected an equity private placement that
involved the issuance of 750,000 units at $0.67 per unit and 1,000,000
units at $0.70 per unit. We realized gross cash proceeds of $1,200,000
from the private placement ($1,104,000 net of offering expenses). Each
unit consists of one common share and one share warrant. 750,000 of the
share purchase warrants entitle the holder to purchase one additional
common share at an exercise price of $0.85 per share for a period of
three years and 1,000,000 of the share purchase warrants entitle the
holder to purchase one additional common share at an exercise price of
$0.70 per share for a period of three years. In May 2003, the share
purchase warrants were repriced to $0.10 issued and 850,000 shares were
issued at a deemed price of $0.21 per share to an accredited investor
in consideration of certain releases provided by the investors to our
company in respect of certain potential unquantified claims threatened
by the investors against our company. In connection with this private
placement, we paid a placement fee of $96,000 plus 140,000 share
purchase warrants, 60,000 exercisable at $0.67 per share and 80,000
exercisable at $0.70 per share.
o On February 14, 2003, we completed a private placement of 714,286 units
at a price of $0.35 per unit. We realized gross cash proceeds of
$250,000 ($230,000 net of offering expenses) from the private
placement. Each unit consists of one common share and one share
warrant. Each warrant entitles the holder to purchase one additional
common share at an exercise price of $0.42 per share until February 14,
2006. In connection with this private placement, we paid a placement
fee of $20,000 and issued 57,143 share purchase warrants exercisable at
$0.35 per share. In May 2003, the share purchase warrants were repriced
to $0.10.
o On March 31, 2003, we completed a private placement of 3,500,000 units
at a price of $0.10 per unit. We realized gross cash proceeds of
$350,000 ($322,000 net of offering expenses) from the private
placement. Each unit consists of one common share and one-half of a
non-transferable share purchase warrant. Each whole warrant entitles
the holder to purchase an additional share of our common stock at a
price of $0.16 per share until March 31, 2005. In connection with this
private placement, we paid a placement fee of $28,000 and issued 14,000
share purchase warrants exercisable at $0.10 per share.
o On April 23, 2003, we issued a secured short-term promissory note to an
accredited investor in the principal amount of $250,000. The note plus
interest at the rate of 12 percent per annum was recently repaid. We
paid a placement fee of $40,000 in connection with the issuance of this
note.
o On May 5, 2003, we issued 500,000 units at a price of $0.10 per unit in
an offshore transaction pursuant to Regulation S under the Securities
Act of 1933. We realized gross cash proceeds of $50,000 from this
private placement. Each unit consists of one share of our common stock
and two non-transferable share purchase warrants. Each whole warrant
entitles the holder to purchase an additional share of our common stock
at a price of $0.12 per share until April 30, 2004. In connection with
this private placement, we paid a placement fee comprised of $4,000 in
cash and 40,000 share purchase warrants exercisable at a price of $0.10
per share.
o On May 6, 2003, as referenced previously, we issued 850,000 shares at a
deemed price of $0.21 per share to an accredited investor and we
repriced 1,000,000 warrants previously issued to the investor on
December 20, 2002, thereby reducing the exercise price of the warrant
from $0.70 per share to $0.10 per share. An aggregate of 3,614,286
additional warrants previously issued to four other investors in
connection with the offshore private placements effected by us on
November 4, 2002, December 20, 2002 and February 14, 2003, were also
repriced to have an exercise price of $0.10 per share. These
transactions were all effected pursuant to Regulation S under the
Securities Act of 1933, and were effected in consideration of certain
releases provided by the investors to our company in respect of certain
potential unquantified claims threatened by the investors against our
company.
o On May 16, 2003, we issued 500,000 shares of common stock to a non-U.S.
person upon exercise of warrants previously granted to such person and
we realized gross proceeds of $80,000 from the exercise price of the
warrants. The shares were issued in an offshore transaction relying on
Regulation S under the Securities Act of 1933. In connection with this
exercise of warrants, we paid a placement fee of $3,200 in cash.
61
o On May 19, 2003, June 11, 2003, and June 17, 2003, we closed three
tranches of a private placement of our 7% convertible debentures to
four accredited investors pursuant to Rule 506 of Regulation D under
the Securities Act of 1933, for gross proceeds of $2,800,000. The
second tranche under the private placement, which we closed on June 11,
2003, was conditional upon our filing a registration statement with the
Securities and Exchange Commission on Form SB-2, which we filed on June
4, 2003. The third tranche, which we closed on June 17, 2003, involved
the sale to these investors of $1,000,000 in aggregate principal amount
of convertible debentures. In connection with this private placement,
we paid placement fees comprised of $269,000 in cash, 112,000 share
purchase warrants exercisable at a price of $0.13 per share, and
100,000 share purchase warrants exercisable at a price of $0.135 per
share. As of September 30, 2003, holders of the 7% convertible
debentures had converted a total of $2,648,240 of principal and related
interest, resulting in the issuance of 20,348,032 shares of our common
stock. The balance of the principal under the 7% convertible debentures
in the aggregate amount of $166,667 may be converted at a conversion
price of $0.13 per share, and interest may be converted at a price per
share equal to 90% of the average closing bid price of our common stock
during the 20 trading days immediately preceding the conversion date.
In addition to the convertible debentures, warrants to purchase up to
an aggregate of 10,769,231 shares of our common stock were issued. Each
convertible debenture and each warrant is subject to anti-dilution
protection upon the occurrence of certain events. If, among other
things, we or any of our subsidiaries offers, sells or otherwise
disposes of or issues any of our common stock (or any equity, debt or
other instrument that is at any time over its life convertible into or
exchangeable for our common stock) at an effective price per share that
is less than the conversion price of the convertible debenture or the
exercise price of the warrant, the conversion price or the exercise
price of the warrant will be reduced to equal such effective price. The
warrants, as issued, are exercisable for five years at an exercise
price of $0.2645 per share. On October 27, 2003, in order to encourage
early exercise of the warrants by the warrant holders, we offered to
reduce the exercise price of the warrants from $0.2645 per share to
$0.20 per share, effective immediately. All other terms of the
warrants, including their expiry date, are proposed to remain
unchanged. As at October 27, 2003, one of the warrant holders accepted
our offer, which remains open for acceptance until November 4, 2003,
and immediately exercised a total of 3,290,596 warrants at the reduced
exercise price. For further details on the three-tranche private
placement of the 7% convertible debentures, please refer to note 8 (c)
to the consolidated financial statements for the year ended July 31,
2003.
o On May 27, 2003, we issued 1,050,000 shares of common stock to a
non-U.S. person upon exercise of warrants previously granted to such
person and we realized gross proceeds of $105,000 from the exercise
price of the warrants. The shares were issued in an offshore
transaction relying on Regulation S under the Securities Act of 1933.
In connection with this exercise of warrants, we paid a placement fee
of $8,400 in cash, and we issued 84,000 share purchase warrants
exercisable at $0.10 per share.
o On June 10, 2003, we issued 1,000,000 shares of common stock to a
non-U.S. person upon exercise of warrants previously granted to such
person and we realized gross proceeds of $100,000 from the exercise
price of the warrants. The shares were issued in an offshore
transaction relying on Regulation S under the Securities Act of 1933.
In connection with this exercise of warrants, we paid a placement fee
of $8,000 in cash, and we issued 80,000 share purchase warrants
exercisable at $0.10 per share.
o On June 13, 2003, we issued 750,000 shares of common stock to a
non-U.S. person upon exercise of warrants previously granted to such
person and we realized gross proceeds of $75,000 from the exercise
price of the warrants. The shares were issued in an offshore
transaction relying on Regulation S under the Securities Act of 1933.
In connection with this exercise of warrants, we paid a placement fee
of $6,000 in cash, and we issued 60,000 share purchase warrants
exercisable at $0.10 per share.
o On July 17, 2003, we closed the private placement of our discounted
convertible debentures to four accredited investors pursuant to Rule
506 of Regulation D under the Securities Act of 1933, for gross
proceeds of $1,700,000. In connection with this private placement, we
issued to the purchasers of the discounted convertible debentures
common warrants to purchase up to an aggregate of 13,076,922 shares of
our common stock, exercisable until July 17, 2008 at an exercise price
of $0.1771 per share. We paid a placement fee comprised of $136,000 in
cash and 68,000 common share purchase warrants exercisable at $0.1771
per share. As of September 30, 2003, holders of discounted convertible
debentures had converted a total of $333,776 of principal and related
interest, resulting in the issuance of 2,564,075 shares of our common
stock. The balance of the principal under the discounted convertible
debentures in the aggregate amount of $639,000 may be converted at a
conversion price of $0.13 per share, and interest may be converted at a
price per share equal to 90% of the average closing bid price of our
common stock during the 20 trading days immediately preceding the
conversion date. Each convertible debenture and each warrant is subject
to anti-dilution protection upon the occurrence of certain events. If,
among other things, we or any of our subsidiaries offers, sells or
otherwise disposes of or issues any of our common stock (or any equity,
debt or other instrument that is at any time over its life convertible
into or exchangeable for our common stock) at an effective price per
share that is less than the conversion price of the convertible
debenture or the exercise price of the warrant, the conversion price or
the exercise price of the warrant will be reduced to equal such
effective price.
62
On May 2, 2003, we served Selling stockholder with 30-days' advance
written notice of our intention to redeem the outstanding principal balance of
$225,000 under convertible debentures issued to Cornell Capital on November 21,
2002 and January 31, 2003. However, Cornell Capital Partners fully converted the
convertible debentures with our consent.
The net proceeds realized by us from these transactions were used for
working capital, and, as discussed below, to fully repay and discharge our
obligations to TRW Automotive, as assignee of the $2.8 million promissory note
issued by us to TRW Inc. in connection with the restructuring of the
relationship between our two companies. We repaid the $250,000 short-term
promissory note dated April 23, 2003 (discussed above in this section), plus
accrued interest at the rate of 12% per annum.
As a result of our negotiations with TRW Automotive U.S. LLC, as
assignee of TRW Inc., TRW Automotive agreed to accept $850,000 as full and final
payment of all amounts due and owing under the promissory note issued to TRW
Inc. on August 31, 2001. We paid this amount out of the proceeds received from
our 7% and discounted convertible debenture financings. As a result, the
security interests granted to TRW Automotive in our assets and in the assets of
our subsidiary, SmarTire (U.S.A.) Inc., have been discharged.
In November 2002 we also arranged for a $5.0 million equity line of
credit facility with an accredited investor. This facility, which was never
drawn upon, was superseded and replaced with another $5.0 million equity line of
credit facility with the same investor on February 19, 2003 primarily because we
decided to appoint a new placement agent. Draw downs under the facility were
subject to certain conditions and limitations, including the requirement that
the underlying shares of common stock issuable to the investor under the
facility shall have been registered on an appropriate registration form under
the Securities Act of 1933. The term of the equity line of credit is 24 months.
To date, we have not taken any steps to file the registration statement, and we
have not drawn down any portion of this facility. Fees to arrange the equity
line of credit were $300,000, $290,000 of which represented a commitment fee
that we paid by the issuance of 446,154 shares of our common stock on December
4, 2002 and $10,000 of which represented a placement agent fee that we paid by
the issuance of 32,258 shares of our common stock on February 24, 2003.
Future Operations
Presently, our revenues are not sufficient to meet operating and
capital expenses. We have incurred operating losses since inception, and this is
likely to continue for the foreseeable future.
Due to the uncertainty of our ability to meet our current operating and
capital expenses, in their report on the annual consolidated financial
statements for the year ended July 31, 2003, our independent auditors included
additional comments in their Auditors' report indicating concerns about our
ability to continue as a going concern. Our consolidated financial statements
contain additional note disclosures describing the circumstances that led to
this disclosure by our independent auditors. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our management projects that we will require a minimum of $8.0-$9.5
million to fund our debt repayment, ongoing operating expenses and working
capital requirements through July 31, 2005.
Our working capital requirements are impacted by our inventory
requirements. Therefore, any increase in sales of our products will be
accompanied not only by an increase in revenues, but also by an increase in our
working capital requirements. Our new products, the market acceptance of which
will impact on our inventory needs- and therefore will impact on our working
capital requirements- include the following:
63
o Our motorcycle tire pressure monitoring system (TPMS) was
introduced for sale into the aftermarket in September 2002. We
introduced a substantially improved second generation
motorcycle tire pressure monitoring system (TPMS) in
mid-February, 2004 and began delivery of this system to our
customers in May 2004.
o In the nine months ended April 30, 2004, we introduced low
pressure tire monitoring systems (TPMS) for the recreational
vehicle market. Marketed as "RoadVoiceTM" and
"TrailerVoiceTM", they represent the first tire monitoring
systems targeted specifically at the recreational vehicle,
towed vehicle and trailer markets. We also plan to introduce
high pressure tire monitoring systems (TPMS) for these markets
during fiscal 2004.
o In May, 2004 the Company completed the development of of a new
receiver allowing for the manufacturing of its tire pressure
monitoring systems (TPMS) for commercial vehicles to commence
in July 2004.
The continuation of our business is dependent upon obtaining further
financing, successful and sufficient market acceptance of our current products
and any new products that we may introduce, the continuing successful
development of our products and related technologies, and, finally, achieving a
profitable level of operations.
We plan to raise any additional capital required to meet the balance of
our estimated funding requirements through July 31, 2004, primarily through the
private placement of our securities (including shares of our common stock that
are reserved for issuance upon the exercise of our outstanding warrants and our
standy equity line). We are presently working with Selling stockholder.
(`Cornell") on a plan to meet our financial capital requirements. Cornell has
been instrumental in facilitating the recent unsecured promissory notes
totalling $1.5M and the $15,000,000 equity line of credit with Selling
stockholder.
Under our Standby Equity Distribution Agreement with Cornell dated May
19, 2004, we may, in our discretion, draw down amounts under the facility from
time to time, subject to various conditions and certain limitations. We are
currently not in a position to draw down any amounts under the facility, as we
have not met all of the conditions for a draw down.
The issuance of additional equity securities by us could result in a
significant dilution in the equity interests of our current stockholders.
Obtaining commercial loans, assuming those loans would be available, will
increase our liabilities and future cash commitments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are
prepared in accordance with generally accepted accounting principles in the
United States. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by management's application of accounting policies. We believe that
understanding the basis and nature of the estimates and assumptions involved
with the following aspects of our consolidated financial statements is critical
to an understanding of our financials.
Going Concern
Our company requires additional financing to fund its operations. Our
company has incurred recurring operating losses and has a deficit of $48,031,230
and working capital of $2,423,932 as at July 31, 2003. During the year ended
July 31, 2003, our company used $4,428,101 cash in operating activities.
Accordingly, during fiscal 2003, our company raised gross cash private placement
proceeds of $8,078,000 to fund its operations. We also arranged the $15.0
million equity line of credit with Selling stockholder.
64
We are taking the steps necessary to draw down amounts under the $15.0
million equity line which, as discussed elsewhere in this annual report, is
subject to various conditions and limitations. We are also pursuing various
financing alternatives to meet our immediate and long-term financial
requirements in conjunction with our investment bankers, Selling stockholder.
There can be no assurance that additional financing will be available to our
company when needed or, if available, that it can be obtained on commercially
reasonable terms. Our company's consolidated financial statements have been
prepared on the going concern basis which assumes that adequate sources of
financing will be obtained as required and that our company's assets will be
realized and liabilities settled in the ordinary course of business.
Accordingly, our company's consolidated financial statements do not include any
adjustments related to the recoverability of assets and classification of assets
and liabilities that might be necessary should our company be unable to continue
as a going concern.
Inventory
Inventory is carried at the lower of cost, determined on a weighted
average cost method, and net realizable value. The determination of net
realizable value is based on several assumptions and estimates. We provide an
allowance that we consider to be reasonable for non-moving or slow moving
inventory items and for items with expected future realizable value lower than
cost. These assumptions and estimates may be inaccurate and may be revised.
The markets in which we compete are rapidly changing due to
technological developments and increasing focus on automotive safety. Other
companies offer products similar to those offered by us, and target the same
customers as we do. Many of these companies have substantially greater
financial, marketing and technical resources. We also anticipate that the
competition within these markets will increase as demand for the products
escalates. It is possible that new competitors or alliances among existing
competitors may emerge and such competitors may rapidly acquire significant
market share and make it difficult for us to sell our current inventory. All of
these elements could reduce the net realizable value of our inventory.
Warranty Obligations
On an ongoing basis, we record our best estimate of our warranty
obligations and product returns related to products sold. These estimates are
made after the consideration of contractual warranty obligations and historical
experience. Unforeseen events, including increased technological difficulties
with products, could occur that have not been anticipated in estimating the
warranty provision. Additional costs or estimates will be recognized as
determinable.
Revenue Recognition
Our company recognizes revenue when there is persuasive evidence of an
arrangement, goods are shipped and title passes, collection is probable, and the
fee is fixed or determinable. Customer acceptance is used as the criterion for
revenue recognition when the product sold does not have an established sales
history to allow management to reasonably estimate returns and future
provisions. Provisions are established for estimated product returns and
warranty costs at the time the revenue is recognized. Our company records
deferred revenue when cash is received in advance of the revenue recognition
criteria being met. Revenue from engineering services is recognized on services
as they are rendered and pre-defined milestones are achieved. Engineering
services revenue for the year ended July 31, 2003 was $173,400 (2002 and 2001 -
nil).
Other Assets
Other assets are recorded at cost and are being amortized over five
years on a straight line basis. Other assets are comprised of licenses to
manufacture and sell tire monitoring systems (TMS) to the original equipment
manufacturers. On an ongoing basis, management assesses whether the expected net
recoverable amount of the licenses exceeds the book value of the licenses. The
net recoverable amount is determined on a projected cash flow basis, discounted
at an appropriate rate. In making our cash flow estimates, we consider recent
market trends and transactions, as well as reasonable estimates of future events
based on current economic characteristics. Although we expect to generate cash
flow from sales to the original equipment manufacturer market place, it is
possible that we will not generate cash flow from sales to the original
equipment manufacturer marketplace in excess of net book value, or that we will
generate cash flow from sales to the original equipment manufacturer market in
future years after the other assets have been fully amortized.
65
DESCRIPTION OF PROPERTY
Our principal executive offices are located at #150 - 13151 Vanier
Place, Richmond, British Columbia, V6V 2J1. We leased this 15,364 square foot
facility for a five year term ending August 31, 2005. This facility consists of
an office and administration area, an engineering department, a prototype
production facility and a warehouse.
Our subsidiary, SmarTire Europe Limited, leases a 9,069 square foot
facility at Park 34, Didcot, Oxfordshire, United Kingdom OX11 7WB for a 15 year
term ending February 20, 2016. This facility consists of an office and
administration area and a warehousing area.
We expect that our current facilities will be sufficient for the
foreseeable future. To the extent that we require additional space in the near
future, we believe that we will be able to secure additional leased facilities
at commercially reasonable rates.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as listed below, we have not been a party to any
transaction, proposed transaction, or series of transactions in which the amount
involved exceeds $60,000, and in which, to our knowledge, any of our directors,
officers, five percent beneficial security holder, or any member of the
immediate family of the foregoing persons has had or will have a direct or
indirect material interest.
Mr. Becerra, a director of our company until his resignation on March
17, 2003, is a principal of West Sussex Trading Inc. During the fiscal year
ended July 31, 2003, we paid West Sussex Trading Inc. $215,108 for consulting
and financial advisory services and have issued 621,143 share purchase warrants
(224,000 at an exercise price of $0.10, 160,000 at an exercise price of $0.50,
60,000 at an exercise price of $0.67, 80,000 at an exercise price of $0.70,
57,143 at an exercise price of $0.35, and 40,000 at an exercise price of $0.10),
which will expire on various dates between December 20, 2007 and July 24, 2008.
During the year ended July 31, 2002, we paid West Sussex Trading Inc. $115,900
for consulting and financial advisory services and issued 46,900 share purchase
warrants at an exercise price of $1.70, expiring on January 18, 2005. During the
year ended July 31, 2001, we paid West Sussex Trading Inc. $78,510 for
consulting and financial advisory services. Our Advisory Agreement with West
Sussex Trading Inc. dated September 4, 2002 (filed with the Securities and
Exchange Commission on October 25, 2002 as an exhibit to our annual report on
Form 10-KSB for the year ended July 31, 2002) has been terminated effective
March 17, 2003.
Bernard Pinsky, a director of our company until July 11, 2002, is a
partner in the law firm of Clark, Wilson and during the years ended July 31,
2002 and 2001, we paid to Clark, Wilson $98,752 and $79,858, respectively, for
legal services.
The promoters of our company are our directors and officers.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On May 29, 2003, our common stock commenced quotation on the OTC
Bulletin Board under the symbol "SMTR.OB".
Until May 28, 2003, our common stock was quoted on the Nasdaq SmallCap
Market under the symbol "SMTR". The following quotations obtained from Canada
Stockwatch reflect the high and low bids for our common stock based on
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low bid prices of our common stock
for the periods indicated below are as follows:
66
----------------------------------------------------------------------------------------------------
Quarter Ended High Low
----------------------------------------------------------------------------------------------------
April 30, 2004 $0.185 $0.105
----------------------------------------------------------------------------------------------------
January 31, 2004 $0.243 $0.165
----------------------------------------------------------------------------------------------------
October 31, 2003 $0.28 $0.135
----------------------------------------------------------------------------------------------------
July 31, 2003 $0.39 $0.135
----------------------------------------------------------------------------------------------------
April 30, 2003 $0.48 $0.07
----------------------------------------------------------------------------------------------------
January 31, 2003 $0.83 $0.31
----------------------------------------------------------------------------------------------------
October 31, 2002 $1.27 $0.42
----------------------------------------------------------------------------------------------------
July 31, 2002 $2.16 $0.88
----------------------------------------------------------------------------------------------------
April 30, 2002 $2.05 $1.75
----------------------------------------------------------------------------------------------------
January 31, 2002 $2.33 $1.81
----------------------------------------------------------------------------------------------------
October 31, 2001 $2.93 $1.90
----------------------------------------------------------------------------------------------------
July 31, 2001 $2.73 $1.70
----------------------------------------------------------------------------------------------------
April 30, 2001 $2.88 $1.91
----------------------------------------------------------------------------------------------------
January 31, 2001 $4.75 $1.75
----------------------------------------------------------------------------------------------------
October 31, 2000 $5.56 $1.25
----------------------------------------------------------------------------------------------------
Our common shares are issued in registered form. Pacific Corporate
Trust Company (10th Floor, 625 Howe Street, Vancouver, British Columbia, V6C 3B8
(telephone: (604) 689-9853, facsimile (604) 689-8144) is the registrar and
transfer agent for our common shares.
As of May 25, 2004, we had 89,013,091 shares of common stock
outstanding and approximately 400 stockholders of record.
DIVIDEND POLICY
We have not declared or paid any cash dividends since inception and we
do not intend to pay any cash dividends in the foreseeable future. Although
there are no restrictions that limit our ability to pay dividends on our common
shares other than as described below, we intend to retain future earnings for
use in our operations and the expansion of our business.
EXECUTIVE COMPENSATION
Particulars of compensation awarded to, earned by or paid to:
(a) our company's chief executive officer (the "CEO");
(b) each of our company's four most highly compensated executive
officers who were serving as executive officers at the end of the most
recently completed fiscal year and whose total salary and bonus exceeds
$100,000 per year; and
(c) any additional individuals for whom disclosure would have been
provided under (b) but for the fact that the individual was not serving
as an executive officer of our company at the end of the most recently
completed fiscal year;
(the "Named Executive Officers") are set out in the summary compensation table
below.
During the fiscal year ended July 31, 2003, six (6) individuals served
as executive officers of our company at various times: Robert Rudman, Al Kozak,
Jeff Finkelstein, Erwin Bartz, Shawn Lammers, and Ian Bateman. Mr. Finkelstein
and Mr. Lammers each earned less than $100,000 in total salary and bonuses
during fiscal 2003, and, therefore, neither of these individuals is considered a
"Named Executive Officer."
67
=========================================================================================================================
SUMMARY COMPENSATION TABLE
- --------------------- -------- ---------------------------------- ----------------------------------------- -------------
Annual Compensation Long Term Compensation
- --------------------- -------- ------------ --------- ----------- ----------------------------- ----------- -------------
Awards Payouts
- --------------------- -------- ------------ --------- ----------- --------------- ------------- ----------- -------------
Name and Principal Year Salary Bonus Other Securities Restricted LTIP All Other
Underlying Shares or
Annual oOptions/ SARs Restricted
Position Compen-sati Granted (#) Share Units Payouts Compen-sation
- --------------------- -------- ------------ --------- ----------- --------------- ------------- ----------- -------------
Robert Rudman 2003 $194,543 Nil Nil 232,000 Nil Nil Nil
President, Chairman
and Chief Executive 2002 $185,377 Nil Nil 90,000 Nil Nil Nil
Officer 2001 $191,058 Nil Nil 150,000 Nil Nil Nil
- --------------------- -------- ------------ --------- ----------- --------------- ------------- ----------- -------------
Ian Bateman 2003 $23,436 Nil Nil 82,500 Nil Nil $136,873(2)
Managing Director
SmarTire Europe 2002 $103,222 Nil Nil 40,000 Nil Nil Nil
Limited 2001 $102,810 Nil Nil 35,000 Nil Nil Nil
- --------------------- -------- ------------ --------- ----------- --------------- ------------- ----------- -------------
Al Kozak
Chief Operating
Officer 2003 $147,585 Nil Nil 111,000 Nil Nil Nil
- --------------------- -------- ------------ --------- ----------- --------------- ------------- ----------- -------------
Erwin Bartz
Vice-President,
Business Development 2003 $108,341 Nil Nil 55,000 Nil Nil $5,826(3)
===================== ======== ============ ========= =========== =============== ============= =========== =============
* The average of the closing foreign exchange rates for fiscal 2003, as
calculated by using the reported daily rates posted by the Federal
Reserve Bank of New York, was CDN$1.4964 to every US$1.00. For the
purposes of this table, executive compensation paid in Canadian
currency to the Named Executive Officers has been converted into United
States currency at the rate of CDN$1.4964 to every US$1.00
(1) The value of perquisites and other personal benefits,
securities and property for the Named Executive Officers that
do not exceed the lesser of $50,000 or 10% of the total of the
annual salary and bonus is not reported herein.
(2) Mr. Bateman's employment was terminated effective October 15,
2002. Pursuant to a separation agreement Mr. Bateman was paid
US$59,023 and 353,865 common shares at a deemed price of
$0.17. When the shares were issued, the fair market value of
each share was $0.22 with an aggregate value of $77,850.
(3) Mr. Bartz earned sales commissions of $5,826 in fiscal 2003.
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted to them during fiscal 2003.
Our company has never issued stock appreciation rights. Our company grants
options that generally vest over two years at an exercise price equal to the
fair market value of a share of common stock as determined by its closing price
on the OTC Bulletin Board. Until May 28, 2003, the exercise price was determined
by its closing price on the Nasdaq SmallCap Market. The exercise price of
options granted by our company that vest in subsequent periods are generally
increased by 20% over the initial exercise price of the options. The term of
each option granted is generally five years from the date of grant. Options may
terminate before their expiration dates if the optionee's status as an employee
is terminated or upon the optionee's death or disability.
68
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
=================== ============== ============== ============== ==================
Name Number of % of Total
Securities Options/
Underlying SARs Granted
Options/ to Employees Exercise
SARs in Fiscal Price
Granted (#) Year ($/Share) Expiration Date
=================== ============= ============== ============== ==================
Robert Rudman 44,000 29.8% $1.16 August 27, 2007
44,000 29.8% $1.39 August 27, 2007
44,000 29.8% $1.67 August 27, 2007
24,000 29.8% $2.00 August 27, 2007
24,000 29.8% $2.40 August 27, 2007
24,000 29.8% $2.88 August 27, 2007
28,000 29.8% $0.36 January 30, 2008
- ------------------- ------------- ------------------ --------------- -------------------
18,000 10.6% $1.16 May 3, 2003
18,000 10.6% $1.39 May 3, 2003
18,000 10.6% $1.67 May 3, 2003
9,500 10.6% $2.00 May 3, 2003
9,500 10.6% $2.40 May 3, 2003
Ian Bateman (1) 9,500 10.6% $2.88 May 3, 2003
- ------------------- ------------- ------------------ --------------- -------------------
15,667 11.9% $1.16 August 27, 2007
15,667 11.9% $1.39 August 27, 2007
15,666 11.9% $1.67 August 27, 2007
8,334 11.9% $2.00 August 27, 2007
8,333 11.9% $2.40 August 27, 2007
8,333 11.9% $2.88 August 27, 2007
Al Kozak 21,000 11.9% $0.36 January 30, 2008
- ------------------- ------------- ------------------ --------------- -------------------
12,000 8.3% $1.16 August 27, 2007
12,000 8.3% $1.39 August 27, 2007
12,000 8.3% $1.67 August 27, 2007
9,500 8.3% $2.00 August 27, 2007
9,500 8.3% $2.40 August 27, 2007
Erwin Bartz 9,500 8.3% $2.88 August 27, 2007
=================== ============= ================== =============== ===================
(1) Mr. Bateman was terminated from our company effective October
15, 2002. Due to his termination, and the payment of the
remainder of his severance in shares on April 3, 2003 his
options expired on May 3, 2003. If he had not been terminated,
the expiration date for his options would have been August 27,
2007.
The following table sets forth for each Named Executive Officer certain
information concerning the number of shares subject to both exercisable and
unexercisable stock options as of July 31, 2003. The values for "in-the-money"
options are calculated by determining the difference between the fair market
value of the securities underlying the options as of July 31, 2003 ($0.17 per
share) and the exercise price of the individual's options. No Named Executive
Officer exercised options during fiscal 2002.
69
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
==================== ============= =========== ==================================== ===============================
Name Shares Aggregate Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at FY-End In-the-Money Options/SARs at
Value (#) FY-end ($)
Acquired on Realized
Exercise (#) ($) Exercisable / Unexercisable Exercisable / Unexercisable
- -------------------- ------------- ----------- ----------------- ------------------ --------------- ---------------
Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- ----------- ----------------- ------------------ --------------- ---------------
Robert Rudman Nil Nil 320,000 169,500 Nil Nil
Al Kozak Nil Nil 145,000 98,000 Nil Nil
Erwin Bartz Nil Nil 116,667 48,333 Nil Nil
==================== ============= =========== ================= ================== =============== ===============
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective August 1, 1999, our Board of Directors approved a new
management agreement with Robert Rudman, which calls for payment of a base
salary of CDN$273,000 (approximately $200,000 at current exchange rates) per
annum subject to increase from time to time plus incentive compensation as
determined by our company's incentive compensation plan. Effective August 1,
2000, Mr. Rudman's salary was increased to CDN$290,000 (approximately $212,000)
per annum. Our company's incentive compensation plan expired on July 31, 2002.
The agreement with Mr. Rudman requires us to pay a termination allowance in the
event of the termination of Mr. Rudman's employment other than for just cause.
The termination allowance is equal to the annual salary.
Effective August 1, 1999, our Board of Directors approved a new
management agreement with Ian Bateman, which called for payment of a base salary
of pounds sterling 67,000 (approximately $108,000) per annum subject to increase
from time to time plus incentive compensation as determined by our company's
incentive compensation plan. Effective August 1, 2000, Mr. Bateman's salary was
increased to pounds sterling 71,000 (approximately $115,000) per annum. Our
company's incentive compensation plan expired on July 31, 2002. The agreement
with Mr. Bateman requires us to pay a termination allowance in the event of the
termination of Mr. Bateman's employment other than for just cause. The
termination allowance is equal to the annual salary. On October 15, 2002, we
terminated Mr. Bateman's management agreement without cause and agreed to pay a
termination allowance of pounds sterling 71,000 (approximately $115,000) over
the next twelve months. On April 3, 2003, we issued to Mr. Bateman a total of
353,865 shares of our common stock at a deemed price of $0.17 per share, in
payment of pounds sterling 38,098 (approximately $60,000) of the termination
allowance. We agreed to pay the balance of the termination allowance, in the
amount of pounds sterling 2,731, to Mr. Bateman in April 2003, and also to pay
his benefits to October 15, 2003 in the aggregate amount of pounds sterling
3,771.
Effective January 3, 2001, our Board of Directors approved a new
management agreement with Erwin Bartz, which calls for payment of a base salary
of CDN$150,000 (approximately $110,000) per annum subject to increase from time
to time plus incentive compensation as determined by our company's incentive
compensation plan. Effective August 1, 2001, Mr. Bartz's salary was increased to
CDN$155,000 (approximately $113,000) per annum. Effective August 1, 2002, Mr.
Bartz's salary was increased to CDN$161,500 (approximately $118,000) per annum
plus a commission based on sales to and margins in the passenger car vehicle
market. Our company's incentive compensation plan expired on July 31, 2002. The
agreement with Mr. Bartz requires us to pay a termination allowance in the event
of the termination of Mr. Bartz' employment other than for just cause. The
termination allowance is equal to the annual salary.
70
Effective August 1, 1999, our Board of Directors approved a new
management agreement with Shawn Lammers, which calls for payment of a base
salary of CDN$120,000 (approximately $88,000) per annum subject to increase from
time to time plus incentive compensation as determined by our company's
incentive compensation plan. Effective August 1, 2000, Mr. Lammers' salary was
increased to CDN$127,200 (approximately $93,000) per annum. Effective August 1,
2001, Mr. Lammers' salary was increased to CDN$135,000 (approximately $99,000)
per annum. Effective August 1, 2002, Mr. Lammers' salary was increased to
CDN$141,000 (approximately $104,000) per annum. Effective August 1, 2003, Mr.
Lammers' salary was increased to CDN$145,000 (approximately $106,000) per annum.
Our company's incentive compensation plan expired on July 31, 2002. The
agreement with Mr. Lammers requires us to pay a termination allowance in the
event of the termination of Mr. Lammers' employment other than for just cause.
The termination allowance is equal to the annual salary.
Effective May 1, 2002, our Board of Directors approved a new management
agreement with Al Kozak, which calls for payment of a base salary of CDN$220,000
(approximately $161,000) per annum subject to increase from time to time plus
incentive compensation as determined by our company's incentive compensation
plan. Our company's incentive compensation plan expired on July 31, 2002. The
agreement with Mr. Kozak requires us to pay a termination allowance in the event
of the termination of Mr. Kozak's employment except for just cause. The
termination allowance is equal to the annual salary.
Effective October 23, 2002, our Board of Directors approved a
management agreement with Jeff Finkelstein, which calls for the payment of a
base salary of CDN$120,000 (approximately $88,000) per annum subject to increase
from time to time. Effective August 1, 2003, Mr. Finkelstein's salary was
increased to CDN$130,000 (approximately $95,000) per annum. This agreement with
Mr. Finkelstein requires us to pay a termination allowance in the event of the
termination of Mr. Finkelstein other than for just cause. The termination
allowance is as follows:
o three months salary if terminated before April 23, 2003,
o six months salary if terminated between April 23, 2003 and
October 23, 2003,
o nine months salary if terminated between October 23, 2003 and
October 23, 2004, and twelve months salary if terminated after
October 23, 2004.
Effective March 31, 2003, as a temporary measure to help preserve
working capital for our company, each of the Named Executive Officers verbally
agreed to a 20% reduction in the cash that he may receive as his base salary
under his management agreement. We agreed to periodically issue shares of our
common stock to each of the Named Executive Officers to make up the balance of
the base salary that he would otherwise be entitled to receive in cash. On July
18, 2003, the 20% in salary that we had withheld since March 31, 2003 was paid
in cash to the Named Executive Officers and the 20% reduction in cash was
cancelled.
Effective August 11, 2003, our Board of Directors approved a management
agreement with John Taylor-Wilson, which calls for payment of a base salary of
CDN$140,000 (approximately $103,000) per annum plus quarterly commissions
ranging from 5% to 100% of the base salary amount if certain predetermined
performance criteria in connection with his duties as Vice President Sales and
Marketing are met. Mr. Taylor-Wilson may, with the approval of our compensation
committee, elect to receive his salary, commission and termination allowance, if
any, in such number of shares of our common stock as will be determined based on
the five day average closing price for our common stock. Pursuant to the
agreement, we also issued to Mr. Taylor-Wilson a total of 450,000 stock options
pursuant to our 2002 Stock Incentive Plan (Non-U.S.), exercisable for five years
at an exercise price equal to 115% of the 10 day average closing price for our
common stock as at August 13, 2003. The agreement is subject to the following
termination provisions:
o if we terminate the agreement for any reason other than for
just cause within three months, we will have no further
obligations to Mr. Taylor-Wilson;
o if we terminate the agreement for any reason other than for
just cause after three months and within six months, we will
be required to either continue to pay Mr. Taylor-Wilson his
salary and to provide him with benefits for a period of three
months from the date of termination or, at our option, to pay
him three months' salary in lieu of notice;
71
o if we terminate the agreement for any reason other than for
just cause after six months and within twelve months, we will
be required to either continue to pay Mr. Taylor-Wilson his
salary and to provide him with benefits for a period of six
months from the date of termination or, at our option, to pay
him six months' salary in lieu of notice;
o if we terminate the agreement for any reason other than for
just cause after twelve months and within twenty-four months,
we will be required to either continue to pay Mr.
Taylor-Wilson his salary and to provide him with benefits for
a period of nine months from the date of termination or, at
our option, to pay him nine months' salary in lieu of notice;
and
o if we terminate the agreement for any reason other than for
just cause after twenty-four months, we will be required to
either continue to pay Mr. Taylor-Wilson his salary and to
provide him with benefits for a period of twelve months from
the date of termination or, at our option, to pay him twelve
months' salary in lieu of notice.
Other than as discussed above, our company has no plans or arrangements
in respect of remuneration received or that may be received by Named Executive
Officers of our company in fiscal 2003 to compensate such officers in the event
of termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds $100,000 per Named Executive Officer.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers receive, on an annual basis, incentive
stock options to purchase shares of our common stock as awarded by our Board of
Directors in consultation with the compensation committee.
Effective January 30, 2003, we instituted a formal directors'
compensation policy whereby directors are compensated for all meetings that they
attend in person at the rate of $1,000 per day, and for all meetings that they
participate by teleconference or other electronic means at the rate of $500 per
day. Directors who participate in a meeting of any committee of the Board of
Directors are entitled to compensation at the rate of $500 per day for
attendance in person, and at the rate of $300 per day for participation by
teleconference or other electronic means. Such fees are payable only if the
meeting of the Board or of a committee of the Board, as the case may be, is more
than one-half hour in duration. Directors are also entitled to reimbursement for
reasonable travel and other out-of-pocket expenses incurred in connection with
attendance at meetings of our Board of Directors, as well as a per diem travel
time allowance of $500 per day.
Our Board of Directors may award special remuneration to any director
undertaking any special services on our behalf other than services ordinarily
required of a director. Other than indicated herein, no director received and/or
accrued any compensation for his services as a director, including committee
participation and/or special assignments.
There are no arrangements or plans in which we provide pension,
retirement or similar benefits for directors or executive officers.
We have adopted eight formal stock incentive plans, two of which were
approved by our shareholders at our 1998 Annual General Meeting, two of which
were approved at our 2000 Annual General Meeting, two of which were adopted at
our 2002 Annual General Meeting, and two of which were adopted by our board of
directors on August 11, 2003. Four of the stock incentive plans provide for
awards to eligible employees of our company or of any related entity who are
resident in the United States and/or subject to taxation in the United States;
the other four stock incentive plans provide for awards to all other eligible
employees of our company or of any related entity.
We had also adopted a formal incentive compensation plan, which was
approved by our shareholders at our 2000 Annual and Extraordinary General
Meeting, but it expired on December 31, 2002. This incentive compensation plan
was intended to complement our existing stock incentive plans and any subsequent
stock incentive plans that may be approved by our shareholders. In granting
awards under this incentive compensation plan, our Board of Directors were
required to follow certain guidelines which took into account after-tax
operating profits after accounting for the cost of capital employed to create
such profits, as suggested by an economic value added model developed by Stern,
Stewart & Co., a global consulting firm. There are no incentive awards under
this incentive compensation plan for fiscal 2002. This incentive compensation
plan expired on July 31, 2002.
72
To date, we have granted to directors, officers, employees and
consultants incentive stock options to purchase shares of our common stock
subject to and in accordance with the prevailing policies of the stock exchange
on which our shares were then listed. Options are granted based on the
assessment by our Board of Directors and/or compensation committee of the
optionee's past and present contribution to the success of our company. These
options are not transferable and are exercisable from the date granted until the
earliest of (i) such number of years (up to ten years) from the date of the
grant, or (ii) such number of days following the death of the optionee as is
specified in each optionee's option agreement.
One of our company's former directors, Mr. Bernard Pinsky, who resigned
effective July 11, 2002, was paid his hourly rate as an attorney at law for his
time expended on his duties as a director.
Other than the management agreements, the advisory agreements and the
stock incentive plans discussed herein, we presently have no material bonus or
profit sharing plans pursuant to which cash or non-cash compensation is or may
be paid to our directors or executive officers.
73
FINANCIAL STATEMENTS
Our consolidated financial statements are stated in United States
Dollars (US$) and are prepared in conformity with generally accepted
accounting principles of the United States of America.
The following financial statements pertaining to SmarTire are filed as
part of this prospectus:
NAME PAGE
Consolidated Balance Sheets at January 31, 2004 (Unaudited) and July 31, F-2
2003
Consolidated Statements of Operations (Unaudited) - Six Months Ended
January 31, 2004 and 2002 F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Loss -
Six Months Ended January 31, 2004 (Unaudited) and Year Ended July 31,
2003 F-4
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended
January 31, 2004 and 2003 F-5
Notes to Consolidated Financial Statements (Unaudited) - Six Months
Ended January 31, 2004 and 2003 F-6
Statement of Management Responsibility F-17
Auditors' Report, dated September 12, 2003 F-18
Consolidated Balance Sheets at July 31, 2003 and July 31, 2002 F-19
Consolidated Statements of Operations - Years Ended July 31, 2003, July
31, 2002 and July 31, 2001 F-20
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) - Years Ended July 31, 2003, July 31, 2002 and July 31, 2001 F-21
Consolidated Statements of Cash Flows - Years Ended July 31, 2003, July
31, 2002 and July 31, 2001 F-23
Notes to Consolidated Statements - Years Ended July 31, 2003, July 31,
2002 and July 31, 2001 F-24
Consolidated Financial Statements
(Expressed in United States dollars)
in accordance with United States Generally Accepted Accounting
Principles
SMARTIRE SYSTEMS INC.
Periods ended January 31, 2004 and 2003
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
January 31, 2004 and July 31, 2003
======================================================================================
January 31, July 31,
2004 2003
(Unaudited)
- --------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,367,190 $ 1,843,694
Receivables, net of allowance for doubtful accounts
of nil (2003 - nil) 506,993 405,885
Inventory 2,611,489 806,846
Prepaid expenses 222,334 165,792
----------------------------------------------------------------------------------
4,708,006 3,222,217
Capital assets 727,038 550,458
Deferred financing costs (note 8) 1,240,677 183,259
Other assets (note 5) 2,736,648 3,129,658
- --------------------------------------------------------------------------------------
$ 9,412,369 $ 7,085,592
======================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 844,207 $ 788,267
Deferred revenue 11,342 10,018
----------------------------------------------------------------------------------
855,549 798,285
Convertible debentures, net of equity portion of
$2,457,023
(2003 - $1,996,664) (note 6) 1,079,166 3
Stockholders' equity:
Share capital (note 7):
Preferred shares, par value $1,000 Cdn per share:
100,000 shares authorized
Issued and outstanding; none
Common shares, without par value:
300,000,000 shares authorized (July 31, 2003 -
200,000,000)
78,346,064 shares issued and outstanding at
January 31, 2004 (July 31, 2003 -55,039,065) 53,188,932 48,204,995
Additional paid-in capital 7,756,794 6,681,893
Deficit (53,199,552) (48,031,230)
Accumulated other comprehensive loss (268,520) (568,354)
----------------------------------------------------------------------------------
7,477,654 6,287,304
- --------------------------------------------------------------------------------------
$ 9,412,369 $ 7,085,592
======================================================================================
Going concern (note 3)
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board
/s/ Robert V. Rudman Director /s/ Bill Cronin Director
- ----------------------------- ---------------
Robert V. Rudman Bill Cronin
F-2
SMARTIRE SYSTEMS INC.
Consolidated Statements of Operations
(Expressed in United States Dollars)
(Unaudited)
=============================================================================================
Three Months Ended Six Months Ended
January January January January
31, 31, 31, 31,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------
Revenue $ 430,191 146,762 $ 857,717 $ 544,351
Cost of goods sold 376,746 130,660 747,150 448,405
- ---------------------------------------------------------------------------------------------
53,445 16,102 110,567 95,946
- ---------------------------------------------------------------------------------------------
Expenses:
Depreciation and
amortization 359,538 292,819 674,490 587,250
Engineering, research
and development 360,353 260,519 746,919 523,079
General and administrative 571,159 705,638 1,281,006 1,615,362
Marketing 418,363 303,093 861,324 823,225
- ---------------------------------------------------------------------------------------------
1,709,413 1,562,069 3,563,739 3,548,916
- ---------------------------------------------------------------------------------------------
Loss from operations (1,655,968) (1,545,967) (3,453,172) (3,452,970)
Other earnings (expenses):
Interest income 1,827 336 4,567 1,662
Net interest and (315,609) (620,884) (1,746,053) (811,782)
financing expenses
Foreign exchange gain 64,571 36,643 26,336 62,845
- ---------------------------------------------------------------------------------------------
(249,211) (583,905) (1,715,150) (747,275)
- ---------------------------------------------------------------------------------------------
Loss for the period $ (1,905,179) $ (2,129,872) $ (5,168,322) $ (4,200,245)
- ---------------------------------------------------------------------------------------------
Basic and diluted loss per
share $ (0.02) $ (0.10) $ (0.08) $ (0.21)
- ---------------------------------------------------------------------------------------------
Weighted average number of
common shares used in the
computation of
basic and diluted loss per
share 76,501,711 21,928,214 67,843,796 20,319,792
=============================================================================================
See accompanying notes to consolidated financial statements.
F-3
SMARTIRE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(Expressed in United States dollars)
Six months ended January 31, 2004 (unaudited) and year ended July 31,
2003 (audited)
----------------------------------------------------------------------------------------------------------------------
Common shares
---------------------------
Additional Deferred
paid-in stock
Shares Amount capital compensation Deficit
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
$ $ $ $
Balance at July 31, 2002 18,711,369 42,514,482 885,461 (17,005) (38,116,601)
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
Issuance of common shares for cash upon private
placements, net of issuance costs of $289,172 6,964,286 1,810,828 - - -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued - - 5,157,521 - -
Conversion of convertible debenture and accrued
interest to common shares net of issuance costs
of $628,526 24,381,133 3,024,395 - - -
Exercise of warrants for cash, net of issuance
costs 3,300,000 298,940 - - -
of $61,060
Issuance of shares as fees on equity line of
credit 478,412 300,000 - - -
Fair value of agent's warrants issued on private
placements and convertible debentures - - 502,367 - -
Debt settlement through issuance of common
shares 353,865 77,850 - - -
Issuance of shares and repricing of warrants to
settle a potential claim 850,000 178,500 136,544 - -
Compensation expense - - - 17,005 -
Loss for the period - - - - (9,914,629)
Translation adjustment - - - - -
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
Balance at July 31, 2003 55,039,065 48,204,995 6,681,893 - (48,031,230)
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
Exercise of stock options for cash (note 7 (d)) 79,400 15,880 - - -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued (note 6) - - 2,457,023 - -
Conversion of convertible debenture and accrued
interest to common shares pro-rata allocation
between additional paid-in-capital and common
shares net of issuance costs of $139,698
(note 6) 12,064,368 1,433,537 122,766 - -
Exercise of warrants for cash, net of issuance
costs of $76,290 (note 7(a)) 10,963,231 3,499,720 (1,568,625) - -
Issuance of shares as fees for services received
(note 7 (e)) 200,000 34,800 - - -
Fair value of agent's warrants issued on private
placement of convertible debentures (note 6(a)) - - 15,699 - -
Issuance of warrants for services received
(note 7(e)) - - 48,038 - -
Loss for the period - - - - (5,168,322)
Translation adjustment - - - - -
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
Balance at January 31, 2004 (Unaudited) 78,346,064 53,188,932 7,756,794 - (53,199,552)
-------------------------------------------------- ------------- ------------- ----------- --------------- --------------
Accumulated
other
comprehensive Stockholders' Comprehensive
loss equity income (loss)
-------------------------------------------------- ---------------- -------------- ----------------
$ $ $
Balance at July 31, 2002 (977,291) 4,289,046 nil
-------------------------------------------------- ---------------- -------------- ----------------
Issuance of common shares for cash upon private
placements, net of issuance costs of $289,172 - 1,810,828 -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued - 5,157,521 -
Conversion of convertible debenture and accrued
interest to common shares net of issuance costs
of $628,526 - 3,024,395 -
Exercise of warrants for cash, net of issuance
costs of $61,060 - 298,940 -
Issuance of shares as fees on equity line of
credit - 300,000 -
Fair value of agent's warrants issued on private
placements and convertible debentures - 502,367 -
Debt settlement through issuance of common
shares - 77,850 -
Issuance of shares and repricing of warrants to
settle a potential claim - 315,044 -
Compensation expense - 17,005 -
Loss for the period - (9,914,629) (9,914,629)
Translation adjustment 408,937 408,937 408,937
-------------------------------------------------- ---------------- -------------- ----------------
Balance at July 31, 2003 (568,354) 6,287,304 (9,505,692)
-------------------------------------------------- ---------------- -------------- ----------------
Exercise of stock options for cash (note 7 (d)) - 15,880 -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued (note 6) - 2,457,023 -
Conversion of convertible debenture and accrued
interest to common shares pro-rata allocation
between additional paid-in-capital and common
shares net of issuance costs of $139,698
(note 6) - 1,556,303 -
Exercise of warrants for cash, net of issuance
costs of $76,290 (note 7(a)) - 1,931,095 -
Issuance of shares as fees for services received
(note 7 (e)) - 34,800 -
Fair value of agent's warrants issued on private
placement of convertible debentures (note 6(a)) - 15,699 -
Issuance of warrants for services received
(note 7(e)) - 48,038 -
Loss for the period - (5,168,322) (5,168,322)
Translation adjustment 299,834 299,834 299,834
-------------------------------------------------- ---------------- -------------- ----------------
Balance at January 31, 2004 (Unaudited) (268,520) 7,477,654 (4,868,488)
-------------------------------------------------- ---------------- -------------- ----------------
F-4
SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Unaudited)
================================================================================
Six months ended
January 31, January 31,
2004 2003
- --------------------------------------------------------------------------------
Cash provided by (used for):
Operating activities:
$
Loss for the period $ (5,168,322) $ (4,200,245)
Items not affecting cash:
Depreciation and amortization 674,490 587,250
Stock based compensation expense -- 8,503
Non-cash interest and finance charges 1,659,036 701,671
Issuance of shares and warrants for
services received 82,838 --
Change in non-cash working capital:
Receivables (76,354) 7,976
Deferred revenue 712 --
Inventory (1,755,435) 133,796
Prepaid expenses (46,430) 277,196
Accounts payable and accrued liabilities (2,338) 390,937
---------------------------------------------------------------------------
Net cash used in operating activities (4,631,803) (2,092,916)
Investing activities:
Purchase of capital assets (235,481) (25,232)
---------------------------------------------------------------------------
Net cash used in investing activities (235,481) (25,232)
Financing activities:
Cash received on exercise of stock options 15,880 --
Cash received on exercise of warrants 2,007,385 --
Issuance of common shares -- 1,450,000
Proceeds from convertible debentures 2,725,000 1,118,000
Financing costs (409,796) (238,177)
Repayment of promissory note -- (500,000)
---------------------------------------------------------------------------
Net cash provided by financing activities 4,338,469 1,829,823
Effect of exchange rate differences on cash
and cash equivalents 52,311 (8,040)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (476,504) (296,365)
Cash and cash equivalents, beginning of period 1,843,694 525,968
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,367,190 $ 229,603
================================================================================
Supplementary information:
Interest and finance charges paid $ 75,998 $ 811,782
Non-cash investing and financing activities:
Conversion of convertible debentures to
common shares 1,556,303 --
Fair value of agents warrants issued in
conjunction with private placements 15,699 146,672
================================================================================
See accompanying notes to consolidated financial statements.
F-5
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
1. BASIS OF PRESENTATION:
These interim consolidated financial statements have been prepared using
United States generally accepted accounting principles. 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 which are for the year ended July
31, 2003.
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 vehicles
and other pneumatic tire applications. All sales of its product are made
in this industry segment.
3. GOING CONCERN:
The Company requires additional financing to fund its operations. The
Company has incurred recurring operating losses and has a deficit of
$53,199,552. Although the Company has working capital of $3,852,457 as at
January 31, 2004, during the six month period ended January 31, 2004, the
Company used cash of $ 4,631,803 in operating activities.
The Company is pursuing various alternatives to meet its intermediate and
long-term financial requirements. During fiscal 2003, the Company realized
gross proceeds of $8,078,000 from financing activities and arranged a $15
million equity line of credit to fund its operations. In addition, during
the six months ended January 31, 2004, the Company realized gross proceeds
of $4,748,265 from financing activities. There can be no assurance that
additional financing will be available to the Company when needed or, if
available, that it can be obtained on commercially reasonable terms. These
consolidated financial statements have been prepared on the going concern
basis which assumes that adequate sources of financing will be obtained as
required and that the Company's assets will be realized and liabilities
settled in the ordinary course of business. Accordingly, these
consolidated financial statements do not include any adjustments related
to the recoverability of assets and classification of assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern.
F-6
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
4. SIGNIFICANT ACCOUNTING POLICY:
Stock-based compensation:
The Company has elected under FAS 123, Accounting for Stock-based
Compensation, to account for employee stock options using the intrinsic
value method. This method is described in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As the Company grants stock options with an
exercise price not less than the market value of the underlying common
shares on the date of grant, no compensation expense is required to be
recognized under APB 25. FAS No. 123 uses the fair value method of
calculating the cost of stock option grants. Had compensation cost for
employee stock options been determined by this method, net earnings (loss)
and net earnings (loss) per share would have been as follows:
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------
Net earnings (loss):
As reported $(1,905,179) $(2,129,872) $(5,168,322) $(4,200,245)
Stock-based compensation
expense recognized using
intrinsic method (120,882) 8,503 -- 8,503
Stock-based compensation
expense determined under
fair value based method for
all awards (136,376) (380,735) (1,375,973) (588,864)
- ----------------------------------------------------------------------------------------
Pro forma $(2,162,437) $(2,502,104) $(6,544,295) $(4,780,606)
========================================================================================
Basic and diluted loss per
share:
As reported (0.02) (0.10) (0.08) (0.21)
Pro forma (0.03) (0.11) (0.10) (0.24)
- ----------------------------------------------------------------------------------------
The Company recognizes the compensation expense at the date of granting
the stock options on a straight-line basis over the vesting period.
The fair value of each option and warrant granted is estimated on the
date of grant using the Black-Scholes option valuation model with the
following range of weighted average assumptions.
================================================================================
JANUARY 31, JANUARY 31,
2004 2003
================================================================================
Expected dividend yield 0% 0%
Expected stock price volatility 135% 128%
Risk-free interest rate 4.16% 4.30%
Expected life of options and warrants 5 years 1.67 years
F-7
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
4. Stock-based compensation (continued):
Weighted-average fair values of options granted during the period are
as follows:
=============================================================================
January 31, January 31,
2004 2003
=============================================================================
Options whose exercise price at date of
grant:
Equals the market price of stock $ -- $ 0.76
Exceeds the market price of stock 0.20 1.77
Is less than the market price of
stock -- --
=============================================================================
The Company recognizes compensation expense for stock options, common
stock and other instruments issued to non-employees for services received
based upon the fair value of the equity instruments issued as the services
are performed and the instrument earned.
If the exercise price of employee stock option award is not fixed in the
functional currency of the Company or in the currency the employee is
paid, the award is accounted for as a variable award until the award is
exercised, forfeited, or expires. The Company measures compensation as the
amount by which the quoted market value of the common shares of the
Company's stock covered by the grant exceeds the option price, with
changes in the market price included in the measurement of loss.
5. OTHER ASSETS:
On December 13, 2000, the Company entered into an Assignment and Amendment
Agreement with TRW that transferred to the Company the license to
manufacture and sell tire monitoring systems to the original equipment
vehicle manufacturers of most medium and heavy duty trucks. Consideration
consisted of 490,072 shares of common stock valued at $1,337,500, based on
the market value of the Company's stock at the date of purchase, plus cash
of $400,000.
On August 31, 2001, the Company and TRW Inc. entered into an agreement to
restructure their strategic alliance. Under the terms of restructuring,
the Company and TRW agreed to terminate a number of agreements. The
Company has the right to manufacture and sell tire monitoring systems to
the original equipment vehicle manufacturers market ("OEM"). Consideration
consisted of a promissory note of $2.8 million, carrying an interest rate
of 6% per annum plus cash of $500,000. The balance of principal in the
amount of $1,350,000 owed at July 31, 2002 was repaid during fiscal 2003
and interest of $97,542 on this balance was forgiven by TRW Inc.
The rights are being amortized over five years on a straight-line basis.
F-8
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
5. OTHER ASSETS (CONTINUED):
===========================================================================
Accumulated Net book
JANUARY 31, 2004 Cost amortization value
===========================================================================
OEM - most medium and heavy duty
trucks $ 1,737,500 $ 990,297 $ 747,203
OEM - all other vehicles 3,300,000 1,310,555 1,989,445
- ---------------------------------------------------------------------------
$ 5,037,500$ $ 2,300,852 $ 2,736,648
===========================================================================
Management believes that the net book value of its other assets of $
2,736,648 as at January 31, 2004 is recoverable based on expectations
of future cash flows from the Company's future sales of tire monitoring
systems. Management's belief is based on an undiscounted cash flow
analysis of management's current best estimate of projected annual
sales to the passenger vehicle and light truck OEM market plus
management's projected sales to the heavy truck OEM market.
6. CONVERTIBLE DEBENTURES:
==============================================================================
Equity
component
(included in
additional
Face value Debt paid-in
of debt component capital)
- ------------------------------------------------------------------------------
Balance as at July 31, 2003 $ 1,966,667 $ 3 $ 5,326,854
11 % discounted convertible
debenture with cash finance
cost of $218,000 and discount
of $768,590 (a) 3,493,590 1,036,567 2,457,023
Accretion of deemed debt -- 1,584,263 --
discount to interest
Conversion of $1,541,667
principal amount of 7% and 8%
convertible debentures to (1,541,667) (1,541,667) (139,698)
common shares (b)
- ------------------------------------------------------------------------------
Balance as at January 31, 2004 $ 3,918,590 $ 1,079,166 $ 7,644,179
==============================================================================
F-9
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
6. CONVERTIBLE DEBENTURES (CONTINUED):
Financing costs of $46,566 related to the 8% debenture and 11% discounted
convertible debenture still outstanding are netted against additional
paid-in capital.
(a) On December 24, 2003, the Company closed a private placement of
discounted unsecured convertible debentures in the aggregate
principal amount of $3,493,590. The Company issued the convertible
debentures at a 22% original issue discount from the face principal
amount (based on a notional interest rate of 11% per annum for each
year of the two-year term of the debentures), resulting in gross
proceeds of $2,725,000. The discount of $768,590 has been recorded
in deferred financing charges and is being amortized over the
maturity period. Advisors to the transaction received a cash
commission of $218,000 and 109,000 three year share purchase
warrants exercisable at a price of $0.25. The fair value of these
warrants at the date of grant was estimated at $15,699. The fair
value of these warrants was estimated on the date of issuance using
the Black-Scholes option valuation model using the following
weighted average assumptions: (expected dividend yield 0%, expected
stock price volatility 141%; risk free interest rate 3.28%, expected
life of warrants 3 years). In addition, expenses of $40,398 for
professional fees related to this transaction were incurred. The
discounted convertible debentures do not otherwise bear interest,
and will mature on April 1, 2006. The outstanding principal amount
of each debenture may be converted at any time into shares of our
common stock, in whole or in part, at the option of the holder of
the debenture at a set price of $0.22 per share. The Company will
make the monthly redemption payments over two years in cash unless
during the twenty trading day prior notice period immediately prior
to the applicable monthly redemption date the Company irrevocably
notifies the holder that it will issue underlying shares in lieu of
cash at a conversion price equal to the lesser of:
(i) the set price of $0.22 per share (subject to adjustment
pursuant to the anti-dilution provisions contained in the
debentures), and
(ii) 85% of the average of the closing prices of the Company's
common stock for twenty days immediately preceding the
applicable monthly redemption date, provided that certain
conditions are met, including the condition that the
underlying shares of common stock shall have been registered
under the Securities Act of 1933, as amended.
For accounting purposes, the proceeds from the issuance of
these convertible debentures were allocated to the fair value
of the warrants issued and the intrinsic value of the
beneficial conversion feature which amounts to $861,351 and
$1,595,672 respectively. The fair value of the warrants was
calculated using the Black-Scholes model. The remaining
proceeds of $1,036,567 was allocated to debt and is being
accreted to the redemption value of the convertible debentures
over the maturity period. During the six months ended January
31, 2004, interest accretion of $42,598 was charged to the
statement of operations as interest expense.
F-10
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
6 CONVERTIBLE DEBENTURES (CONTINUED):
(b) During the six months ended January 31, 2004, $1,541,667 of
principal and $31,570 of interest were converted into common
shares resulting in the issuance of 12,064,368 common
shares. Interest accretion of $1,573,237 was charged to the
statement of operations as interest expense upon conversion
of convertible debentures.
As at January 31, 2004, $425,000 remained outstanding from the July 16,
2003 convertible debenture and $3,493,590 remained outstanding from the
December 24, 2003 convertible debenture. An additional $16,932 in
professional fees that related to the July 16, 2003 debenture were
incurred during the six months ended January 31, 2004.
7. SHARE CAPITAL:
(a) For the six months ended January 31, 2004, the Company realized
gross cash proceeds of $2,007,385 and net cash proceeds of
$1,931,095 from the exercise of 10,963,231 warrants. The fair value
of these warrants of $1,568,625 was initially recorded as additional
paid in capital. On the exercise of these warrants, $1,568,625 was
reclassified to share capital. On October 27, 2003 the Company
offered warrant holders who were issued warrants with an exercise
price of $0.2645 on May 15, 2003 in connection with the convertible
debenture offering a reduction in their exercise price to $0.20 plus
one additional warrant at $0.20 if they exercised their warrants. A
total of 3,290,596 warrants were exercised. In addition, the Company
granted 194,000 additional warrants exercisable at a price of $0.20
per share for five years to a shareholder who also exercised their
warrants. On November 6, 2003, the exercise price of the 7,478,635
warrants granted at $0.20 were reduced to $0.1771.
(b) The Company paid $75,355 to Palisades Master Fund as an early
participation bonus, being an amount equal to the difference between
the aggregate exercise price that Palisades Master Fund paid upon
the exercise of 3,290,596 outstanding warrants at $0.20 per share
and the aggregate exercise price that Palisades Master Fund would
have paid if it had the benefit of the reduced exercise price of
$0.1771 per share. This bonus was accounted for as an interest and
financing expense during the six months ended January 31, 2004.
(c) On December 15, 2003, the Company's authorized common share capital
was increased to 300,000,000, pursuant to a special resolution of
the shareholders adopted at the annual and special annual meeting of
the Company held on December 11, 2003.
F-11
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
7. SHARE CAPITAL (CONTINUED):
(d) A summary of stock option transactions and balances during
the period ended January 31, 2004 is as follows:
Weighted
average
Options exercise
Outstanding price
-----------------------------------------------------------------------
Balance at July 31, 2003
1,714,400 $ 2.54
Options granted 0.20
8,949,600
Options exercised (79,400) (0.20)
Options forfeited (32,300) (3.77)
-----------------------------------------------------------------------
Balance at January 31, 2004 10,552,300 $ 0.57
=======================================================================
These options have a weighted average remaining life of 4.24 years.
(e) During the six months ended January 31, 2004, 200,000 common shares
with a fair market value of $0.174 per share and 300,000 share
purchase warrants with an exercise price of $0.17 per share were
issued for services received. The fair value of these warrants at
the date of grant was estimated at $48,038. The fair value of these
warrants was estimated on the date of issuance using the
Black-Scholes option valuation model using the following weighted
average assumptions: (expected dividend yield 0%, expected stock
price volatility 152%; risk free interest rate 3.94%, expected life
of warrants 5 years). As these warrants vest after one year, the
fair value of these warrants are amortized over the vesting period
and charged as an administration expense.
(f) As at January 31, 2004, warrants outstanding were exercisable for
38,733,485 (July 31, 2003-32,154,507) common shares of the Company.
The warrants entitle the holders to purchase common shares of the
Company at prices ranging from $0.10 to $2.80 per share that expire
on various dates until October 27, 2008.
F-12
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
7. SHARE CAPITAL (CONTINUED)
(g) On July 23, 2003, the Company entered into a common stock purchase
agreement with Talisman Management in connection with our 36-month,
$15,000,000 equity line of credit facility. The Company may, in its
discretion, draw down amounts under the facility from time to time,
subject to various conditions and certain limitations. The Company
is currently not in a position to draw down any amounts under the
facility, as it has not met all of the conditions for a draw down,
including the requirement that the resale of the underlying common
stock issuable to Talisman Management under the facility be
registered pursuant to an effective registration statement under the
Securities Act of 1933. During the six months ended January 31,
2004, the Company paid $58,176 to prepare the registration statement
related to the $15,000,000 equity line of credit facility. These
costs were recorded as deferred financing costs.
The Company issued 1,250,000 warrants exercisable at a price of
$0.1955 per share for three years as consideration for the equity
line of credit. The fair value of these warrants at the date of
grant is estimated at $178,259 by the Black-Scholes option valuation
model. The fair value of the warrant was recorded as a deferred
financing expense and will be amortized once the Company has drawn
against the line of credit.
8. DEFERRED FINANCING CHARGES:
=======================================================================
Six Year
months ended ended
January 31, July 31, 2003
2004
-----------------------------------------------------------------------
Equity line of credit
Fair value of agents warrants
(note 7 (j)) $ 178,259 $ 178,259
Professional fees 63,176 5,000
-----------------------------------------------------------------------
241,435 183,259
-----------------------------------------------------------------------
Discounted convertible debenture
(note 6 (a))
Discount 768,590 --
Commission 218,000 --
Fair value of agents warrants 15,699 --
Professional fees 40,398 --
-----------------------------------------------------------------------
1,042,687 --
Amortization (43,445) --
-----------------------------------------------------------------------
999,242 --
Total deferred financing charges $ 1,240,677 $ 183,259
-----------------------------------------------------------------------
F-13
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
8. DEFERRED FINANCING CHARGES (CONTINUED)
The deferred charges related to the discounted convertible debenture are
being amortized over the maturity period. During the six months ended
January 31, 2004, $43,201 was amortized and charged to interest expense.
9. RELATED PARTY TRANSACTIONS:
During the six months ended January 31, 2004, the Company incurred
expenses of $nil (2003 - $215,108) for consulting services and financing
fees on the private sales of its convertible debentures for financing
services to a company in which a former director (resigned in March, 2003)
of the Company had significant influence.
10. PRODUCT WARRANTIES:
The Company provides for estimated warranty costs at the time of product
sales. Warranty expense accruals are based on best estimate with reference
to historical claims experience. As warranty estimates are based on
forecasts, actual claim costs may differ from amounts provided. An
analysis of changes in liability for product warranties follows:
==========================================================================
Balance, July 31, 2003 $ 20,438
Provision increase 9,343
Expenditures (4,511)
--------------------------------------------------------------------------
Balance, January 31, 2004 $ 25,270
==========================================================================
F-14
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Six Months ended January 31, 2004 and 2003
================================================================================
11. 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. Geographic information
is as follows:
Revenue from external customers
==========================================================================
Three months ended Six months ended
------------------------------------------------------------------------
January January January January
31, 31, 31, 31,
2004 2003 2004 2003
------------------------------------------------------------------------
China $ 123,866 $ - $ 312,389 $ -
United States 176,373 29,610 258,536 180,626
Korea 33,469 - 92,269 -
United Kingdom 63,896 24,626 122,285 67,713
Italy - 70,530 - 182,483
Germany - 12,566 - 40,471
Other 32,587 9,430 72,238 73,058
------------------------------------------------------------------------
$ 430,191 $ 146,762 $ 857,717 $ 544,351
==========================================================================
As at January 31, 2004, 56% (July 31, 2003-73%) of the Company's fixed
assets were in Canada, 21% (July 31, 2003-27%) were in Europe and 23%
were in Korea (July 31, 2003-nil).
Major customers, representing 10% or more of total sales, include:
==========================================================================
Three months ended Six months ended
--------------------------------------------------------------------------
January 31, January 31, January 31, January 31,
2004 2003 2004 2003
--------------------------------------------------------------------------
Customer A $ 105,471 - $ 282,457 $ -
Customer B 33,414 - 92,269 -
Customer C - 70,530 - 182,483
Customer D 51,913 22,254 79,473 56,698
==========================================================================
12. COMPARATIVE FIGURES:
Certain figures have been reclassified to conform with the financial
statement presentation adopted for the current period.
F-15
Consolidated Financial Statements
(Expressed in United States dollars)
SMARTIRE SYSTEMS INC.
Years ended July 31, 2003, 2002 and 2001
F-16
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of SmarTire Systems Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of all information in the Annual Report. The consolidated financial
statements have been prepared in accordance with the accounting principles
generally accepted in the United States and are considered by management to
present fairly the financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded, and that financial records are properly maintained to
provide accurate and reliable financial statements.
The Company's Audit Committee is composed of two non-management directors and
the Chief Executive Officer of the Company and is appointed by the Board of
Directors annually. The committee meets periodically with the Company's
management and independent auditors to review financial reporting matters and
internal controls and to review the consolidated financial statements and the
independent auditors' report. The Audit Committee reported its findings to the
Board of Directors who have approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
Robert V. Rudman
Chief Executive Officer
Jeff Finkelstein
Chief Financial Officer
F-17
KPMG
KPMG LLP Telephone (604) 691-3000
CHARTERED ACCOUNTANTS Telefax (604) 691-3031
Box 10426, 777 Dunsmuir Street www.kpmg.ca
Vancouver, BC V7Y 1K3
Canada
AUDITORS' REPORT TO THE DIRECTORS OF SMARTIRE SYSTEMS INC. We have audited the
consolidated balance sheets of SmarTire Systems Inc. as at July 31, 2003 and
2002 and the consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the three
year period ended July 31, 2003. 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 audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
July 31, 2003 and 2002 and the results of its operations and its cash flows for
each of the years in the three year period ended July 31, 2003 in accordance
with accounting principles generally accepted in the United States of America.
SIGNED "KPMG LLP"
Chartered Accountants
Vancouver, Canada
September 12, 2003
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 2 to the financial statements. Our report to the board of directors dated
September 12, 2003 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
SIGNED "KPMG LLP"
Chartered Accountants
Vancouver, Canada
September 12, 2003
KPMG LLP, a Canadian owned limited
liability partnership established
under the laws of Ontario, is the
Canadian member firm of KPMG
International, a Swiss nonoperating
association.
F-18
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
July 31, 2003 and 2002
================================================================================
2003 2002
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,843,694 $ 525,968
Receivables, net of allowance for doubtful
accounts of nil (2002 - nil) 405,885 188,294
Inventory (note 4) 806,846 1,277,953
Prepaid expenses 165,792 374,731
----------------------------------------------------------------------------
3,222,217 2,366,946
Deferred financing expense (note 9(e)) 183,259 -
Capital assets (note 5) 550,458 625,182
Other assets (note 6) 3,129,658 3,757,473
- -------------------------------------------------------------------------------
$ 7,085,592 $ 6,749,601
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 788,267 $ 1,110,555
Promissory note payable (note 6) - 1,350,000
Deferred revenue 10,018 -
----------------------------------------------------------------------------
798,285 2,460,555
Convertible debentures, net of equity portion of
$1,966,664
(2002 - nil) (note 8) 3 -
Stockholders' equity:
Share capital (note 9):
Preferred shares, par value $1,000 Cdn per
share:
20,000 shares authorized
Issued and outstanding; none
Common shares, without par value:
200,000,000 shares authorized
55,039,065 shares issued and
outstanding at
July 31, 2003 (July 31, 2002
-18,711,369) 48,204,995 42,514,482
Additional paid-in capital 6,681,893 885,461
Deferred stock compensation - (17,005)
Deficit (48,031,230) (38,116,601)
Accumulated other comprehensive loss (568,354) (977,291)
----------------------------------------------------------------------------
6,287,304 4,289,046
- -------------------------------------------------------------------------------
$ 7,085,592 $ 6,749,601
- -------------------------------------------------------------------------------
Going concern (note 2)
Commitments and contingencies (note 14)
Subsequent events (note 16)
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board
- ------------------------------ ---------------------------
Robert V. Rudman, Director Bill Cronin, Director
F-19
SMARTIRE SYSTEMS INC.
Consolidated Statements of Operations
(Expressed in United States dollars)
Years ended July 31, 2003, 2002 and 2001
================================================================================
2003 2002 2001
- -------------------------------------------------------------------------------
Revenue $ 1,802,596 $ 1,012,344 $ 779,611
Cost of goods sold 1,387,365 699,955 385,897
- -------------------------------------------------------------------------------
415,231 312,389 393,714
Expenses:
Depreciation and amortization 1,236,870 1,152,378 446,096
Engineering, research and
development 1,177,935 1,727,606 1,485,874
General and administrative 2,939,260 2,631,215 2,701,621
Marketing 1,448,326 1,527,644 1,744,004
--------------------------------------------------------------------------
6,802,391 7,038,843 6,377,595
- -------------------------------------------------------------------------------
Loss from operations (6,387,160) (6,726,454) (5,983,881)
Other earnings (expenses):
Interest income 2,835 18,735 359,799
Net interest and financing
expenses (3,722,505) (145,472) -
Foreign exchange gain 192,201 24,015 117,063
--------------------------------------------------------------------------
(3,527,469) (102,722) 476,862
- -------------------------------------------------------------------------------
Loss for the year $(9,914,629) $(6,829,176) $ (5,507,019)
- -------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.37) $ (0.41) $ (0.39)
Weighted average number of common
shares:
Basic 26,771,427 16,743,977 14,296,240
Diluted 26,771,427 16,743,977 14,296,240
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-20
SMARTIRE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(Expressed in United States dollars)
Years ended July 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------------
Common shares
-------------------------
Shares Amount Additional Deferred Deficit
paid-in stock
capital compensation
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
$ $ $ $
Balance at July 31, 2000 14,497,797 35,965,583 581,442 - (25,780,406)
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
Exercise of stock options for cash 11,500 23,000 - - -
Exercise of warrants for cash 160,000 240,000 - - -
Issuance of common shares on purchase of license
from TRW Inc. (note 6) 490,072 1,337,500 - - -
Deferred compensation expense related to stock
option plans - - 102,020 (102,020) -
Compensation expense - - - 61,247 -
Loss for the period - - - - (5,507,019)
Translation adjustment - - - - -
- -------------------------------------------------- ------------ ------------ ------------ -----------------------------
Balance at July 31, 2001 15,159,369 37,566,083 683,462 (40,773) (31,287,425)
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
Issuance of common shares for cash upon private
placements, net of issuance costs of
$551,569 (note 9(f)) 3,352,000 4,650,289 - - -
Exercise of warrants for cash, net of issuance
costs of $10,890 (note 9(f)) 200,000 298,110 - - -
Fair value of warrants issued on private
placement (note 9(f)) - - 206,340 - -
Forfeiture of stock options - - (4,341) 4,341 -
Compensation expense - - - 19,427 -
Loss for the period - - - - (6,829,176)
Translation adjustment - - - - -
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
Balance at July 31, 2002 18,711,369 42,514,482 885,461 (17,005) (38,116,601)
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
Issuance of common shares for cash upon private
placements, net of issuance costs of
$289,172 (note 9(a)) 6,964,286 1,810,828 - - -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued (note 8) - - 5,157,521 - -
Conversion of convertible debenture and accrued
interest to common shares net of issuance 24,381,133 3,024,395 - - -
costs of $628,526 (note 8)
Exercise of warrants for cash, net of issuance
costs of $61,060 (note 9(b)) 3,300,000 298,940 - - -
Issuance of shares as fees on equity line of
credit (note 9(e)) 478,412 300,000 - - -
- -------------------------------------------------- ------------ ------------ ------------ -------------- --------------
Balance carried forward 53,835,200 47,948,645 6,042,982 (17,005) (38,116,601)
Accumulated Stockholders'eqComprehensiveincome
other (loss)
comprehensive
loss
- -------------------------------------------------- ---------------- -------------- ---------------
$ $ $
Balance at July 31, 2000 (533,274) 10,233,345 1,740,783
- -------------------------------------------------- ---------------- -------------- ---------------
Exercise of stock options for cash - 23,000 -
Exercise of warrants for cash - 240,000 -
Issuance of common shares on purchase of license
from TRW Inc. (note 6) - 1,337,500 -
Deferred compensation expense related to stock
option plans - - -
Compensation expense - 61,247
Loss for the period - (5,507,019) (5,507,019)
Translation adjustment (272,924) (272,924) (272,924)
- -------------------------------------------------- ---------------- -------------- ---------------
Balance at July 31, 2001 (806,198) 6,115,149 (5,779,943)
- -------------------------------------------------- ---------------- -------------- ---------------
Issuance of common shares for cash upon private
placements, net of issuance costs of
$551,569
(note 9(f)) - 4,650,289 -
Exercise of warrants for cash, net of issuance
costs of $10,890 (note 9(f)) - 298,110 -
Fair value of warrants issued on private
placement (note 9(f)) - 206,340 -
Forfeiture of stock options - - -
Compensation expense - 19,427 -
Loss for the period - (6,829,176) (6,829,176)
Translation adjustment (171,093) (171,093) (171,093)
- -------------------------------------------------- ---------------- -------------- ---------------
Balance at July 31, 2002 (977,291) 4,289,046 (7,000,269)
- -------------------------------------------------- ---------------- -------------- ---------------
Issuance of common shares for cash upon private
placements, net of issuance costs of
$289,172 (note 9(a)) - 1,810,828 -
Intrinsic value of beneficial conversion feature
of convertible debentures plus fair value of
warrants issued (note 8) - 5,157,521 -
Conversion of convertible debenture and accrued
interest to common shares net of issuance - 3,024,395 -
costs of $628,526 (note 8)
Exercise of warrants for cash, net of issuance
costs of $61,060 (note 9(b)) - 298,940 -
Issuance of shares as fees on equity line of
credit (note 9(e)) - 300,000 -
- -------------------------------------------------- ---------------- -------------- ---------------
Balance carried forward (977,291) 14,880,730 -
F-21
SMARTIRE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(Continued)
(Expressed in United States dollars)
Years ended July 31, 2003, 2002 and 2001
===================================================================================================================================
Common shares
-------------------------
Shares Amount Additional Deferred Deficit Accumulated Stockholders' Comprehensive
paid-in stock other equity income (loss)
capital compen- compre-
sation hensive
loss
- -----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $ $ $ $
Balance brought forward 53,835,200 47,948,645 6,042,982 (17,005) (38,116,601) (977,291) 14,880,730 -
Fair value of agent's
warrants issued on
private placements
and convertible
debentures
(notes 8 and 9) - - 502,367 - - - 502,367 -
Debt settlement through
issuance of common
shares (note 9(d)) 353,865 77,850 - - - - 77,850 -
Issuance of shares and
repricing of
warrants to settle
a potential claim
(note 9(c)) 850,000 178,500 136,544 - - - 315,044 -
Compensation expense - - - 17,005 - - 17,005 -
Loss for the period - - - - (9,914,629) - (9,914,629) (9,914,629)
Translation adjustment - - - - - 408,937 408,937 408,937
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2003 55,039,065 48,204,995 6,681,893 - (48,031,230) (568,354) 6,287,304 (9,505,692)
===================================================================================================================================
See accompanying notes to consolidated financial statements.
F-22
SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended July 31, 2003, 2002 and 2001
- ----------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------
Cash provided by (used for):
Operating activities:
Loss for the year $(9,914,629) $ (6,829,176) $(5,507,019)
Items not affecting cash:
Depreciation and amortization 1,236,870 1,152,378 446,096
Stock-based compensation 17,005 19,427 61,247
Non-cash interest and finance 3,694,914 - -
charges
Issuance of shares and repricing of
warrants to settle a potential
claim (note 9(c)) 315,044 - -
Change in non-cash working capital:
Receivables (182,366) (5,266) (115,379)
Deferred revenue 9,423 - -
Deferred financing expense (5,000) - -
Inventory 594,333 151,249 (1,310,788)
Prepaid expenses 240,861 (294,769) 15,963
Accounts payable and accrued
liabilities (434,556) 346,652 301,335
-------------------------------------------------------------------------------
Net cash used in operating activities (4,428,101) (5,459,505) (6,108,545)
Investing activities:
Purchase of capital assets (62,978) (164,886) (332,832)
Purchase of other asset - (500,000) (400,000)
-------------------------------------------------------------------------------
Net cash used in investing activities (62,978) (664,886) (732,832)
Financing activities:
Issuance of common shares, net of
cash costs (note 9(a)) 1,932,000 5,165,629 263,000
Cash received on exercise of warrants
(note 9(b)) 334,400 - -
Net cash proceeds from convertible
debentures (note 8) 4,964,801 - -
Issuance of promissory note (note 7) 210,000 - -
Repayment of promissory notes (notes
6 and 7) (1,600,000) (1,450,000) -
-------------------------------------------------------------------------------
Net cash provided by financing
activities 5,841,201 3,715,629 263,000
Effect of exchange rate differences on
cash and cash equivalents (32,396) 4,473 (244,429)
- ----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,317,726 (2,404,289) (6,822,806)
Cash and cash equivalents, beginning of
year 525,968 2,930,257 9,753,063
- ----------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,843,694 $ 525,968 $ 2,930,257
- ----------------------------------------------------------------------------------
Supplementary information:
Interest and finance charges paid $ 27,591 $ 92,093 $ 12,408
Non-cash investing and financing
activities:
Purchase of other asset through
issuance of promissory note - 2,800,000 -
Fair value of agents warrants issued
in conjunction with financings 502,367 206,340 -
Shares issued for financing services - 28,358 -
on private placement
Settlement of debt through issuance
of common shares (note 9(d)) 77,850 - -
Conversion of convertible debentures
to common shares 3,024,395 - -
Issuance of shares as consideration
for equity line of credit 300,000 - -
- ----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-23
1. 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 vehicles
and other pneumatic tire applications. All sales of its product are made
in this industry segment.
2. GOING CONCERN:
The Company requires additional financing to fund its operations. The
Company has incurred recurring operating losses and has a deficit of
$48,031,230 and working capital of $2,423,932 as at July 31, 2003. During
the year ended July 31, 2003, the Company used $4,428,101 cash in
operating activities.
The Company is pursuing various alternatives to meet its intermediate and
long-term financial requirements. During fiscal 2003, the Company realized
gross cash proceeds of $8,078,000 and arranged a $15.0 million equity line
of credit to fund its operations. There can be no assurance that
additional financing will be available to the Company when needed or, if
available, that it can be obtained on commercially reasonable terms. These
consolidated financial statements have been prepared on the going concern
basis which assumes that adequate sources of financing will be obtained as
required and that the Company's assets will be realized and liabilities
settled in the ordinary course of business. Accordingly, these
consolidated financial statements do not include any adjustments related
to the recoverability of assets and classification of assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern.
3. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, SmarTire USA Inc.,
SmarTire Europe Limited, and SmarTire Technologies Inc. All
intercompany balances and transactions have been eliminated.
(b) Research and development costs:
Research and development costs are expensed as incurred. Equipment
used in research and development is capitalized only if it has an
alternative future use.
(c) Cash and cash equivalents:
Cash and cash equivalents includes investments in short-term
investments with a term to maturity when acquired of 90 days or
less.
F-24
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Inventory:
Inventory is valued at the lower of cost and net realizable value.
Cost is determined using the weighted average method and includes
invoice cost, duties and freight. Provision for obsolescence is
estimated by management based on historical values and expected
future sales.
(e) Capital assets:
Capital assets are recorded at cost. Depreciation of computer
hardware and software and office and shop equipment is provided for
on the declining balance basis at 30% per annum. Leasehold
improvements are depreciated over the lesser of their useful lives
or the term of the lease.
(f) Other assets:
Other assets include the license to manufacture and sell tire
monitoring systems to the original equipment vehicle manufacturers
(note 6). Other assets are recorded at cost and are being amortized
over five years on a straight-line basis.
(g) Impairment of long-lived assets:
The Company monitors the recoverability of long-lived assets, based
on estimates using factors such as expected future asset
utilization, business climate and future undiscounted cash flows
expected to result from the use of the related assets or to be
realized on sale. The Company recognizes an impairment loss if the
projected undiscounted future cash flows is less than the carrying
amount. The amount of the impairment charge, if any, is measured
equal to the excess of the carrying value over the expected future
cash flows discounted using the Company's average cost of funds.
(h) Revenue recognition:
The Company recognizes revenue when there is persuasive evidence of
an arrangement, goods are shipped and title passes, collection is
probable, and the fee is fixed or determinable. Customer acceptance
is used as the criterion for revenue recognition when the product
sold does not have an established sales history to allow management
to reasonably estimate returns and future provisions. Provisions are
established for estimated product returns and warranty costs at the
time the revenue is recognized. The Company records deferred revenue
when cash is received in advance of the revenue recognition criteria
being met. Revenue from engineering services is recognized on
services as they are rendered and pre-defined milestones are
achieved. Engineering services revenue for the year were $173,400
(2002 and 2001 - nil).
F-25
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Loss per share:
Basic loss per share computations are based on the weighted average
number of shares outstanding during the year. If in a period the
Company has outstanding dilutive stock options and warrants, diluted
loss per share is calculated using the treasury stock method.
(j) Income taxes:
The Company accounts for income taxes in accordance with the asset
and liability method. Under this method, deferred income taxes are
recognized for the future income tax consequences attributable to
differences between the financial statement carrying amounts and
their respective income tax bases and for loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of
a change in tax rates is recognized in income in the period of
enactment. Deferred income tax assets are evaluated and if their
realization is not considered to be "more likely than not", a
valuation allowance is provided.
(k) Warranty costs:
The Company accrues warranty costs upon the recognition of related
revenue, based on its best estimates, with reference to past
experience.
(l) Foreign currency translation:
The Company's functional or primary operating currency is the
Canadian dollar. The Company's financial statements are prepared in
Canadian dollars before translation to the US dollar reporting
currency. The Company translates transactions in currencies other
than the Canadian dollar at the exchange rate in effect on the
transaction date. Monetary assets and liabilities denominated in a
currency other than the Canadian dollar are translated at the
exchange rates in effect at the balance sheet date. The resulting
exchange gains and losses are recognized in earnings. Amounts
reported in Canadian dollars have been translated into US dollars as
follows: assets and liabilities are translated into US dollars at
the rate of exchange in effect at the balance sheet date and revenue
and expense items are translated at the average rates for the
period. Unrealized gains and losses resulting from the translation
into the reporting currency are accumulated in accumulated other
comprehensive loss, a separate component of stockholders' equity.
F-26
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Use of estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management at the date of the
financial statements to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts to revenues and expenses during
the reporting period. Significant areas requiring the use of
estimates include estimating the net realizable value of inventory
and the future cash flows for assessing the net recoverable amount
of long-lived assets. Actual results may differ from those
estimates.
(n) Stock-based compensation:
The Company has elected under FAS 123, Accounting for Stock-based
Compensation, to account for employee stock options using the
intrinsic value method. This method is described in Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As the Company grants
stock options with an exercise price not less than the market value
of the underlying common shares on the date of grant, no
compensation expense is required to be recognized under APB 25. FAS
No. 123 uses the fair value method of calculating the cost of stock
option grants. Had compensation cost for employee stock options been
determined by this method, net earnings (loss) and net earnings
(loss) per share would have been as follows:
=========================================================================
2003 2002 2001
-----------------------------------------------------------------------
Net earnings (loss):
As reported $ (9,914,629) $(6,829,176) $(5,507,019)
Stock-based compensation
expense
recognized using intrinsic
value method 17,005 19,427 61,247
Stock-based compensation
expense
determined under fair
value based
method for all awards (738,339) (1,076,749) (1,316,930)
-----------------------------------------------------------------------
Pro forma $ 10,635,963) $(7,886,498) $(6,762,702)
=========================================================================
Basic and diluted earnings
(loss) per share:
As reported (0.37) (0.41) (0.39)
Pro forma (0.40) (0.47) (0.47)
=========================================================================
F-27
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(n) Stock-based compensation (continued):
The Company recognizes the compensation expense at the date of
granting the stock options on a straight-line basis over the vesting
period.
The fair value of each option and warrant granted is estimated on
the date of grant using the Black-Scholes option valuation model
with the following range of weighted average assumptions.
========================================================================
2003 2002 2001
-----------------------------------------------------------------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 128-155% 129% 220%
Risk-free interest rate 3.6-4.3% 4.35% 5.60%
Expected life of options and
warrants 2-5 years 1.67 years 2.00 years
========================================================================
Weighted-average fair values of options granted during the year are as
follows:
========================================================================
2003 2002 2002
------------------------------------------------------------------------
Options whose exercise price at date
of grant:
Equals the market price of stock $ 0.72 $ - $ 3.88
Exceeds the market price of stock 1.77 2.07 3.04
Is less than the market price of - - 3.25
stock
========================================================================
The Company recognizes compensation expense for stock options,
common stock and other instruments issued to non-employees for
services received based upon the fair value of the equity
instruments issued as the services are performed and the instrument
earned.
If the exercise price of employee stock option award is not fixed in
the functional currency of the Company or in the currency the
employee is paid, the award is accounted for as a variable award
until the award is exercised, forfeited, or expires unexercised. The
Company measures compensation as the amount by which the quoted
market value of the common shares of the Company's stock covered by
the grant exceeds the option price, with changes in the market price
included in the measurement of loss.
(o) Comprehensive income:
Under SFAS 130, Reporting Comprehensive Income, the Company is
required to report comprehensive income, which includes net loss as
well as changes in equity from non-owner sources. The other changes
in equity included in comprehensive income for the periods presented
comprise the foreign currency cumulative translation adjustments.
Accumulated other comprehensive loss is presented in the
consolidated statements of stockholders' equity and comprehensive
income (loss).
F-28
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(p) Recent accounting pronouncements:
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure
("FAS No. 148"), which provides alternative methods of transition
for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, FAS No. 148
amends the disclosure requirements of FAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
FAS No. 148 is effective for fiscal years ending after December 15,
2002 with earlier application permitted. The Company has adopted the
disclosure provisions of FAS No. 148 in these consolidated financial
statements.
In November 2002, FASB issued Emerging Issues Task Force 00-21,
Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue generating
activities. In some arrangements, the different revenue-generating
activities are sufficiently separable, and there may be sufficient
evidence of their fair values to separately account for some or all
of the deliverables. In other arrangements, some or all of the
deliverables are not independently functional, or there is not
sufficient evidence of their fair values to account for them
separately. EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact of this accounting pronouncement on
our financial results.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("FAS No. 146"),which
addressees accounting and reporting for costs associated with exit
or disposal activities. FAS No. 146 relates to the recognition of a
liability for a cost associated with an exit or disposal activity
and requires that a liability be recognized for those costs only
when the liability is incurred, that is, when it meets the
definition of a liability under the FASB's conceptual framework. FAS
No. 146 also established fair value as the objective for initial
measurement of liabilities related to exit or disposal activities.
As a result, FAS No. 146 significantly reduces an entity's ability
to recognize a liability for future expenses related to a
restructuring. FAS No.146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
application of FAS No. 146 has not impacted these consolidated
financial statements.
F-29
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(p) Recent accounting pronouncements (continued):
In October 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS No. 144"), that
replaces FAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed O". FAS No. 144
applies to the assessment of the impairment in the carrying value of
long-lived assets, excluding goodwill and certain other specified
items, including those to be disposed of by sale, including
discontinued operations. FAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount and fair value
less costs to sell. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. FAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
Company has adopted FAS No. 144 which had no material effect on the
Company's financial results.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations ("FAS No. 143"), which requires entities to
record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset. FAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company has adopted FAS No. 143 in fiscal 2003 which had no
material effect on the Company's financial results.
4. INVENTORY:
==========================================================================
2003 2002
--------------------------------------------------------------------------
Raw materials $ 318,512 $ 143,368
Work in progress 59,599 -
Finished goods 428,735 1,134,585
--------------------------------------------------------------------------
$ 806,846 $ 1,277,953
==========================================================================
5. CAPITAL ASSETS:
==========================================================================
2003 Cost Accumulated Net book
amortization value
--------------------------------------------------------------------------
Computer hardware and software $ 600,781 $ 415,801 $ 184,980
Office and shop equipment 886,748 609,095 277,653
Leasehold improvements 192,515 104,690 87,825
--------------------------------------------------------------------------
$1,680,044 $ 1,129,586 $ 550,458
==========================================================================
F-30
5. Capital assets (continued):
==========================================================================
2002 Cost Accumulated Net book
amortization value
--------------------------------------------------------------------------
Computer hardware and software $ 503,407 $ 307,693 $ 195,714
Office and shop equipment 764,573 438,806 325,767
Leasehold improvements 170,997 67,296 103,701
--------------------------------------------------------------------------
$1,438,977 $ 813,795 $ 625,182
==========================================================================
6. OTHER ASSETS:
On December 13, 2000, the Company entered into an Assignment and
Amendment Agreement with TRW that transferred to the Company the license
to manufacture and sell tire monitoring systems to the original
equipment vehicle manufacturers of most medium and heavy duty trucks.
Consideration consisted of 490,072 shares of common stock valued at
$1,337,500, based on the market value of the Company's stock at the date
of purchase, plus cash of $400,000.
On August 31, 2001, the Company and TRW Inc. entered into an agreement
to restructure their strategic alliance. Under the terms of
restructuring, the Company and TRW agreed to terminate a number of
agreements. The Company has the right to manufacture and sell tire
monitoring systems to the original equipment vehicle manufacturers
market ("OEM"). Consideration consisted of a promissory note of $2.8
million, carrying an interest rate of 6% per annum plus cash of
$500,000. The balance of principal in the amount of $1,350,000 owed at
July 31, 2002 was repaid during fiscal 2003 and interest of $97,542 on
this balance was forgiven by TRW Inc.
The rights are being amortized over five years on a straight-line basis.
==========================================================================
2003 Cost Accumulated Net book
amortization value
--------------------------------------------------------------------------
OEM - most medium and heavy
duty trucks $ 1,737,500 $ 845,850 $ 891,650
OEM - all other vehicles 3,300,000 1,061,992 2,238,008
--------------------------------------------------------------------------
$ 5,037,500 $ 1,907,841 $ 3,129,658
==========================================================================
F-31
6. Other assets (continued):
==========================================================================
2002 Cost Accumulated Net book
amortization value
--------------------------------------------------------------------------
OEM - most medium and heavy duty
trucks $ 1,737,500 $ 612,606 $ 1,124,894
OEM - all other vehicles 3,300,000 667,421 2,632,579
==========================================================================
$ 5,037,500 $ 1,280,027 $ 3,757,473
--------------------------------------------------------------------------
Management believes that the net book value of its other assets of
$3,129,658 as at July 31, 2003 is recoverable based on expectations of
future cash flows from the Company's future sales of tire monitoring
systems. Management's belief is based on an undiscounted cash flow
analysis of management's current best estimate of projected annual sales
to the passenger vehicle and light truck OEM market plus management's
projected sales to the heavy truck OEM market.
7. PROMISSORY NOTE:
On April 23, 2003, the Company received gross proceeds of $250,000 upon
the issuance of a secured short-term promissory note to an accredited
investor. Advisors to the placement received a cash commission of $40,000
and 100,000 warrants. The fair value of these warrants at the date of
grant was estimated at $22,870 using the Black-Scholes option valuation
model using the weighted average assumptions as disclosed in note 3(n). On
June 16, 2003, the Company repaid the promissory note of $250,000 plus
interest of $3,773. The fair value of the warrant and the commission were
expensed.
F-32
8. CONVERTIBLE DEBENTURES:
--------------------------------------------------------------------------
Face value Debt Equity
of debt component component
(additional
paid-in
capital)
--------------------------------------------------------------------------
Balance as at July 31, 2002 $ - $ - $ -
10% redeemable convertible
debentures
with cash financing cost of 750,000 66,000 684,000
$76,177 (a)
5% redeemable convertible
debentures
with cash financing cost of
$94,000 and
discount of $32,000 (b) 400,000 257,143 142,857
7% and 8% convertible debentures
with
cash financing cost of 4,500,000 3 4,499,997
$483,022 (c)
--------------------------------------------------------------------------
Initial allocation 5,650,000 323,146 5,326,854
Accretion of deemed debt
discount to
interest - 3,329,778 -
Conversion of 10%, 5% and
$2,533,333 of
7% convertible debentures to
common
shares (3,683,333) (3,652,921) -
--------------------------------------------------------------------------
Balance as at July 31, 2003 $ 1,966,667 $ 3 $ 5,326,854
--------------------------------------------------------------------------
Financing cost of $169,333 related to debentures still outstanding are
netted against additional paid-in capital. As described below, financing
cost including cash cost and fair value of agents' warrants of $628,526
related to debentures converted to share capital is reclassified to share
capital.
(a) In the first private placement, the Company realized gross cash
proceeds of $500,000 and $250,000, respectively, from the issuance
of 10% redeemable convertible notes of the Company plus 150,000
share purchase warrants on the completion of a private placement
effected pursuant to Regulation S under the Securities Act of 1933.
The agreements were signed on September 20, 2002 and the notes were
to mature on December 20, 2002. Each warrant initially entitled the
holder to purchase one of the Company's common shares and is
exercisable at a price of $1.25 on or before September 20, 2005, on
which date the warrant will expire. These warrants were subsequently
repriced to $0.10 on May 6, 2003 as described in note 9(c).
F-33
8. CONVERTIBLE DEBENTURES (CONTINUED):
(a) (continued):
For accounting purposes, the Company calculated the fair value of
warrants issued using the Black-Scholes model and the intrinsic
value of the beneficial conversion feature, which in aggregate
totals $684,000, and initially recorded these values as additional
paid-in capital. The intrinsic value is the amount by which the fair
value of the underlying common shares at the date of the agreement
exceeds the conversion price. The remaining balance of $66,000 was
recorded as a liability. The carrying value of the liability was to
be accreted to the redemption value of the debentures over the
period from September 26, 2002 to its initial maturity date of
December 20, 2002. Advisors to the private placement received a cash
commission of $60,000 or 8% on the face value of the notes and
120,000 share purchase warrants exercisable at a price equal to the
lesser of conversion price of the convertible notes into common
shares or $0.50. The warrants are exercisable over five years and
expire on November 4, 2007. The fair value of these warrants at the
date of grant was $51,393. The fair value of the warrants was
estimated on the date of issuance using the Black-Scholes option
valuation model. On November 4, 2002, the holder converted these
convertible notes into 1,500,000 units. On conversion of these
senior convertible notes, the carrying value of debt and accrued
interest was reclassified to common shares included in stockholders'
equity (note 9). Interest accretion of $684,000 was charged to the
statement of operations as interest expense during the year ended
July 31, 2003. In the second private placement, the Company issued
senior (b) subordinated redeemable convertible debentures to a
private investment company bearing interest at 5% per annum. The
Company closed the first tranche on November 21, 2002 and the second
tranche on January 31, 2003. In each tranche, the Company received
proceeds of $184,000 for the issuance of a debenture in the
principal amount of $200,000. Total net cash proceeds after finance
charges were $274,000. Each debenture was issued at an 8% discount
from the face principal amount. Advisors to the placement received a
cash commission of $64,000 and 68,325 warrants. Additional expenses
of $30,000 were incurred for this transaction. The fair value of
these warrants at the date of grant was estimated at $15,626. The
fair value of these warrants was estimated on the date of issuance
using the Black-Scholes option valuation model using the weighted
average assumptions as disclosed in note 3(n). For accounting
purposes, the Company calculated the intrinsic value of the
beneficial conversion feature which amounted to $142,857 and
initially recorded its value as additional paid-in capital. The
remaining balance of $257,143 was recorded as liability.
The commission and fair value of the warrant were recorded as
financing costs. These debentures were converted to common shares
between February 10, 2003 and May 16, 2003 at conversion prices
ranging from $0.064 to $0.28. Interest accretion of $142,857 was
charged to the statement of operations as interest expense during
the year ended July 31, 2003.
F-34
8. CONVERTIBLE DEBENTURES (CONTINUED):
(c) On June 17, 2003, the Company closed a private placement of 7%
convertible debentures in three tranches pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, for gross proceeds of
$2,800,000. Principal and all accrued and unpaid interest is due on
May 19, 2005. On July 17, 2003, the Company closed another private
placement of 8% convertible debentures pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, for gross proceeds of
$1,700,000. Principal and all accrued and unpaid interest is due on
July 16, 2006. Net cash proceeds from the convertible debentures
were $4,016,978. In connection with the offering of the convertible
debentures, the Company issued 23,846,153 common share purchase
warrants of which 10,769,231 warrants entitle the holders to
purchase common shares of the Company at $0.2645 per share until May
15, 2008 and 13,076,922 warrants entitle the holders to purchase
common shares of the Company at $0.1771 per share until July 17,
2008. Advisors to the transactions received a cash commission of
$360,000 and 180,000 share purchase warrants: 112,000 share purchase
warrants at a price of $0.13 per share for a period of five years,
and 68,000 share purchase warrants exercisable at a price of $0.13
for a period of three years. The fair value of these warrants at the
date of grant was estimated at $77,640 using the Black-Scholes
option valuation model using weighted average assumptions as
disclosed in note 3(n). Additional expenses related to this offering
were $123,022 plus 100,000 share purchase warrants exercisable at a
price of $0.135 per share for a period of five years. The financing
cost will be amortized over the life of the convertible debentures
as finance costs. Principal under the convertible debentures in the
aggregate amount of $3,500,000 may be converted by the holder, in
whole or in part and from time to time at a conversion price of
$0.13 per share; principal under the convertible debentures in the
aggregate amount of $1,000,000 may be converted at a conversion
price equal to the lesser of $0.13 per share and 70% of the average
closing bid price during the five trading days immediately preceding
the date of issuance of such convertible debentures, subject to a
floor price of $0.06 per share. Interest on the debentures is
payable quarterly on March 1, June 1, September 1 and December 1,
and at maturity, in cash or, at the Company's option, in shares of
the Company's common stock at an interest conversion price equal to
90% of the lesser of the average closing bid price during the 20
trading days immediately preceding the interest payment date, or the
average closing bid price during the 20 trading days immediately
preceding the date on which the shares are issued if such shares are
issued and delivered after the interest payment date. The Company's
right to elect to pay accrued interest in shares of its common stock
is subject to certain conditions, including the requirement that
there shall be an effective registration statement qualifying the
resale of the common stock to be issued to the holders of the
convertible debentures in lieu of a cash interest payment. All
overdue accrued and unpaid interest under the convertible debentures
will be subject to a late fee at the rate of 18% per annum.
Principal of $266,667, and all accrued and unpaid interest, under
the convertible debentures will be due and payable at maturity on
May 19, 2005.
F-35
8. CONVERTIBLE DEBENTURES (CONTINUED):
(c) (continued):
Each of the convertible debentures contains a contractual
restriction on beneficial share ownership. It provides that the
holder may not convert convertible debentures, or receive shares of
our common stock as payment of interest, to the extent that the
conversion or the receipt of the interest payment would result in
the holder, together with its affiliates, beneficially owning in
excess of 4.99% of the Company's then issued and outstanding shares
of common stock. For these purposes, beneficial ownership is to be
determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the rules promulgated
thereunder.
The Company may not prepay any portion of the principal amount on
any convertible debenture without the prior written consent of the
holder of the debenture.
The Company will be considered in default of the convertible
debentures if certain events occur. Once an event of default occurs,
the holder of a convertible debenture can elect the Company to
immediately repay a mandatory prepayment amount as outlined in the
agreement.
If an event of default occurs, the holder of a convertible debenture
can elect to require the Company to immediately repay a mandatory
prepayment amount equal to the greater of:
(i) 120% of the principal amount of the debenture, plus all
accrued and unpaid interest and any other amounts outstanding
in respect of the debenture; or
(ii) 120% of the principal amount of the debenture, plus all
accrued and unpaid interest and any other amounts outstanding
in respect of the debenture, divided by the conversion price
of the debenture, and multiplied by the greater of:
A. the last reported closing bid price for our common stock
on the date on which the payment is due, or
B. the last reported closing bid price for our common stock
on the date on which the payment actually paid.
For accounting purposes, the proceeds from the issuance of these
convertible debentures were primarily allocated to fair value of
warrants issued and the intrinsic value of the beneficial conversion
feature, which amounts to $2,799,997 and $1,699,999 respectively.
The fair value of the warrants was calculated using the Black
Scholes model assumptions as disclosed in note 3(n). The remaining
value of the proceeds of $4 was allocated to debt and is being
accreted to the redemption value of the convertible debentures over
the period from the date of issuance to the initial maturity dates
of May 19, 2005 and July 16, 2006.
F-36
8. CONVERTIBLE DEBENTURES (CONTINUED):
(c) (continued):
During the year, $2,533,333 of principal and $12,846 of interest
were converted into common shares resulting in the issuance of
19,564,102 common shares. Interest accretion of $2,533,322 was
charged to the statement of operations as interest expense upon
conversion of convertible debentures. As at July 31, 2003,
$1,966,667 of the convertible debenture remained outstanding, of
which $266,667 remained outstanding from the June 17, 2003
convertible debenture and $1,700,000 remained outstanding from the
July 16, 2003 convertible debenture.
9. SHARE CAPITAL:
During the year ended July 31, 2003, the Company realized gross cash
proceeds of $2,100,000 and net cash proceeds of $1,932,000 from the
completion of five separate private placements, each effected pursuant to
Regulation S under the Securities Act of 1933.
--------------------------------------------------------------------------
Number of Amount
shares
--------------------------------------------------------------------------
Issuance of first private placement for
cash (net of cash financing cost of $20,000) 500,000 $ 230,000
Issuance of second private placement for
cash (net of cash financing cost of $96,000) 1,750,000 1,104,000
Issuance of third private placement for
cash (net of cash financing cost of $20,000) 714,286 230,000
Issuance of fourth private placement for
cash (net of cash financing cost of $28,000) 3,500,000 322,000
Issuance of fifth private placement for
cash (net of cash financing cost of $4,000) 500,000 46,000
--------------------------------------------------------------------------
6,964,286 $ 1,932,000
--------------------------------------------------------------------------
The fair value of warrants issued to advisors to the private placement,
as described below is $121,172 and is netted against share capital as
share issuance cost.
F-37
9. SHARE CAPITAL (CONTINUED):
(a) The first private placement resulted in the issuance of 2,000,000
units at a price of $0.50 per unit. Each unit consisted of one
common share and one share purchase warrant. Each warrant entitles
the holder to purchase one additional common share at an exercise
price of $0.50 per share until November 4, 2005. The Company
realized gross proceeds of $250,000 from this private placement; the
balance of the aggregate purchase price for the units was paid for
by the application of $750,000 of principal under the senior
convertible notes issued by the Company on September 20, 2002 (note
8(a)). On conversion of senior convertible notes, the carrying value
of the debt and equity component of the debt were reclassified to
common shares included in stockholders' equity. This conversion was
made in accordance with original terms of the agreement. An
additional 17,672 common shares were issued as a payment of accrued
interest at a deemed price of $0.50 per share. The warrants were
repriced to have an exercise price of $0.10 per share on May 6, 2003
(note 9(c)). Advisors to the private placement were paid a
commission of $20,000 and were issued 40,000 share purchase warrants
exercisable at $0.50 per share. The fair value of these warrants at
the date of grant was estimated at $17,131. The fair value of these
warrants is estimated on the date of issuance using the
Black-Scholes option valuation model using the weighted average
assumptions as disclosed in note 3(n). The fair value of the warrant
and the commission were recorded as share issue costs.
The Company realized gross cash proceeds of $1,200,000 and net cash
proceeds of $1,104,000 from the second private placement. In this
private placement, the Company issued and sold 750,000 units at
$0.67 per unit and 1,000,000 units at $0.70 per unit. Each unit
consists of one common share and one share purchase warrant. Of the
share purchase warrants issued, 750,000 entitle the holder to
purchase one additional common share at an exercise price of $0.85
per share for a period of three years and 1,000,000 of the share
purchase warrants entitle the holder to purchase one additional
common share at an exercise price of $0.70 per share for a period of
three years. The warrants were repriced to have an exercise price of
$0.10 per share on May 6, 2003. Advisors to the private placement
were paid a commission of $96,000 and issued 140,000 share purchase
warrants, 60,000 exercisable at $0.67 per share and 80,000
exercisable at $0.70 per share. The fair value of these warrants at
the date of grant was estimated at $78,148 by the Black-Scholes
option valuation model using the weighted average assumptions as
disclosed in note 3(n). The fair value of the warrants and the
commission were recorded as share issue costs.
F-38
9. SHARE CAPITAL (CONTINUED):
(a) (continued):
The Company realized gross cash proceeds of $250,000 and net cash
proceeds of $230,000 from the third private placement. In this
private placement, the Company issued and sold 714,286 units at
$0.35 per unit. Each unit consists of one common share and one share
purchase warrant exercisable at a price of $0.42 per share for a
period of three years. The warrants were repriced to have an
exercise price of $0.10 per share on May 6, 2003. Advisors to the
private placement received a commission of $20,000 and 57,143 share
purchase warrants exercisable at a price of $0.35 per share for five
years by the Black-Scholes option valuation using the weighted
average assumptions as disclosed in note 3(n). The fair value of the
warrants and the commission were recorded as share issue costs.
The Company realized gross cash proceeds of $350,000 and net cash
proceeds of $322,000 from the fourth private placement. In this
private placement, the Company issued and sold 3,500,000 units at
$0.10 per unit. Each unit consists of one common share and one half
share purchase warrant exercisable at a price of $0.16 per share for
a period of two years. Advisors to the private placement received a
cash commission of $28,000 and 14,000 share purchase warrants
exercisable at a price of $0.10 per share for five years. The fair
value of these warrants at the date of grant was estimated at $4,408
by the Black-Scholes option valuation using the weighted average
assumptions as disclosed in note 3(n). The fair value of the
warrants and the commission were recorded as share issue costs.
The Company realized gross cash proceeds of $50,000 and net cash
proceeds of $46,000 from the fifth private placement. In this
private placement, the Company issued and sold 500,000 units at
$0.10 per unit. Each unit consists of one common share and two share
purchase warrants exercisable at a price of $0.12 until April 30,
2004. Advisors to the private placement received a cash commission
of $4,000 and 40,000 share purchase warrants exercisable at a price
of $0.10 per share for five years. The fair value of these warrants
at the date of grant was estimated at $8,846 by the Black-Scholes
option valuation using the weighted average assumptions as disclosed
in note 3(n). The fair value of the warrants and the commission were
recorded as share issue costs.
(b) The Company also realized gross cash proceeds of $360,000 and net
cash proceeds of $334,400 from the exercise of 3,300,000 warrants.
Advisors to the transactions received a cash commission of $25,600
and 224,000 share purchase warrants exercisable at a price of $0.10.
The fair value of these warrants at the date of grant was estimated
at $35,460 by the Black-Scholes option valuation using the weighted
average assumptions as disclosed in note 3(n). The fair value of the
warrants were recorded as share issue costs.
F-39
9. SHARE CAPITAL (CONTINUED):
(c) On May 6, 2003, the Company issued 850,000 shares at a deemed price
of $0.21 per share to an accredited investor and repriced 1,000,000
warrants previously issued to the investor on December 20, 2002,
thereby reducing the exercise price of the warrant from $0.70 per
share to $0.10 per share. An aggregate of 3,614,286 additional
warrants previously issued to other investors were also repriced to
an exercise price of $0.10 per share. These transactions were all
effected pursuant to Regulation S under the Securities Act of 1933,
and were effected in consideration of certain releases provided by
the investors to the Company in respect of certain potential
unquantified claims threatened by the investors against the Company.
The fair value of these shares and incremental fair value of the
repriced warrants is recorded as an administration expense in the
fourth quarter. The fair value of the shares is $178,500 based on
the deemed price of $0.21 and the incremental fair value of the
warrants is $136,544. The fair value of the warrant is estimated on
the date of issuance by the Black-Scholes option valuation model
using the weighted average assumptions as disclosed in note 3(n).
The fair value of these warrants and the value of shares issued were
recorded as an administrative expense.
(d) On April 3, 2003, the Company issued to the former managing director
of SmarTire Europe Limited a total of 353,865 common shares at a
deemed price of $0.21 per share, in partial payment and settlement
of the Company's obligation to pay him a termination allowance in
connection with the termination of his management agreement, without
cause, on October 15, 2002.
(e) The Company has also arranged a $15.0 million and $5.0 million
equity line of credit facility from separate private investment
companies:
F-40
9. SHARE CAPITAL (CONTINUED):
(e) (i) On May 19, 2004, the Company arranged a $15 million equity
line of credit from a private investment company. The Company
may, at its discretion, draw down amounts under the facility
from time to time, subject to various conditions and certain
limitations until July 23, 2006. The Company will receive the
proceeds of each draw down under the equity line of credit
facility in payment for shares of its common stock, to be
issued to the investor in two tranches for each draw down. The
number of shares of the Company's common stock issuable will
be determined based on a pre-set pricing period, subject to a
threshold price. The Company may not draw down the facility
unless the shares issuable upon the draw down of the credit
facility have been registered on an effective registration
statement filed in the appropriate form under the Securities
Act of 1933. On September 3, 2003, the Company filed a
registration statement with the Securities and Exchange
Commission to register the $15 million equity line of credit.
The registration statement is not effective yet. Only one draw
down is permitted under the equity line during each draw down
pricing period of 20 consecutive trading days, and there must
be at least six trading days between each draw down pricing
period. Further, each draw down (in the minimum amount of
$300,000) will be limited to the greater of: (a) 300,000 and
(b) 12.5% of the average of the daily volume weighted average
prices of the Company's common stock during the 30 day period
preceding the draw down notice, multiplied by the total
aggregate trading volume of the Company's common stock during
each 30 day period.
The Company issued 1,250,000 warrants exercisable at a price
of $0.1955 per share for three years as consideration of the
equity line of credit. The fair value of these warrants at the
date of grant is estimated at $178,259 by the Black-Scholes
option valuation using the weighted average assumptions as
disclosed in note 3(n). The fair value of the warrant is
recorded as a deferred financing expense and will be amortized
once the Company has drawn against the line of credit.
F-41
9. SHARE CAPITAL (CONTINUED):
(e) (ii) The Company has also arranged an additional $5.0 million
equity line of credit. The Company may draw down the facility
at its discretion provided that each draw down is at least
seven trading days apart, and the maximum amount that may be
drawn down at any one time is limited to $70,000 and advance
notice is required. The term of the equity line of credit is
24 months. At the time of draw down against the line of credit
the Company will issue common shares equal to that amount
advanced divided by 99% of the stock price on the five
consecutive days after the date of notice. On each date of
advance of funds, the Company is to pay 1.5% of the advanced
funds as a commission. On the date of the execution of the
contract, the Company issued shares worth $290,000 based on
the trading price of the stock of the Company on that day.
Shares worth $10,000 were issued to the placement agent on
February 26, 2003. As a result, the Company has recorded the
fair value of the common shares as an expense, since the
Company has no intentions of drawing down against this
facility in the near future. The Company may draw down the
facility at its discretion upon effectiveness of the
registration statement to be filed by the Company in the
appropriate form under the Securities Act of 1933 for the
purpose of registering the shares issuable upon the draw down
of the credit facility. To date, the Company has not taken any
steps to file the registration statement, and has not drawn
down any portion of this facility.
(f) For the year ended July 31, 2002, the Company realized net cash
proceeds of $4,856,629 from the completion of three separate private
placements, each effected pursuant to Regulation S under the
Securities Act of 1933. In the first private placement, the Company
issued and sold 1,830,000 units for net cash proceeds of $2,955,469.
Each unit was issued at a price of $1.70 and consisted of one common
share and one common share purchase warrant. Each warrant entitles
the holder to purchase one common share of the Company and is
exercisable at a price of:
A. $2.30 if exercised on or before June 30, 2002;
B. $2.80 if exercised after June 30, 2002 and on or before February 28,
2003; and
C. $3.30 if exercised after February 28, 2003 but on or before October
31, 2003, on which date the warrant will expire.
F-42
9. SHARE CAPITAL (CONTINUED):
(f) (continued):
Advisors to the private placement were issued 58,100 share purchase
warrants exercisable at a price of $1.70 and a cash commission of
$149,770 plus expenses of $5,761. The warrants are exercisable over
three years from the date of issuance.
In the second private placement, the Company issued and sold 750,000
common shares at a price of $1.75 per share for net cash proceeds of
$1,173,660. Advisors to the private placement were issued 52,500
share purchase warrants exercisable at a price of $1.75 and a cash
commission of $131,250 plus expenses of $7,590. The warrants are
exercisable over three years from the date of issuance. The fair
value of these warrants at the date of grant was $95,715.
In the third private placement, the Company issued and sold 750,000
common shares at a price of $1.00 per share for net cash proceeds of
$727,500. Advisors to the private placement were issued 22,000
common shares plus a cash commission of $22,500. The fair value of
these shares at the date issued was $28,358.
The Company also realized net proceeds of $298,110 from the exercise
of 200,000 warrants. On May 19, 2002, 140,000 warrants were
exercised at $1.50. On June 26, 2002, 60,000 warrants issued in the
Company's first private placement in fiscal 2002 were repriced from
$2.30 to $1.65 and exercised and an additional 30,000 share purchase
warrants exercisable at a price of $2.80 per share were issued. The
new warrants are exercisable over three years from the date of
issuance. Advisors to the private placement earned a cash commission
of $10,890.
(g) Stock-based compensation plans:
At July 31, 2003, the Company had six stock-based compensation plans
that are described below:
(i) Under the "1998 US Stock Incentive Plan" the Company may grant
options to its employees for up to 300,000 common shares.
Under the "1998 Stock Incentive Plan" the Company may grant
options to its employees for up to 600,000 common shares.
F-43
9. SHARE CAPITAL (CONTINUED):
(g) Stock-based compensation plans (continued):
(ii) Under the "2000 US Stock Incentive Plan" the Company may grant
options to its employees for up to 200,000 common shares.
Under the "2000 Stock Incentive Plan" the Company may grant
options to its employees for up to 800,000 common shares.
(iii) Under the "2002 US Stock Incentive Plan" the Company may grant
options to its employees for up to 100,000 common shares.
Under the "2002 Stock Incentive Plan" the Company may grant
options to its employees for up to 900,000 common shares.
The options currently outstanding under "1998 US Stock Incentive
Plan" and the "2000 and 2002 Stock Incentive Plan" generally vest
from two to four years, with the first 20% to 33% vesting at the
date of grant and the balance vesting annually at each anniversary
date of the grant thereafter. The exercise price of each option is
based on the fair value of the common stock at the date of grant.
These options have a five year term.
===============================================================================================================
2003 2002 2001
----------------------- ---------------------- -----------------------
Shares Weighted Shares Weighted Shares Weighted
average average average
exercise exercise exercise
price price price
- ---------------------------------------------------------------------------------------------------------------
Outstanding, beginning of 1,677,250 $3.08 1,458,750 $3.20 997,625 $3.09
year
Options granted 778,300 1.42 484,700 2.88 498,600 3.44
Options exercised - - - - (11,500) (2.00)
Options forfeited (741,150) (2.80) (266,200) (3.40) (25,975) (2.99)
- ---------------------------------------------------------------------------------------------------------------
Outstanding, end of year 1,714,400 $2.54 1,677,250 $3.08 1,458,750 $3.20
===============================================================================================================
F-44
9. SHARE CAPITAL (CONTINUED):
(g) Stock-based compensation plans (continued):
=======================================================================================================
Options outstanding Options exercisable
------------------------------------------ ----------------------------------
Range of Number Weighted Weighted Number Weighted
exercise prices of shares average average exercisable average
remaining exercise exercise
contractual price price
life
- -------------------------------------------------------------------------------------------------------
$0.36 - 2.89 1,053,306 3.61 $1.84 662,326 $1.75
$2.90 - 5.63 661,094 2.27 3.64 528,293 3.57
- -------------------------------------------------------------------------------------------------------
$0.36 - 5.63 1,714,400 3.09 $2.54 1,190,619 $2.56
=======================================================================================================
The Company normally issues options to directors at fixed exercise
prices. 75,000 options issued to directors and outstanding as at
July 31, 2003 (2002 - 120,000) vest immediately, but if not
exercised each year, there is an annual 20% increase in the exercise
price until the options expire. For accounting purposes these
options are considered to be variable in nature and compensation
expense is recorded to the extent of increases in the market value
of the underlying common shares as compared to the exercise price at
each reporting period.
Where options issued after January 18, 2001 have an exercise price
in a currency that is not either the (a) functional currency of the
Company, or (b) the currency in which the employee is paid, the
options are to be accounted for as variable plan options and
compensation expense will be recorded equal to changes in the market
value of the underlying common shares at each reporting period.
During the year ended July 31, 2003 and 2002, the Company granted
options in U.S. dollars when the functional currency of the Company
is the Canadian dollar. Most employees of the Company are paid in
either Canadian dollars or British pounds sterling. Accordingly,
these employee options are considered to be variable options.
The compensation expense (recovery) for these variable options for
the year ended July 31, 2003 is nil [2002 - ($3,190); 2001 -
$3,190]. In addition, compensation expense is recognized to the
extent that options are granted having an exercise price less than
the market price of the underlying common stock on the date of
grant.
(h) Warrants:
As at July 31, 2003, warrants outstanding were exercisable for
32,154,507 (2002 - 2,030,317) common shares of the Company. The
warrants entitle the holders to purchase common shares of the
Company at prices ranging from $0.10 to $2.80 per share and expire
on various dates until July 24, 2008.
The exercise price of warrants issued were not less than the market
price of the Company's common shares at the date of issuance.
F-45
10. FINANCIAL INSTRUMENTS:
(a) Fair value of financial instruments:
The carrying values of cash and cash equivalents, receivables,
accounts payable and accrued liabilities, promissory notes payable
and convertible debentures approximate their fair values due to
being in a ready cash form or the short-term maturity of these
instruments.
(b) Credit risk:
The majority of the Company's activities are concentrated in the
automotive industry and sales are primarily to a few major customers
(note 15). To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company
maintains reserves for potential credit losses based on a risk
assessment of its customers.
(c) Foreign currency risk:
The Company operates internationally which gives rise to the risk
that cash flows may be adversely impacted by exchange rate
fluctuations. To July 31, 2003, the Company has not entered into
derivatives or other hedging instruments to mitigate its foreign
exchange risk.
11. RELATED PARTY TRANSACTIONS:
During the year ended July 31, 2003, the Company paid $271,921 (2002 - $115,900)
for consulting services and financing fees on the private sales of its common
stock and issued 621,143 share purchase warrants at exercise prices ranging from
$0.10 to $0.70 for financing services to a company in which a former director
(resigned in March, 2003) of the Company had significant influence. These
options expired unexercised 30 days after the former director ceased to be a
director of the Company.
F-46
12. INCOME TAXES:
Effective tax rate:
(a)
The effective income tax rates differ from the Canadian statutory
rates for the following reasons:
=======================================================================
2003 2002 2001
-----------------------------------------------------------------------
Canadian statutory tax rate 38.5% 41.7% 45.6%
Computed tax expense $ (3,817,132) $(2,847,766) $ (2,511,200)
Foreign losses tax affected 192,027 128,066 260,118
at lower rates
Reduction in effective tax - 483,059 1,600,378
rates
Permanent and other 387,870 975,676 115,318
differences
Change in valuation allowance 3,237,235 1,260,965 535,386
-----------------------------------------------------------------------
$ - $ - $ -
=======================================================================
(b) Deferred tax assets and liabilities:
=======================================================================
2003 2002 2001
----------------------------------------------------------------------
Deferred tax assets:
Fixed and other assets,
accounting
depreciation in excess
of tax $ 861,607 $ 519,987 $ 328,787
Loss carryforwards 14,148,423 11,472,671 10,137,211
Scientific research and
development
expenses 359,733 319,525 352,985
Share issue costs 373,523 192,718 218,050
Others - 1,150 208,053
----------------------------------------------------------------------
Total gross deferred tax
assets 15,743,286 12,506,051 11,245,086
Valuation allowance (15,743,286) (12,506,051) (11,245,086)
----------------------------------------------------------------------
Net deferred tax assets $ - $ - $ -
=======================================================================
In assessing the realizability of future tax assets, Management
considers whether it is more likely than not that some portion or all
of the future tax assets will be realized. The ultimate realization of
the future tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible.
F-47
12. INCOME TAXES (CONTINUED):
(b) Deferred tax assets and liabilities (continued):
For Canadian tax purposes, the Company has approximately $27,200,000
of non-capital losses for income tax purposes available at July 31,
2003 to reduce taxable income of future years. These losses will
expire as follows:
----------------------------------------------------------------------
2004 $ 2,600,000
2005 3,000,000
2006 7,200,000
2007 200,000
2008 4,100,000
2009 5,200,000
2010 4,900,000
----------------------------------------------------------------------
$ 27,200,000
----------------------------------------------------------------------
Additionally, for Canadian tax purposes, the Company has scientific
research and development expenditures of $1,010,000 available to
reduce future taxable income indefinitely.
For United States tax purposes, the Company has approximately
$5,700,000 of net operating losses for income tax purposes available
at July 31, 2003 to reduce taxable income of future years. These
losses will expire as follows:
----------------------------------------------------------------------
2012 $ 100,000
2013 1,000,000
2019 1,800,000
2020 1,300,000
2021 400,000
2022 800,000
2023 300,000
----------------------------------------------------------------------
$ 5,700,000
----------------------------------------------------------------------
For United Kingdom tax purposes, the Company has approximately
$8,600,000 of non-capital losses for income tax purposes available
at July 31, 2003 to reduce taxable income of future years. These
losses may be carried forward indefinitely.
F-48
13. EARNINGS (LOSS) PER SHARE:
The weighted average number of shares outstanding used in the computation
of earnings (loss) per share were as follows:
--------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------
Weighted-average shares used in
computation of basic earnings (loss)
per share 26,771,427 16,743,977 14,296,240
Weighted average shares from assumed
conversion of dilutive warrants
and options - - -
--------------------------------------------------------------------------
Fully diluted weighted average
number of common shares 26,771,427 16,743,977 14,296,240
--------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES:
(a) The Company is committed to the following payments under operating
leases, and service agreements for premises and certain equipment
and consultants:
---------------------------------------------------------------------
2004 $ 1,371,320
2005 344,569
2006 142,200
2007 123,803
2008 123,803
---------------------------------------------------------------------
(b) Cash and short-term investments are used to secure credit card
advances in the amount of $25,000 (2002 - $40,777).
(c) Included in accounts payable is $250,000 payable within the next
four months to a supplier for non-recoverable engineering fees.
F-49
14. Commitments and contingencies (continued):
(d) Product warranties:
The Company provides for estimated warranty costs at the time of
product sale. Warranty expense accruals are based on best estimate
with reference to historical claims experience. As warranty
estimates are based on forecasts, actual claim costs may differ from
amounts provided. An analysis of changes in liability for product
warranties follows:
=====================================================================
Balance, August 1, 2001 $ 6,522
Provision increase 3,284
Expenditures (692)
---------------------------------------------------------------------
Balance, July 31, 2002 9,114
Provision increase 29,946
Expenditures (18,622)
---------------------------------------------------------------------
Balance, July 31, 2003 $ 20,438
=====================================================================
15. 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. Geographic information is as follows:
Revenue from external customers:
=========================================================================
Revenue from
external customers
----------------------------------------
2003 2002 2001
-------------------------------------------------------------------------
United States $ 509,228 $ 524,516 $ 581,514
United Kingdom 261,905 266,638 198,097
Italy 391,169 12,629 -
China 243,866 - -
Other 396,428 208,561 -
-------------------------------------------------------------------------
$ 1,802,596 $ 1,012,344 $ 779,611
=========================================================================
73% of the Company's fixed assets are in Canada and 27% are in Europe.
F-50
15. SEGMENTED INFORMATION (CONTINUED):
Major customers, representing 10% or more of total sales, include:
=========================================================================
2003 2002 2001
-------------------------------------------------------------------------
Customer A $ - $ 27,995 143,788
Customer B 44,910 36,003 246,803
Customer C 127,413 143,487 126,742
Customer D 109,270 187,314 -
Customer E 391,169 - -
=========================================================================
16. SUBSEQUENT EVENTS:
(a) Subsequent to the year end, the Company registered 2,000,000 and
8,000,000 common shares for its "2003 US Stock Incentive Plan" and
"2003 Non U.S. Stock Incentive Plan" respectively.
(b) Subsequent to the year end, the Company issued 200,000 common shares
with a fair market value of $0.17 per share and 300,000 share
purchase warrants with an exercise price of $0.17 per share for
services received. The Company also issued 2,564,075 common shares
to convert $333,775 of debt and interest.
F-51
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
Our Securities and Exchange Commission filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov.
You may also read and copy any materials we file with the Securities
and Exchange Commission at the SEC's public reference room at 450 Fifth Street
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2, under the Securities Act with respect to
the securities offered under this prospectus. This prospectus, which forms a
part of that registration statement, does not contain all information included
in the registration statement. Certain information is omitted and you should
refer to the registration statement and its exhibits. With respect to references
made in this prospectus to any contract or other document of SmarTire, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract or
document. You may review a copy of the registration statement at the SEC's
public reference room. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our filings and the
registration statement can also be reviewed by accessing the SEC's website at
http://www.sec.gov.
No finder, dealer, sales person or other person has been authorized to
give any information or to make any representation in connection with this
offering other than those contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by SmarTire Systems Inc. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this prospectus.
130
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under our Bylaw, subject to the Business Corporations Act (Yukon
Territory) and subject to court approval in certain circumstances, we must
indemnify each of our current or former directors and officers, and any a person
who acts or has acted at our request as a director or officer of a corporation
of which we are or were a shareholder or creditor, and any such indemnified
person's heirs and legal representatives, against all costs, charges and
expenses, including any amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of serving or having served as a director or officer of our company or such
corporation, if: (a) he or she acted honestly and in good faith with a view to
the best interests of our company; and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, he
or she had reasonable grounds for believing his or her conduct was lawful.
Under section 126 of the Business Corporations Act (Yukon Territory),
court approval is required for us to indemnify any of the foregoing persons in
respect of an action by or on behalf of our company, or by or on behalf of any
corporation of which we are or were a shareholder or creditor, to procure a
judgment in our or its favor, as the case may be. Court approval may be granted
for us to indemnify any such person against all costs, charges and expenses
reasonably incurred by him or her in connection with the action only if: (a) he
or she acted honestly and in good faith with a view to the best interests of our
company; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful.
Section 126 of the Business Corporations Act (Yukon Territory) goes on
to provide that, in any event, any of the foregoing persons is entitled to be
indemnified by us in respect of all costs, charges and expenses reasonably
incurred by him or her in connection with the defence of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason
of being or having been a director or officer of our company or a corporation of
which we are or were a shareholder or creditor, if he or she: (a) was
substantially successful on the merits in his or her defence of the action or
proceeding; (b) is fairly and reasonably entitled to indemnity, (c) acted
honestly and in good faith with a view to the best interests of our company; and
(b) in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, he or she had reasonable grounds for believing
his or her conduct was lawful.
Insofar as indemnification for liabilities arising under the Securities
Act might be permitted to directors, officers or persons controlling our company
under the provisions described above, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the selling stockholder. All of the
amounts shown are estimates, except for the SEC Registration Fees. (NEED TO
UPDATE)
SEC registration fees $1,200
Printing and engraving expenses $5,000(1)
Accounting fees and expenses $10,000(1)
Legal fees and expenses $35,000(1)
131
Transfer agent and registrar fees $5,000(1)
Fees and expenses for qualification under state
securities laws $0
Miscellaneous $1,000(1)
Total $57,200
(1) We have estimated these amounts
Item 26 RECENT SALES OF UNREGISTERED SECURITIES
On May 20, 2004, 1,000,000 warrants were exercised at an exercise price
of $0.12 per share to a non-U.S. person upon exercise of warrants previsouly
granted to it. The shares were issued in an offshore transaction relying on
Regulation S under the Securities Act of 1933.
On May 19, 2004, we entered into a $15.0 million standby equity
distribution agreement with Selling stockholder relying on Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act of 1933. We may draw down
the facility at its discretion provided that each draw down is at least seven
trading days apart, and the maximum amount that may be drawn down at any one
time is limited to $500,000 and advance notice is required. The term of the
equity line of credit is 24 months. At the time of draw down against the line of
credit we will issue common shares equal to that amount advanced divided by 98%
of the lowest bid price on the five consecutive days after the date of notice.
On each date of advance of funds, we are to pay 5% placement fee. We may draw
down the facility at its discretion upon effectiveness of the registration
statement to be filed in the appropriate form under the Securities Act of 1933
for the purpose of registering the shares issuable upon the draw down of the
credit facility.
On April 30, 2004, 500,000 warrants were exercised at an exercise price
of $0.104 per share to a U.S. person upon exercise of warrants previously
granted to it. We relied on Rule 506 of Regulation D and/or Section 4(2) of the
Securities Act of 1933 to effect this issuance.
By conversion notice effective April 15, 2004, a holder of 8%
convertible debentures (described below) elected to convert $100,000 of
principal and $6,067 in accrued interest outstanding under the convertible
debentures. In response, we issued 823,680 shares of our common stock to the
debenture holder relying on section 3(a)(9) of the Securities Act of 1933.
On April 2, 2004, we issued a total of 1,399,676 shares of our common
stock, at a deemed issue price of $0.1040 per share, to the holders of the
discounted convertible debentures (described below), upon exercise of our right
to effect payment of the first monthly redemption amount due under the
discounted convertible debentures in shares of our common stock. We relied on
section 3(a)(9) and/or section 4(2) of the Securities Act of 1933 in issuing
these shares.
On March 2, 2004, we issued a total of 1,033,851 shares of our common
stock, at a deemed issue price of $0.1408 per share, to the holders of the
discounted convertible debentures (described below), upon exercise of our right
to effect payment of the first monthly redemption amount due under the
discounted convertible debentures in shares of our common stock. We relied on
section 3(a)(9) and/or section 4(2) of the Securities Act of 1933 in issuing
these shares.
132
On March 2, 2004, we issued a total of 1,033,851 shares of our common
stock, at a deemed issue price of $0.1408 per share, to the holders of the
discounted convertible debentures (described below), upon exercise of our right
to effect payment of the first monthly redemption amount due under the
discounted convertible debentures in shares of our common stock. We relied on
section 3(a)(9) and/or section 4(2) of the Securities Act of 1933 in issuing
these shares.
On February 3, 2004, we issued a total of 812,045 shares of our common
stock, at a deemed issue price of $0.1613 per share, to six of the holders of
the discounted convertible debentures (described below), upon exercise of our
right to effect payment of the first monthly redemption amount due under the
discounted convertible debentures in shares of our common stock. We relied on
section 3(a)(9) and/or section 4(2) of the Securities Act of 1933 in issuing
these shares.
By conversion notice effective January 27, 2004, a holder of 8%
convertible debentures (described below) elected to convert $84,000 of principal
and $3,621 in accrued interest outstanding under the convertible debentures. In
response, we issued 667,331 shares of our common stock to the debenture holder
relying on section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated January 12, 2004, a holder of 8% convertible
debentures (described below) elected to convert $130,000 of principal and $5,171
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,030,965 shares of our common stock to the debenture holder relying
on section 3(a)(9) of the Securities Act of 1933.
On December 24, 2003, we closed a private placement of discounted
convertible debentures in the aggregate principal amount of $3,493,590, maturing
April 1, 2006, to seven accredited investors pursuant to Rule 506 and/or section
4(2) of the Securities Act of 1933, for gross proceeds of $2,725,000. Principal
under each discounted convertible debenture may be converted by the holder in
whole or in part and from time to time at a conversion price of $0.22 per share,
subject to adjustment as set forth in the convertible debentures. The discounted
convertible debentures are subject to mandatory redemption in equal monthly
payments. We may elect to make the monthly redemption payments in shares of our
common stock at a conversion price equal to the lesser of (a) the set price of
$0.22 per share (subject to adjustment pursuant to the anti-dilution provisions
contained in the debentures), and (b) 85% of the average of the 20 closing
prices of our common stock immediately preceding the applicable monthly
redemption date, provided that certain conditions are met. In connection with
this private placement, each purchaser of discounted convertible debentures also
received a warrant to purchase that number of shares of our common stock equal
to 50% the principal amount of such purchaser's convertible debentures divided
by the set conversion price of $0.22 per share. Warrants to purchase an
aggregate total of 7,939,978 shares of our common stock were issued, and are
exercisable until December 24, 2006 at an exercise price of $0.25 per share.
On December 24, 2003, we issued to HPC Capital Management, a broker
dealer registered pursuant to section 15 of the Securities Exchange Act of 1934,
a warrant to purchase up to 109,000 shares of our common stock, exercisable
until December 24, 2006, at an exercise price of $0.25 per share. We issued
these warrants pursuant to Rule 506 and/or section 4(2) of the Securities Act of
1933, in partial payment of placement fee in connection with the private
placement of the discounted convertible debentures.
On November 10, 2003, in consideration for their agreement to
immediately exercise a total of 7,478,635 outstanding warrants at a reduced
exercise price of $0.1771 per share, we issued to three of the four purchasers
of our 7% convertible debentures (described below), a total of 7,478,635
additional warrants exercisable for a period of five years at an exercise price
of $0.1771 per share. The outstanding warrants that were exercised were
originally issued with an exercise price of $0.2645 per share. We issued a total
of 7,478,635 shares of our common stock upon the exercise of the outstanding
warrants for gross proceeds of $1,324,466, and the 7,478,635 additional
warrants, pursuant to Rule 506 and/or section 4(2) of the Securities Act of
1933. Each of the purchasers represented that it is an "accredited investor" as
defined in Rule 501 of the Securities Act of 1933.
133
On October 27, 2003, in consideration for its agreement to immediately
exercise a total of 3,290,596 outstanding warrants at a reduced exercise price
of $0.20 per share, we issued to one of the four purchasers of the 7%
convertible debentures, Palisades Master Fund, a total of 3,290,596 additional
warrants exercisable for a period of five years at an exercise price of $0.20
per share. The outstanding warrants that were exercised were originally issued
with an exercise price of $0.2645 per share. We issued a total of 3,290,596
shares of our common stock upon the exercise of the outstanding warrants for
gross proceeds of $658,119, and the 3,290,596 additional warrants, pursuant to
Rule 506 and/or section 4(2) of the Securities Act of 1933. The purchaser
represented that it is an "accredited investor" as defined in Rule 501 of the
Securities Act of 1933. In light of the reduced exercise price of the additional
warrants issued to the other three warrant holders, we subsequently agreed to
reduce the exercise price of the 3,290,596 additional warrants issued to
Palisades Master Fund, and the exercise price of 194,000 warrants previously
issued to HPC Capital Management, from $0.20 to $0.1771 per share. All other
terms of the warrants, including their expiry date, remain the same. In
addition, we paid $75,354.65 to Palisades Master Fund as an early participation
bonus, being an amount equal to the difference between the aggregate exercise
price that Palisades Master Fund paid upon the exercise of its 3,290,596
outstanding warrants at $0.20 per share and the aggregate exercise price that
Palisades Master Fund would have paid if it had had the benefit of the reduced
exercise price of $0.1771 per share.
On October 27, 2003, in consideration of its agreement to immediately
exercise a total of 194,000 outstanding warrants, we issued to HPC Capital
Management, a broker dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934, a total of 194,000 additional warrants, exercisable for a
period of five years at an exercise price of $0.20 per share. We issued these
warrants pursuant to Rule 506 and/or section 4(2) of the Securities Act of 1933.
HPC Capital Management represented that it is an "accredited investor" as
defined in Rule 501 of the Securities Act of 1933.
By conversion notice dated October 21, 2003, a holder of 8% convertible
debentures (described below) elected to convert $75,000 of principal and $1,600
in accrued interest outstanding under the convertible debentures. In response,
we issued 585,525 shares of our common stock to the debenture holder relying on
section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated October 10, 2003, a holder of 7% convertible
debentures (described below) elected to convert $66,667 of principal and $1,503
in accrued interest outstanding under the convertible debentures. In response,
we issued 522,626 shares of our common stock to the debenture holder relying on
section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated October 9, 2003, a holder of 8% convertible
debentures (described below) elected to convert $300,000 of principal and $5,333
in accrued interest outstanding under the convertible debentures. In response,
we issued 2,343,858 shares of our common stock to the debenture holder relying
on section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated October 6, 2003, a holder of 8% convertible
debentures (described below) elected to convert $156,000 of principal and $2,808
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,219,366 shares of our common stock to the debenture holder relying
on section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated October 3, 2003, a holder of 7% convertible
debentures (described below) elected to convert $100,000 of principal and $2,119
in accrued interest outstanding under the convertible debentures. In response,
we issued 784,164 shares of our common stock to the debenture holder relying on
section 3(a)(9) of the Securities Act of 1933
By conversion notice dated October 1, 2003, a holder of 8% convertible
debentures (described below) elected to convert $200,000 of principal and $3,778
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,562,763 shares of our common stock to the debenture holder relying
on section 3(a)(9) of the Securities Act of 1933.
By conversion notice dated September 24, 2003, a holder of 8%
convertible debentures (described below) elected to convert $100,000 of
principal and $2,061 in accrued interest outstanding under the convertible
debentures. In response, we issued 783,930 shares of our common stock to the
debenture holder relying on section 3(a)(9) of the Securities Act of 1933.
134
By conversion notice dated September 10, 2003, a holder of 7%
convertible debentures (described below) elected to convert $130,000 of
principal and $1,560 in accrued interest outstanding under the convertible
debentures. In response, we issued 1,010,612 shares of our common stock to the
debenture holder relying on section 3(a)(9) of the Securities Act of 1933.
By conversion notices dated September 9, 2003 and September 10, 2003, a
holder of 7% convertible debentures (described below) elected to convert $70,000
and $50,000 of principal and $840 and $611 in accrued interest outstanding under
the convertible debentures. In response, we issued 932,769 shares of our common
stock to the debenture holder relying on section 3(a)(9) of the Securities Act
of 1933.
By conversion notice dated August 27, 2003, a holder of 7% convertible
debentures (described below) elected to convert $80,000 of principal and $764 in
accrued interest outstanding under the convertible debentures. In response, we
issued 620,694 shares of our common stock to the debenture holder relying on
section 3(a)(9) of the Securities Act of 1933.
On August 15, 2003, we issued to Epoch Financial Group, Inc., an
accredited investor, a warrant to purchase up to 300,000 shares of our common
stock, exercisable at any time during the five-year period ending on August 15,
2008, at an exercise price of $0.17 per share. We issued these warrants pursuant
to Rule 506 and/or section 4(2) of the Securities Act of 1933, in partial
payment of an engagement fee.
On August 14, 2003, we issued to HPC Capital Management, a broker
dealer registered pursuant to section 15 of the Securities Exchange Act of 1934,
a total of 200,000 fully-paid and non-assessable shares of our common stock at a
deemed price of $0.17 per share. We issued these shares pursuant to Rule 506
and/or section 4(2) of the Securities Act of 1933, in partial payment of an
engagement fee.
By conversion notice dated July 30, 2003, a holder of 7% convertible
debentures (described below) elected to convert $50,000 of principal and $486 in
accrued interest outstanding under the convertible debentures. In response, we
issued 391,674 shares of our common stock to the debenture holder relying on
Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
By conversion notice dated July 28, 2003, a holder of 7% convertible
debentures (described below) elected to convert $300,000 of principal and $2,392
in accrued interest outstanding under the convertible debentures. In response,
we issued 2,323,648 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
On July 25, 2003, we issued at the direction of West Sussex Trading,
Inc. a total of 224,000 warrants to three accredited investors in partial
payment of placement fees, relying on Rule 506 of Regulation D, Section 4(2) of
the Securities Act of 1933 and/or Regulation S under the Securities Act of 1933.
Each warrant is exercisable until July 25, 2008 at an exercise price of $0.10
per share.
On May 19, 2004, we entered into a $15.0 million equity line of credit
facility with an accredited investor relying on Rule 506 of Regulation D and/or
Section 4(2) of the Securities Act of 1933. We may, in our discretion, draw down
amounts under the facility from time to time, subject to various conditions and
certain limitations. We will receive the proceeds of each draw down under the
equity line of credit facility in payment for shares of our common stock, to be
issued to the investor in two tranches for each draw down. The number of shares
of our common stock so issuable will be determined with reference to a draw down
pricing period of 20 consecutive trading days, as specified in the draw down
notice, subject to a threshold price to be designated by us in connection with
the draw down as the lowest price at which we will sell shares of common stock
to the investor. Each draw down will be limited to the greater of: (a) $300,000
and (b) 12.5% of the average of the daily volume weighted average prices of our
common stock during the 30-day period preceding the draw down notice, multiplied
by the total aggregate trading volume of our common stock during such 30-day
period; subject to a minimum draw down amount of $300,000. Only one draw down is
permitted under the equity line during each draw down pricing period of 20
consecutive trading days, and there must be at least six trading days between
each draw down pricing period. We may not draw down the facility unless the
shares issuable upon the draw down of the credit facility have been registered
on an effective registration statement filed in the appropriate form under the
Securities Act of 1933.
135
On May 19, 2004, relying on Rule 506 of Regulation D and/or Section
4(2) of the Securities Act of 1933, we issued to the investor under the $15.0
million equity line of credit, as a commitment fee, a warrant to purchase up to
1,000,000 shares of our common stock, exercisable until July 23, 2006 at an
exercise price of $0.1955 per share.
On May 19, 2004, we issued to HPC Capital Management, a broker dealer
registered pursuant to section 15 of the Securities Exchange Act of 1934, a
warrant to purchase up to 250,000 shares of our common stock, exercisable until
July 23, 2006, at an exercise price of $0.1955 per share. We issued these
warrants pursuant to Rule 506 and/or section 4(2) of the Securities Act of 1933,
in partial payment of placement fee in connection with the $15.0 million equity
line of credit.
On July 17, 2003, we closed a private placement of 8% convertible
debentures to four accredited investors pursuant to Rule 506 and/or section 4(2)
of the Securities Act of 1933, for gross proceeds of $1,700,000. Principal under
the convertible debentures in the aggregate principal amount of $1,700,000 may
be converted by the holder in whole or in part and from time to time at a
conversion price of $0.13 per share, and interest may be converted at a price
per share equal to 90% of the average closing bid price of our common stock
during the 20 trading days immediately preceding the conversion date, in each
case subject to adjustment as set forth in the convertible debentures. In
connection with this private placement, each of the purchasers of the 8%
convertible debentures also received warrants to purchase that number of shares
of our common stock determined by dividing the principal amount of such
purchaser's convertible debentures by the base conversion price of $0.13 per
share, for an aggregate total of 13,076,922 warrants exercisable until July 17,
2008 at $0.1771 per share.
On July 17, 2003, we issued to HPC Capital Management, a broker dealer
registered pursuant to section 15 of the Securities Exchange Act of 1934, a
warrant to purchase up to 68,000 shares of our common stock, exercisable until
July 17, 2008, at an exercise price of $0.1771 per share. We issued these
warrants pursuant to Rule 506 and/or section 4(2) of the Securities Act of 1933,
in partial payment of placement fee in connection with the private placement of
8% convertible debentures.
By conversion notice dated July 14, 2003, a holder of 7% convertible
debentures (described below) elected to convert $200,000 of principal and $1,180
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,540,205 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
By conversion notice dated July 11, 2003, a holder of 7% convertible
debentures (described below) elected to convert $305,555 of principal and $2,258
in accrued interest outstanding under the convertible debentures. In response,
we issued 2,366,124 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
By conversion notice dated July 10, 2003, a holder of 7% convertible
debentures (described below) elected to convert $279,167 of principal and $1,628
in accrued interest outstanding under the convertible debentures. In response,
we issued 2,166,062 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
By conversion notice dated June 30, 2003, a holder of 7% convertible
debentures (described below) elected to convert $200,000 of principal and $1,580
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,543,469 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
By conversion notices dated June 17, 2003, three holders of 7%
convertible debentures (described below) elected to convert a total of $356,111
of principal and $957 in accrued interest outstanding under the convertible
debentures. In response, we issued a total of 2,729,486 shares of our common
stock to the debenture holders relying on Rule 506 of Regulation D and/or
Section 4(2) of the Securities Act of 1933.
By conversion notice dated June 12, 2003, a holder of 7% convertible
debentures (described below) elected to convert $260,000 of principal and $358
in accrued interest outstanding under the convertible debentures. In response,
we issued 2,008,821 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
136
By conversion notices dated June 11, 2003, two holders of 7%
convertible debentures (described below) elected to convert a total of $387,500
of principal and $1,249 in accrued interest outstanding under the convertible
debentures. In response, we issued a total of 2,988,859 shares of our common
stock to the debenture holders relying on Rule 506 of Regulation D and/or
Section 4(2) of the Securities Act of 1933.
By conversion notice dated June 9, 2003, a holder of 7% convertible
debentures (described below) elected to convert $195,000 of principal and $758
in accrued interest outstanding under the convertible debentures. In response,
we issued 1,505,754 shares of our common stock to the debenture holder relying
on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
On May 27, 2003, we issued 1,050,000 shares of common stock to a
non-U.S. person upon exercise of warrants previously granted to it. The shares
were issued in an offshore transaction relying on Regulation S under the
Securities Act of 1933.
On May 27, 2003, we issued to Impact Capital Partners Limited, a broker
dealer registered pursuant to section 15 of the Securities Exchange Act of 1934,
warrants to purchase up to an aggregate of 168,325 shares of our common stock,
exercisable at any time during the five-year period ending on May 27, 2008, at
exercise prices of: (a) with respect to 23,881 warrants, $0.74 per share; (b)
with respect to 44,444 warrants, $0.40 per share; and (c) with respect to
100,000 warrants, $0.22 per share. We issued these warrants pursuant to Rule 506
and/or section 4(2) under the Securities Act of 1933, in partial payment of a
placement fee in connection with the private placement of certain convertible
debentures and the issuance of a short-term secured promissory note to Selling
stockholder.
On May 15, 2003, June 11, 2003 and June 17, 2003, we closed the
constituent tranches of a three-tranche private placement of 7% convertible
debentures to four accredited investors pursuant to Rule 506 and/or section 4(2)
of the Securities Act of 1933, for gross proceeds of $2,800,000. Principal under
the convertible debentures in the aggregate principal amount of $2,800,000 may
be converted by the holder in whole or in part and from time to time at a
conversion price of $0.13 per share, and interest may be converted at a price
per share equal to 90% of the average closing bid price of our common stock
during the 20 trading days immediately preceding the conversion date, in each
case subject to adjustment as set forth in the convertible debentures. In
connection with this private placement, each of the purchasers of the 7%
convertible debentures also received warrants to purchase that number of shares
of our common stock determined by dividing 50% of the principal amount of such
purchaser's convertible debentures by the base conversion price of $0.13 per
share, for an aggregate total of 10,769,231 warrants exercisable until May 19,
2008 at $0.2645 per share.
By conversion notice dated May 16, 2003, Cornell Capital Partners
elected to convert $100,000 of principal and $5,854.02 in accrued interest
outstanding under certain convertible debentures (described below) that were
issued on November 21, 2002 and January 31, 2003. The conversion price was
$0.20. In response, we issued 529,270 shares to Cornell Capital Partners relying
on Section 4(2) of the Securities Act of 1933.
On May 15, 2003, we issued to HPC Capital Management, a broker dealer
registered pursuant to section 15 of the Securities Exchange Act of 1934, a
warrant to purchase up to 112,000 shares of our common stock, exercisable at any
time during the five-year period ending on May 15, 2008, at an exercise price of
$0.13 per share. We also issued to HPC Capital Management a warrant to purchase
up to 14,000 shares of our common stock exercisable at any time until May 15,
2008 at an exercise price of $0.10 per share. We issued these warrants pursuant
to Rule 506 and/or section 4(2) of the Securities Act of 1933, in partial
payment of placement fees: (a) with reference to the warrant to purchase up to
112,000 shares of common stock, in connection with the private placement of the
7% convertible debentures; and (b) with reference to the warrant to purchase up
to 14,000 shares of our common stock, in connection with a private placement of
3,500,000 units (each consisting of one common share and one-half of a
non-transferable share purchase warrant), issued on March 31, 2003 at a price of
$0.10 per unit in an offshore transaction pursuant to Regulation S under the
Securities Act of 1933.
On May 15, 2003, we issued to Dunwoody Brokerage Services, Inc., a
broker dealer registered pursuant to section 15 of the Securities Exchange Act
of 1934, a warrant to purchase up to 100,000 shares of our common stock,
exercisable at any time during the five-year period ending on May 15, 2008, at
an exercise price of $0.135 per share. We issued these warrants pursuant to Rule
506 and/or section 4(2) under the Securities Act of 1933, in partial payment of
a placement fee in connection with the private placement of the 7% convertible
debentures.
137
By conversion notice dated May 14, 2003, Cornell Capital Partners
elected to convert $125,000 of principal outstanding under certain convertible
debentures (described below) that were issued on November 21, 2002 and January
31, 2003. The conversion price was $0.20. In response, we issued 625,000 shares
to Cornell Capital Partners relying on Section 4(2) of the Securities Act of
1933.
On May 7, 2003, we issued at the direction of West Sussex Trading, Inc.
a total of 40,000 warrants to three accredited investors in partial payment of
placement fees in connection with the private placement of 500,000 units on May
5, 2003 described below, relying on Rule 506 of Regulation D, Section 4(2) of
the Securities Act of 1933 and/or Regulation S under the Securities Act of 1933.
Each warrant is exercisable until May 7, 2008 at an exercise price of $0.10 per
share.
On May 7, 2003, we issued at the direction of West Sussex Trading, Inc.
a total of 57,143 warrants to four accredited investors in partial payment of
placement fees, relying on Rule 506 of Regulation D, Section 4(2) of the
Securities Act of 1933 and/or Regulation S under the Securities Act of 1933.
Each warrant is exercisable until May 7, 2008 at an exercise price of $0.35 per
share.
On May 5, 2003, we issued 500,000 units at a price of $0.10 per unit in
an offshore transaction pursuant to Regulation S under the Securities Act of
1933. We realized gross cash proceeds of $50,000 from this private placement.
Each unit consists of one share of our common stock and two non-transferable
share purchase warrants. Each whole warrant entitles the holder to purchase an
additional share of our common stock at a price of $0.12 per share until April
30, 2004. In connection with this private placement, we have paid placement and
advisory fees of $4,000.
On May 6, 2003, we issued 850,000 shares at a deemed price of $0.21 per
share to an accredited investor and, as disclosed below, we repriced 1,000,000
warrants previously issued to the investor on December 20, 2002, thereby
reducing the exercise price of the warrant from $0.70 per share to $0.10 per
share. An aggregate of 3,614,286 additional warrants previously issued to four
other investors in connection with the offshore private placements effected by
us on November 4, 2002, December 20, 2002 and February 14, 2003 (each of which
are discussed below), were also repriced to have an exercise price of $0.10 per
share. These transactions were all effected pursuant to Regulation S under the
Securities Act of 1933, and were effected in consideration of certain releases
provided by the investors to our company in respect of certain potential
unquantified claims threatened by the investors against our company.
On March 31, 2003, we issued 3,500,000 units at a price of $0.10 per
unit in an offshore transaction pursuant to Regulation S under the Securities
Act of 1933. Each unit consists of one common share and one-half of a
non-transferable share purchase warrant. Each whole warrant entitles the holder
to purchase an additional share of our common stock at a price of US$0.16 per
share until March 31, 2005. We have paid a placement fee of $28,000 in
connection with this private placement.
By conversion notice dated March 14, 2003, Cornell Capital Partners
elected to convert $125,000 of principal outstanding under the convertible
debentures that were issued on November 21, 2002. The conversion price was
$0.064, which is equal to 80% of the lowest closing bid price for the five day
period prior to March 14, 2003. On March 20, 2003, we issued 1,953,125 shares to
Cornell Capital Partners relying on Section 4(2) of the Securities Act of 1933.
On April 3, 2003, we issued to Ian Bateman a total of 353,865 shares of
our common stock at a deemed price of $0.17 per share, in partial payment and
settlement of our obligation to pay him a termination allowance in connection
with the termination of his management agreement, without cause, on October 15,
2002. We issued these shares to Mr. Bateman in an offshore transaction pursuant
to Regulation S under the Securities Act of 1933.
138
On February 24, 2003, we issued 32,258 shares of our common stock to
the placement agent that we have engaged in connection with the $5.0 million
equity line of credit facility described below, as a commitment fee in
consideration of the placement agent's agreement to act in such capacity. We
issued the shares to the placement agent, an accredited investor, at a deemed
price of $0.31 per share relying on Rule 506 and/or Section 4(2) of the
Securities Act of 1933.
On February 19, 2003, we entered into a $5.0 million equity line of
credit facility with an accredited investor relying on Rule 506 of Regulation D
and/or Section 4(2) of the Securities Act of 1933. This replaces and supersedes
the equity line of credit facility we entered into on November 21, 2002. We may
draw down the facility at its discretion provided that each draw down is at
least seven trading days apart, and the maximum amount that may be drawn down at
any one time is limited to $70,000 and advance notice is required. The term of
the equity line of credit is 24 months. At the time of draw down against the
line of credit we will issue common shares equal to that amount advanced divided
by 99% of the stock price on the five consecutive days after the date of notice.
On each date of advance of funds, we are to pay 1.5% of the advanced fund as a
commission. On the date of the execution of the contract, we issued shares worth
$300,000 based on the trading price of our stock on that day. We may draw down
the facility at its discretion upon effectiveness of the registration statement
to be filed in the appropriate form under the Securities Act of 1933 for the
purpose of registering the shares issuable upon the draw down of the credit
facility.
On February 14, 2003, we issued 714,286 units at a price of $0.35 per
unit in an offshore transaction pursuant to Regulation S under the Securities
Act of 1933. Each unit consists of one common share and one share purchase
warrant. Each warrant entitles the holder to purchase one additional common
share at an exercise price of $0.42 per share until February 13, 2006. Effective
May 6, 2003, these warrants were repriced at $0.10 per share. Advisors to the
private placement are entitled to a commission of $20,000 plus 57,143 purchase
warrants exercisable at $0.35 per share until February 13, 2008. Of the 57,143
share purchase warrants, 9,524 were issued pursuant to one accredited person
pursuant to Regulation D, Section 4(6) and/or Section 4(2) of the Securities Act
of 1933 and 47,619 were issued to three persons in an offshore transaction
pursuant to Regulation S of the Securities Act of 1933.
On February 12, 2003, Cornell Capital Partners elected to convert
$40,000 of principal outstanding under the convertible debentures that were
issued on November 21, 2002. The conversion price was $0.256, which is equal to
80% of the lowest closing bid price for the five day period prior to February
12, 2003. We issued 156,250 shares to Cornell Capital Partners relying on Rule
506 and/or Section 4(2) of the Securities Act of 1933.
On February 10, 2003, Cornell Capital Partners elected to convert
$10,000 of principal outstanding under the convertible debentures that were
issued on November 21, 2002. The conversion price was $0.28, which is equal to
80% of the lowest closing bid price for the five day period prior to February
10, 2003. We issued 35,714 shares to Cornell Capital Partners relying on Rule
506 and/or Section 4(2) of the Securities Act of 1933.
On February 3, 2003, we granted stock options to purchase an aggregate
of up to 26,300 shares of our common stock at $0.37 per share. The options have
a five year term and were granted to two of our directors in reliance upon Rule
506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
On January 31, 2003, we issued a convertible debenture to Selling
stockholder, an accredited investor, relying on Rule 506 of Regulation D and/or
Section 4(2) of the Securities Act of 1933. This constituted the second and
final tranche of a $400,000 private placement effected by us pursuant to a
Securities Purchase Agreement dated November 21, 2002. We issued a single
convertible debenture maturing November 21, 2004 and having a face principal
amount of $200,000. The convertible debenture was issued at an 8% discount, for
gross proceeds of $184,000. Our obligations under the convertible debentures
were secured against all of our present and after-acquired personal property,
assets and undertaking. Such security interest was subordinated to the security
interest previously granted by us to TRW Inc. in all of our present and
after-acquired personal property, assets and undertaking.
On January 30, 2003, we granted stock options to purchase an aggregate
of up to 118,000 shares of our common stock. 114,000 options vest immediately
and if exercised before January 30, 2004 the exercise price is $0.36, if
exercised after January 30, 2004 but before January 30, 2005 the exercise price
is $0.43 and if exercised after January 30, 2005, the exercise price is $0.52.
Of the other 4,000 options, 1,334 vest immediately at an exercise price of
$0.36, 1,333 vest on January 2, 2004 at an exercise price of $0.43 and 1,333
vest on January 2, 2005 at an exercise price of $0.52. The options have a five
year term and were granted to five of our directors, officers and/or employees
in reliance upon either Regulation S or Rule 506 of Regulation D and/or Section
4(2) of the Securities Act of 1933.
139
On January 15, 2003, we issued 300,000 share purchase warrants in
payment of a placement fee related to the private placement of units on November
4, 2002 and December 20, 2002. We issued 236,667 warrants in an offshore
transaction to three non-U.S. persons in reliance upon Regulation S of the
Securities Act of 1933. We issued 63,333 warrants to one accredited person
pursuant to Regulation D, Section 4(6) and/or Section 4(2) of the Securities Act
of 1933. 160,000 of the warrants are exercisable at $0.50 per share until
November 4, 2007, 60,000 of the warrants are exercisable at $0.67 until December
15, 2007 and 80,000 of the warrants are exercisable at $0.70 per share until
December 15, 2007.
On January 2, 2003, we granted stock options to acquire an aggregate of
up to 18,000 shares of our common stock. 6,000 of the options are exercisable at
$1.00 per share, 6,000 vest on January 2, 2004 and are exercisable at $1.20 per
share and 6,000 vest on January 2, 2005 and are exercisable at $1.44 per share.
The options have a five year term and were granted to an employee in reliance on
Regulation S and/or Section 4(2) of the Securities Act of 1933.
On December 20, 2002, we issued 750,000 units at a price of $0.67 per
unit in an offshore transaction pursuant to Regulation S under the Securities
Act of 1933. Each unit consists of one common share and one share purchase
warrant. Each warrant entitles the holder to purchase one additional common
share at an exercise price of $0.85 per share until December 15, 2005. Effective
May 6, 2003, these warrants were repriced at $0.10 per share. Advisors to the
private placement were paid placement and advisory fees of $40,000.
On December 20, 2002, we issued 1,000,000 units at a price of $0.70 per
unit in an offshore transaction pursuant to Regulation S under the Securities
Act of 1933. Each unit consists of one common share and one share purchase
warrant. Each warrant entitles the holder to purchase one additional common
share at an exercise price of $0.70 per share until December 15, 2005. Effective
May 6, 2003, these warrants were repriced at $0.10 per share. Advisors to the
private placement were paid placement and advisory fees of $56,000.
On November 21, 2002, we entered into a $5.0 million equity line of
credit facility with Selling stockholder relying on Rule 506 of Regulation D
and/or Section 4(2) of the Securities Act of 1933. We may draw down the facility
at its discretion provided that each draw down is at least seven trading days
apart, and the maximum amount that may be drawn down at any one time is limited
to $70,000 and advance notice is required. The term of the equity line of credit
is 24 months. At the time of draw down against the line of credit we will issue
common shares equal to that amount advanced divided by 99% of the stock price on
the five consecutive days after the date of notice. On each date of advance of
funds, we are to pay 1.5% of the advanced fund as a commission. On the date of
the execution of the contract, we issued shares worth $300,000 based on the
trading price of our stock on that day. We may draw down the facility at its
discretion upon effectiveness of the registration statement to be filed in the
appropriate form under the Securities Act of 1933 for the purpose of registering
the shares issuable upon the draw down of the credit facility. We subsequently
terminated this equity line of credit facility and entered into a new $5.0
million equity line of credit facility as described above.
On December 4, 2002, we issued 446,154 shares of our common stock to
the lender under the equity line of credit at a deemed price of $0.65 per share,
in payment of a commitment fee. We relied on Rule 506 of Regulation D and/or
Section 4(2) of the Securities Act of 1933 to effect this issuance.
On November 21, 2002, we entered into a Securities Purchase Agreement
whereby we agreed to issue up to $400,000 in convertible debentures, issuable in
two tranches of $200,000 each to Selling stockholder relying on Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act of 1933. Upon closing of
the first tranche of the private placement on November 21, 2002, we issued a
single convertible debenture maturing November 21, 2004 and having a face
principal amount of $200,000. The convertible debenture was issued at an 8%
discount, for gross proceeds of $184,000. Our obligations under the convertible
debentures were secured against all of our present and after-acquired personal
property, assets and undertaking. Such security interest was subordinated to the
security interest previously granted by us to TRW Inc. in all of our present and
after-acquired personal property, assets and undertaking.
140
On November 4, 2002, we issued, in an offshore transaction pursuant to
Regulation S under the Securities Act of 1933, two million units at a price of
$0.50 per unit. We realized gross cash proceeds of $250,000 from the private
placement; the balance of the aggregate purchase price for the units was paid
for by the application of $750,000 of principal under the senior convertible
notes issued on September 20, 2002 (described below). Each unit consists of one
common shares and one share purchase warrant. Each warrant entitled the holder
to purchase one additional common share at an exercise price of $0.50 per share
until November 4, 2005. Effective May 6, 2003, these warrants were repriced at
$0.10 per share. An additional 17,672 common shares were issued as a payment of
accrued interest at a deemed price of $0.50 per share. Advisors to the private
placement were paid placement and advisory fees of $80,000 and issued 160,000
share purchase warrants exercisable at $0.50 per share for a period of five
years pursuant to Rule 506, Section 4(2) under the Securities Act of 1933 and/or
Regulation S.
On September 20, 2002, we realized gross cash proceeds of $750,000 from
the issuance of 10% redeemable convertible notes plus 150,000 share purchase
warrants from the completion of a private placement effected in an off-shore
transaction to a non-U.S. person, pursuant to Regulation S under the Securities
Act of 1933. Interest on these notes is payable when the notes are fully
converted or redeemed.
On July 17, 2002, we issued 750,000 shares of common stock to a
non-U.S. person in an offshore transaction pursuant to Regulation S at a price
of $1.00 per share. In connection with such private placement, on July 31, 2002,
we issued 22,000 shares of common stock to a different non-U.S. person in an
offshore transaction pursuant to Regulation S at a price of $1.29 per share, as
a placement fee.
On June 27, 2002, we issued 30,000 common share purchase warrants to a
non-U.S. person in an offshore transaction pursuant to Regulation S under the
Securities Act of 1933. Each warrant entitles the holder to purchase one common
share in the capital of the issuer at an exercise price of $2.80 per share until
June 27, 2005, on which date the warrant will expire.
On June 26, 2002, we issued 60,000 shares of common stock to a non-U.S.
person upon exercise of warrants previously granted to it. We received total
consideration of $99,000. The shares were issued in an offshore transaction
relying on Regulation S under the Securities Act of 1933.
On May 14, 2002, we issued 140,000 shares of common stock to a non U.S
person upon exercise of warrants previously granted to it. We received total
consideration of $210,000. The shares were issued in an offshore transaction
relying on Regulation S under the Securities Act of 1933.
On March 26, 2002, we issued 750,000 common shares at a price of $1.75
to a non-U.S. person in an offshore transaction pursuant to Regulation S. We
also issued warrants for the purchase of 52,500 common shares to a non-U.S.
person in an offshore transaction pursuant to Regulation S. The warrants were
issued in payment of a placement fee related to the sale of the common shares.
Each warrant entitles the holder to purchase one common share at an exercise
price of $1.75 until March 26, 2005, on which date the warrant will expire.
On February 13, 2002, we issued warrants for the purchase of 11,200
common shares to a non-U.S. person in an offshore transaction pursuant to an
exemption from registration as provided by Regulation S under the Securities Act
of 1933. The warrants were issued in payment of a placement fee related to the
sale of units described below. Each warrant entitles the holder to purchase one
common share of the Company at an exercise price of $1.70 until February 13,
2005, on which date the warrant will expire.
On January 18, 2002, we issued 46,900 share purchase warrants to an
accredited investor pursuant to Rule 506 of Regulation D of the Securities Act
of 1933 . This warrant was issued in payment of a placement fee related to the
sale of units described below. Each warrant entitles the holder to purchase one
common share in the capital of the issuer at an exercise price of $1.70 until
January 18, 2005, on which date the warrant will expire.
141
Between November 8, 2001 and January 8, 2002, we issued a total of
1,830,000 units to a select group of offshore investors in an offshore
transaction pursuant to an exemption from registration as provided by Regulation
S under the Securities Act of 1933. Each unit was issued at a price of $1.70 and
consists of one common share and one common share purchase warrant. Each warrant
is exercisable at a price of: (a) $2.30 if exercised on or before June 30, 2002;
(b) $2.80 if exercised after June 30, 2002 and on or before February 28, 2003;
and (c) $3.30 if exercised after February 28, 2003 but on or before October 31,
2003, on which date the warrant will expire. Gross proceeds of the placement
were $3,111,000, resulting in net proceeds of $2,955,469 after payment of
placement fees and expenses related to the offering.
In May 2001, we issued 40,072 shares of common stock at a deemed price
of $2.50 per share to TRW Inc. as primary consideration in the Assignment and
Amendment Agreement with TRW Inc. that transfers to us the license to
manufacture and sell tire monitoring systems to the original equipment
manufacturers of most medium and heavy trucks. These securities were issued on
reliance on the exemptions from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder.
On December 18, 2000, we issued 450,000 shares of common stock at a
deemed price of $2.75 per share to TRW Inc. as primary consideration in the
Assignment and Amendment Agreement with TRW Inc. that transfers to us 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.
On October 2, 2000, we issued 160,000 shares of common stock to a
non-U.S. person upon exercise of warrants previously granted to it. In exchange
for the issuance, we received total consideration of $240,000. These securities
were issued under an exemption provided by Rule 903 of Regulation S promulgated
under the Securities Act of 1933, as amended.
On April 7,2000, we issued 3,500 shares of our common stock to one of
our employees at $2.00 per share as compensation for services rendered. We
issued to the employee in an offshore transaction relying on Regulation S and/or
Section 4(2) of the Securities Act of 1933.
Between March 27 and April 3, 2000, we issued 1,910,250 shares of
common stock to certain accredited European investors at a price of $2.00 per
share. Net proceeds of the placement were $3,340,473 after payment of placement
fees. The shares were issued in an offshore transaction relying on Regulation S
under the Securities Act of 1933.
On December 16, 1999, we issued 25,000 shares of common stock at a
value of $1.50 per share to Transense Technologies plc pursuant to a license
agreement. Under the agreement, we purchased 250,000 units of Transense, each
comprised of one share and one two-year purchase warrant, for a total purchase
price of L150,000 (Pounds Sterling). The purchase price was paid two-thirds in
cash and one-third in SmarTire shares. The offer and sale of these securities
was made in reliance on the exemption from registration under Section 4(2) of
the Securities Act of 1933.
On December 15, 1999, we issued to one of our employees 10,000 shares
of our common stock at $1.50 per share as compensation for services rendered.
The shares were issued to the employee in an offshore transaction relying on
Regulation S under the Securities Act of 1933.
In September and October of 1999, we issued 1,505,000 shares of common
stock at a price of $2.00 per share, resulting in net proceeds of $2,799,300
after payment of placement fees. The shares were issued to three institutional
investors located in Europe in an unregistered private placement. The shares
were issued in an offshore transaction relying on Regulation S under the
Securities Act of 1933.
142
Item 27 EXHIBITS
3.1 Certified of Incorporation of TTC/Truck Tech Corp. dated
September 8, 1987(1)
3.2 Memorandum and Articles of TTC/Truck Tech Corp.(1)
3.3 Memorandum of TTC/Truck Tech Corp. dated September 2, 1987(1)
3.4 Altered Memorandum of TTC/Truck Tech Corp. dated October 25,
1991(1)
3.5 Certificate of Change of Name from TTC/Truck Tech Corp. to
UniComm Signal Inc. dated April 13, 1994 (1)
3.6 Certificate of Change of Name from UniComm Signal Inc. to
SmarTire Systems Inc. dated December 24, 1997(1)
3.7 Special Resolution and Altered Memorandum of UniComm Signal
Inc. dated October 28, 1994(1)
3.8 Special Resolution and Altered Memorandum of UniComm Signal
Inc. dated January 17, 1997(1)
3.9 Special Resolution and Altered Memorandum of SmarTire Systems
Inc. dated November 17, 1995(1)
3.10 Special Resolution and Altered Memorandum of SmarTire Systems
Inc. dated January 16, 1998(1)
3.11 Special Resolution and Altered Memorandum of SmarTire Systems
Inc. dated December 5, 2000(4)
3.12 Substituted Articles of SmarTire Systems Inc. adopted December
5, 2000(4)
3.13. Articles of Continuance, dated January 29, 2003 and effective
February 6, 2003 (11)
3.14 Certificate of Amendment issued to SmarTire Systems Inc. by
the Yukon Registrar of Corporations effective December 15,
2003, and attached Articles of Amendment of SmarTire Systems
Inc. dated December 11, 2003(21)
3.15 Certificate of Registration of Restated Articles issued to
SmarTire Systems Inc. by the Yukon Registrar of Corporations
effective December 15, 2003, and attached Restated Articles of
Incorporation of SmarTire Systems Inc. dated December 11,
2003(21)
3.17 By-Law No. 1, dated February 6, 2003(11)
5.1 Opinion of Sichenzia Ross Friedman Ference LLP regarding the
legality of the securities being registered**
10.1 Product Licensing Agreement dated May 5, 1998 between SmarTire
Systems Inc. and Advantage Enterprises Inc.(2)(3)
10.2 Management Agreement between SmarTire Systems Inc. and Shawn
Lammers dated as of August 1, 1999(3)
10.3 Management Agreement between SmarTire Systems Inc. and Robert
Rudman dated as of August 1, 1999(3)
10.4 Management Agreement between SmarTire Europe Limited and Ian
Bateman dated as of December 9, 1999(3)
143
10.5 ASIS Development / Purchase Agreement dated as of December 13,
1999 between SmarTire Systems Inc. and Sensonor ASA(3)(2)
10.6 License Agreement dated September 20, 1999 between SmarTire
Systems Inc. and Transense Technologies plc.(3)(2)
10.7 Management agreement between SmarTire Systems Inc. and Erwin
Bartz dated as of January 3, 2001(5)
10.8 License agreement dated August 31, 2001 between SmarTire
Systems Inc. and TRW Inc.(6)(2)
10.9 License agreement dated August 31, 2001 between TRW Inc. and
SmarTire Systems Inc.(6)(2)
10.10 Form of private placement subscription agreement between
SmarTire Systems Inc. and purchasers of securities in SmarTire
Systems Inc.'s first private placement completed in January
2002(7)
10.11 Advisory fee payment and subscription agreement between
SmarTire Systems Inc. and West Sussex Trading, Inc. dated
January 17, 2002 related to partial consideration paid under
SmarTire Systems Inc.'s private placement completed in January
2002(7)
10.12 Advisory fee payment and subscription agreement between
SmarTire Systems Inc. and Seraph Capital AG dated February 12,
2002 related to partial consideration paid under SmarTire
Systems Inc.'s private placement completed in January 2002(7)
10.13 Private placement subscription agreement between SmarTire
Systems Inc. and West LB Panmure Limited dated March 21, 2002
related to SmarTire Systems Inc.'s March 2002 private
placement(7)
10.14 Advisory fee payment and subscription agreement between
SmarTire Systems Inc. and Seraph Capital AG dated March 26,
2002 related to partial consideration paid under SmarTire
Systems Inc.'s March 2002 private placement(7)
10.15 Management agreement between SmarTire Systems Inc. and Al
Kozak dated as of May 1, 2002(8)
10.16 Memorandum of understanding between SmarTire Systems Inc. and
Visteon Corporation(8)
10.17 Form of securities purchase agreement between SmarTire Systems
Inc. and purchasers of the 10% convertible redeemable
promissory note due December 20, 2002(8)
10.18 Form of 10% convertible redeemable promissory note due
December 20, 2002(8)
10.19 Advisory agreement between SmarTire Systems Inc. and West
Sussex Trading Inc. dated September 4, 2002 related to
consideration payable under SmarTire Systems Inc.'s private
placement of the 10% convertible redeemable promissory notes
due December 20, 2002(8)
10.20 Advisory agreement between SmarTire Systems Inc. and Impact
Capital Limited dated October 25, 2002(9)
10.21 Management agreement between SmarTire Systems Inc. and Jeff
Finkelstein dated as of October 25, 2002(9)
144
10.22 Supply agreement between SmarTire Systems Inc. and Pirelli
Pneumatici dated September 24, 2002(9)(2)
10.23 Security Agreement between SmarTire Systems Inc. and Cornell
Capital Partners, L.P., dated as of November 21, 2002(10)
10.24 Restated Securities Purchase Agreement between SmarTire
Systems Inc. and Cornell Capital Partners, L.P., dated as of
November 21, 2002(10)
10.25 Escrow Agreement between SmarTire Systems Inc., Wachovia Bank
N.A. and Cornell Capital Partners, L.P., dated as of November
21, 2002(10)
10.26 Investor Registration Rights Agreement between SmarTire
Systems Inc. and Cornell Capital Partners, L.P., dated as of
November 21, 2002(10)
10.27 Secured Convertible Debenture issued by SmarTire Systems Inc.
to Cornell Capital Partners, .L.P, dated as of November 21,
2002(10)
10.28 Equity Line of Credit Agreement between SmarTire Systems Inc.
and Cornell Capital Partners, L.P., dated as of November 21,
2002(10)
10.29 Placement Agent Agreement between SmarTire Systems Inc.,
Cornell Capital Partners, L.P., and Aegis Capital Corp., dated
as of November 21, 2002(10)
10.30 Escrow Agreement between SmarTire Systems Inc., Cornell
Capital Partners, L.P., Butter Gonzalez LLP and Wachovia Bank,
N.A., dated as of November 21, 2002(10)
10.31 Registration Rights Agreement between SmarTire Systems Inc.
and Cornell Capital Partners, L.P., dated as of November 21,
2002(10)
10.32 Collaborative Agreement between SmarTire Systems Inc. and
Visteon Corporation, dated December 9, 2002(10)
10.33 Manufacturing, Co-Marketing and Development Agreement, dated
February 6, 2003, between SmarTire Systems Inc. and Hyundai
Autonet Co., Ltd.(12)
10.34 Settlement Agreement, dated as of March 3, 2003, between
SmarTire Systems Inc. and TRW Automotive U.S. LLC.(11)
10.35 Extension and Settlement Agreement, dated March 10, 2003,
between SmarTire Systems Inc. and TRW Automotive U.S. LLC.(11)
10.36 Equity Line of Credit Agreement between SmarTire Systems Inc.
and Cornell Capital Partners, L.P., dated as of February 19,
2003(10)
10.37 Placement Agent Agreement between SmarTire Systems Inc.,
Cornell Capital Partners, L.P., and Aegis Capital Corp., dated
as of February 19, 2003(10)
10.38 Escrow Agreement between SmarTire Systems Inc., Cornell
Capital Partners, L.P., Butter Gonzalez LLP and Wachovia Bank,
N.A., dated as of February 19, 2003(10)
10.39 Registration Rights Agreement between SmarTire Systems Inc.
and Cornell Capital Partners, L.P., dated as of February 19,
2003(10)
145
10.40 Secured Short-Term Promissory Note dated April 23, 2003,
issued to Cornell Capital Partners, L.P.(12)
10.41 Security Agreement dated April 23, 2003 between SmarTire
Systems Inc. and Cornell Capital Partners, L.P.(12)
10.42 Engagement Letter, dated October 25, 2002 with Impact Capital
Partners Limited(13)
10.43 Engagement Letter, dated March 14, 2003 with Dunwoody
Brokerage Services, Inc. and Jenkins Capital Management,
LLC(13)
10.44 Letter agreement among SmarTire Systems Inc., Dunwoody
Brokerage Services, Inc. and Jenkins Capital Management, LLC
terminating the Engagement Letter among the parties dated
March 14, 2003(13)
10.45 Engagement Letter between SmarTire Systems Inc. and HPC
Capital Management, dated March 19, 2003 **
10.46 Securities Purchase Agreement, dated May 15, 2003, among
SmarTire Systems Inc. and Palisades Master Fund, L.P., Alpha
Capital AG, Crescent International Ltd., and Goldplate
Investment Partners(13)
10.47 Registration Rights Agreement, dated May 15, 2003, among
SmarTire Systems Inc. and Palisades Master Fund, L.P., Alpha
Capital AG, Crescent International Ltd., and Goldplate
Investment Partners(13)
10.48 Escrow Agreement, dated May 15, 2003, among SmarTire Systems
Inc. and Palisades Master Fund, L.P., Alpha Capital AG,
Crescent International Ltd. , Goldplate Investment Partners
and Feldman Weinstein, LLP, as escrow agent(13)
10.49 Form of 7% Convertible Debenture(13)
10.50 Form of Stock Purchase Warrant(13)
10.51 Warrant Certificate dated May 16, 2003 registered in the name
of Dunwoody Brokerage Services, Inc.(13)
10.52 Stock Purchase Warrant dated May 16, 2003 registered in the
name of HPC Capital Management(13)
10.53 Placement Fee Payment and Subscription Agreement, dated May
27, 2003, with Impact Capital Partners Limited(13)
10.54 Form of Stock Purchase Warrant for Impact Capital Partners
Limited.(13)
10.55 Second Extension and Settlement Agreement, dated May 15, 2003,
with TRW Automotive U.S. LLC(13)
10.56 Memorandum of Agreement with SensoNor, ASA(13)
10.57 Securities Purchase Agreement, dated as of July 17, 2003,
among SmarTire Systems Inc. and Palisades Master Fund, L.P.,
Alpha Capital AG, Crescent International Ltd., and Goldplate
Investment Partners(14)
146
10.58 Registration Rights Agreement, dated as of July 17, 2003,
among SmarTire Systems Inc. and Palisades Master Fund, L.P.,
Alpha Capital AG, Crescent International Ltd., and Goldplate
Investment Partners(14)
10.59 Escrow Agreement, dated as of July 17, 2003, among SmarTire
Systems Inc. and Palisades Master Fund, L.P., Alpha Capital
AG, Crescent International Ltd., Goldplate Investment Partners
and Feldman Weinstein, LLP, as escrow agent(14)
10.60 Form of 8% convertible debenture(14)
10.61 Form of Stock Purchase Warrant(14)
10.62 Stock Purchase Warrant, dated as of July 17, 2003, registered
in the name of HPC Capital Management(14)
10.63 Standby Equity Distribution Agreement, dated as of May 19,
2004, between SmarTire Systems Inc. and Selling stockholder
Limited**
10.64 Registration Rights Agreement, dated as of May 19, 2004,
between SmarTire Systems Inc. and Selling stockholder
Limited**
10.65 Escrow Agreement, dated as of May 19, 2004, among SmarTire
Systems Inc., Selling stockholder Limited and Feldman
Weinstein, LLP, as escrow agent**
10.66 Stock Purchase Warrant, dated as of May 19, 2004, registered
in the name of Selling stockholder Limited(14)
10.67 Stock Purchase Warrant, dated as of May 19, 2004, registered
in the name of HPC Capital Management(14)
10.68 Advisory fee payment and subscription agreement between
SmarTire Systems Inc. and West Sussex Trading, Inc. dated July
25, 2003(14)
10.69 Direction and Assignment Agreement among SmarTire Systems
Inc., West Sussex Trading, Inc. and Lawrence Becerra dated
July 25, 2003(14)
10.70 Form of Direction and Assignment Agreement among SmarTire
Systems Inc., West Sussex Trading, Inc. and each of William A.
Page and John Finbury, dated July 25, 2003(14)
10.71 Form of Direction and Assignment Agreement among SmarTire
Systems Inc., West Sussex Trading, Inc. and each of Lawrence
Becerra, William A. Page and Kapplan Properties Ltd., dated
May 7, 2003(14)
10.72 Direction and Assignment Agreement among SmarTire Systems
Inc., West Sussex Trading, Inc. and John Finbury dated May 7,
2003(14)
10.73 Form of Direction and Assignment Agreement among SmarTire
Systems Inc., West Sussex Trading, Inc. and each of Lawrence
Becerra, William A. Page and Kapplan Properties Ltd., dated
January 10, 2003(14)
10.74 Direction and Assignment Agreement among SmarTire Systems
Inc., West Sussex Trading, Inc. and John Finbury, dated as of
January 10, 2003(14)
10.75 Management Agreement between SmarTire Systems Inc. and John
Taylor-Wilson, dated as of August 1, 2003(14)
147
10.76 Engagement Letter between SmarTire Systems Inc. and HPC
Capital Management, dated August 12, 2003**
10.77 Financial Consulting Agreement between SmarTire Systems Inc.
and Epoch Financial Group, Inc., dated August 15, 2003(14)
10.78 Stock Purchase Warrant, dated August 15, 2003, registered in
the name of Epoch Financial Group, Inc.(14)
10.79 Agreement in Principle between SmarTire Systems Inc. and
Beijing Boom Technology Limited dated September 8, 2003(15)(2)
10.80 Master Distribution Agreement between SmarTire Systems Inc.
and Beijing Boom Technology Co. Ltd. dated October 17,
2003.(16) (Portions of this document have been omitted and
filed separately with the Securities and Exchange Commission
pursuant to a Request for Confidential Treatment filed under
17 C.F.R.ss.ss.200.80(b)(4) and 240.24b-2.)
10.81 Contract Manufacturing Services Agreement between SmarTire
Systems Inc. and Hyundai Autonet Company dated October 17,
2003.(17)(2)
10.82 Letter Agreement dated October 27, 2003 between SmarTire
Systems Inc. and HPC Capital Management.(18)
10.83 Stock Purchase Warrant, dated October 27, 2003, registered in
the name of HPC Capital Management.(18)
10.84 Letter Agreement dated October 27, 2003 between SmarTire
Systems Inc. and Palisades Master Fund, L.P.(18)
10.85 Stock Purchase Warrant, dated October 27, 2003, registered in
the name of Palisades Master Fund, L.P.(18)
10.86 Letter Agreement dated November 6, 2003 between SmarTire
Systems Inc. and Crescent International Ltd.(19)
10.87 Stock Purchase Warrant, dated November 10, 2003, registered in
the name of Crescent International Ltd. (19)
10.88 Letter Agreement dated November 6, 2003 between SmarTire
Systems Inc. and Alpha Capital AG(19)
10.89 Stock Purchase Warrant, November 10, 2003, registered in the
name of Alpha Capital AG(19)
10.90 Letter Agreement dated November 6, 2003 between SmarTire
Systems Inc. and Goldplate Investment Partners(19)
10.91 Stock Purchase Warrant, dated November 10, 2003, registered in
the name of Goldplate Investment Partners(19)
10.92 Amending Letter Agreement dated November 10, 2003 between
SmarTire Systems Inc. and HPC Capital Management(19)
10.93 Amended Stock Purchase Warrant, dated as of October 27, 2003,
registered in the name of HPC Capital Management(19)
148
10.94 Amending Letter Agreement dated November 10, 2003 between
SmarTire Systems Inc. and Palisades Master Fund, L.P.(19)
10.95 Amended Stock Purchase Warrant, dated as of October 27, 2003,
registered in the name of Palisades Master Fund, L.P.(19)
10.96 Development Agreement dated September 12, 2003 between
SmarTire Systems Inc. and Vansco Ltd.(20)
10.97 Co-Marketing and Development Agreement dated October 10, 2003
between Haldex Brake Products Ltd. and SmarTire Systems
Inc.(20)
10.98 Supply Agreement dated October 10, 2003 between SmarTire
Systems Inc. and Haldex Brake Products Ltd.(20)
10.99 Securities Purchase Agreement, dated as of December 19, 2003,
among SmarTire Systems Inc. and Palisades Master Fund, L.P.,
Alpha Capital AG, Crescent International Ltd., Goldplate
Investment Partners, Gamma Opportunity Capital Partners, LP,
PEF Advisors Ltd. and Bristol Investment Fund, Ltd.(22)
10.100 Registration Rights Agreement, dated as of December 24, 2003,
among SmarTire Systems Inc. and Palisades Master Fund, L.P.,
Alpha Capital AG, Crescent International Ltd., Goldplate
Investment Partners, Gamma Opportunity Capital Partners, LP,
PEF Advisors Ltd. and Bristol Investment Fund, Ltd. (22)
10.101 Escrow Agreement, dated as of December 24, 2003, among
SmarTire Systems Inc. and Palisades Master Fund, L.P., Alpha
Capital AG, Crescent International Ltd., Goldplate Investment
Partners, Gamma Opportunity Capital Partners, LP, PEF Advisors
Ltd., Bristol Investment Fund, Ltd. and Feldman Weinstein,
LLP, as escrow agent(22)
10.102 Form of Discounted Convertible Debenture(22)
10.103 Form of Addendum to Discounted Convertible Debenture(22)
10.104 Form of Stock Purchase Warrant(22)
10.105 Placement Fee Payment and Subscription Agreement, dated as of
December 24, 2003, between SmarTire Systems Inc. and HPC
Capital Management (22)
10.106 Stock Purchase Warrant, dated as of December 24, 2003,
registered in the name of HPC Capital Management (22)
10.107 Amendment Agreement between SmarTire Systems Inc. and Talisman
Management Limited dated January 21, 2004, amending the Common
Stock Purchase Agreement between the parties dated as of July
23, 2003(23)
10.108 Amendment Agreement between SmarTire Systems Inc. and Talisman
Management Limited dated January 21, 2004, amending the
Registration Rights Agreement between the parties dated as of
July 23, 2003(23)
10.109 Form of Promissory note issued to Cornell Capital
Partners, LP(24)
10.110 Standby Equity Distribution Agreement dated May 19, 2004**
10.111 Registration Rights Agreement dated May 19, 2004**
10.112 Escrow Agreement with Cornell Capital
149
21.1 SmarTire Technologies Inc.
21.2 SmarTire USA Inc.
21.3 SmarTire Europe Limited
23.2 Consent of KPMG LLP**
24.1 Power of Attorney (contained on the signature pages of this
registration statement)
** Filed herewith.
(1) Incorporated by reference to SmarTire Systems Inc.'s Form 10-KSB
filed with the Securities and Exchange Commission on August 18, 1998.
(2) Portions of the Exhibit have been omitted pursuant to an order
granting confidential treatment under the Securities Exchange Act of
1934.
(3) Incorporated by reference to SmarTire Systems Inc.'s Form 10-QSB
filed with the Securities and Exchange Commission on March 16, 2000.
(4) Incorporated by reference to SmarTire Systems Inc.'s definitive
Proxy Statement and Information Circular on Schedule 14A filed with the
Securities and Exchange Commission on October 31, 2000.
(5) Incorporated by reference to SmarTire Systems Inc.'s Form 10-KSB
filed with the Securities and Exchange Commission on October 26, 2001.
(6) Incorporated by reference to SmarTire Systems Inc.'s Form 10-KSB/A
filed with the Securities and Exchange Commission on August 19, 2002.
(7) Incorporated by reference to SmarTire Systems Inc.'s Form 10-QSB
filed with the Securities and Exchange Commission on June 14, 2002.
(8) Incorporated by reference to SmarTire Systems Inc.'s Form 10-KSB
filed with the Securities and Exchange Commission on October 25, 2002.
(9) Incorporated by reference to SmarTire Systems Inc.'s Form 10-QSB
filed with the Securities and Exchange Commission on December 13, 2002.
(10) Incorporated by reference to SmarTire Systems Inc.'s Form SB-2
filed with the Securities Exchange Commission on January 23, 2003.
(11) Incorporated by reference to Post-Effective Amendment No. 1 to
SmarTire Systems Inc.'s Form SB-2 filed with the Securities Exchange
Commission on March 14, 2003.
(12) Incorporated by reference to Post-Effective Amendment No. 3 to
SmarTire Systems Inc.'s Form SB-2 filed with the Securities Exchange
Commission on May 2, 2003.
(13) Incorporated by reference to SmarTire Systems Inc.'s Form SB-2
filed with the Securities Exchange Commission on June 4, 2003.
150
(14) Incorporated by reference to SmarTire Systems Inc.'s Form SB-2
filed with the Securities Exchange Commission on August 18, 2003.
(15) Incorporated by reference to SmarTire Systems Inc.'s Form 8-K
filed with the Securities and Exchange Commission on September 10,
2003.
(16) Incorporated by reference to SmarTire Systems Inc.'s Form 8-K/A
filed with the Securities and Exchange Commission on January 7, 2004.
(17) Incorporated by reference to SmarTire Systems Inc.'s Form 8-K
filed with the Securities and Exchange Commission on October 24, 2003.
(18) Incorporated by reference to Pre-Effective Amendment No. 1 to
SmarTire Systems Inc.'s registration statement on Form SB-2/A filed
with the Securities Exchange Commission on November 4, 2003.
(19) Incorporated by reference to SmarTire Systems Inc.'s Form 8-K
filed with the Securities and Exchange Commission on November 13, 2003.
(20) Incorporated by reference to SmarTire Systems Inc.'s Form 10-QSB
filed with the Securities and Exchange Commission on December 12, 2003.
(21) Incorporated by reference to SmarTire Systems Inc.'s Form 8-K
filed with the Securities and Exchange Commission on December 23, 2003.
(22) Incorporated by reference to SmarTire Systems Inc.'s Form SB-2
filed with the Securities Exchange Commission on January 15, 2004.
(23) Incorporated by reference to SmartTire System Inc.'s Form SB-2
filed with the Securities and Exchange Commission on February 6, 2004
(24) Incorporated by reference to SmarTire Systems Inc.'s 8-K filed
with the Securities Exchange Commission on April 28, 2004.
Item 28 UNDERTAKINGS
The undersigned Company hereby undertakes that it will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include:
(a) any prospectus required by Section 10(a)(3) of the Securities Act;
(b) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(c) any additional or changed material information with respect to the
plan of distribution not previously disclosed in the registration
statement;
(2) for the purpose of determining any liability under the Securities Act, each
of the post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
151
(3) remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors,
officers and controlling persons of SmarTire pursuant to the foregoing
provisions, or otherwise, SmarTire has been advised that in the opinion of the
Commission that type of indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against said liabilities (other than the payment by SmarTire
of expenses incurred or paid by a director, officer or controlling person of
SmarTire in the successful defense of any action, suit or proceeding) is
asserted by the director, officer or controlling person in connection with the
securities being registered, SmarTire will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of the issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
152
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Richmond, British Columbia on June 1, 2004.
SMARTIRE SYSTEMS INC.
/s/Robert Rudman
- -------------------------------------------------------
By: Robert Rudman, President, Chief Executive Officer and Chairman
/s/Jeff Finkelstein
- -------------------------------------------------------
By: Jeff Finkelstein, Chief Financial Officer,
Principal Financial Officer and Principal Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person who signature
appears below constitutes and appoints Robert Rudman as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or of their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates stated.
Signatures
/s/Robert Rudman
- -------------------------------------------------------
Robert Rudman, President, CEO, Chairman and Director
June 1, 2004
/s/Al Kozak
- -------------------------------------------------------
Al Kozak, Chief Operating Officer and Director
June 1, 2004
/s/John Bolegoh
- -------------------------------------------------------
John Bolegoh, Technical Support Manager and Director
June 1, 2004
/s/William Cronin
- -------------------------------------------------------
William Cronin, Director
June 1, 2004
/s/Johnny Christiansen
- -------------------------------------------------------
Johnny Christiansen, Director
June 1, 2004
/s/Martin Gannon
- -------------------------------------------------------
Martin Gannon, Director
June 1, 2004
153